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ÐÓ{ ÓÌò òÓ  ÓOPINIONÐ $$t# ÐPER€CURIUMÐ %` $ ÐÌI.ó óÔ#†¼^Õ»XX9D #ÔÔ‡X9X»¼^ÕÔÐ è&8"& ÐÓË ÓÌòòóóÔ#†¼^Õ»XX9; #ÔÓ  ÓÔ€X9X»¼^ÕÔà  àThe€Commissioner€of€Revenue€conducted€a€sales€and€use€tax€audit€of€AT&T€Corp.€for€a€five„Ð À($( Ðyear€period€beginning€January€1,€1990€and€concluded€that€its€sales€of€telephone€central€officeÐ ¬)ü$) Ðequipment€did€not€qualify€for€an€exemption€from€taxation€as€sales€of€industrial€machinery.€€A€NoticeÐ ˜*è%* Ðof€Assessment€for€$25.81€million€was€issued,€and€AT&T€timely€filed€this€action€(1)€challenging€theÐ „+Ô&+ ÐCommissionerððs€assessment,€and€(2)€seeking€remission€or€credit€for€such€taxes€previously€paid€byÐ p,À', Ðit€on€engineering€services€furnished€to€BellSouth.Ð \-¬(-ý ÐÔ_Ô‡à  àThe€Commissioner€asserted€the€propriety€of€her€action€in€issuing€the€Notice€of€Assessment,Ð ° Ðand€denied€that€AT&T€was€(1)€entitled€to€a€recovery€or€credit€for€prior€years,€and€(2)€that€theÐ œì ÐChancery€Court€lacked€jurisdiction€to€entertain€an€action€for€refund€of€taxes€paid€for€the€periodÐ ˆØ Ðinvolved,€1993€excepted,€because€AT&T€failed€to€follow€the€statutory€scheme€relative€to€theÐ tÄ Ðrecovery€of€taxes.Ð `° ÐÌò òÓ  ÓII.ó óÐ 8 ˆ ÐÓ…ÓÌà  àThe€Chancellor€held,€on€cross€motions€for€summary€judgment,€that€(1)€AT&T€did€not€qualifyÐ  ` Ðfor€the€industrial€Ô_ÔmachineryÔ_Ô€exemption,€(2)€AT&Tððs€claim€that€its€engineering€services€provided€toÐ ü L  ÐBellSouth€were€non„taxable€was€well€taken,€and€(3)€that€the€Chancery€Court€had€subject€matterÐ è 8  Ðjurisdiction€of€the€issue.Ð Ô$  ÐÌà  àBoth€parties€appeal.€€Review€is€òòde€novoóó€with€no€presumption€of€correctness.€€òòò òNuclear€FuelÐ ¬ü  ÐServices€Inc.€v.€Ô_ÔHuddlestonÔ_Ôóóó ó,€920€S.W.2d€659€(Tenn.€Ct.€App.€1995).€€The€issues€presented€forÐ ˜è  Ðreview€are€(1)€whether€telephone€central€office€equipment€sold€by€AT&T€to€BellSouth,€òòet€al.óó,Ð „Ô  Ðqualifies€for€an€exemption€from€sales€and€use€tax€as€industrial€machinery,€(2)€whether€engineeringÐ pÀ Ðservices€provided€by€AT&T€to€BellSouth,€òòet€al.,óó€in€conjunction€with€the€sale€of€telephone€centralÐ \¬ Ðoffice€€power,€transmission€and€switching€equipment€were€subject€to€sales€tax,€and€(3)€whether€theÐ H˜ Ðfailure€of€AT&T€to€comply€with€the€jurisdictional€requirements€of€Tenn.€Code€Ann.€ðð€67„1„1802Ð 4„ Ðdeprived€the€trial€court€of€jurisdiction€to€adjudicate€the€claim€for€a€refund.Ð  p ÐÌò òÓ  ÓIII.ó óÐ øH ÐÓMÓÌà  àWe€shall€first€consider€the€issue€of€the€jurisdiction€of€the€courts€to€consider€AT&Tððs€claimsÐ Ð  Ðfor€refund€or€credit€for€taxes€paid€on€alleged€industrial€machinery€sales€for€1990,€1991,€1992,€andÐ ¼  Ð1994.Ð ¨ø ÐÌà  àIt€is€not€controverted€that€AT&T€did€not€file€formal€claims€for€refund€for€these€years€ð ðunderÐ €Ð Ðoath€and€supported€by€proper€proof,ðð€as€required€by€Tenn.€Code€Ann.€ðð€67„1„1802(a)(1).Ð l¼ ÐÌà  àThe€Chancellor€assumed€jurisdiction€of€the€claim€for€refund,€relying€on€Tenn.€Code€Ann.€ððÐ D!” Ð67„1„1801(Ô_ÔiÔ_Ô)€which€provides:Ð 0"€  ÐÌà8  à(Ô_ÔiÔ_Ô)€To€the€extent€of€any€amounts€collected€by€or€paid€to€the€commissioner€withÐ $X" Ðrespect€to€an€assessment,€or€any€portion€thereof,€challenged€by€suit€by€the€taxpayer,Ð ô$D # Ðwhether€such€collection€was€pursuant€to€a€jeopardy€proceeding€by€application€ofÐ à%0!$ Ðassets€restored€to€the€taxpayer€pursuant€to€subsection€(h),€or€otherwise,€the€suit€shallÐ Ì&"% Ðproceed€as€a€timely€suit€for€refund€or€taxes€paid,€as€if€a€timely€claim€for€refund€hadÐ ¸'#& Ðbeen€filed€by€the€taxpayer€and€denied€by€the€commissioner.Ф(ô#'Ð Ð  ÐÌà  àThis€statute€is€inapplicable€to€the€case€at€Bar.€€It€is€applicable€only€to€taxes€collected€by€orÐ |*Ì%) Ðpaid€to€the€Commissioner€of€Revenue€with€òòrespect€to€an€assessmentóó,€and€it€is€undisputed€thatÐ h+¸&* ÐÔ_ÔAT&Tððs€payments€in€1990,€1991,€1992,€and€1994€were€not€paid€ð ðwith€respect€to€an€assessmentðð€forÐ ° Ðthat€period€because€no€assessment€was€made€until€June€1995.€€We€agree€with€the€argument€of€theÐ œì ÐCommissioner€that€Tenn.€Code€Ann.€ðð€67„1„1801(i)€applies€only€to€taxes€collected€or€paid€after€anÐ ˆØ Ðassessment€has€been€issued€and€a€timely€suit€has€been€filed.