Is selling and installing a modular cleanroom subject to Tennessee sales tax — and how do you tell whether an installed item stays taxable personal property or becomes a nontaxable fixture?

Plain-English summary

The taxpayer designs, builds, installs, and services modular cleanrooms — removable, self-contained controlled-environment spaces built inside a customer's larger facility. It fabricates the wall and ceiling panels off-site, then assembles them on the customer's premises using removable splines and hardware; to take a cleanroom down, the crew essentially reverses the process and bundles the parts for transport to a new location. The question: is selling and installing one of these subject to Tennessee sales and use tax?

Yes — it's taxable, because the cleanroom stays tangible personal property (TPP) after installation. Tennessee specifically taxes the service of installing "tangible personal property that remains tangible personal property after installation . . . where a charge is made for the installation" (§ 67-6-205(c)(6)). So the sale-and-installation of the cleanroom is a taxable transaction if the cleanroom remains TPP. The flip side matters: if an installed item instead becomes affixed to realty (a fixture, i.e., part of the building), then installing it is not a taxable service — and the installer would instead owe contractor's use tax on the materials it uses to perform the job, unless it already paid sales/use tax on them (§ 67-6-209(b); Rule 1320-5-1-.27(2)).

The TPP-vs-fixture line is Tennessee's law of fixtures, and it turns on the parties' intent. The Tennessee Supreme Court has said "only those chattels are fixtures which are so attached to the freehold that, from the intention of the parties and the uses to which they are put, they are presumed to be permanently annexed, or a removal thereof would cause serious injury to the freehold." Property meant to be removable at the owner's pleasure is not a fixture. Intent is read through objective factors (type of structure, mode of attachment, use and purpose) and the subjective expressed intent of the parties, plus two practical tests: does removal seriously damage the building, and would removal destroy the item's essential character as personalty?

The Department's three-part application here:

1. Intended to be removable. The cleanrooms are advertised and designed to be removable, and the taxpayer says installed units can be relocated within a customer's facility or removed entirely and resold.
2. No serious damage on removal. Taking the cleanroom down (removing the gap filler and systematically disassembling the splined panels) causes no serious damage to the surrounding real property — unlike, say, the large fuel tanks held to be realty in Magnavox.
3. Character as personalty survives. Because a cleanroom can be removed and moved to a new location, removal doesn't destroy its essential character as personal property.

Because all three point the same way, the cleanroom is TPP, and both the sale price and the installation charge are taxable.

A useful caveat on "effort." The ruling stresses that the cost or inconvenience of removal is not determinative. Even something big and labor-intensive to move can remain TPP — Tennessee courts have treated grain bins, an ornamental gate on a concrete foundation, and even portable one-story bank buildings as personal property, while carpet (tackless-strip), a conveyor system, and large greenhouses (with built-in restrooms and concrete tunnels) became realty. The deciding factor is intended permanence, not how hard the job is.

This ruling is the close companion of Revenue Ruling 20-11 (household-appliance installation), which applies the same § 67-6-205(c)(6) hook and law-of-fixtures test — there, free-standing appliances stay TPP (taxable install) while built-in ones become fixtures (nontaxable install). Here, the whole modular cleanroom stays TPP, so the entire sale-and-installation is taxed.

What this means for you

Sellers/installers of modular, relocatable building systems (cleanrooms, modular offices, partitions)

If your product is designed to be relocated and comes apart without seriously damaging the host building, Tennessee will likely treat it as tangible personal property — meaning you must collect sales tax on both the goods and the separately charged installation (§ 67-6-205(c)(6)). Build your contracts and marketing around that reality: advertised removability, removable fasteners, and an express intent that the unit can be moved or resold all support TPP treatment.

When your installation makes the item part of the building

If instead your work permanently incorporates materials into real property (the item becomes a fixture), you generally don't charge sales tax on the installation as a service. But you then become the consumer of the materials and owe use tax on what you buy and use, unless you already paid tax on it (§ 67-6-209(b)). Don't assume "no sales tax on the install" means "no tax at all."

