Can Tennessee fix the constitutional problem with the whiskey-barrel tax exemption by adding a legislative interpretation of 'manufactured article'?

Plain-English summary

This is the second AG opinion of 2018 on the same proposed exemption for aged whiskey barrels. Tenn. Att'y Gen. Op. 18-06 (March 5, 2018) had concluded that the original bill failed under article II, section 30 of the Tennessee Constitution because barrels used to age whiskey are tools of whiskey manufacturing, not the manufactured article. The drafters tried again with Amendment No. 2 to HB 2038, which:

• Declared that the phrase "articles manufactured from the produce of this state, or any other state of the union, in the hands of the manufacturer" "include[s] and ha[s] always included aged whiskey barrels" while owned or leased by a whiskey maker.
• Defined "aged whiskey barrel" as a barrel made of U.S.-sourced timber that has held whiskey and "has changed, or will change, in form or appearance" through the aging process.

Rep. Gary Hicks asked AG Slatery whether the amended bill would survive. AG Slatery answered no.

The opinion adds a separation-of-powers theory to the same conclusion as 18-06. Whether something is a "manufactured article" within article II, § 30 is a question of constitutional construction. Only the courts can interpret the Constitution (Witcher v. Bilbrey; Marbury v. Madison; Moore v. Love; Colonial Pipeline v. Morgan). The Tennessee Supreme Court has already done so in Benedict and Morgan & Hamilton: the exemption follows the article the manufacturer is producing, and stops when that article passes to a different manufacturer who uses it as a commodity. Amendment No. 2 attempts to legislatively reinterpret the Constitution against that judicial construction. Tennessee's separation of powers (Tenn. Const. art. II, §§ 1, 2) forbids that.

The amendment's "change in form or appearance" language doesn't help. Courts evaluate the natural and reasonable effect of a statute, not its declarations (Peay v. Nolan). Whether a barrel changes color or expands during whiskey aging, the whiskey maker is still a manufacturer of whiskey, not a manufacturer of barrels. The bill itself reveals this by tying the exemption to barrels "owned or leased by a person that produces or manufactures whiskey in those barrels." Articles used for manufacturing purposes are precisely what § 30 does not cover (Morgan & Hamilton).

Bottom line: the constitutional defect identified in Op. 18-06 cannot be cured by legislative redefinition.

Currency note

This opinion was issued in 2018. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The whiskey-barrel taxation issue was actively litigated and legislated after 2018. Anyone evaluating present taxability should pull the current versions of the cited statutes and any post-2018 case law or AG opinions.

Common questions

Q: Why does the AG say only courts can decide what 'manufactured' means?
A: Tennessee's Constitution divides government power among legislative, executive, and judicial branches (art. II, §§ 1, 2). Constitutional interpretation is judicial. The Tennessee Supreme Court already settled "manufactured article" in Morgan & Hamilton; the legislature cannot rewrite that interpretation by statute.

Q: Why isn't the legislature's 'finding' that barrels change in appearance enough?
A: Peay v. Nolan controls: courts look at the "real character" and "natural and reasonable effect" of a statute, not just the words of its declarations. Whether a barrel changes color, expands, or remains intact, the whiskey maker is using it as a tool to make whiskey. That puts it outside § 30's scope.

Q: Doesn't 'aged whiskey barrels' change use the change in form to make it manufactured?
A: The amendment's structure undermines its own goal. It applies only to barrels "owned or leased by a person that produces or manufactures whiskey in those barrels." That phrasing concedes the use is making whiskey, not making barrels. Articles used for manufacturing purposes by a different manufacturer are categorically outside § 30 (Morgan & Hamilton).

Q: Could the legislature ever exempt aged whiskey barrels?
A: Probably only by amending the Tennessee Constitution. Article II, § 30's text and the Supreme Court's settled construction together set a textual floor that ordinary legislation cannot reach.

Q: What about other articles used in manufacturing, like flour for a bakery?
A: Same analysis. Flour in the hands of a baker is a tool, not a manufactured article. The exemption follows the article the manufacturer makes, not its inputs.

Q: Does this affect the whiskey itself?
A: The opinion is about the barrel, not the spirit. It decides only that a barrel used to age whiskey is not a "manufactured article" exempt under § 30; it does not address the taxability of the whiskey.

