Are a federal contractor's (and its subcontractors') purchases of equipment and construction materials for a new steam-production facility on U.S.-government-owned land in Tennessee exempt from sales and use tax?

Plain-English summary

The taxpayer is the federal government's prime contractor for operating a U.S.-government-owned manufacturing plant in Tennessee. The plant's manufacturing is powered by steam delivered through a closed-loop system: steam used in production reverts to water, is recovered, and is converted back into steam, so the same steam and water are reused over and over. The contractor won a contract to design, build, and commission a new steam facility — a physical building plus a dedicated tank farm — to replace the existing one, and it (and its subcontractors) would buy the construction materials and the machinery/equipment for it. The question: are those purchases exempt from Tennessee sales and use tax?

The Department ruled yes — but only for items that actually become a component part of the facility.

The general rule first. Tennessee taxes retail sales of tangible personal property (and certain enumerated services) and imposes a matching use tax on property used in the state. A contractor or subcontractor that uses tangible personal property to perform a contract is normally treated as the taxable user and owes the "contractor's use tax" under Tenn. Code Ann. § 67-6-209(b) — unless an exemption applies.

The exemption — § 67-6-209(e). This statute exempts the sale or use of materials and equipment purchased or used to construct or install (by a contractor, subcontractor, or otherwise) an electric generating plant or distribution system, any resource recovery facility where steam or electric energy is produced, or any coal gasification plant or distribution system owned or operated by the United States or a federal agency. (The "resource recovery facility where steam… is produced" language was added by a 1980 amendment; the original 1974 version covered only electric generating plants.) The Department's Rule 1320-05-01-.102 implements it: property that actually becomes a component part of such a plant is exempt regardless of who buys it, but the exemption does not reach property or taxable services used in the process of installing the exempt property that don't themselves become a component part.

Why this facility qualifies. Because the new facility recovers and continuously recycles its steam and water to power manufacturing, it is a "resource recovery facility where steam is produced," and the plant sits on U.S.-government-owned land. So materials and equipment that become a component part of the facility — including both the building and the dedicated tank farm (used exclusively for steam production) — are exempt under § 67-6-209(e).

The "component part" limit (and the cited case). The exemption is policed by the component-part requirement. In Hall Contracting Corp. v. Tidwell, 507 S.W.2d 697 (Tenn. 1974), the Tennessee Supreme Court held that a natural-gas pipeline that fed an electric generating plant but could also serve other customers was not "part of" the plant, because the ordinary meaning of "plant" (the building, machinery, fixtures, equipment employed in the operation) doesn't include a fuel-delivery system. The taxpayer here conceded the exemption doesn't cover construction equipment, tools, and other supplies not incorporated into the steam plant — those remain taxable.

Industrial machinery, separately. Some items are also exempt as industrial machinery under § 67-6-206(a), and that exemption applies regardless of who buys and installs the item; § 67-6-209(c) confirms the contractor's use tax doesn't apply where the purchase would otherwise be exempt. But there's a procedural catch: a subcontractor buying industrial machinery cannot use the prime contractor's industrial-machinery authorization — it must apply for its own authorization number, which will apply only to this project.

What this means for you

Contractors building or upgrading federally owned energy/steam facilities

If you're buying materials or equipment that will become a component part of a U.S.-owned electric generating plant, steam resource-recovery facility, or coal gasification plant, those purchases can be exempt under § 67-6-209(e) — and the exemption follows the property, not the buyer, so subcontractors' qualifying purchases are covered too. Buy them tax-free by giving your supplier an exemption certificate for each purchase (Rule 1320-05-01-.102(2)); keep clean records, because a supplier who doesn't collect the certificate stays liable for the tax.

Watch the "component part" line

The exemption stops at items that are incorporated into the plant. Scaffolding, tools, consumable supplies, and other things used to do the installation but that don't end up as part of the facility are taxable. Plan your tax accrual around that distinction; Hall Contracting shows the Department and courts read "part of the plant" narrowly.

