Are the materials and equipment a contractor buys to build an electricity-generating plant for a Tennessee city, on city-owned land, exempt from Tennessee sales and use tax?

Plain-English summary

A licensed contractor that sells and installs energy systems agreed to build an electricity-generating facility for a Tennessee city on city-owned property. The plant will produce electricity that the city will use at one of its own facilities. The contractor asked whether the materials and equipment it (and its suppliers and subcontractors) buys or uses to build the plant are subject to Tennessee sales and use tax. The Department said no — they're exempt under Tenn. Code Ann. § 67-6-209(e).

Why a contractor would normally owe tax here. Tennessee's Retailers' Sales Tax Act taxes the retail sale of tangible personal property (§ 67-6-202(a)) and imposes a matching use tax on property used, consumed, or stored for use in the state (§ 67-6-203(a)). A long-standing wrinkle, the "contractors' use tax," makes a contractor pay use tax on property it consumes performing a job when that property wasn't already taxed (see § 67-6-209(a)–(b)). So absent an exemption, the contractor's purchases for this project would generally be taxable.

The exemption that applies. Section 67-6-209(e) exempts the "sale or use of materials and equipment purchased or used for construction or installation, by a contractor, subcontractor or otherwise, of, in or as a part of any electric generating plant … owned or operated by … the state of Tennessee or any agency or political subdivision thereof." The Department (and Tenn. Comp. R. & Regs. 1320-5-1-.102) breaks this into four elements:

1. The property is materials and equipment — not in dispute here.
2. It's bought or used by a contractor or subcontractor — not in dispute (the taxpayer is a contractor).
3. It's used in or as a part of an electric generating plant.
4. The plant is owned or operated by the State of Tennessee, a state agency, or a political subdivision.

Element 3 — is it an electric generating plant, and does the property become part of it? The facility produces electricity, so it's an "electric generating plant." But the exempt property must actually become a component part of the plant. The Department leaned on Hall Contracting Corp. v. Tidwell, 507 S.W.2d 697 (Tenn. 1974), which defined "plant" (the machinery, apparatus, and fixtures used to carry on the operation) and held that a natural-gas pipeline feeding an electric plant — but also usable to serve other customers — was not "part of" the plant. The lesson, repeated in the rule: property used merely in the process of installing the exempt plant that does not become a component part (or that serves a dual purpose like Hall's pipeline) is not exempt.

Element 4 — government ownership. The facility is owned and operated by the city, which is a political subdivision of the State of Tennessee, so this element is met.

How to actually claim it. The exemption isn't automatic at the register. To buy the materials and equipment without paying the tax up front, the contractor or subcontractor must follow Tenn. Comp. R. & Regs. 1320-5-1-.102(2) and give each supplier an exemption certificate for each purchase, in lieu of the sales and use tax.

What this means for you

Contractors and subcontractors on government energy projects

If you're building or installing an electric generating plant for the State of Tennessee or a city, county, or other political subdivision, the materials and equipment that become part of the plant can be bought exempt from Tennessee sales and use tax (§ 67-6-209(e)) — and the exemption flows down to your subcontractors and suppliers too. The catch is the component-part limit: tools, consumables, or dual-use delivery systems that don't end up as part of the finished plant stay taxable. Document which purchases go into the plant itself versus the installation process.

Cities, utilities, and public agencies procuring power facilities

A publicly owned or operated generating plant lets the construction materials and equipment ride on this exemption, lowering project cost — but the savings only attach to property incorporated into the plant. Make sure your contractor knows to issue exemption certificates so the savings actually flow through.

Accountants and tax professionals

This is a contractors'-use-tax exemption, not a general resale exemption. The four-element test (materials/equipment; contractor/subcontractor; used in/as part of an electric generating plant; government ownership or operation) is administered through Rule 1320-5-1-.102. Watch the Hall Contracting "component part / dual-use" line — fuel-delivery or distribution components usable by others may fall outside "the plant." Claiming the exemption requires an exemption certificate per purchase under subsection (2), not a post-hoc refund posture.