Background and statutory framework

Tennessee's Constitution gives the courts the final word on its meaning. Article II, §§ 1 and 2 separate powers; Witcher v. Bilbrey reaffirms that "[t]he courts are solely responsible for interpreting the Tennessee Constitution"; Colonial Pipeline confirms that the constitutional balance is policed against legislative encroachment.

The "manufactured article" exemption in art. II, § 30 has a long line of construction. Benedict v. Davidson County established the exemption attaches to the article being manufactured, from raw input to finished product. Morgan & Hamilton Co. v. City of Nashville held that the exemption stops when the article passes to a different manufacturer to be used as input or commodity. The exemption favors "the article manufactured, not . . . the commodities which the manufacturer may . . . use for manufacturing purposes."

The 2018 effort failed Op. 18-06 on textual grounds. The 2018 follow-up adds the legislative declaration. AG Slatery treats this as a separation-of-powers violation: a legislative gloss cannot override a judicial construction of the Constitution. Peay v. Nolan ties the analysis together by directing courts to evaluate the "natural and reasonable effect" of any statute regardless of its declared purpose.

Citations

• Tenn. Const. art. II, §§ 1, 2; art. II, §§ 28, 30
• Tenn. Code Ann. § 67-5-216 (proposed subsection (c))
• S.B. 2076/H.B. 2038 (Am. No. 2, HA 0942), 110th Tenn. Gen. Assem. (2018)
• I.M. Darnell & Son Co. v. City of Memphis, 208 U.S. 113 (1908)
• Benedict v. Davidson County, 110 Tenn. 183, 67 S.W. 806 (1902)
• State ex rel Witcher v. Bilbrey, 878 S.W.2d 567 (Tenn. Ct. App. 1994)
• Morgan & Hamilton Co. v. City of Nashville, 151 Tenn. 382, 270 S.W. 75 (1925)
• Richardson v. Young, 122 Tenn. 471, 125 S.W. 664 (1909)
• Marbury v. Madison, 5 U.S. 137 (1803)
• Moore v. Love, 171 Tenn. 682, 107 S.W.2d 982 (1937)
• Colonial Pipeline Co. v. Morgan, 263 S.W.3d 827 (Tenn. 2008)
• Peay v. Nolan, 157 Tenn. 222, 7 S.W.2d 815 (1928)
• Tenn. Att'y Gen. Op. 18-06 (March 5, 2018)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2018/op18-15.pdf

Original opinion text

March 26, 2018
Opinion No. 18-15

Tax Exemption for "Aged Whiskey Barrels"

Question
Is proposed Senate Bill 2076/House Bill 2038, 110th Tenn. Gen. Assem. (2018), as amended by Amendment No. 2 to HB 2038 (HA 0942/Drafting Code 014670), constitutional?

Opinion
No. Under article II, section 30, of the Tennessee Constitution, as interpreted and construed by the Tennessee Supreme Court, an article being used to manufacture another product, such as a barrel being used by a whiskey maker to manufacture aged whiskey, is not entitled to an exemption from constitutionally mandated ad valorem taxation, and it is not within the legislative power to override or modify a judicial interpretation of the Constitution.

ANALYSIS

Senate Bill 2076/House Bill 2038, 110th Tenn. Gen. Assem. (2018), as amended by Amendment No. 2 to HB 2038 (HA 0942/Drafting Code 014670), would add a new subsection (c) to Tenn. Code Ann. § 67-5-216 with the goal of exempting from ad valorem tax wooden barrels used in the process of manufacturing whiskey. The new subsection (c) purports to do this by interpreting the phrase "articles manufactured from the produce of this state, or any other state of the union, in the hands of the manufacturer" to "include and [to] have always included aged whiskey barrels during the time in which such barrels are owned or leased by a person that produces or manufactures whiskey in those barrels." Amendment No. 2, Section 1(c)(1). It then defines "aged whiskey barrel" as a barrel that is made of United States-sourced timber, that contains or has contained whiskey, and that "has changed, or will change, in form or appearance as a result of the unique process of aging whiskey." Id., Section 1(c)(2).

Article II, section 28, of the Tennessee Constitution generally subjects all property to ad valorem taxation with certain limitations and permitted exceptions. Article II, section 30, exempts from that taxation any "article, manufactured of the produce of this State." Amendment No. 2 is designed to declare by legislative fiat that aged whiskey barrels are "manufactured" articles within the meaning of section 30 so that they can qualify for a section 30 tax exemption.