Subcontractors: get your own industrial-machinery authorization

If you'll be buying industrial machinery for the job, don't rely on the prime contractor's authorization. Apply to the Department of Revenue for your own industrial-machinery authorization number — it will apply only to that project. (This mirrors the Department's per-applicant/per-project approach to the industrial-machinery exemption.)

Accountants and tax professionals

The federal-facility exemption is § 67-6-209(e); the contractor's use tax is § 67-6-209(b) (and § 67-6-209(c) defers to other exemptions); the industrial-machinery exemption is § 67-6-206(a) with the definition at § 67-6-102(44)(A)(i); the use tax is § 67-6-203(a); a contractor using property to perform a contract is a "dealer" under § 67-6-102(23)(K). Administrative guidance is Tenn. Comp. R. & Regs. 1320-05-01-.102. Controlling case: Hall Contracting Corp. v. Tidwell, 507 S.W.2d 697 (Tenn. 1974).

Common questions

Q: We're building a steam plant for a federal agency in Tennessee. Are our material purchases tax-free?
A: To the extent the materials and equipment become a component part of the facility, yes — they're exempt under § 67-6-209(e). Items that don't get incorporated into the plant (tools, scaffolding, consumables) are taxable.

Q: Does the exemption depend on who buys the item — the prime contractor or a subcontractor?
A: No. For the § 67-6-209(e) exemption, what matters is that the property becomes a component part of the qualifying plant; it applies "without regard to who purchases" it. (The separate industrial-machinery authorization, however, is per applicant — see below.)

Q: What is a "resource recovery facility where steam is produced"?
A: Here it was a closed-loop system that recovers and continuously recycles steam and water to power manufacturing. Because the steam/water is reused rather than discharged, the facility "recovers" the resource — qualifying it under § 67-6-209(e). Both the building and the tank farm used exclusively for steam production qualified.

Q: Can my subcontractor use our industrial-machinery exemption authorization?
A: No. Each subcontractor buying industrial machinery must obtain its own industrial-machinery authorization number from the Department; it cannot purchase on the prime contractor's authorization. That number will apply only to the specific project.

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. Confirm your own facts with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.):
- § 67-6-209(e) (exemption for materials/equipment to construct or install an electric generating plant, a resource recovery facility where steam or electric energy is produced, or a coal gasification plant owned or operated by the United States) — "resource recovery facility" language added by 1980 Tenn. Pub. Acts Ch. 563 § 1
- § 67-6-209(b) (contractor's use tax on property used to perform a contract); § 67-6-209(c) (no contractor's use tax where the purchase would otherwise be exempt)
- § 67-6-206(a) (no tax on industrial machinery); § 67-6-102(44)(A)(i) (definition of "industrial machinery")
- § 67-6-203(a) (use tax); § 67-6-102(94)(A) (definition of "use")
- § 67-6-102(23)(K) (contractor using property to perform a contract is a "dealer"); § 67-6-102(76) (retail sale); § 67-6-102(78)(A) (sale); § 67-6-102(89)(A) (tangible personal property)

Regulations:
- Tenn. Comp. R. & Regs. 1320-05-01-.102 (administration of the § 67-6-209(e) exemption; component-part requirement; exemption-certificate procedure)

Case law:
- Hall Contracting Corp. v. Tidwell, 507 S.W.2d 697 (Tenn. 1974) (defining "plant" and holding a fuel-delivery pipeline was not a component part of an electric generating 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/20-02.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 an exemption from the Tennessee sales and use tax to equipment and materials
purchased for the construction and installation of [REDACTED] steam facility on property owned by
the United States government in [CITY,] Tennessee.

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”) produces [REDACTED] products for the [FEDERAL GOVERNMENT], and
commercial customers. The Taxpayer is the federal government’s primary contractor for the
operation and management of [A MANUFACTURING PLANT] (“MP”) in [CITY], Tennessee.

