The Tennessee Supreme Court has upheld a decision by the Tennessee Department of Revenue to impose a tax variance on the parent company of Verizon Wireless. The Court held that the Commissioner of Revenue was within his authority to impose the variance, in order to keep the company from avoiding paying Tennessee franchise and excise taxes on over a billion dollars in revenue from sales to Tennessee customers.
The lawsuit was filed by Vodafone Americas Holdings, Inc., a multistate wireless telecommunications corporation, and its subsidiaries (Vodafone), doing business throughout the United States as Verizon Wireless.
From 2000-2006, Vodafone filed Tennessee franchise and excise tax returns and paid taxes totaling more than $13 million on the revenues Vodafone received for services provided to its Tennessee customers. In 2007, Vodafone filed a lawsuit asking the trial court to require the Department of Revenue to refund nearly all of the Tennessee franchise and excise taxes Vodafone had paid for the years 2002 through 2006. Vodafone claimed that, if the apportionment formula in Tennessee’s franchise and excise tax statutes were applied correctly, Vodafone would owe virtually no taxes on its sales receipts for cell phone services provided to Tennessee customers, receipts that totaled over a billion dollars in revenue to Vodafone.
The Commissioner of Revenue then decided to impose on Vodafone a tax variance, that is, the Commissioner required Vodafone to pay franchise and excise taxes on its sales receipts from Tennessee customers for 2002-2006 by a formula that varied from the standard apportionment formula in Tennessee’s tax statutes. Tennessee’s tax laws give the Commissioner of Revenue the discretion to impose a tax variance if application of the standard tax formula would not fairly represent the extent of the taxpayer’s business activity in Tennessee.
Vodafone argued that, by requiring it to pay franchise and excise taxes by a formula other than the standard formula in the Tennessee statutes, the Commissioner exceeded his authority and usurped the legislature’s prerogative to set tax policy. The trial court and the Court of Appeals both upheld the Commissioner’s decision to issue the tax variance. The Tennessee Supreme Court granted Vodafone’s request for permission to appeal.
The Tennessee Supreme Court first considered the Tennessee legislature’s statement of the policy behind Tennessee’s franchise and excise tax statutes, which reads: “Doing business in Tennessee … is declared to be a taxable privilege.” It did an extensive review of the legislative history behind the statutes that give the Commissioner of Revenue the authority to impose a tax variance in certain cases. The Court found that the legislature granted the Commissioner authority to impose a tax variance as an important part of the state’s effort to prevent corporations doing business in Tennessee from shifting income and profits – and as a result, tax revenues – out of the state.
The Tennessee Supreme Court held that the Tennessee legislature intended for the Commissioner to have the authority to impose a variance where, as here, application of the statutory tax formula would allow Vodafone to reap millions of dollars in revenue from doing business in Tennessee while paying no tax for the privilege of doing so. Striking down the variance, the Court held, would judicially nullify the legislature’s tax policy choices. It found that the variance in this case required Vodafone to pay a fair amount of franchise and excise taxes on its revenue from services to Tennessee customers, and so the Court upheld the Commissioner’s action.
Justice Jeffrey S. Bivins filed a dissent in which he disagreed with the majority’s decision to uphold the tax variance in this case. Justice Bivins found that the Commissioner had ignored the Department of Revenue’s own regulation and had exceeded his authority by imposing the variance on Vodafone. Justice Bivins noted that the Commissioner failed to even address the variance regulation in his letter imposing the variance. Moreover, the imposition of the variance in this case is tantamount to imposing a variance on an entire industry, which was beyond the scope of the Commissioner's authority under the variance regulation, according to the opinion Justice Bivins wrote.
Read the majority opinion in Vodafone Americas Holdings, Inc. v. Reagan Farr, authored by Justice Holly Kirby, and the dissent by Justice Bivins.