Ð tÄ ÐÌà  àStatutes€authorizing€suits€against€the€State€are€in€derogation€of€sovereign€immunity,€and€mustÐ L œ Ðbe€strictly€construed.€€òòò òAutomobile€Sales€Co.€v.€Johnsonóóó ó,€174€Tenn.€38,€41,€122€S.W.2d€453,€455Ð 8 ˆ Ð(1938).€€Statutes€permitting€and€providing€procedures€for€suits€against€the€state,€and€especially€suitsÐ $ t Ðinvolving€taxes,€are€jurisdictional€and€must€be€strictly€construed€so€as€to€limit€such€jurisdiction.€Ð  ` Ðò òòòGriffith€Motors,€Inc.€v.€Kingóóó ó,€641€S.W.2d€200€(Tenn.€1982).Ð ü L  ÐÌà  àIn€òòò òBeare€Co.€v.€Olsenóóó ó,€711€S.W.2d€603€(Tenn.€1986),€the€Beare€Company€filed€suit€seekingÐ Ô$  Ða€refund€of€sales€taxes€which€had€been€paid€on€Beareððs€purchases€of€electricity,€gas,€and€water€fromÐ À  Ðthe€City€of€Humboldt.€€The€Commissioner€of€Revenue€filed€a€motion€to€dismiss€for€lack€of€subjectÐ ¬ü  Ðmatter€jurisdiction€due€to€the€Beare€Companyððs€failure€to€satisfy€the€statutory€provisions€for€tax€suits.€Ð ˜è  ÐThe€Chancellor€ruled€that€the€Beare€Company€ð ðsubstantially€compliedðð€with€the€statutoryÐ „Ô  Ðprerequisites€for€suit,€and€denied€the€Commissionerððs€motion.Ð pÀ ÐÌà  àThe€Supreme€Court€reversed,€reaffirming€the€settled€principle€that€suits€for€tax€refunds€areÐ H˜ Ðsuits€against€the€State€and€can€be€maintained€only€in€the€manner€and€upon€the€conditions€consentedÐ 4„ Ðto€by€the€State.€€òòSee,€also,€ò òL.€L.€Bean€Inc.€v.€Braceyóóó ó,€817€S.W.2d€292€(Tenn.€1991)€holding€that€theÐ  p Ðstatutory€scheme€provides€the€exclusive€authority€for€determining€liability€with€respect€to€taxesÐ  \ Ðcollected€or€administered€by€the€Department€of€Revenue.ò òòòòòó óóóóó€€Accordingly,€we€hold€that€the€trial€courtÐ øH Ðwas€without€jurisdiction€to€adjudicate€the€claims€for€refund€for€1990,€1991,€1992€and€1994.Ð ä4 ÐÌò òÓ  ÓIV.ó óÐ ¼  ÐÓ«&ÓÌà  àThe€principal€issue€in€this€case€is€whether€telephone€central€office€power,€transmission,€andÐ ”ä Ðswitching€equipment€sold€by€AT&T€Corp.€to€BellSouth,€òòet€al.óó,€qualified€as€industrial€machineryÐ €Ð Ðexempt€from€sales€and€use€tax.Ð l¼ Ðà  àÌà  àThe€undisputed€facts€are€derived€from€the€affidavits€and€depositions€of€engineers€and€aÐ D!” Ðprofessor€of€electrical€engineering€and€may€be€appropriately€condensed€from€the€briefs.Ð 0"€  ÐÌòòA:€Central€Office€Power,€Transmission,€and€Switching€Equipment.óóÐ $X" ÐÌà  àFor€the€years€involved,€AT&T€Corp.€manufactured€and€sold€power,€transmission,€andÐ à%0!$ Ðswitching€equipment€to€BellSouth€and€others€for€use€in€telephone€central€offices,€which€are€locationsÐ Ì&"% Ðin€a€telephone€network€where€the€telephone€line€of€a€person€making€a€phone€call€is€connected€eitherÐ ¸'#& Ðto€the€line€of€the€person€being€called€or€to€a€trunk€line€connecting€to€another€central€office€along€theÐ ¤(ô#' Ðnetwork.Ð )à$( Ðâ âà  àà ` àà ¸ àà  àà h àà À àà  àÐ |*Ì%) Ðà  àCentral€office€power€equipment€is€used€to€generate€and€supply€electrical€current€and€voltageÐ ° Ðâ âfor€central€office€operations€and€for€telephones€connected€to€the€central€office;€transmissionÐ œì Ðequipment€is€used€to€ð ðbundleðð€and€ð ðamplifyðð€telephone€calls€for€transmission€between€centralÐ ˆØ Ðoffices,€and€switching€equipment€is€used€to€connect€the€telephone€caller€with€the€party€being€called.Ð tÄ ÐÌà  àBellSouth€is€primarily€a€land„line€telephone€company€providing€local€telephone€service€andÐ L œ Ðcertain€intrastate€toll€telephone€services€to€customers€in€several€southeastern€states,€includingÐ 8 ˆ ÐTennessee.€€Its€telephone€network€consists€of€wires€and€equipment€connecting€with€other€similarÐ $ t Ðsystems€to€form€a€local,€state,€national,€and€international€telephone€network.€€As€part€of€its€network,Ð  ` ÐBellSouth€had€over€190€telephone€central€offices€located€in€Tennessee,€each€utilizing€power,Ð ü L  Ðtransmission,€and€switching€equipment€necessary€for€BellSouth€to€provide€telecommunicationsÐ è 8  Ðservice.Ð Ô$  ÐÌà  àTelephone€service€is€provided€essentially€by€electrical€signals€passing€through€conductiveÐ ¬ü  Ðlines€to€the€customersðð€telephones.