Common questions

Q: Does a contractor normally pay Tennessee tax on what it buys for a job?
A: Often yes. Beyond ordinary sales tax, the "contractors' use tax" can make a contractor owe use tax on property it consumes performing a contract (§ 67-6-209(a)–(b)). Specific exemptions, like § 67-6-209(e) for government electric generating plants, override that.

Q: What kinds of projects qualify for this exemption?
A: Construction or installation of an electric generating plant that is owned or operated by the State of Tennessee or any of its agencies or political subdivisions (here, a city). The property must be materials and equipment bought or used by a contractor, subcontractor, or otherwise.

Q: Is every purchase on the project exempt?
A: No. Only property that becomes a component part of the plant is exempt. Property used merely in the installation process that doesn't become part of the plant — or a dual-use system that also serves others (like the gas pipeline in Hall Contracting Corp. v. Tidwell) — is not exempt.

Q: How does the contractor actually buy exempt?
A: By giving each supplier an exemption certificate for each purchase, in lieu of paying the tax, as required by Tenn. Comp. R. & Regs. 1320-5-1-.102(2). (The Department published a certificate form for this purpose.)

Q: Can I rely on this letter ruling for my own project?
A: No. A Tennessee letter ruling binds the Department only as to the specific taxpayer and facts it was issued to, and it can be revoked or modified. Confirm your own situation with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.; Retailers' Sales Tax Act, §§ 67-6-101 to -907):

• § 67-6-209(e) (exemption for materials and equipment used in/as part of an electric generating plant owned or operated by the state or a political subdivision)
• § 67-6-209(a), (b) (the "contractors' use tax" the exemption carves out of)
• § 67-6-202(a) (sales tax on retail sales of TPP); § 67-6-203(a) (use tax)
• § 67-6-102(76) ("retail sale"); § 67-6-102(78)(A) ("sale")

Tennessee rule:

• Tenn. Comp. R. & Regs. 1320-5-1-.102 (1974) — administration of the § 67-6-209(e) exemption; subsection (1) (component-part requirement); subsection (2) (exemption certificate per purchase)

Case cited by the ruling:

• Hall Contracting Corp. v. Tidwell, 507 S.W.2d 697 (Tenn. 1974) (defining "plant"; a dual-use natural-gas pipeline serving the electric plant and others was not "part of" the plant)

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/13-17.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING #13-17

Letter rulings are binding on the Department only with respect to the individual taxpayer
being addressed in the ruling. This ruling is based on the particular facts and
circumstances presented, and is an interpretation of the law at a specific point in time. The
law may have changed since this ruling was issued, possibly rendering it obsolete. The
presentation of this ruling in a redacted form is provided solely for informational purposes,
and is not intended as a statement of Departmental policy. Taxpayers should consult with a
tax professional before relying on any aspect of this ruling.

SUBJECT

Exemption from the Tennessee sales and use tax of equipment and materials for the construction
of a[REDACTED] facility on city-owned property in [CITY — IN TENNESSEE].

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] (the “Taxpayer”) is a [REDACTED] licensed contractor specializing in the sale
and installation of [ENERGY] systems. The Taxpayer provides [REDACTED] equipment that
[REDACTED]. [REDACTED].

The Taxpayer has entered into an agreement with [CITY — IN TENNESSEE] to construct a
[REDACTED] facility (the “Facility”) on city-owned property. The proposed Facility will
[PRODUCE] electricity, which the [CITY —- IN TENNESSEE] will use at its [REDACTED]
facility.

RULING

Is the sale or use of equipment and materials by the Taxpayer or its suppliers and subcontractors
for the construction or installation of the Facility for [CITY — IN TENNESSEE] exempt for
purposes of the Tennessee sales and use tax under TENN. CODE ANN. § 67-6-209(e) (2013)?

Ruling: Yes, the sale or use of equipment and materials by the Taxpayer or its suppliers
and subcontractors for the construction or installation of the Facility for [CITY — IN
TENNESSEE] is exempt for purposes of the Tennessee sales and use tax under TENN.
CODE ANN. § 67-6-209(e) (2013).

