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IN THE SUPREME COURT OF TENNESSEE AT NASHVILLE
February 5, 2003 Session BELLSOUTH ADVERTISING AND PUBLISHING COMPANY v. RUTH JOHNSON, COMMISSIONER OF REVENUE, STATE OF TENNESSEE
Appeal by permission from the Court of Appeals, Middle Section Chancery Court for Davidson County No. 97-2643-II and 98-748-I (II) Claudia Bonnyman, Special Chancellor

No. M2000-03091-SC-R11-CV - Filed March 12, 2003

In this use tax case, we address the issue of whether or not the plaintiff should receive a credit under Tennessee law for sales tax it paid to the State of Alabama on the purchase of photocompositions used in printing telephone directories that were later distributed in Tennessee. Under Tennessee Code Annotated section 67-6-203(a) (1998), a use tax is levied at the rate of six percent (6%) of the cost price of each item or article of tangible personal property when the same is not sold but is used, consumed, distributed, or stored for use or consumption in this state; provided, that there shall be no duplication of the tax. (Emphasis added). To avoid duplication of the tax, Tennessee Code Annotated section 67-6-507(a) (1998) provides a credit for like taxes paid to other states on tangible personal property. The trial court and the Court of Appeals both found that the plaintiff was not owed a credit for sales tax paid to Alabama for the photocompositions, since there was no "like tax" paid on the telephone directories. We conclude that the plaintiff is entitled to a credit because the cost of the photocompositions on which the Alabama sales tax was paid is included in the cost of the directories on which Tennessee is seeking to impose a use tax. Accordingly, we reverse the judgments of the trial court and the Court of Appeals and grant summary judgment to the plaintiff. Tenn. R. App. P. 11; Judgment of the Court of Appeals Reversed; Judgment of the Trial Court Reversed FRANK F. DROWOTA , III, C. J., delivered the opinion of the court, in which E. RILEY ANDERSON, ADOLPHO A. BIRCH, JR., JANICE M. HOLDER, and WILLIAM M. BARKER, JJ., joined. James W. McBride, Washington, D.C., and Brigid M. Carpenter, Nashville, Tennessee, for the appellant, BellSouth Advertising and Publishing Company.

Paul G. Summers, Attorney General and Reporter; Michael E. Moore, Solicitor General; and Wyla M. Posey, Assistant Attorney General, for the appellee, Ruth Johnson, Commissioner of Revenue, State of Tennessee. OPINION Factual Background The plaintiff in this sales and use tax case is BellSouth Advertising and Publishing Corporation ("BAPCO"), a Georgia corporation and a registered dealer with the defendant, the Tennessee Department of Revenue (the "Department"). BAPCO produces and distributes telephone directories, which are provided to telephone customers free of charge. BAPCO derives its revenue from selling advertising space in the directories. BAPCO compiles information to be included in the directory, including advertising data, white pages listing data, customer page data, and community interest page data. This information is then typed onto photocompositions, which are used to transfer the text to printing plates. The plates are then used to print the directories. During the time period in question, BAPCO purchased the photocompositions from TechSouth, an Alabama company. TechSouth used information supplied by BAPCO to create the photocompositions and then sold the photocompositions to BAPCO. BAPCO paid 1.5% sales tax to Alabama on these purchases, totaling $165,413.72. The photocompositions were used by another company, Steven Graphics, Inc., to print the directories; Steven Graphics also bound the directories and prepared them for distribution. The photocompositions were destroyed following their use. The Department conducted an audit of BAPCO in 1997 for the period of January 1, 1989, through December 31, 1994. At the conclusion of this audit, the Department issued an assessment for sales and use tax liability against BAPCO in the amount of $125,179.87. During the audit, BAPCO realized that it had not claimed a credit for the sales tax paid in Alabama on the photocompositions; it asked the auditor to allow such credit under Tennessee Code Annotated section 67-6-507(a) as part of the audit. If allowed, the credit would have been sufficient to offset the tax assessment. The auditor refused, and BAPCO filed a claim for a refund with the Department on June 27, 1997. The Department denied the claim, and BAPCO filed a complaint on August 7, 1997, challenging the assessment. BAPCO filed a second complaint on March 11, 1998, claiming a refund for the amount of Alabama sales tax paid on the photocompositions. The cases were consolidated in June 1998. Both parties filed motions for summary judgment in July 2000, and the Special Chancellor granted the Department's motion for summary judgment. BAPCO appealed to the Court of Appeals, asserting that the trial court erred in granting summary judgment to the Department and in not granting summary judgment to BAPCO, and that -2-

the Department's refusal to allow a credit violates the Commerce Clause of the federal Constitution by discriminating against BAPCO as an out-of-state vendor. The Court of Appeals upheld the decision of the trial court, characterizing Tennessee Code Annotated section 67-6-507 as an exemption statute and finding that to "come within the exemption described in Tenn. Code Ann.

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