€€Electrical€current€flows€from€the€telephone€companyððs€centralÐ ˜è  Ðoffice€to€the€customerððs€telephone,€and€then€back€to€the€central€office.€€The€electricity€that€flowsÐ „Ô  Ðthrough€the€telephone€lines€serves€no€useful€purpose€other€than€as€a€medium€of€telecommunication.Ð pÀ ÐÌà  àMore€than€90€percent€of€BellSouthððs€sales€revenues€in€Tennessee€during€the€audit€periodÐ H˜ Ðwere€derived€from€switching€and€transmitting€telephone€calls€either€from€or€to€BellSouth€customers.€Ð 4„ ÐIts€customers€are€charged€a€flat€rate€for€a€specified€time€period€(usually€one€month)€for€localÐ  p Ðexchange€service,€or€on€the€basis€of€measured€usage,€such€as€the€number€or€duration€of€calls€duringÐ  \ Ða€given€period,€for€long„distance€calls.€€Billing€is€not€based€on€a€measure€of€electricity€used.Ð øH ÐÌà  àDuring€the€relevant€time€period,€BellSouth€never€applied€for€or€received€from€the€TennesseeÐ Ð  ÐDepartment€of€Revenue€an€authorization€under€Sales€and€Use€Tax€Rule€1.06€(Tenn.€Admin.€Comp.Ð ¼  Ð1320„5„1„1.06)€to€purchase€industrial€machinery€exempt€from€sales€and€use€tax.Ð ¨ø ÐÌòòB.€€Line€or€System€Engineering€Services.óóÐ €Ð ÐÌà  àIn€conjunction€with€its€sales€of€central€office€power,€transmission€and€switching€equipmentÐ X ¨ Ðto€BellSouth€during€the€audit€period,€AT&T€Corp.€also€typically€provided€certain€services,€whichÐ D!” Ðincluded€installation€of€the€equipment€in€central€offices€and€engineering€the€equipment.€€AT&TÐ 0"€  ÐCorp.ððs€invoices€to€BellSouth€€itemized€separate€charges€for€equipment,€installation€and€engineering.Ð #l! ÐÌà  àSystem€engineering€services€are€performed€in€connection€with€the€expansion€or€modificationÐ ô$D # Ðof€telephone€central€offices.€€A€telephone€central€office€is€a€facility€which€is€owned€and€operated€byÐ à%0!$ Ða€local€telephone€company,€such€as€BellSouth,€and€which€houses€many€different€types€ofÐ Ì&"% Ðsophisticated€telephone€equipment€for€generating,€switching€and€transmitting€telephone€calls.Ð ¸'#& ÐÌà  àNo€two€central€offices€are€alike.€€The€type€and€layout€of€equipment€within€central€offices€willÐ )à$( Ðvary€depending€on€factors€such€as:€the€central€officeððs€position€within€the€telephone€network€(òòe.g.óó.Ð |*Ì%) Ðurban€or€rural);€the€customer€base€served€by€the€office€(òòe.g.,óó€residential€or€commercial);€and€theÐ h+¸&* Ðclasses€and€types€of€service€offered€to€subscribers€(òòe.g.,óó€call€waiting,€caller€ID,€call€forwarding,€etc.).€Ð ° ÐTelephone€central€offices€are€generally€in€a€constant€state€of€growth€and€evolution.Ð œì ÐÌà  àBellSouthððs€purpose€in€obtaining€system€engineering€services€from€outside€vendors,€such€asÐ tÄ ÐAT&T€Corp.,€is€to€expand€central€office€capacity€without€the€interruption€of€service€to€BellSouthððsÐ `° Ðtelephone€subscribers.Ð L œ ÐÌà  àAT&T€Corp.ððs€ð ðsystem€engineering€servicesðð€involve€the€following€specific€tasks:Ð $ t ÐÌÓ€ (5h83ÓÝ"‚3£"ÝÝ  Ýà8  àÝ‚3£º>ÝÔ25hÔÚ  ÚaÚ  Ú.Ô3  Ôà0` Ð Ð àÝ  ÝAnalyzing€and€consulting€with€a€vendee,€such€as€BellSouth,€concerning€theÐ ü L  Ðselection€of€the€particular€equipment€required€by€the€central€office:݃3£º>ó>ÝŒÐè 8 ` Ð ` Ð  ÐŒÝ  ÝÝ"‚3£"ÝÝ  Ýà8  àÝ‚3£:@ÝÔ25hÔÚ  ÚbÚ  Ú.Ô3  Ôà0` Ð Ð àÝ  ÝDetermining€how€to€connect€new€equipment€with€existing€central€officeÐ Ô$  Ðequipment€so€as€to€prevent€interruptions€in€subscriber€telephone€service;݃3£:@s@ÝŒÐÀ ` Ð ` Ð  ÐŒÝ  ÝÝ"‚3£"ÝÝ  Ýà8  àÝ‚3£ºAÝÔ25hÔÚ  ÚcÚ  Ú.Ô3  Ôà0` Ð Ð àÝ  ÝMaintaining€updated€records€of€equipment€configuration€and€the€designingÐ ¬ü  Ðstatus€of€each€office;݃3£ºAóA݌Иè ` Ð ` Ð  ÐŒÝ  ÝÝ"‚3£"ÝÝ  Ýà8  àÝ‚3£ CÝÔ25hÔÚ  ÚdÚ  Ú.Ô3  Ôà0` Ð Ð àÝ  ÝDetermining€the€compatibility€of€the€proposed€additions€with€the€existingÐ „Ô  Ðsystem,€including€the€location€of€component€parts,€routing€of€wires€andÐ pÀ Ðcables,€adequacy€of€power€sources,€and€integration€with€testing€systems,€andÐ \¬ Ðlighting€and€alarm€systems;€and݃3£ CCCÝŒÐH˜` Ð ` Ð  ÐŒÝ  ÝÝ"‚3£"ÝÝ  Ýà8  àÝ‚3£!EÝÔ25hÔÚ  ÚeÚ  Ú.Ô3  Ôà0` Ð Ð àÝ  ÝPreparing€detailed€specifications€which€tell€installers€(usually€by€reference€toÐ 4„ Ðpre„existing€publications)€how€to€install€equipment;€what€paths€to€takeÐ  p Ðthrough€the€central€office€for€new€or€relocated€cable;€where€to€terminateÐ  \ Ðcables;€and€other€details.