If a company installs energy-saving equipment it owns in a customer's building and bills only a monthly share of the energy saved, is that 'pay-from-your-savings' arrangement subject to Tennessee sales and use tax?

Plain-English summary

The taxpayer designs, installs, and remotely monitors energy-saving power systems. It puts energy-consumption meters in a customer's facility, designs a retrofit, and installs equipment to cut the customer's energy use. The company keeps ownership of all the equipment for the life of the contract, maintains and replaces it for free, and the customer can't operate it (though the customer can view the data on a web dashboard). The customer pays nothing up front — just a monthly charge based on the energy it saves (a fixed rate per unit saved). No savings, no payment. The contract says the equipment does not attach to or become a fixture of the building, and the customer can never buy it.

The question: is this "we install and monitor it, you pay out of your savings" arrangement subject to Tennessee sales and use tax?

The ruling: Yes — it's a taxable lease of tangible personal property (§ 67-6-204). The chain of reasoning:

• The equipment is tangible personal property, and by installing it in the customer's facility the company transfers possession (not title) for consideration. That is a "lease or rental" (§ 67-6-102(49)). The customer's inability to operate the equipment doesn't undo the transfer of possession.
• The statute's operator exclusion — providing equipment with an operator who is necessary to run it isn't a lease (§ 67-6-102(49)(A)(iii)) — doesn't apply, because remote monitoring isn't providing an operator necessary for the system to function.
• Tennessee taxes the sales price of leases/rentals of TPP that are germane to an established business (§ 67-6-204(a)(1)). The company's whole business is leasing this equipment, so the lease is taxable, and the monthly energy-savings charge is the sales price.
• The Department compared the model to Essary v. Huddleston (portable toilets supplied and maintained = a taxable lease of TPP) — a lease coupled with servicing is still a taxable lease.
• Installation rides into the price. Installing TPP that stays TPP is itself a taxable service when separately charged (§ 67-6-205(c)(6)) — but here there's no separate installation charge. Because the true object is the (independently taxable) equipment lease, the bundled installation is included in the taxable sales price anyway (Rule 1320-5-1-.27(2)).

So the company owes Tennessee sales and use tax on the full monthly amount billed to its Tennessee customers.

What this means for you

"Equipment-as-a-service" / shared-savings and pay-from-savings providers

If your model is "we own and install the equipment, you pay only out of the savings or output it generates," Tennessee is likely to treat that as a taxable lease of tangible personal property, not a nontaxable service — even with no up-front price, no title transfer, and a customer who never touches the gear. The recurring charge (however you compute it — energy saved, units produced, a performance formula) is the taxable sales price. Plan to collect Tennessee sales tax on those monthly bills.

When equipment-with-an-operator is NOT a lease

There is a real carve-out: supplying equipment together with an operator who is necessary to make it perform and who does more than maintain, inspect, or set it up is not a "lease or rental" (§ 67-6-102(49)(A)(iii)). But remote monitoring doesn't count — the Department held that watching the system over a dashboard isn't providing the operator the exclusion requires. To fall outside the lease definition, a human operator has to actually run the equipment.

Installation charges

Installing tangible personal property that stays tangible personal property is a taxable service when you bill for it separately (§ 67-6-205(c)(6)). If you don't separately charge for installation but the underlying lease or sale is taxable, the installation is folded into the taxable price (Rule 1320-5-1-.27(2)) — you don't escape tax by burying it.

Accountants and tax professionals

The analysis: (1) transfer of possession of TPP for consideration = "lease or rental" (§ 67-6-102(49)); (2) the operator exclusion (§ 67-6-102(49)(A)(iii)) is narrow and not met by remote monitoring; (3) leases germane to the business are taxed on the full sales price (§ 67-6-204(a)(1); § 67-6-102(79)(A)); (4) Essary v. Huddleston (1995 WL 384985) — lease-plus-servicing is still a lease; (5) the true-object/bundling rule pulls an unbilled installation into the taxable price (§ 67-6-205(c)(6); Rule 1320-5-1-.27(2); Thomas Nelson, AT&T, Rivergate Toyota, Ltr. Rul. 14-10).