1

[MP] is [REDACTED]. [MP] has state-of-the-art equipment and capabilities for [REDACTED]. The
manufacturing that occurs at [MP] is powered by steam. [REDACTED].
The steam is delivered through a continuous closed loop system where the steam used in the
production process reverts to water and is then recovered and converted back into steam. As a result,
the same steam and water is used over and over in the production process. The steam is a reusable
resource and the [MP] steam plant and loop operates as a resource recovery system.
In [MONTH, YEAR], the Taxpayer received a [CONTRACT] to design, build, and commission a new
[REDACTED] steam facility (the “Facility”) at [MP].1 The Facility will consist of the physical building and
[A TANK FARM]. [REDACTED]. The [TANK FARM] will be used exclusively for steam production for use
in the manufacturing process.
The new Facility will replace an existing [REDACTED] steam facility. Like the existing facility, the new
Facility will include a closed loop system where steam and water are recovered and continuously
recycled for use in the manufacturing processes. The steam produced by the new Facility will be used
exclusively in the manufacturing process to directly power the various [REDACTED] manufacturing
processes carried out at [MP]. The Taxpayer’s [CONTRACT] includes both the construction of the
Facility itself and the installation of the [MACHINERY AND EQUIPMENT] within the Facility.
The Taxpayer plans to use subcontractors who will purchase the [MACHINERY AND EQUIPMENT] that
will be used directly in the steam production process. The Taxpayer also plans to use subcontractors
to purchase construction materials for building the Facility itself.

Is the purchase of equipment and materials by the Taxpayer or its subcontractors for the construction
and installation of the Facility at [MP] exempt for purposes of the Tennessee sales and use tax under
TENN. CODE ANN. § 67-6-209(e) (2018)?
Ruling: Yes, the purchase of equipment and materials by the Taxpayer or its subcontractors
for the construction and installation of the Facility at [MP] is exempt from the Tennessee sales
and use tax under TENN. CODE ANN. § 67-6-209(e) (2018) as long as the equipment and materials
become component parts of the Facility.

Under the Retailers’ Sales Tax Act,2 the retail sale in Tennessee of tangible personal property and
specifically enumerated services are subject to the sales and use tax, unless an exemption applies.3

The Department of Revenue has issued the Taxpayer a Tennessee Manufacturing and Processing Industrial Machinery, Energy
Fuels and Water Sales and Use Tax Certificate of Exemption.
1

Tennessee Retailers’ Sales Tax Act, Ch. 3, §§ 1-18, 1947 Tenn. Pub. Acts Ch. 22, §§ 22-54 (codified as amended at TENN. CODE
ANN. §§ 67-6-101 to -907 (2018)).
2

TENN. CODE ANN. § 67-6-102(76) (2018) defines a “retail sale” as “any sale, lease, or rental for any purpose other than for resale,
sublease, or subrent.” A “sale,” is defined in pertinent part as “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
3

2

The Retailers’ 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 that 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.”4 “Use” is defined broadly to include “the exercise of any right or power over tangible
personal property incident to the ownership thereof.”5
Under Tennessee law, a contractor is generally liable for the “contractor’s use tax” when the contractor
uses tangible personal property in the performance of a contract, unless an exemption applies.
Specifically, TENN. CODE ANN. § 67-6-209(b) (2018) provides that where a contractor or subcontractor
defined as a “dealer”6 uses tangible personal property in the performance of a contract, or to fulfill
contract or subcontract 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.”
TENN. CODE ANN. § 67-6-209(e) provides an exemption from sales and use tax for “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 or distribution system,
any resource recovery facility where steam or electric energy is produced, or any coal gasification plant or
distribution system owned or operated by the United States or any agency thereof created by an act
of congress[.]”7
The Department has established regulatory guidance in TENN. COMP. R. & REGS. 1320-05-01-.102 (1974),
(“Rule 102”) which describes the application, limitation, and administration of the exemption found in
TENN. CODE ANN. § 67-6-209(e).8 Specifically, Rule 102 provides:
Tangible personal property which actually becomes a component part of an electric
generating plant or distribution system owned or operated by the United States or any
of its agencies, . . . is exempt from the Sales or Use Tax. This exemption applies without
regard to who purchases the tangible personal property, and without regard to the

consideration.” TENN. CODE ANN. § 67-6-102(78)(A) (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).
4

TENN. CODE ANN. § 67-6-203(a) (2018).

