The Tennessee Court of Appeals recently addressed whether the Department of Revenue properly reclassified the taxpayer’s business activities for purposes of the Tennessee Business Tax. The taxpayer was in the business of selling, installing, and repairing automotive glass. After the Business Tax Act was implemented in 1971, the taxpayer registered with the Department and subsequently filed business tax returns under Classification 1(B), which specifically includes persons making sales of glass. After more than 40 years, the Department reclassified the taxpayer’s business under Classification 3(C), which applies to a seller of services. During the prior four plus decades, there had been no changes to the taxpayer’s business or the applicable statute. Under the new classification, the taxpayer was liable for a greater amount of business tax. The taxpayer paid the tax assessment, but later filed a refund claim, which was denied. The taxpayer subsequently sued for a refund.
Under Tennessee’s Business Tax Act, a business must be classified in accordance with its dominant business activity. This activity dictates what rate of business tax will apply to the taxpayer. The Commissioner argued that the taxpayer should be considered a seller of services because the taxpayer regularly installed the glass that it sold. Under the Business Tax Act, a taxpayer’s “dominant business activity” is “the business activity that is the major and principal source of taxable gross sales of the business.” In this instance, the taxpayer’s sales figures revealed that the majority of the corporation’s taxable gross sales were attributable to the sale of glass. The Commissioner had not disputed these figures, but argued that, under a departmental rule, all the sales of glass plus the labor charges for installing the glass should be treated as service receipts. Noting that it “is well-settled law” that “the Commissioner cannot enlarge the scope of a taxing statute by regulation,” the court ruled in the taxpayer’s favor as “the majority of the taxpayer’s gross sales were attributable to the sale of glass.” The court also upheld the chancery court’s award of attorney’s fees to the taxpayer. Please contact Loren Chumley at 615-248- 5565 with questions on Auto Glass Company of Memphis Inc. v. Commissioner, Department Of Revenue, State Of Tennessee.