Common questions

Q: We don't sell the equipment or charge for it up front — the customer only pays out of energy savings. Is that taxable in Tennessee?
A: Yes. Transferring possession of equipment you own for a recurring charge is a lease of tangible personal property, taxable under § 67-6-204. The monthly savings-based charge is the taxable sales price.

Q: The customer can't even operate our equipment — doesn't that mean it isn't a lease?
A: No. The Department said the customer's inability to operate the equipment doesn't negate the transfer of possession, so it's still a lease.

Q: We monitor everything remotely — does that make us a service provider instead of a lessor?
A: No. The "equipment with an operator" exclusion (§ 67-6-102(49)(A)(iii)) needs an operator who is necessary to run the equipment and does more than maintain or set it up. Remote monitoring doesn't qualify, so the deal stays a taxable lease.

Q: We don't charge separately for installation. Is the install taxed?
A: Effectively yes — because the underlying lease is taxable and you don't bill installation separately, the installation is included in the taxable sales price (Rule 1320-5-1-.27(2)).

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

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-6-204, § 67-6-204(a)(1) (tax on the sales price of all leases and rentals of tangible personal property germane to an established business)
• § 67-6-102(49), § 67-6-102(49)(A)(iii) ("lease or rental"; exclusion for equipment provided with a necessary operator who does more than maintain/inspect/set up)
• § 67-6-102(78)(A) ("sale"); § 67-6-102(76) ("retail sale"); § 67-6-102(79)(A) ("sales price"); § 67-6-102(89)(A) ("tangible personal property")
• § 67-6-205(c), § 67-6-205(c)(6) (enumerated taxable services; installing TPP that remains TPP after installation where a charge is made)

Rules:

• Tenn. Comp. R. & Regs. 1320-05-01-.32(2) (1987) (sales tax computed on the lease/rental billing cycle); 1320-5-1-.27(2) (2016) (installation performed in connection with a sale of TPP is included in the sales price)

Case law:

• Essary v. Huddleston, No. 02A01-9408-CH-00179, 1995 WL 384985 (Tenn. Ct. App. June 29, 1995) (supplying and maintaining portable toilets = a taxable lease of TPP)
• True-object / bundling: Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621, 624 (Tenn. 1987); AT&T Corp. v. Johnson, 2002 WL 31247083 (Tenn. Ct. App. Oct. 8, 2002); Rivergate Toyota, Inc. v. Huddleston, 1998 WL 83720 (Tenn. Ct. App. Feb. 27, 1998); Tenn. Dep't of Revenue Ltr. Rul. 14-10 (Oct. 14, 2014)

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/18-04.pdf

Original ruling text

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.

The application of the Tennessee sales and use tax to the installation and monitoring of energysaving equipment.

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.

[TAXPAYER] (the “Taxpayer”), a [STATE]-based company, designs, installs, and monitors energysaving power systems for customers looking to reduce their energy expenses. The Taxpayer

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describes its product offering as [REDACTED]. The Taxpayer’s customers include [REDACTED]
companies with numerous facilities across the country, some of which are in Tennessee.
The Taxpayer installs energy consumption meters in a customer’s facilities to evaluate its existing
power system, [REDACTED]. The Taxpayer then designs a retrofit system that will reduce the
customer’s energy consumption and installs the necessary equipment, such as [REDACTED]. The
Taxpayer remotely monitors the customer’s energy use through its consumption meters and a webbased dashboard and calculates the customer’s energy savings as a result of the Taxpayer’s
installation. The Taxpayer continues to monitor a customer’s energy usage for the time period set
forth in the customer’s [AGREEMENT] (the “Agreement”).
The Taxpayer bills customers for their monthly energy savings. Customers pay the Taxpayer a fixed
rate per unit of energy saved, such as [REDACTED], pursuant to the Agreement. This is the only fee
customers pay the Taxpayer. If a customer does not experience any energy savings, the customer
does not remit any payment to the Taxpayer.
The Taxpayer owns and maintains the equipment installed in a customer’s facility for the life of the
Agreement. The Agreement provides that the equipment does not attach to or become a fixture to
the customer’s real property. If the equipment malfunctions, the Taxpayer will service or replace the
equipment at no additional cost to the customer. Customers have no ability to access or operate the
Taxpayer’s equipment, though they can access the data collected from the equipment using the
Taxpayer’s web-based dashboard. At the end of a customer’s Agreement, the Taxpayer either
removes its equipment from the customer’s facility or leaves it in place. The Taxpayer makes this
decision on a case-by-case basis toward the end of the contract period. Customers do not have the
option to purchase the equipment.

