                   IN THE COURT OF APPEALS OF TENNESSEE

                          EASTERN SECTION AT KNOXVILLE              FILED
                                                                       May 13, 1997
UPPER EAST TENNESSEE                        )       WASHINGTON CHANCERY
                                                             Cecil Crowson, Jr.
DISTRIBUTING,                               )                       Appellate C ourt Clerk
                                            )       NO. 03A01-9701-CH-00011
       Plaintiff/Appellee                   )
                                            )       HON. LEWIS W. MAY,
v.                                          )       CHANCELLOR, By Interchange
                                            )
RUTH E. JOHNSON,                            )       JUDGMENT REVERSED;
Commissioner of Revenue,                    )       MOTION OF THE DEFENDANT
State of Tennessee,                         )       GRANTED;
                                            )       REMANDED FOR ENTRY OF
       Defendant/Appellant                  )       JUDGMENT FOR THE STATE.
                                            )
                                            )


Forrest B. Bigham, Nashville, for Appellant.
Walter Lee Davis, Jr., Johnson City, for Appellee.



                                       OPINION

                                                    INMAN, Senior Judge

       This complaint was heard by the Chancellor upon stipulated facts, trial briefs and

oral argument. Motions for Summary Judgment were filed by both parties; the trial court

granted Plaintiff’s motion.     Defendant appeals and presents the following issue,

reproduced verbatim:

       1.     Rule 96 of the Department of Revenue is a valid example of
              the express statutory authority of the Commissioner of
              Revenue to implement rules and regulations concerning
              sales for resale.

                     A.        Plaintiff’s initial sale was taxable as a
                              retail sale because it failed to qualify
                              as a tax-exempt sale for resale under
                              Rule 96.

                     B.       Rule 96 is valid and consistent with
                              Tennessee sales and use tax statutes
                              and is reasonable, practical and
                              necessary to effectuate the purposes
                              of the law.

       Plaintiff argues that RULE 96 does not apply because Plaintiff’s sale was a sale

for resale and not a retail sale under the undisputed facts. In the alternative, if RULE 96

is found to apply, then RULE 96 is void because it is inconsistent with T. C. A. § 67-6-

102(23)(A) and T. C. A. § 67-6-313(a).
                                            I

       The parties stipulated 32 paragraphs of facts for trial. We paraphrase those

material to our decision:

       Plaintiff [hereinafter “Seller”] is a manufacturer and dealer of coin-operated

amusement game machines with offices and facilities in Gray, Tennessee. Between

January 1991 and December 1993, Seller sold for resale various coin-operated

amusement machines to Coin Concepts, Inc., [hereinafter “Buyer”] a New Jersey

corporation with no physical presence in Tennessee. Buyer effected the sale by

sending purchase orders to Seller in Tennessee, but left the machines at Seller’s

Tennessee facility and subsequently re-sold them to Buyer’s customer, Aladdin’s

Castle, Inc., a Delaware corporation which uses the machines in its business operations

throughout the United States.

       Seller agreed to act as Buyer’s agent to deliver the machines to Buyer’s

customer, Aladdin’s Castle. Possession of the machines was transferred from Seller

directly to Buyer’s customer, Aladdin’s Castle, at Seller’s facilities in Tennessee.

       Two machines were used by Aladdin’s Castle facilities in Tennessee, and

Aladdin’s Castle paid Tennessee use tax on those two machines.

       The remaining [presumably 98] machines were sent to other states, and in each

state which imposes a use tax, Aladdin’s Castle paid the tax.

          Seller did not collect any Tennessee sales or use tax or pay any tax in

connection with the sales of the machines to Buyer or the deliveries of the machines to

Aladdin’s Castle. No arrangements were made between Seller and the Tennessee

Commissioner of Revenue regarding the sales to Buyer or the deliveries to Aladdin’s

Castle.

       The Tennessee Department of Revenue assessed Seller $18,753.00 for sales

and use tax, local tax and interest.

       The trial court found the Department of Revenue’s assessment to be erroneous

and not due, and awarded judgment including attorney’s fees to Seller.




                                            2
                                             II

       Retail sales in Tennessee are subject to Sales and Use Tax under T. C. A. § 67-

6-101, et seq, Retailers’ Sales Tax Act. The Act defines taxable retail sales as “taxable

sale of tangible personal property . . . to a consumer or to any person for any purpose

other than for resale [emphasis added]”

       Stipulation of Fact #6 at trial in this case provides:

       “Between January 1991 and December 1993 Plaintiff sold for resale
       [emphasis added] various coin-operated amusement games . . . to Coin
       Concepts, Inc. . . . “

       Notwithstanding this stipulation, the Commissioner argues that Plaintiff’s sale of

the machines to Buyer, although a sale for resale, was subject to taxation “as a retail

sale” because it failed to qualify as a tax-exempt sale for resale under Sales and Use

Tax Rules of the Tennessee Department of Revenue, Rule 1320-5-1.96:

       1320-5-1.96 Tangible Personal Property Sold By Dealers to Other
       Vendors, Where delivery is Made for Use and Consumption:

       Except in cases where specific and satisfactory arrangements are made
       with the Commissioner before sales and deliveries are made, sales of
       tangible personal property . . . by a dealer to an out of state vendor who
       directs that the dealer act as [the vendor’s] agent to deliver or ship [to the
       vendor’s] customer, who is a user or consumer, are subject to the Sales
       or Use Tax. The dealer so acting as agent for the out of state vendor
       must collect the tax involved on the transaction unless the transaction
       comes within the conditions indicated herein.