The intent factors are what to document

Removability at the owner's pleasure, mode of attachment, and whether removal damages the building or destroys the item's character drive the result — and effort/expense of removal does not. If you want TPP treatment, keep the design and the paperwork consistent with an intent that the item stays movable.

Accountants and tax professionals

Taxable-installation hook: § 67-6-205(c)(6) (TPP remaining TPP after installation). Contractor/installer use tax if the item becomes realty: § 67-6-209(b); Rule 1320-5-1-.27(2). Fixtures framework: intent of the parties (Gen. Carpet Contractors v. Tidwell; Magnavox Consumer Elects. v. King quoting Hickman v. Booth); objective/subjective factors (Harry J. Whelchel Co. v. King; Hubbard v. Hardeman Cnty. Bank); serious-damage and destroyed-character tests (Process Sys., Inc. v. Huddleston; Memphis Hous. Auth.; Green v. Harper); personalty outcomes (Whelchel; Keenan v. Fodor; Hubbard) vs. realty outcomes (Gen. Carpet Contractors; Process Sys.; Hermann Holtkamp Greenhouses).

Common questions

Q: Do I charge Tennessee sales tax when I sell and install a modular cleanroom? A: Yes. Because the cleanroom stays tangible personal property after installation, both the sale price and the installation charge are taxable (§ 67-6-205(c)(6)).

Q: When is installation not taxable?
A: When the item you install becomes a fixture — permanently part of the real property. Then the installation isn't a taxable service, but you owe use tax on the materials you use (unless already taxed).

Q: How do I know if my product is a fixture or personal property? A: It's the law of fixtures, decided by intent: how it's attached, whether removal would seriously damage the building, and whether removal would destroy its character as personal property. If it's meant to be removable at the owner's pleasure, it's generally personal property.

Q: My system is huge and hard to remove. Doesn't that make it a fixture? A: Not by itself. Tennessee says the cost or inconvenience of removal is not determinative — courts have treated even portable bank buildings as personal property. The question is intended permanence, not difficulty.

Q: Can I rely on this ruling?
A: Not directly. A Tennessee letter ruling binds the Department only as to the taxpayer and exact facts it addressed and cannot be relied on by anyone else. Your facts may differ; confirm with a tax professional.

Citations and references

Tennessee statutes and rules (Tenn. Code Ann. / Tenn. Comp. R. & Regs.):

• § 67-6-205(c)(6) (installing TPP that remains TPP after installation, where a charge is made, is a taxable service)
• § 67-6-209(b) (contractor's/installer's use tax on materials when the item becomes realty, unless already taxed); Tenn. Comp. R. & Regs. 1320-5-1-.27(2) (2016)
• § 67-6-102(76) ("retail sale"); § 67-6-102(78)(A) ("sale"); § 67-6-102(89)(A) ("tangible personal property")

Case law (Tennessee law of fixtures):

• Gen. Carpet Contractors, Inc. v. Tidwell, 511 S.W.2d 241, 242-243 (Tenn. 1974) (intent controls; tackless-strip carpet became realty)
• Magnavox Consumer Elects. v. King, 707 S.W.2d 504, 507 (Tenn. 1986) (quoting Hickman v. Booth, 173 S.W. 438 (Tenn. 1914))
• Harry J. Whelchel Co. v. King, 610 S.W.2d 710, 713-714 (Tenn. 1980) (grain bins remained personalty; objective/subjective factors)
• Hubbard v. Hardeman Cnty. Bank, 868 S.W.2d 656, 660 (Tenn. Ct. App. 1993) (portable one-story bank buildings remained personalty)
• Process Sys., Inc. v. Huddleston, No. 101801-I, 1996 WL 614526, at 3 (Tenn. Ct. App. Oct. 25, 1996) (conveyor system became realty); Memphis Hous. Auth. v. Memphis Steam Laundry-Cleaner, Inc., 463 S.W.2d 677, 679 (Tenn. 1971); Green v. Harper*, 700 S.W.2d 565, 567 (Tenn. Ct. App. 1985)
• Keenan v. Fodor, No. M2011-01475-COA-R3CV, 2012 WL 3090303, at *8-9 (Tenn. Ct. App. July 30, 2012) (ornamental gate remained personalty)
• Hermann Holtkamp Greenhouses, Inc. v. Metro. Nashville & Davidson Cnty., No. M2009-00345-COA-R3-CV, 2010 WL 366697, at *9 (Tenn. Ct. App. Feb. 2, 2010) (greenhouses became realty)