Are the Taxpayer’s Agreements to furnish and monitor energy-saving power equipment subject to
Tennessee sales and use tax?
Ruling: Yes, the Taxpayer’s Agreements to furnish and monitor energy-saving power equipment are
subject to Tennessee sales and use tax under TENN. CODE ANN. § 67-6-204 (Supp. 2017).

Under the Retailers’ Sales Tax Act, the retail sale in Tennessee of tangible personal property and
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specifically enumerated services are subject to the sales and use tax, unless an exemption applies.
“Retail sale” is defined as “any sale, lease, or rental for any purpose other than for resale, sublease,
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or subrent.”
TENN. CODE ANN. § 67-6-102(78)(A) (Supp. 2017) defines “sale,” in pertinent part, to mean “any transfer
of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any
1

Tennessee Retailers’ Sales Tax Act, Ch. 3, §§ 1-18, 1947 Tenn. Pub. Acts Ch. 22, §§ 2254 (codified as amended at TENN. CODE
ANN. §§ 67-6-101 to -907 (2013 & Supp. 2017)).
2

TENN. CODE ANN. § 67-6-102(76) (Supp. 2017).

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manner or by any means whatsoever of tangible personal property for a consideration.”
Furthermore, TENN. CODE ANN. § 67-6-102(49) (Supp. 2017) defines “lease or rental” as “any transfer of
possession or control of tangible personal property for a fixed or indeterminate term for
consideration.” However, “lease or rental” does not include providing tangible personal property
along with an operator, provided that “the operator is necessary for the equipment to perform as
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designed” and “must do more than maintain, inspect, or set-up tangible personal property.”
“Tangible personal property” includes “property that can be seen, weighed, measured, felt, or
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touched, or that is in any other manner perceptible to the senses.”
TENN. CODE ANN. § 67-6-204(a)(1) (Supp. 2017) imposes a tax on the sales price of all leases and
rentals of tangible personal property where the lease or rental is part of or germane to the
established business. “Sales price” is defined as “the total amount of consideration, including cash,
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credit, property, and services, for which personal property or services are sold, leased, or rented.”
The sales tax is computed based on the billing cycle set forth in the applicable lease or rental
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contract.
The Tennessee sales tax also applies to retail sales of services specifically enumerated in the
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Retailers’ Sales Tax Act. One such service is “the installing of tangible personal property that
remains tangible personal property after installation…where a charge is made for the installation,
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whether or not the installation is made as an incident to the sale of tangible personal property.”
Additionally, when a transaction involves taxable and nontaxable components and the transaction’s
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10
11
12
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true object or a “crucial,” “essential,” “necessary,” “consequential,” or “integral” element of the

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TENN. CODE ANN. § 67-6-102(49)(A)(iii).

4

TENN. CODE ANN. § 67-6-102(89)(A).

5

TENN. CODE ANN. § 67-6-102(79)(A).

6

TENN. COMP. R. & REGS.1320-05-01-.32(2) (1987).

7

See TENN. CODE ANN. § 67-6-205(c) (Supp. 2017).

8

TENN. CODE ANN. § 67-6-205(c)(6).

9
See, e.g., Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621, 624 (Tenn. 1987) (holding that a transaction involving the sale of nontaxable intangible advertising concepts was nevertheless subject to sales tax on the entire amount of the transaction because
advertising models, which were tangible personal property, were an “essential,” “crucial,” and “necessary” element of the
transaction).
10

Id.; see also AT&T Corp. v. Johnson, No. M2000-01407-COA-R3-CV, 2002 WL 31247083, at *8 (Tenn. Ct. App. Oct. 8, 2002)
(holding that a transaction involving the sale of engineering services along with separately itemized tangible
telecommunications systems was subject to sales tax on the entire amount of the contract because “equipment, engineering,
and installation combine in this instance to product BellSouth’s desired result: a functioning item of tangible personal
property assembled on the customer’s premises,” and further describing the engineering services as “essential” and “integral”
to the sale of tangible personal property).
11

See supra note 11.