ANALYSIS

Under the Retailers’ Sales Tax Act,' the retail sale in Tennessee of tangible personal property is
subject to the sales tax,” unless an exemption applies. The Retailer’s Sales Tax Act also imposes
the use tax at the same rate as the sales tax on “the purchase price of each item or article of
tangible personal property when the tangible personal property 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.”

One specific application of the use tax involves what is known colloquially as the “contractors’
use tax,” which provides for a use tax in certain situations where property used by a contractor
has not been subject to sales tax prior to the contractor’s use of the property.

' Tennessee Retailers’ Sales Tax Act, ch. 3, 88 1-18, 1947 Tenn. Pub. Acts 22, 22-54 (codified as amended at TENN.
CODE ANN. 88 67-6-101 to -907 (2013)).

° For purposes of the Tennessee sales and use tax, “retail sale” is defined as “any sale, lease, or rental for any
purpose other than for resale, sublease, or subrent.” TENN. CODE ANN. § 67-6-102(76) (2013). The term “sale” is
defined in pertinent part to mean “any transfer of title or possession, or both, exchange, barter, lease or rental,
conditional or otherwise, in any manner or by any means whatsoever of tangible personal property for a
consideration.” TENN. CODE ANN. § 67-6-102(78)(A).

TENN. CODE ANN. § 67-6-202(a) (2013).
4 TENN. CODE ANN. § 67-6-203(a) (2013).

° For example, TENN. CODE ANN. § 67-6-209(a) (2013) provides in part that where a “contractor erects or applies
tangible personal property” that has been “manufactured, produced, compounded or severed from the earth” by the
contractor, excluding certain uses regarding movement on the same job site or when used as “fill,” the contractor
“shall pay the tax levied in this section on the fair market value of such tangible personal property when used.” In
another example, TENN. CODE ANN. § 67-6-209(b) provides that where a contractor or subcontractor defined as a
“dealer” uses tangible personal property in the performance of the contract, or to fulfill contract or subcontract

2

There are, however, exemptions from the contractor’s use tax. In particular, TENN. CODE ANN.
§ 67-6-209(e) (2013) exempts the “sale or use of materials and equipment purchased or used for
construction or installation, by a contractor, subcontractor or otherwise, of, in or as a part of any
electric generating plant . . . owned or operated by . . . the state of Tennessee or any agency or
political subdivision thereof.” Additionally, the Department provides guidance in TENN. COMP.
R. & REGS. 1320-5-1-.102 (1974) describing the application, limitation, and administration of the
exemption.

Accordingly, tangible personal property may be exempt from the Tennessee sales and use tax if:
1) the tangible personal property consists of materials and equipment; 2) the tangible personal
property is purchased or used by a contractor or subcontractor; 3) the tangible personal property
is used in or as a part of an electric generating plant; and 4) the electric generating plant is owned
or operated by the state of Tennessee, a state agency, or any political subdivision thereof.° There
is no question that the items purchased by the Taxpayer here are considered materials and
equipment, and the Taxpayer has represented that it is a contractor. Consequently, this ruling will
only address the third and fourth elements of the analysis.

ELECTRIC GENERATING PLANT USAGE

As stated above, the first remaining line of inquiry is whether the items the Taxpayer uses in the
Facility are properly considered as used in, or used as a part of, an electric generating plant. They
are properly considered as such, provided the items become a component part of the Facility.

The Taxpayer has indicated that the proposed Facility will [PRODUCE] electricity. Based on the
facts provided, it appears that the Facility is properly considered an electric generating plant for
purposes of the exemption under TENN. CODE ANN. § 67-6-209(e).