݃3£!EZEÝŒÐøH` Ð ` Ð  ÐŒÝ  ÝÌà  àEngineering€services€are€unique€to€each€central€office,òòò ò€ó ónotóó€to€the€equipment€itself,€òòi.e.,óóÐ Ð  Ðengineering€specifications€take€into€account€the€existing€equipment,€layout,€power€supply,€etc.,€ofÐ ¼  Ða€particular€central€office€and€the€specific€alterations€required€by€the€project.€€If€an€equipment€orderÐ ¨ø Ðfor€one€central€office€were€to€be€canceled,€new€specifications€would€be€required€to€integrate€the€sameÐ ”ä Ðpieces€of€equipment€into€a€different€central€office.Ð €Ð ÐÌà  àThe€òòsystemóó€engineering€services€which€are€the€subject€of€this€case€are€distinct€from€òòdesignóóÐ X ¨ Ðengineering€services,€which€consist€of€engineering€and€design€work€associated€with€the€manufactureÐ D!” Ðof€standardized€pieces€of€telephone€equipment.€€AT&T€Corp.€does€not€dispute€that€the€cost€ofò ò€òòó ódesignóóÐ 0"€  Ðengineering€services€are€properly€part€of€the€ð ðsales€priceðð€of€the€equipment.Ð  #p! ÐÌà  àThe€òòsystemóó€engineering€services€which€are€the€subject€of€this€case€are€distinct€fromÐ ø$H # Ðòòinstallationò ò€ó óóóservices,€which€consist€of€the€physical€placement€or€mounting€of€equipment;€wiring€andÐ ä%4!$ Ðinterconnection€of€equipment;€testing;€ð ðpower„upðð;€and€ð ðcut„over,ðð€and€placing€in€service.€Ð Ð& "% ÐInstallation€services€sold€by€AT&T€Corp.€are€furnished€by€an€entirely€different€group€from€AT&TÐ ¼' #& ÐCorp.ððs€system€engineer,€and€are€frequently€performed€by€the€vendee€itself,€such€as€BellSouth,€orÐ ¨(ø#' Ðby€third„party€installers€engaged€by€the€vendee.€€AT&T€Corp.€charges€its€Tennessee€vendees€salesÐ ”)ä$( Ðtax€on€its€installation€services€and€does€not€claim€that€its€installation€services€are€non„taxable€inÐ €*Ð%) ÐTennessee.Ð l+¼&* Їà  àVendees,€such€as€BellSouth,€generally€plan,€administer€and€execute€modifications€to€theirÐ ° Ðcentral€offices€on€a€ð ðprojectðð€basis.€€BellSouth€initiates€orders€for€engineering€services€by€preparingÐ œì Ða€ð ðtelephone€equipment€order,ðð€or€ð ðTEO,ðð€and€forwarding€it€to€the€vendor.€€TEOs€comprise€the€basicÐ ˆØ Ðpurchase€order€for€specific€items€of€equipment,€engineering€services,€or€installation€services.€€TEOsÐ tÄ Ðgenerally€specify€whether€the€order€is€for€engineering€(ð ðEðð),€equipment€(ð ðFðð),€installation€(ð ðIðð),€orÐ `° Ðsome€combination€thereof.€€For€a€single€project,€BellSouth€may€issue€multiple€TEOs,€and€mayÐ L œ Ðacquire€equipment€and€services€from€more€than€one€vendor€for€the€same€project.Ð 8 ˆ ÐÌà  àBellSouth€acquires€line€or€system€engineering€services€from€vendors,€such€as€AT&T€Corp.,Ð  ` Ðpursuant€to€master€contracts€or€ð ðgeneral€agreementsðð€which€govern€most€aspects€of€the€purchaser„Ð ü L  Ðvendor€relationship.€€These€master€contracts€specifically€permit€BellSouth€to€contract€with€vendorsÐ è 8  Ðòòotheróó€than€AT&T€Corp.,€and€permit€BellSouth€to€acquire€equipment,€engineering€services,€andÐ Ô$  Ðinstallation€services,€either€separately€on€in€combination.Ð À  ÐÌà  àAlthough€system€engineering€services€are€frequently€ordered€on€the€same€TEO€as€anÐ ˜è  Ðequipment€order,€engineering€services€are€separately€identified€on€the€TEO€and€are€òòoptionalóó€with€theÐ „Ô  Ðvendee,€òòi.e.,óó€in€any€central€office€project,€BellSouth€has€the€options€to:Ð pÀ ÐÌØ! !ØÓ€ (Eh88ÓÝ"‚3£"ÝÝ  Ýà8  àÝ‚3£gVÝÔ2EhÔÚ  ÚaÚ  Ú.Ô3  Ôà0` Ð Ð àÝ  Ýorder€materials€without€system€engineering€services€(F€only);݃3£gV VÝŒÐH˜` Ð ` Ð  ÐŒÝ  ÝÝ"‚3£"ÝÝ  Ýà8  àÝ‚3£WÝÔ2EhÔÚ  ÚbÚ  Ú.Ô3  Ôà0` Ð Ð àÝ  Ýorder€system€engineering€services€alone€(E€only);݃3£WºWÝŒÐ4„` Ð ` Ð  ÐŒÝ  ÝÝ"‚3£"ÝÝ  Ýà8  àÝ‚3£XÝÔ2EhÔÚ  ÚcÚ  Ú.Ô3  Ôà0` Ð Ð àÝ  Ýfurnish€materials,€and€equipment€manufactured€by€another€vendor€to€beÐ  p Ðsystem€engineered€by€AT&T€Corp.;€or݃3£XÈX݌Р\` Ð ` Ð  ÐŒÝ  ÝÝ"‚3£"ÝÝ  Ýà8  àÝ‚3£éYÝÔ2EhÔÚ  ÚdÚ  Ú.Ô3  Ôà0` Ð Ð àÝ  Ýfurnish€its€own€equipment€to€be€system€engineered€by€AT&T.