Related guidance:

• Tenn. Dep't of Revenue Rev. Rul. 20-11 (household-appliance installation; same § 67-6-205(c)(6) hook and law-of-fixtures test — free-standing appliances stay TPP, built-in ones become fixtures)

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/19-06.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 sale and installation of modular cleanrooms.

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”) specializes in the design, manufacturing, installation, and services associated with modular cleanrooms for their [REDACTED] customers. The Taxpayer advertises its cleanroom as a removable self-contained space to be installed within a larger space. The purpose of a cleanroom is to create an environment that is free from outside contaminants and where dust or particles are kept to a minimum.

1

The Taxpayer fabricates the component parts, such as walls and ceilings, off-site and then delivers and installs them at the end user’s facility. Installation begins with the ceiling system that consists primarily of [REDACTED] ceiling panels. The [CEILING] panels are fabricated with [REDACTED] that locks into adjacent panels with a removable [REDACTED] spline. The ceiling panels are supported by [REDACTED] beams that are supported from the existing structure above with removable [REDACTED] hardware. After the ceiling is installed, a removable and adjustable floor track is attached to a [REDACTED] floor
[REDACTED]. Once the floor track is installed, [REDACTED] [WALL] panels are installed on top of the floor track with removable [REDACTED] spline. Wall panels are progressively installed with windows and doors also being installed with removable spline. When the architectural component installation is 1 complete, all wall and ceiling panels are treated with a [REDACTED] gap filler to ensure all seams are airtight. To remove or relocate a cleanroom, the steps are essentially performed in reverse. The [REDACTED] gap filler is [REMOVED] and all components are systematically removed and either stacked or bundled for transport to the new location. The Taxpayer’s intent is to treat a cleanroom as a type of equipment. The cleanroom is designed and installed with the intention that it may be removed or relocated without causing permanent damage to the surrounding realty.

Is the sale and installation of a modular cleanroom subject to the Tennessee sales and use tax? Ruling: Yes. The sale and installation of a modular cleanroom is subject to the Tennessee sales and use tax because the cleanroom remains tangible personal property after installation.

2

Under the Retailers’ Sales Tax Act, the retail sale in Tennessee of tangible personal property and 3 specifically enumerated services is subject to the sales tax, unless an exemption applies. One specifically enumerated service taxable at retail is the installing of “tangible personal property that 4 remains tangible personal property after installation . . . where a charge is made for the installation.” Thus, the sale and installation of a cleanroom will be subject to the Tennessee sales and use tax if the cleanroom remains tangible personal property following installation. If, on the other hand, the

1

The [REDACTED] gap filler is [REDACTED].

2

Tennessee Retailers’ Sales Tax Act, ch. 3, §§ 1-18, 1947 Tenn. Pub. Acts 22, 22-54 (codified as amended at TENN. CODE ANN. §§ 676-101 to -907 (2018)). 3

“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) (2018). TENN. CODE ANN. § 67-6-102(78)(A) 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 manner or by any means whatsoever of tangible personal property for a consideration.” 4

TENN. CODE ANN. § 67-6-205(c)(6) (2018). “Tangible personal property” includes “property that can be seen, weighed, measured, felt, or touched, or that is in any other manner perceptible to the senses.” TENN. CODE ANN. § 67-6-102(89)(A).