[Footnote 1: Section 30 must be read to include articles manufactured of the produce of Tennessee or any other State, because the federal Commerce Clause prohibits States from "impos[ing] upon the products of other states . . . more onerous . . . taxes than it imposes upon the like products of its own territory." I.M. Darnell & Son Co. v. City of Memphis, 208 U.S. 113, 121, 28 S. Ct. 247, 52 L. Ed. 413 (1908) (discussing article II, section 30, of the Tennessee Constitution).]

But whether any given article is "manufactured" within the meaning of article II, section 30, is a question of the proper construction and interpretation of the Tennessee Constitution. Benedict v. Davidson County, 110 Tenn. 183, 67 S.W. 806, 807 (1902). And it is well-established that only the courts have the power to interpret the Constitution. State ex rel Witcher v. Bilbrey, 878 S.W.2d 567, 573 (Tenn. Ct. App. 1994) ("The courts are solely responsible for interpreting the Tennessee Constitution.").

The Tennessee Supreme Court has in fact ruled on the proper construction and interpretation of "manufactured" for purposes of applying the tax exemption in article II, section 30, of the Tennessee Constitution. The Court has determined that "[m]anufactured articles are not exempt as commodities of commerce, but as articles of manufacture in the hands of the manufacturer," which means that "the immunity from taxation of the article of manufacture assured by the Constitution does not follow after the article has passed from the manufacturer of the particular article he produces or designs." Morgan & Hamilton Co. v. City of Nashville, 151 Tenn. 382, 270 S.W. 75, 76 (1925) (emphasis added). Rather, the exemption, which is "intended to encourage domestic manufacture[,] is an exemption of the article manufactured, not of the commodities which the manufacturer may . . . use for manufacturing purposes . . . ." Id.

In short, the Tennessee Supreme Court has held that the section 30 tax exemption depends on the conversion of the "produce" into an article which the manufacturer himself makes, i.e., "an article different from the original product which he bought for use in manufacturing." Morgan & Hamilton Co., 270 S.W. at 77. Accordingly, the section 30 exemption would apply during the process in which timber (the "produce" in question) is made into barrels (the "manufactured" article in question) by the barrel manufacturer, but would cease to apply when the barrels are used by the whiskey maker for the purpose of manufacturing whiskey, since the whiskey maker does not convert the timber out of which the barrels were made, or even the barrels themselves, into a different or distinct manufactured article.

In declaring that "aged whiskey barrels" are and always have been "manufactured" articles within the meaning of the Constitution, Amendment No. 2 purports to interpret or reinterpret the existing judicial construction of "manufactured" in article II, section 30. That is, the purpose of Amendment No. 2 is to override or modify a long-standing judicial interpretation of the Constitution and substitute a legislative interpretation.

But interpreting the Constitution is not within the power of the legislative branch of government. It is the exclusive province of the courts to interpret the Constitution. The Tennessee Constitution divides the powers of government "into three distinct departments: the Legislative, Executive, and Judicial" and expressly bars any one department from exercising the powers belonging to either of the other two departments. Tenn. Const. art. II, §§ 1 and 2. This constitutionally mandated division is known as the "separation of powers."

The power of the legislature is the power to "make, order, and repeal the laws," while the power of the judiciary is the power to "interpret and apply the laws." Richardson v. Young, 122 Tenn. 471, 125 S.W. 664, 668 (Tenn. 1909); see also Marbury v. Madison, 5 U.S. 137, 177, 2 L. Ed. 60 (1803) ("It is emphatically the province and duty of the judicial department to say what the law is."); Moore v. Love, 171 Tenn. 682, 107 S.W.2d 982, 986 (1937) ("We adhere to the fundamental principle of democratic constitutional government that, while the judiciary may not properly legislate nor determine the policy of legislation, in like measure the Legislature may not invade the judicial sphere by limitations not directed or permitted by the charter of our liberties, the Constitution itself.").

The judiciary is not only vested with the sole power to interpret the law but also has the sole power to determine the constitutionality of actions taken by the other two branches of government, and the Tennessee Constitution prohibits the executive and the legislative branches from encroaching on that judicial power as well. Colonial Pipeline Co. v. Morgan, 263 S.W.3d 827, 842-43 (Tenn. 2008). The exercise of legislative power is restrained by the Constitution, "and it is always a judicial question as to whether or not those restraints have been ignored or overlooked by the Legislature in passing a statute." Peay v. Nolan, 157 Tenn. 222, 7 S.W.2d 815, 818 (1928) (emphasis added).