݃3£éY"ZÝŒÐøH` Ð ` Ð  ÐŒÝ  ÝÌà  àEven€where€BellSouth€acquires€both€central€office€switching€equipment€and€systemÐ Ð  Ðengineering€services€from€AT&T€Corp.,€BellSouth€will€almost€invariably€obtain€certain€equipment,Ð ¼  Ðsuch€as€alarms,€test€kits€and€monitoring€equipment,€from€third„party€vendors.€€In€the€transmissionÐ ¨ø Ðarea,€it€is€common€for€BellSouth€to€contract€with€AT&T€Corp.€for€system€engineering€services€butÐ ”ä Ðto€acquire€equipment€such€as€DSX€(digital€cross„connect)€panels€manufactured€by€vendors€other€thanÐ €Ð ÐAT&T€Corp.Ð l¼ ÐÌà  àAT&T€Corp.€prices€its€system€engineering€services€and€equipment€separately.€€MoreÐ D!” Ðspecifically:Ð 0"€  ÐÌØ! !ØÓ€ (Uh88ÓÝ"‚3£"ÝÝ  Ýà8  àÝ‚3£¡^ÝÔ2UhÔÚ  ÚaÚ  Ú.Ô3  Ôà0` Ð Ð àÝ  ÝPrices€of€AT&T€Corp.ððs€system€engineering€services€are€based€on€timeÐ $X" Ðstudies€which€predict€the€average€amount€of€time€it€takes€to€perform€aÐ ô$D # Ðparticular€service.݃3£¡^Ú^ÝŒÐà%0!$` Ð ` Ð  ÐŒÝ  ÝÝ"‚3£"ÝÝ  Ýà8  àÝ‚3£H`ÝÔ2UhÔÚ  ÚbÚ  Ú.Ô3  Ôà0` Ð Ð àÝ  ÝThere€is€no€correlation€between€the€price€of€a€tangible€product€supplied€byÐ Ì&"% ÐAT&T€Corp.€and€the€price€of€the€system€engineering€services€required€toÐ ¸'#& Ðengineer€the€product€into€(or€out€of)€an€existing€system.€€Because€systemÐ ¤(ô#' Ðengineering€services€are€priced€on€the€time€it€takes€to€perform€the€service€andÐ )à$( Ðon€project€complexity€(and€not€on€the€price€of€the€equipment€ordered),€theÐ |*Ì%) Ðprice€of€system€engineering€services€generally€decreases€with€multiple€ordersÐ h+¸&* Ðof€equipment.€€By€contrast,€the€price€of€an€item€of€equipment€remainsÐ ° Ðgenerally€the€same,€regardless€of€the€number€of€pieces€ordered€or€where€theyÐ œì Ðare€placed.€€(Large€volume€customers,€like€BellSouth,€may€receive€a€discountÐ ˆØ Ðbased€on€the€total€volume€of€purchases€of€both€equipment€and€engineeringÐ tÄ Ðservices.)݃3£H``ÝŒÐ`°` Ð ` Ð  ÐŒÝ  ÝÝ"‚3£"ÝÝ  Ýà8  àÝ‚3£çdÝÔ2UhÔÚ  ÚcÚ  Ú.Ô3  Ôà0` Ð Ð àÝ  ÝSystem€engineering€services€ordered€by€a€vendee€must€be€paid€for,Ð L œ Ðirrespective€of€whether€the€vendee€ultimately€cancels€the€equipment€order.€Ð 8 ˆ ÐIf€a€telephone€company€customer€cancels€an€equipment€order€involving€bothÐ $ t Ðequipment€and€system€engineering€services,€the€telephone€company€must€payÐ  ` Ðfor€engineering€services€rendered€prior€to€cancellation€and€for€engineeringÐ ü L  Ðservices€necessary€to€restore€records€to€their€original€condition.݃3£çd eÝŒÐè 8 ` Ð ` Ð  ÐŒÝ  Ýà8  àÐ Ð Ð  Ðà  àAT&T€Corp.ððs€engineering€services€and€equipment€are€warranted€for€different€periods.€Ð À  ÐAT&T€Corp.ððs€warranty€for€engineering€services€is€6€months;€AT&T€Corp.ððs€warranty€for€tangibleÐ ¬ü  Ðproducts€is€a€minimum€of€one€year,€with€many€products€(òòe.g.óó,€cable)€warranted€for€much€longerÐ ˜è  Ðperiods.Ð „Ô  ÐÌà  àDuring€the€period€1990€through€1994,€central€office€power,€transmission€and€switchingÐ \¬ Ðequipment€was€manufactured€and€sold€by€AT&T€Corp.€through€divisions€entirely€separate€from€theÐ H˜ Ðsystems€engineering€group.Ð 4„ ÐÌà  àIrrespective€of€whether€BellSouth€acquires€system€engineering€services€from€AT&T€Corp.Ð  \ Ðseparately€or€in€combination€with€other€services€or€equipment,€AT&T€Corp.€bills€its€charges€forÐ øH Ðengineering€services€separately,€and€bills€BellSouth€for€system€engineering€services€electronically.Ð ä4 ÐÌò òÓ  ÓV.ó óÐ ¼  ÐÓlÓÌà  àTenn.€Code€Ann.€ðð€67„6„206(a)€provides€succinctly€that€after€June€30,€1983,€no€tax€is€dueÐ ”ä Ðwith€respect€to€industrial€machinery.Ð €Ð ÐÌà  àTenn.€Code€Ann.€ðð€67„6„102(13)€defines€industrial€machinery€asÐ X ¨ ÐÌà8  àà8` Ð Ð à(A)€Machinery,€apparatus€and€equipment€with€all€associated€parts,Ð 0"€  Ðappurtenances,€and€accessories€.€.€.€which€is€necessary€to,€andÐ #l! Ðprimarily€for,€the€fabrication€and€processing€tangible€personalÐ $X" Ðproperty€for€resale€and€consumption€off€the€premises,€.€.€.€òòwhere€theÐ ô$D # Ðuse€of€such€machinery,€equipment€or€facilities€is€by€one€who€engagesÐ à%0!$ Ðin€such€fabrication€or€processing€as€oneððs€principal€business.€.€.€.ÐÌ&"%` x` x ÐÓ  Óà8 @ àà8 @ à.€.€.Ð ¸'#& ÐÓoÓà8  àà8` Ð Ð àóó(D)òò€Such€industrial€machineryóó€necessary€to€and€primarily€for€theÐ ¤(ô#' Ðfabrication€and€processing€of€tangible€personal€property€for€resale€orÐ )à$( Ðused€primarily€for€the€control€of€air€pollution€or€water€pollutionÐ |*Ì%) Ðincludes,€but€is€not€limited€to:Ðh+¸&*` x` x ÐÓ  Óà8 @ à.