       In this case, the dealer (Seller) sold to an out of state vendor (Buyer), who

directed that Seller act as his agent to deliver the property to vendor’s customer,

Aladdin, who is a user of the machines. Thus RULE 96 requires Seller to collect retail

tax on the transaction unless specific and satisfactory arrangements were made with the

Commissioner before sale and delivery were made. The parties stipulated that no such

arrangements were made. Therefore,according to the undisputed facts, the sale was

a sale for resale under T. C. A. § 67-6-101 et seq, which nevertheless became subject

to retail sales tax under RULE 96 because Seller made delivery for Buyer to its

customer/user without the required arrangements having been made with the

Commissioner prior to the sale or transfer of possession.




                                             3
                                            III

       Seller argues that RULE 1320-5-1-.96 is only applicable to sales in which the

principal is undisclosed, citing RULE 1320-5-1-.01.

       1320-5-1-.01 Auctioneers-Agents-Factors

       Every factor, auctioneer, or agent acting for any unknown or undisclosed
       principal entrusted with any bill of lading, customhouse permit, or
       warehouse receipt for delivery of tangible personal property, or entrusted
       with possession of any such personal property for the purpose of sale,
       shall be deemed the owner thereof, and, upon the sale at retail of such
       property, shall be required to file a return of the receipts of sales and pay
       a tax thereon. A sale by such factor, auctioneer or agent, when acting for
       a known or disclosed principal shall be taxable to the principal. The same
       rule applies to lien holders, such as storage men, pawnbrokers and
       artisans.

       Seller cites no reference for his assertion that RULE 96 is limited by RULE 1, or

that a sale which is taxable to a known or disclosed principal cannot therefore be taxed

to an agent, and we find no such authority.1

                                            IV

       Seller argues that in the event we find RULE 96 applicable, then RULE 96 is void

because it is inconsistent with T. C. A. § 67-6-102(23)(A) and T. C. A. § 67-6-313(a).

       T. C. A. § 67-6-102(23)(A) provides:

       “Retail sales” or “sale at retail” means a taxable sale of tangible personal
       property or specifically taxable services to a consumer or to any person
       for any purpose other than for resale. “Retail sales” or “sales at retail”
       means and includes all such transactions as the commissioner, upon
       investigation, finds to be in lieu of sales. Any sale for resale must,
       however, be in strict compliance with rules and regulations promulgated
       by the commissioner. Any dealer making a sale for resale which is not in
       strict compliance with rules and regulations shall be personally liable for
       and pay the tax;

       Seller argues that the cited statute indicates the legislature did not intend to

tax sales for resale. Therefore, under Covington Pike Toyota, Inc. v. Caldwell, 829

S.W.2d 132 (Tenn. 1992), “it is fundamental that the Commissioner cannot enlarge

the scope of a taxing statute by regulation, and rules contrary to the express

directives of a taxing statute are void.”



       1
         There is no evidence that the Commissioner attempted to collect the same
Tennessee tax from both the agent and the principal. Moreover, RULE 96 requires
the Seller to collect the tax, indicating one very practical purpose of RULE 96: the
Seller has contact with the out-of-State Buyer, and is therefore in a better position to
collect the tax than the Commissioner.

                                            4
       Our reading of T. C. A. § 67-6-102(23)(A) indicates, however, that the legislature

clearly intended to limit the tax-exempt status of sales for resale to those sales which

were in strict compliance with the rules and regulations promulgated by the

Commissioner. Therefore, since Seller was not in compliance with RULE 96, having

failed to make “specific and satisfactory arrangements” with the Commissioner before

sale and delivery, the Commissioner was specifically authorized by statute to tax the

sale as if it were a retail sale.

                                             V

       The Seller asserts that RULE 96 is void because the legislature intended to

exempt from tax all Tennessee products manufactured for export.

       T. C. A. § 67-6-313(a) provides:

       It is not the intention of this chapter to levy a tax upon articles of tangible
       personal property imported into this state or produced or manufactured in
       this state for export.

       There is no proof on the record that the machines sold were produced for export,

although this assertion is made in Seller’s appellate brief. Therefore, we decline to

address this issue.

                                            VI

       The stipulated facts indicate that the transaction at issue was one anticipated by

the legislature and provided for in T. C. A. § 67-6-102(23)(A) and Sales and Use Tax

RULE 96. We find RULE 96 to be in harmony with the statute, and that it supports the

Commissioner’s assessment of sales tax in this case.2 Therefore, the judgment of the

trial court is reversed and the case is remanded for entry of judgment for the

Commissioner of Revenue as upon Summary Judgment. Costs are assessed to the

Appellee.




       2
        As argued by the Commissioner, “The very logical and legitimate purpose of
Rule 96 makes eminently good sense and is necessary for the enforcement of the
sales tax law. It is carefully and specifically directed at the not-infrequent efforts of
sellers to avoid the tax by using out-of-state third parties as intermediaries in a series
of transactions.” Although no bad faith is alleged in this case, the importance of this
court’s attention to the regulations of the Commissioner designed to avoid such “not-
infrequent” scenarios is clear.

                                             5
                                      __________________________________
                                      William H. Inman, Senior Judge

CONCUR:



_______________________________
Houston M. Goddard, Presiding Judge



_______________________________
Charles D. Susano, Jr., Judge




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