12

See Rivergate Toyota, Inc. v. Huddleston, No. 01A01-9602-CH-00053, 1998 WL 83720, at *4 (Tenn. Ct. App. Feb. 27, 1998)
(holding that a transaction involving the commission and distribution of advertising brochures was subject to sales tax on the
“entire cost of the transaction” because, although the transaction involved a number of services, the brochures themselves
“were not inconsequential elements of the transaction but, in fact, were the sole purpose of the contract”).

13

See AT&T Corp. v. Johnson, 2002 WL 31247083, at *8.

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transaction is subject to tax, the entire transaction is subject to sales tax. If the true object of the
transaction is independently taxable, then the true object and any essential elements of the
15
transaction will be subject to sales tax. Only if the true object of the transaction is not
independently subject to sales tax and the items that would be subject to sales tax are “merely
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incidental” to the true object of the transaction will the transaction not be subject to sales tax.
The Taxpayer’s equipment [REDACTED] is tangible personal property, as it can easily be seen and
touched. When the Taxpayer installs this equipment in a customer’s facility, it is transferring
possession of the property to the customer for consideration, without transferring title. The
customer’s inability to operate the equipment does not negate the fact that the Taxpayer has
transferred possession. Additionally, although the Taxpayer monitors the equipment remotely, it
does not provide an operator that is necessary for proper system function. This transaction
therefore is a lease.
Tennessee sales tax is imposed on the sales price of a lease or rental when that lease is an essential
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part of an established business. The lease of the Taxpayer’s equipment is an essential part of the
Taxpayer’s business and is therefore subject to sales tax. The Taxpayer does not itemize a specific
sales price upfront but instead bills customers monthly for their energy savings according to a
predetermined formula set forth in the customer’s Agreement. This monthly charge is the only
consideration a customer pays to the Taxpayer. The amount charged to a customer in the monthly
bill is therefore the Taxpayer’s sales price. Accordingly, the Taxpayer owes sales and use tax on the
price billed each month to Tennessee customers.
Furthermore, the Taxpayer’s business model is similar to that addressed in Essary v. Huddleston, as
both involve a lease of tangible personal property coupled with a servicing component. In Essary, the
Tennessee Court of Appeals held that providing portable toilets to customers and maintaining them
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for the duration of use constituted a taxable lease of tangible personal property.
Although the Taxpayer’s installation service is not independently taxable because no separate
charge is made for the installation, the true object of the Taxpayer’s business transactions is the
lease of the energy-saving equipment. The Taxpayer’s entire business model is based on providing
customers with equipment that will reduce their energy expenses and allow the Taxpayer to collect
a portion of those savings. As set forth above, the equipment lease is independently taxable. Sales
tax is thus imposed on the Taxpayer’s total sales price, which includes both the monthly charge
billed to customers for the lease of the energy-saving equipment and the included installation
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service.

14

See generally Tenn. Dept. of Rev. Ltr. Rul. 14-10 (Oct. 14, 2014) [hereinafter “Ltr. Rul. 14-10”] (discussing Tennessee law
regarding bundling and the “true object” test).

15

See AT&T Corp. v. Johnson, 2002 WL 31247083, at *9.

16

See generally Ltr. Rul. No. 14-10, supra note 15.

17

See TENN. CODE ANN. § 67-6-204(a).

18

Essary v. Huddleston, No. 02A01-9408-CH-00179, 1995 WL 384985, at *2 (Tenn. Ct. App. June 29, 1995).

19

See TENN. COMP. R & REGS. 1320-5-1-.27(2) (2016). (clarifying that installation services performed in connection with the sale
of tangible personal property are included in the sales price of that tangible personal property).

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Accordingly, the Taxpayer’s Agreements are subject to the Tennessee sales and use tax under TENN.
CODE ANN. § 67-6-204 as a lease of tangible personal property.

Courtney Swim
Assistant General Counsel

APPROVED:
David Gerregano
Commissioner of Revenue

DATE:

9/12/18

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