€.€.Ð ° ÐÓKqÓà8  àà8` Ð Ð à(i)€Machines€used€for€generating,€producing,€and€distributing€utilityÐ œì Ðservices,€electricity,€steam,€and€treated€or€untreated€water;€.€.€.€.€ÐˆØ` x` x ÐÌ[Emphasis€added.]Ð `° ÐÌà  àIn€òòò òTennessee€Farmers€Cooperative€v.€Statesó óóó,€736€S.W.2d€87€(Tenn.€1987),€a€guidingÐ 8 ˆ Ðprinciple€with€respect€to€claims€of€exemption€from€taxation€was€clearly€reaffirmed:Ð $ t ÐÌà8  àPlaintiff€comes€to€this€Court€with€ð ðthe€heavy€and€exacting€burden€of€proving€theÐ ü L  Ðerror€in€the€assessment,ðð€òòò òStratton€v.€Jacksonóóó ó,€707€S.W.2d€865€(Tenn.€1986).€Ð è 8  ÐMoreover,€while€tax€statutes€are€generally€construed€in€favor€of€the€taxpayer,€òòò òMoto„Ð Ô$  ÐPep,€Inc.,€v.€McGoldrickóóó ó,€202€Tenn.€119,€128,€303€S.W.2d€326,€330€(1957),€ð ð[i]n€aÐ À  Ðsuit€against€the€State€by€a€taxpayer€claiming€exemption€from€taxation,€the€taxingÐ ¬ü  Ðstatute€is€construed€strictly€against€the€taxpayer.€€The€burden€is€on€the€taxpayer€toÐ ˜è  Ðestablish€his€exemption.€€The€presumption€is€against€the€exemption,€and€exemptionÐ „Ô  Ðfrom€taxation€will€not€be€read€into€a€taxing€statute€by€implication.ðð€€òòò òHamiltonÐ pÀ ÐNational€Bank€v.€McCanless,€óóó ó176€Tenn.€570,€574,€144€S.W.2d€768,€769„770€(1940)Ð \¬ Ð(citations€omitted).ò òòò€€ó óSee,€also,€ò òLeTournear€Sales€&€Service,€Inc.€v.€Olsenóóó ó,€691Ð H˜ ÐS.W.2d€531,€534€(Tenn.€1985);€òòò òWoods,€v.€General€Oils,€Inc.óóó ó,€558€S.W.2d€433,€435Ð 4„ Ð(Tenn.€1977);€òòò òAmerican€National€Bank€and€Trust€Co.€of€Chattanooga€v.Ð  p ÐMacFarlandóóó ó,€209€Tenn.€263,€268„289,€352€S.W.2d€441,€443€(1961).Ð \Ð Ð  ÐÌà  àThe€Commissioner€argues€that€under€the€general€definition,€ð ðmachinery,€apparatus€andÐ ä4 Ðequipmentðð€qualify€as€exempt€industrial€machinery€only€if€it€is€used€by€one€whose€principal€businessÐ Ð  Ðis€the€fabrication€or€processing€of€tangible€personal€property€for€resale.€€This€argument€appears€toÐ ¼  Ðbe€consonant€with€the€plain€language€of€the€statute.€€òòSeeóó,€ò òòòTennessee€Farmers€Cooperative€v.€Stateóóó ó,Ð ¨ø Ðòòsupraóó.Ð ”ä ÐÌà  àAT&T€argues€that€it€qualifies€for€the€utility€services€exemption€provided€in€subsection€(D)(i)Ð l¼ Ðof€the€statute.€€We€agree€with€the€Chancellor€that€this€subsection€does€not€provide€an€independent,Ð X ¨ Ðor€separate,€exemption,€but€must€be€considered€in€context€with€subsection€(A),€citing€òòò òTibbalsÐ D!” ÐFlooring€Co.€v.€Huddlestonóóó ó,€891€S.W.2d€196€(Tenn.€1994)€for€the€proposition€that€the€thresholdÐ 0"€  Ðquestion€for€the€exemption€is€whether€the€requirements€of€subsection€(A)€are€being€satisfied.Ð #l! ÐÌà  àAT&T€argues€that€central€office€equipment€generates€and€processes€electrical€current€andÐ ô$D # Ðvoltage,€and€that€electricity€constitutes€tangible€personal€property€within€the€definition€of€Tenn.€CodeÐ à%0!$ ÐAnn.€ðð€67„6„102(28).€€Our€Supreme€Court€has€so€held;€òòsee,ò ò€Texas€Eastern€Transmission€Corp.€v.Ð Ì&"% ÐBensonóóó ó,€480€S.W.2d€905€(Tenn.€1972).€€AT&T€extrapolates€this€principle€to€conclude€that€BellSouthÐ ¸'#& Ðis€engaged€in€the€sale€of€electricity.€€We€cannot€agree,€because€BellSouth€ð ðis€primarily€a€land„lineÐ ¤(ô#' Ðtelephone€company€providing€local€exchange€and€certain€intrastate€toll€telephone€services€toÐ )à$( Ðâ âsubscribers.ðð€€We€agree€with€the€Chancellor€that€what€BellSouth€sells€is€a€service€„„„Ð |*Ì%) Ðtelecommunication€„„„€and€that€AT&T€is€not€entitled€to€exempt,€as€industrial€machinery,€its€sale€ofÐ ° Ðcentral€office€equipment€to€BellSouth.Ð œì Ðâ âÌò òÓ  ÓVI.ó óÐ tÄ ÐÓyÓÌà  àThe€Chancellor€ruled€that€system€engineering€services€performed€by€AT&T€with€its€sales€ofÐ L œ Ðequipment€to€BellSouth€were€not€subject€to€sales€tax,€because€the€services€were€not€ð ðpart€of€the€saleÐ 8 ˆ Ðof€tangible€personal€property.ððÐ $ t ÐÌà  àThe€Commissioner€insists€that€this€legal€conclusion€is€erroneous€because€the€engineering€wasÐ ü L  Ðan€essential€prerequisite€to€the€installation€of€the€complex€equipment.