2

cleanroom becomes affixed to realty upon installation, the sale and installation of the cleanroom will 5 not be subject to the Tennessee sales and use tax. The issue of whether an item of tangible personal property becomes part of realty depends upon the application of the law of fixtures to the particular factual circumstances. The Tennessee Supreme Court has held that the question of when an item is considered a fixture must be resolved by ascertaining the 6 intent of the parties. The court has explained that “only those chattels are fixtures which are so attached to the freehold that, from the intention of the parties and the uses to which they are put, they are presumed to be permanently annexed, or a removal thereof would cause serious injury to the 7 freehold.” 8

Therefore, if the property is intended to be removable at the pleasure of the owner, it is not a fixture. 9 Both objective and subjective factors may show such intent. Objective factors include the type of 10 structure, the mode of attachment, and the use and purpose of the property. The subjective factor is 11 the expressed intent, if any, of the parties. Courts have also found that tangible personal property becomes a part of realty if removing the 12 personalty would seriously damage the building to which it is affixed. Further, courts have held that tangible personal property is more akin to a fixture if removal would destroy its essential character as 13 personalty. For example, the Tennessee Supreme Court in Harry J. Whelchel Co. looked at both the stated intent of the farmers, as well as the objective factors noted above, and reached the conclusion that the grain 14 bins at issue were personalty. Although the bins were large in size and bolted to a concrete base, the court found that they were attached to the concrete base solely for the purpose of preventing them 15 from blowing over in a high wind when empty. Additionally, the bins were financed as personal 5

However, the Taxpayer would be liable for use tax with respect to all tangible personal property used in the performance of its contract, unless the Taxpayer had already paid sales and use tax on the purchase of such items. See TENN. CODE ANN. § 67-6-209(b) (2018); TENN. COMP. R. & REGS. 1320-5-1-.27(2) (2016). 6

Gen. Carpet Contractors, Inc. v. Tidwell, 511 S.W.2d 241, 242-243 (Tenn. 1974).

7

Magnavox Consumer Elects. v. King, 707 S.W.2d 504, 507 (Tenn. 1986) (quoting Hickman v. Booth, 173 S.W.438 (Tenn. 1914)).

8

Id.

9

Hubbard v. Hardeman Cnty. Bank, 868 S.W.2d 656, 660 (Tenn. Ct. App. 1993).

10

Harry J. Whelchel Co. v. King, 610 S.W.2d 710, 713-714 (Tenn. 1980).

11

Id.

12

See Process Sys., Inc. v. Huddleston, No. 101801-I, 1996 WL 614526, at *3 (Tenn. Ct. App. Oct. 25, 1996) (citing Memphis Hous. Auth. v. Memphis Steam Laundry-Cleaner, Inc., 463 S.W.2d 677, 679 (Tenn. 1971)). 13

See id. (finding that conveyor system’s essential character would be destroyed upon removal, which required cutting system components into pieces with an acetylene torch) (citing Green v. Harper, 700 S.W.2d 565, 567 (Tenn. Ct. App. 1985)). 14

610 S.W.2d at 714.

15

Id.

3

16

property, sold at foreclosure as personal property, and installed by lessees on leased farms. Likewise, the Tennessee Court of Appeals in Keenan found that a large ornamental gate remained personalty despite having a substantial concrete foundation poured for its support that would leave craters were it 17 removed. The court lent greater significance to the person’s stated intention that the gate would be 18 moveable and that it was designed so as to be moveable if necessary. On somewhat different facts, the Tennessee Court of Appeals in Hubbard reached a similar conclusion 19 in holding that two one-story branch bank buildings were personal property. It based its ruling on the facts that the leased buildings were constructed to be portable, such that they could be moved or sold as market conditions or need for the buildings changed, and that the leases expressly provided that the 20 buildings were not to become fixtures. In contrast, the Tennessee Supreme Court in General Carpet Contractors examined carpet that was laid 21 using the tackless strip method and was therefore easily removable. The court found that the carpet became realty because the parties installed it with the intent that it remain in place for the length of its useful life. The method of installation simply allowed for easy replacement of the carpet when it was 22 worn out. Similarly, the Tennessee Court of Appeals found in Process Systems, Inc. that removal of a conveyor system would damage the building in which it was installed and would destroy the system’s 23 essential character. Accordingly, the conveyer system was held to be an improvement to real 24 property. Likewise, the Tennessee Court of Appeals found in Hermann Holtkamp Greenhouses, Inc. that a person’s greenhouses became realty upon installation based on their enormous square footage, built-in 25 restrooms and lunchrooms, and concrete tunnels. The court expressed that each of these facts 26 reflected an intention that the greenhouses remain permanently installed on the property. In the Taxpayer’s case, the totality of the circumstances indicates that a cleanroom remains tangible personal property following installation. First, the cleanrooms are intended to be removable at the pleasure of the owner. As noted above, the Tennessee Supreme Court has held that the question of 16

