Which industrial and medical gases sold by a specialty gas distributor — oxygen, acetylene, nitrogen, argon, propane, and mixtures used in welding — are exempt from Tennessee's local sales and use tax as "natural or artificial gas"?

Subject

Which industrial gases qualify for the local sales tax exemption as energy fuel.

Plain-English summary

The Tennessee Department of Revenue drew a bright line for a specialty gas distributor: gases are exempt from local sales and use tax only if they're combustible/flammable and actually used as an energy fuel — inert gases never qualify, no matter how essential they are to an industrial process.

Tenn. Code Ann. § 67-6-704 bars counties and cities from taxing sales of "natural or artificial gas" (among other energy sources). The Department reads this to cover any gas capable of being used as an energy fuel (combustible or flammable) when it's actually sold for that purpose — for welding, heating, cooling, cooking, or similar fuel-consuming activities. Applying that rule to five scenarios: (1) oxygen, acetylene, and nitrogen are examples of qualifying energy-fuel gases, while argon, helium, and compressed air are inert and never qualify; (2) an acetylene/oxygen welding mixture is exempt because acetylene (the fuel) combusts and oxygen supports that combustion as part of the same energy-fuel use; (3) nitrogen bought by a for-profit medical center is exempt only if it's actually used as an energy fuel in providing medical services — if used for some other purpose, it isn't; (4) argon used as a welding shielding gas is not exempt, because it's inert and doesn't combust, regardless of how essential it is to producing a quality weld; and (5) propane used to fuel a forklift is exempt because it combusts to power the equipment, even though the forklift itself isn't used directly in the manufacturing process.

The ruling also flags a separate, broader exemption at Tenn. Code Ann. § 67-6-206 providing a reduced rate or total exemption for certain energy fuels (including gases) sold to and used by manufacturers — a distinct provision from the local-tax carve-out analyzed here, worth checking separately for manufacturing customers.

What this means for you

Industrial, medical, and specialty gas distributors

Whether a gas is exempt from local sales tax turns entirely on combustibility and actual fuel use, not on how critical the gas is to your customer's process. A gas that's absolutely essential to a job (like argon shielding a weld) can still be fully taxable if it doesn't itself combust, while a fuel gas used for a purpose unrelated to your customer's "main" activity (like propane powering a forklift, not the production line) can still be exempt because the fuel-use test is what matters, not the centrality of the equipment to manufacturing. Track how each gas is actually being used by each customer, since the same gas (like nitrogen) can be exempt or taxable depending on end use.

Accountants and tax professionals

This ruling gives a practical checklist for the § 67-6-704 local-tax exemption: (1) is the gas combustible/flammable, and (2) is it actually sold/used as an energy fuel. Both must be "yes." Remember to separately check Tenn. Code Ann. § 67-6-206's manufacturer-specific energy-fuel exemption, which operates on different terms and can apply even when § 67-6-704's local exemption doesn't (or vice versa) — the two provisions aren't interchangeable.

Common questions

Q: Are all industrial gases used in manufacturing or medical settings exempt from local sales tax?
A: No. Only gases that are combustible/flammable AND actually used as an energy fuel qualify — inert gases like argon, helium, and compressed air never qualify for this exemption regardless of their industrial importance.

Q: Is an acetylene/oxygen welding mixture exempt even though oxygen itself doesn't burn?
A: Yes, because oxygen supports the combustion of the fuel gas (acetylene) as part of the same energy-fuel welding use — the mixture as sold and used for that purpose is exempt.

Q: Does nitrogen's exemption status depend on how it's used?
A: Yes. Nitrogen is exempt only when actually used as an energy fuel; if a medical center uses it for a non-fuel purpose, the exemption doesn't apply.

Q: Does propane powering equipment (like a forklift) that isn't itself part of the manufacturing process still qualify?
A: Yes, in this ruling — the propane combusts to power the forklift, satisfying the energy-fuel test regardless of whether the forklift is used directly in production.

Q: Does this ruling apply to other gas distributors' sales?
A: No. A Tennessee letter ruling binds the Department only for the specific taxpayer and facts addressed and cannot be relied on by others, though the combustibility/fuel-use test it applies is of general use. Also note the statute's language changed effective July 1, 2007 under Streamlined Sales and Use Tax Agreement conforming legislation — verify current wording.

Citations and references

Statutes:

• Tenn. Code Ann. § 67-6-704 (local sales/use tax exemption for electric power, natural/artificial gas, and certain energy sources; combustible-fuel-use test)
• Tenn. Code Ann. § 67-6-206 (separate reduced-rate/exemption provision for energy fuels sold to and used by manufacturers)

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/sales/06-32.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING #06-32
WARNING
Letter rulings are binding on the Department only with respect to the individual
taxpayer being addressed in the ruling. This presentation of the ruling in a redacted
form is informational only. Rulings are made in response to particular facts
presented and are not intended necessarily as statements of Department policy.