Ð è 8  ÐÌà  àThe€engineering€services€at€issue€would€begin€when€AT&T€received€a€telephone€equipmentÐ À  Ðorder€(ð ðTEOðð)€from€its€customer.€€The€order€would€be€analyzed€and€reduced€to€specifications€whichÐ ¬ü  Ðwere€a€detailed€listing€of€all€of€the€actual€items€that€would€be€needed€to€provide€the€ultimateÐ ˜è  Ðinstallation€of€working€equipment.€€Engineering€would€identify€associated€equipment,€racking,€andÐ „Ô  Ðcabling€that€would€be€needed€for€a€functioning€installation€of€the€basis€equipment€and€would€checkÐ pÀ Ðthe€customerððs€order€to€ensure€that€the€ordered€equipment€would€be€compatible€with€the€existingÐ \¬ Ðequipment€in€the€central€office.€€Engineering€would€also€plan€the€physical€placement€of€theÐ H˜ Ðequipment€within€the€existing€central€office,€including€cables,€connections,€racking,€and€lighting.€Ð 4„ ÐA€blueprint€showing€the€appropriate€placement€and€connection€of€the€equipment€would€be€prepared.€Ð  p ÐThe€specifications€and€associated€information€would€be€provided€to€the€installers€to€guide€them€inÐ  \ Ðthe€installation.€€Switches€and€transmission€equipment€were€generally€sold€to€BellSouth€during€theÐ øH Ðaudit€period€engineered,€furnished,€and€installed.Ð ä4 ÐÌà  àPursuant€to€Tenn.€Code€Ann.€ðð€67„6„202(a),€sales€tax€is€imposed€at€a€stated€percentage€ofÐ ¼  Ðthe€sales€price€of€tangible€personal€property€sold€in€this€state.€€Tenn.€Code€Ann.€ðð€67„6„102(26)Ð ¨ø Ðprovides€that:Ð ”ä ÐÌà8  àà8` Ð Ð àð ðSales€priceðð€means€the€total€amount€for€which€a€taxable€service€orÐ l¼ Ðtangible€personal€property€is€sold,€òòincluding€any€services€that€are€aÐ X ¨ Ðpart€of€the€sale€of€tangible€personal€propertyóó,€valued€in€money,Ð D!” Ðwhether€paid€in€money€or€otherwise.€.€.€.Ð0"€ ` x` x ÐÌ[Emphasis€added.]Ð $X" ÐÌà  àThe€issue€here€is€whether€the€described€engineering€services€were€a€part€of€the€sales€of€theÐ à%0!$ Ðcentral€office€equipment.€€AT&T€argues€that€the€engineering€services€are€nontaxable€because€theÐ Ì&"% Ðservices€were€ð ðtrueðð€services,€and€because€they€often€involved€some€items€from€other€equipmentÐ ¸'#& Ðvendors.€€Many€of€the€sales€of€transmission€or€switching€equipment€apparently€were€in€conjunctionÐ ¤(ô#' Ðwith€larger€central€office€expansion€projects,€often€involving€some€components€provided€by€third„Ð )à$( Ðparty€vendors€or€by€BellSouth€itself,€although,€at€least€for€switches,€the€overwhelming€majority€ofÐ |*Ì%) Ðthe€materials€would€be€furnished€by€AT&T.Ð h+¸&* Їà  àThe€use€of€some€items€provided€by€a€third€party€does€not€insulate€AT&T€from€the€fullÐ ° Ðapplication€of€the€sales€tax€to€its€sale€of€tangible€personal€property€and€related€services.€€AT&TÐ œì Ðargues€the€contrary,€and€relies€on€the€cases€of€òòò òCities€Service€Co.€v.€Tidwellóóó ó,€534€S.W.2d€298€(Tenn.Ð ˆØ Ð1996),€and€òòò òAustin€Co.€v.€Woodsóóó ó,€620€S.W.2d€73€(Tenn.€1981).€€We€do€not€believe€these€casesÐ tÄ Ðsupport€AT&T.€€òòò òCities€Serviceóóó ó€holds€that€engineering,€design,€procurement,€and€administrativeÐ `° Ðservices€are€not€taxable€where€provided€by€a€non„vendor€of€tangible€personal€property.€€That€caseÐ L œ Ðinvolved€services€by€a€party€who€sold€no€tangible€personal€property€at€all.€€The€òòò òAustinó óóó€case€alsoÐ 8 ˆ Ðholds€that€the€term€ð ðsales€priceðð€for€the€purposes€of€Tenn.€Code€Ann.€ðð€67„6„102€is€limited€toÐ $ t Ðð ðòòservices€rendered€by€the€seller,€as€part€of€the€sale€to€the€purchases.óóðð€€In€òòò òAustinóóó ó,€the€court€found€thatÐ  ` Ðð ðthe€services€of€Austin€are€those€rendered€by€a€non„vendor.ðð€€The€logic€of€both€cases€is€that€theÐ ü L  Ðð ðsales€priceðð€of€tangible€personal€property€cannot€include€services€rendered€by€one€who€was€not€theÐ è 8  Ðvendor€of€any€tangible€personal€property,€and€does€not€support€the€proposition€that€the€mere€presenceÐ Ô$  Ðof€components€furnished€by€another€vendor€automatically€insulates€from€tax€all€design€engineeringÐ À  Ðservices€performed€by€the€major€vendor.€€In€the€case€at€Bar,€AT&T€is€a€substantial€vendor€of€theÐ ¬ü  Ðtangible€personal€property€involved;€and€is€not€a€ð ðthird€partyðð€to€its€own€sales€of€tangible€personalÐ ˜è  Ðproperty€to€BellSouth,€regardless€of€the€circumstance€that€some€other€items€in€the€overall€projectÐ „Ô  Ðwere€purchased€from€other€vendors.