As noted above, the tangible personal property must be used in or as a part of the electric
generating facility in question. The Tennessee Supreme Court examined this limitation on the
applicability of the exemption in Hall Contracting Corp. v. Tidwell, 507 S.W.2d 697 (Tenn.
1974). In that case, the Court determined that, to be exempt, the tangible personal property must
be used in or as part of the “plant,” which it defined as:

“a. The line building, machinery, apparatus, fixtures, employed in carrying
on a trade or mechanical or other industrial business.

b. A factory, workshop for the manufacture of a particular product.

obligations, “such contractor or subcontractor shall pay a tax at the rate prescribed by § 67-6-203 measured by the
purchase price of such property.”

° See TENN. CODE ANN. § 67-6-209(e); TENN. COMP. R. & REGS. 1320-5-1-.102(1) (1974).

c. A piece of equipment or set of machine parts functioning together for
performance of a particular operation.”

The Court applied those definitions to a pipeline that supplied natural gas to an electric
generating plant but that could be used to serve other natural gas customers in addition to the
electric generating plant.” The Court concluded that the pipeline was not “a part of an electric
generating plant” for purposes of the exemption,’ reasoning that the ordinary meaning of “plant,”
as defined above, did not encompass a fuel delivery system. '°

Thus, in order to qualify for the exemption, the tangible personal property must be used in or as
a part of the electric generating plant, such that the tangible personal property becomes
component parts of the electric generating plant.'’ But the exemption “does not apply to any
tangible personal property or taxable service which is used in the process of installing the exempt
property, when such property does not become a component part of the electric generating plant
or distribution system.”

Here, the Taxpayer entered into an agreement to construct a [REDACTED] Facility. The Facility
will be used to [PRODUCE] electricity for the city’s [REDACTED] facility. The Facility is
properly considered an electric generating plant for purposes of the TENN. CODE ANN. 8 67-6-
209(e) exemption, and therefore all of the tangible personal property used in the Facility that
becomes a component part of the facility is considered part of the Facility.

OWNERSHIP

The next remaining line of inquiry is whether the Facility is owned by a political subdivision of
the state of Tennessee. The facts provided indicate that the Facility meets this requirement.

The final element in order for the sale or use of equipment and materials by the Taxpayer or its
suppliers and subcontractors for the construction or installation of the Facility to be exempt is
whether the Facility is owned and operated by “the state of Tennessee or any agency or political
subdivision thereof.” '°

” Hall Contracting Corp. v. Tidwell, 507 S.W.2d 697, 698-99 (Tenn. 1974) (citing WEBSTER'S NEW INTERNATIONAL
DICTIONARY).

• Id. at 699.

• Id. Note that to the extent the Taxpayer’s facility parallels the facts in Hall Contracting Corp. in which the delivery
  method to the facility could be used by those other than the Taxpayer, the materials and equipment for that delivery
  method do not constitute part of the plant and are not properly exempt.

Td.

" TENN. COMP. R. & REGS. 1320-5-1-.102(1).

' TENN. COMP. R. & REGS. 1320-5-1-.102(2).

'S See TENN. CODE ANN. § 67-6-209(e).

Here, the Facility is owned and operated by [CITY — IN TENNESSEE], which is a political
subdivision of the State of Tennessee.

Accordingly, the materials and equipment purchased by the contractors or subcontractors for the
city-owned Facility fall within the exemption provided in TENN. CODE ANN. § 67-6-209(e).

Note that, in order to purchase items that are exempt pursuant to TENN. CODE ANN. § 67-6-
209(e) without payment of the tax, the Taxpayer must follow the procedures set forth in TENN.
Comp. R. & REGS. 1320-5-1-.102(2) (1974), which states that the contractors or subcontractors
purchasing the tangible personal property used in the electric generating plant may furnish their
supplier an exemption certificate for each purchase in lieu of the Sales and Use Tax on such
sales.

Lauren A. Fields
Assistant General Counsel — Research & Taxation

APPROVED: Richard H. Roberts
Commissioner of Revenue

DATE: November 19, 2013

'* A copy of the exemption certificate referred to in TENN. COMP. R. & REGS. 1320-5-1-.102(2) may be found on the
Department’s website, available at http://www.tennessee.gov/revenue/forms/sales/f1306701.pdf (last visited Oct.
17, 2013).