Id.

17

Keenan v. Fodor, No. M2011-01475-COA-R3CV, 2012 WL 3090303, at *8-9 (Tenn. Ct. App. July 30, 2012).

18

Id.

19

868 S.W.2d at 660.

20

Id.

21

511 S.W.2d at 243.

22

Id.

23

1996 WL 614526 at *3.

24

Id.

25

Hermann Holtkamp Greenhouses, Inc. v. Metro. Nashville & Davidson Cnty., No. M2009-00345-COA-R3-CV, 2010 WL 366697, at *9 (Tenn. Ct. App. Feb. 2, 2010). 26

Id.

4

27

when an item is considered a fixture is resolved by ascertaining the intent of the parties. In other words, tangible personal property becomes a fixture following installation only if the relevant parties 28 intend that it remain with the real property. The Taxpayer has indicated that installed cleanrooms can be relocated within a customer’s facility or removed completely and resold. Second, the cleanrooms are designed to be removed without causing permanent damage to the surrounding realty. The courts have held that tangible personal property becomes a part of the realty if 29 removing the personal property would seriously damage the real property to which it is affixed. Here, no serious damage results to the real property from which the cleanroom is removed. Unlike the large fuels tanks determined to have become realty in Magnavox Consumer Electronics, uninstalling a clean 30 room is a straightforward process. To do so, the Taxpayer reverses the installation process by
[REMOVING] the [REDACTED] gap filler [REDACTED] and then systematically removing all components and preparing them for transport to the new location. The facts indicate that no serious damage to the 31 underlying real property occurs upon removal of a cleanroom. Third, removal of a cleanroom would not destroy its essential character as personal property. The Tennessee Court of Appeals has stated that tangible personal property becomes a part of the realty if 32 removal would destroy its “essential character as personalty.” The Taxpayer has stated that a cleanroom may be removed from the site upon which it is installed and moved to a new location. This indicates that the cleanroom’s “essential character” remains intact upon removal and relocation. Based on the physical characteristics of the cleanroom as described above, it appears the parties intend for a cleanroom to remain personalty following its installation. Thus, a cleanroom must be treated as tangible personal property and charges for both the sale and installation of a cleanroom are subject to the Tennessee sales and use tax.

APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

9/6/19

27

Gen. Carpet Contractors, 511 S.W.2d at 242-243.

28

See Magnavox Consumer Elects., 707 S.W.2d at 507.

29

Magnavox Consumer Elects., 707 S.W.2d at 507; Process Systems, Inc., 1996 WL 614526, at *3; Memphis Housing Authority, 463 S.W.2d at 679. 30

707 S.W.2d at 506-07.

31

While considerable effort may be required to remove a clean room, the cost or inconvenience of removal is not a determinative factor. As discussed above, the courts have found that large items, such as a one-story bank building, remained tangible personal property following installation; presumably, the removal of an entire building requires considerable effort and expense. Hubbard, 868 S.W.2d at 660. 32

See Process Sys., Inc., 1996 WL 614526, at *3; Green, 700 S.W.2d at 567.

5