Ð pÀ ÐÌà  àAT&T€also€argues€that€its€system€engineering€services€are€nontaxable€because€they€wereÐ H˜ Ðpriced€separately,€warranted€separately,€and€separately€stated€on€customer€invoices.€€TheÐ 4„ Ðseparateness€of€the€cost€of€engineering€services€in€not€relevant.€€òòSee,€ò òThomas€Nelson,€Inc.,€v.€Olsonóóó ó,Ð  p Ð723€S.W.2d€621,€622€(Tenn.€1987);€òòò òSaverio€v.€Carsonóóó ó,€208€S.W.2d€1018€(Tenn.€1948).€€Neither€areÐ  \ ÐAT&Tððs€warranty€policies€relevant.€€Separately€stated€invoice€charges,€while€prerequisite€to€a€claimÐ øH Ðof€nontaxability,€cannot€be€dispositive€of€the€proper€application€of€the€sales€tax€to€the€transaction.€Ð ä4 ÐA€taxpayer€cannot€transform€a€properly€taxable€amount€into€a€nontaxable€amount€through€the€simpleÐ Ð  Ðexpedient€of€a€separately€stated€invoice€charge.Ð ¼  ÐÌà  àEquipment,€engineering,€and€installation€combine€in€this€instance€to€produce€BellSouthððsÐ ”ä Ðdesired€result:€a€functioning€item€of€tangible€personal€property€assembled€on€the€customerððsÐ €Ð Ðpremises.€€Without€engineering,€this€final€product€cannot€be€provided€to€the€customer.€€As€theÐ l¼ ÐTennessee€Supreme€Court€has€observed:Ð X ¨ ÐÌà8  àà8` Ð Ð àThere€is€scarcely€to€be€found€any€article€susceptible€to€sale€or€rentÐ 0"€  Ðthat€in€not€the€result€of€an€idea,€genius,€skill€and€labor€applied€to€aÐ #l! Ðphysical€substance.€€A€loaf€of€bread€is€the€result€of€the€skill€and€laborÐ $X" Ðof€the€cook€who€mixed€the€physical€ingredients€and€applied€heat€atÐ ô$D # Ðthe€temperature€and€consistency€her€judgment€dictated.€€A€radio€is€theÐ à%0!$ Ðresult€of€the€thought€of€a€genius,€or€several€such€persons,€combinedÐ Ì&"% Ðwith€the€skill€and€labor€of€trained€technicians€applied€to€a€tangibleÐ ¸'#& Ðmass€of€substance.€€An€automobile€is€the€result€of€all€these€elements,Ð ¤(ô#' Ðand€of€patents,€etc.;€and€so€on,€ad€infinitum.€€If€these€elements€shouldÐ )à$( Ðbe€separated€from€the€finished€product€and€the€sales€tax€applied€onlyÐ |*Ì%) Ðto€the€cost€of€the€raw€material,€the€sales€tax€act€would,€for€allÐ h+¸&* Ðpractical€purposes,€be€entirely€destroyed.€€The€material€used€in€theÐ ° Ðmaking€of€a€phonograph€record€probably€costs€only€a€few€cents.€€TheÐ œì Ðvoice€of€a€Caruso€recorded€thereon€makes€it€sell€for€perhaps€a€dollar.€Ð ˆØ ÐTo€measure€the€sales€tax€only€by€the€value€of€the€physical€material€inÐ tÄ Ðthis€phonograph€record€is€to€apply€an€impossible€formula.Ð`°` x` x ÐÌòòò òCrescent€Amusement€Co.€v.€Carsonóóó ó,€187€Tenn.€112,€213€S.W.2d€27,€29€(1948).Ð 8 ˆ ÐÌà  àTo€exempt€the€cost€of€engineering€from€sales€tax€in€this€case€would€be€to€apply€theÐ  ` Ðð ðimpossible€formulaðð€warned€against€by€the€Supreme€Court.€€The€engineering€services€were€in€mostÐ ü L  Ðinstances€essential€to€the€installation€of€the€equipment.€€Most€of€the€switching€equipment€was€soldÐ è 8  Ðð ðE,€F,€&€Iðð€ð!ð€engineered,€furnished,€and€installed.€€The€engineering€services€in€this€case€were€anÐ Ô$  Ðintegral€ð ðpart€of€the€sale€of€tangible€personal€property,ðð€and€thus€were€subject€to€sales€tax.Ð À  ÐÌò òÓ  ÓConclusionó óÐ ˜è  ÐÓ¶¤ÓÌà  àThe€ruling€that€AT&Tððs€sales€of€telephone€central€office€power,€transmission€and€switchingÐ pÀ Ðequipment€were€not€tax„exempt€sales€of€industrial€machinery,€but€were€subject€to€sales€tax,€isÐ \¬ Ðaffirmed.Ð H˜ ÐÌà  àThe€ruling€that€the€engineering€services€performed€by€AT&T€in€conjunction€with€its€salesÐ  p Ðof€central€office€power,€transmission€and€switching€equipment€were€not€subject€to€sales€tax€isÐ  \ Ðreversed.Ð øH ÐÌà  àThe€ruling€that€the€Chancery€Court€had€subject€matter€jurisdiction€over€AT&Tððs€claim€forÐ Ð  Ðrefund€of€taxes€paid€in€1990,€1991,€1992€and€1994€is€reversed.Ð ¼  ÐÌà  àThe€case€is€remanded€for€(1)€a€determination€of€the€amount€of€taxes€owing€by€AT&T,€(2)€anÐ ”ä Ðaward€of€attorney€fees€and€expenses€pursuant€to€Tenn.€Code€Ann.€ðð€67„1„1803(d),€and€(3)€for€allÐ €Ð Ðother€appropriate€purposes.Ð l¼ ÐÌà  àCosts€are€assessed€to€AT&T.Ð D!” ÐÌà8  àà ` àà ¸ àà  àà h àà À àà  àà p àPER€CURIUM