If the legislature were to enact Amendment No. 2, it would be encroaching impermissibly on the exclusive power of the judiciary, the power to interpret the Constitution. The legislature may not, under the guise of enacting a "law," interpret the Constitution, which is what Amendment No. 2 attempts to do by legislatively answering the question, properly a question for the judiciary, whether a barrel used to age whiskey is a "manufactured article" within the meaning of article II, section 30. Indeed, the legislature would be interpreting the Constitution in a way that contradicts long-standing judicial interpretation. Because reinterpreting or differently interpreting the Constitution is not within the power of the legislature, any attempt to do so would be a violation of the Constitution under separation-of-powers doctrine.

Amendment No. 2 is constitutionally infirm for another reason as well. In examining the constitutionality of a statute, the courts will look to "its real character, and [to] the end designed to be accomplished, and the courts are not concluded by mere declarations, for in whatever language a statute may be framed, its purpose and constitutional validity must be determined by its natural and reasonable effect." Peay v. Nolan, 7 S.W.2d at 819. Thus, Amendment No. 2 would be unconstitutional not only because it would violate the doctrine of separation of powers, but also because, when its "real character" is examined and not just its "declarations," it is clear that it is designed to circumvent the constitutional requirement that all property, other than "manufactured" articles within the meaning of section 30 as interpreted by the Tennessee Supreme Court, be subject to ad valorem tax.

As this Office explained in Tenn. Att'y Gen. Op. 18-06 (March 5, 2018), an exemption for barrels that are used to age whiskey would be unconstitutional under article II, section 30, because those barrels are not "manufactured articles" as the Supreme Court has interpreted that term. Amendment No. 2 does nothing to change that. Despite all the "language" in which Amendment No. 2 is "framed," the whiskey maker is still merely using the barrels as a commodity in its own manufacturing process; the whiskey maker is not converting the barrel into an article different from the barrel that the whiskey maker bought. Thus, the barrel "owned or leased" in the hands of the whiskey maker is not a "manufactured article" within the scope of section 30 as construed by the Tennessee Supreme Court.

The reference in the Amendment to the change "in form or appearance" that a barrel undergoes during the whiskey-aging process does not alter the fact that a whiskey barrel is a means to the end of producing whiskey, not the other way around. Put simply, a whiskey maker is a manufacturer of whiskey, not a manufacturer of barrels. In fact, Amendment No. 2 itself makes it clear that the "aged whiskey barrels" are not manufactured articles but are articles used for manufacturing purposes because, by its own terms, Amendment No. 2 applies to barrels that are "owned or leased by a person that produces or manufactures whiskey in those barrels." That alone renders the barrels ineligible for the section 30 tax exemption; articles "use[d] for manufacturing purposes" are not within the scope of section 30. Morgan & Hamilton Co., 270 S.W. at 76.

In any event, reference to a change in appearance is a mere "declaration" that is not binding on the courts, "for in whatever language a statute may be framed, its purpose and constitutional validity must be determined by its natural and reasonable effect." Peay v. Nolan, 7 S.W.2d at 819. The change-in-appearance declaration notwithstanding, the natural and reasonable effect of Amendment No. 2 is that, at the end of the whiskey-manufacturing process, the barrel used to manufacture the aged whiskey is still a barrel, regardless of any secondary market that may exist for the used barrel. Any change in appearance is due only to its having been used in the whiskey-making process.

In sum, Amendment No. 2 suffers from the same constitutional infirmities as did the previous version of the proposed legislation, which was the subject of Tenn. Att'y Gen. Op. 18-06 (March 5, 2018). Under article II, section 30, of the Tennessee Constitution, as interpreted and construed by the Tennessee Supreme Court, an article being used to manufacture another product, such as a barrel being used by a whiskey maker to produce aged whiskey, is not entitled to an exemption from constitutionally mandated ad valorem taxation, and it is not within the legislative power to override or modify a judicial interpretation of the Constitution.

HERBERT H. SLATERY III
Attorney General and Reporter

ANDRÉE SOPHIA BLUMSTEIN
Solicitor General

JAMES P. URBAN
Assistant Attorney General

Requested by:
The Honorable Gary Hicks
State Representative
620 Cordell Hull Building
Nashville, Tennessee 37243