SUBJECT
Whether certain gases fall under the prohibition against local taxation found in Tenn.
Code Ann. § 67-6-704

SCOPE
This letter ruling is an interpretation and application of the tax law as it relates to a
specific set of existing facts furnished to the department by the taxpayer. The rulings
herein are binding upon the Department and are applicable only to the individual
taxpayer being addressed.
This letter ruling may be revoked or modified by the Commissioner at any time.
Such revocation or modification shall be effective retroactively unless the following
conditions are met, in which case the revocation shall be prospective only:
(A) The taxpayer must not have misstated or omitted material facts
involved in the transaction;
(B) Facts that develop later must not be materially different from the facts
upon which the ruling was based;
(C) The applicable law must not have been changed or amended;
(D) The ruling must have been issued originally with respect to a
prospective or proposed transaction; and
(E) The taxpayer directly involved must have acted in good faith in relying
upon the ruling; and a retroactive revocation of the ruling must inure to the
taxpayer's detriment.
FACTS
[TAXPAYER] is a distributor of industrial, medical and specialty gases and related
equipment and supplies. The Taxpayer’s customers engage in a wide variety of business
activities, such as manufacturing, farming, health care, contracting, and fabrication. The

Taxpayer is not a utility company, and its gases are not metered or delivered by pipeline;
instead, they are typically provided in specially designed, returnable cylinders and tanks.
The gases sold by the Taxpayer include, but are not limited to, oxygen (both medical and
industrial), nitrogen, propane, argon, acetylene, carbon dioxide, and nitrous oxide.

ISSUES
1.

May the gases sold by Taxpayer, as described above, fall within the definition
of either natural or artificial gas and qualify for the exemption from the local
sales and use tax afforded pursuant to Tenn. Code Ann. § 67-6-704? If yes,
what general rules should be applied in determining which gases qualify?

2.

A repairperson purchases a mixture of acetylene and oxygen for use in a
welding process. As used in this application:
a. The acetylene is an energy or fuel gas which burns during the welding
process.
b. The oxygen is not a fuel gas. However, when used in a welding
application, the oxygen chemically combines with the fuel gas (in this
case, acetylene) to support and accelerate combustion
Are the acetylene and oxygen exempted from the imposition of the local sales
and use tax pursuant to Tenn. Code Ann. § 67-6-704?

3.

A for-profit medical center purchases nitrogen, which will be used in
providing medical services. Is the nitrogen exempted from the imposition of
the local sales and use tax pursuant to Tenn. Code Ann. § 67-6-704?

4.

A repairperson purchases argon for use in a welding process. The argon does
not burn; it is an inert, shielding gas. Shielding gases are used to protect the
weld area from atmospheric gases and water vapor, which could reduce the
quality of the weld or make the welding process more difficult. Is the argon
exempted from the imposition of the local sales and use tax pursuant to Tenn.
Code Ann. § 67-6-704?

5.

A manufacturer purchases propane, which will be used to power forklifts at
his industrial site. The forklifts are not used directly in the production
process. Is the propane that will be used as a fuel to power the forklifts
exempted from the imposition of the local sales and use tax pursuant to Tenn.
Code Ann. § 67-6-704?
RULINGS

1.

Some of the gases sold by the Taxpayer are exempt; please see the analysis
below for more information.

2.

Yes.

2

3.

The nitrogen may be exempt; please see the analysis below for more
information.

4.

No.

5.

Yes.

ANALYSIS
1.
Tenn. Code Ann. § 67-6-704 exempts certain energy fuels from local sales and
use tax:
No county or incorporated city or town is authorized to levy any tax on the
sale, purchase, use, consumption or distribution of electric power or
energy, or of natural or artificial gas, or coal and fuel oil or steam and
chilled water produced and distributed by an energy resource recovery
facility operated in a county with a metropolitan form of government. 1
Industrial gases which are to be used by the consumer as energy fuels for welding,
heating, cooling, cooking, and other similar activities, are exempt from local sales and
use tax pursuant to Tenn. Code Ann. § 67-6-704. If the gas is capable of being used as an
energy fuel (i.e. it is combustible or flammable), and if it is intended for use as an energy
fuel, the local sales and use tax will not apply. Oxygen, acetylene and nitrogen are
examples of such energy fuel gases. However, gases such as argon, helium, compressed
air and other inert gases do not qualify for the exemption and are subject to local sales
and use tax. Mixed gases will be exempt from local sales and use tax if the mixture is
combustible or flammable when they are sold to a person for use as an energy fuel. 2
2.
Acetylene and oxygen, when mixed together for use as an energy fuel are exempt
from local sales and use tax.
3.
Nitrogen will be exempt from local sales and use tax if it is intended for use as an
energy fuel in the provision of medical services. However, if it is not used as an energy
fuel and is used for a different purpose, it will not be exempt.
4.
Argon will not be exempt from local sales and use tax. Gases such as argon,
helium, compressed air and other inert gases are subject to local sales and use tax.
1

After July 1, 2007, Tenn. Code Ann. § 67-6-704 will read: “No county or incorporated city or town is
authorized to levy a sales or use tax on the sale, purchase, use, consumption or distribution of energy in the
form of steam or chilled water sold by an energy resource recovery facility operated in a county with a
metropolitan form of government.”
2
Please note that Tenn. Code Ann. § 67-6-206 provides a reduced rate or total exemption for certain
energy fuels, including gases, when sold to and used by manufacturers.

3

5.
Propane will be exempt from local sales and use tax when it is used as an energy
fuel. In this case, the propane combusts to power a forklift so it qualifies as an energy
fuel.

Deborah A. Toon
Tax Counsel

APPROVED: Loren L. Chumley
Commissioner

DATE:

9/18/06

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