5

TENN. CODE ANN. § 67-6-102(94)(A).

TENN. CODE ANN. § 67-6-102(23)(K) defines a “dealer” in pertinent part as one who “uses tangible personal property, whether
the title to such property is in such person or some other entity, and whether or not such other entity is required to pay a sales
or use tax, in the performance of such person’s contract or to fulfill such person's contract obligations, unless such property
has previously been subjected to a sales or use tax, and the tax due thereon has been paid.”
6

7

Emphasis added.

It is important to note that this rule was enacted in 1974. In 1974, the exemption in TENN. CODE ANN. § 67-6-209(e) only applied
to “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 or distribution system.” TENN. CODE ANN. § 67-3004 (Supp. 1974). The statute
was subsequently amended and the exemption expanded in 1980 when the following language was added: “any resource
recovery facility where steam or electric energy is produced, or any coal gasification plant or distribution system.” 1980 Tenn.
Pub. Acts Ch. 563 §1. Although the rule has not been updated, it is reasonable to conclude that its application extends to those
facilities and plants that were added to the statute after the rule was promulgated.
8

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form of any contract involved for the installation of the property as a part of such a
system. The exemption provided for herein does not apply to any tangible personal
property as a part of such a system. The exemption provided for herein 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.9
Additionally, Rule 102 also contemplates contractors and subcontractors will provide exemption
certificates when making purchases of tangible personal property to be used in building such plants
and systems when such tangible personal property becomes a component part of the plant or system:
Contractors and sub-contractors purchasing tangible personal property to be used as
a component part of an electric generating plant or distribution system may furnish
their supplier an exemption certificate for each purchase in lieu of the Sales or Use
Tax on such sales. Dealers making such sales shall keep such certificates as part of
their records. Any dealer who has made any sales which would otherwise be exempt
because of this rule and regulation, but who fails to obtain an appropriate exemption
certificate at the time of making the sale, shall nevertheless be liable for the payment
of any Sales or Use Tax which would otherwise be due on such a transaction. 10
THE FACILITY AT [MP]
As noted above, TENN. CODE ANN. § 67-6-209(e) provides an exemption from sales and use tax for
materials and equipment purchased or used for the construction or installation of a resource recovery
facility owned by the federal government where steam or electric energy is produced.11 The
exemption applies to purchases made by both contractors and subcontractors, so long as the
materials and equipment become a component part of the facility.12
In Hall Contracting Corp. v. Tidwell,13 the Tennessee Supreme Court addressed the limitation of this
exemption as it applied to an electric generating facility. 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.

9

TENN. COMP. R. & REGS. 1320-05-01-.102(1). (Emphasis added.)

10

TENN. COMP. R. & REGS. 1320-05-01-.102(2).

11

TENN. CODE ANN. § 67-6-209(e) (2018).

12

See id.; TENN. COMP. R. & REGS. 1320-5-1-.102(1) (1974).

13

507 S.W.d2d 697 (Tenn. 1974).

4

c.

A piece of equipment or set of machine parts functioning together for performance of
a particular operation.14

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.15 The court concluded that the pipeline was not “a part of an electric generating plant” for
purposes of the exemption,16 reasoning that the ordinary meaning of “plant,” as defined above, did
not encompass a fuel delivery system.17
Thus, in order to qualify for the exemption, the tangible personal property must be used in or as a part
of the resource recovery facility where steam is produced, such that the tangible personal property
becomes a component part of the resource recovery facility where steam is produced.18 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 [resource recovery facility where steam is produced].“19
The Taxpayer’s new Facility will include a closed loop system where the steam and water produced
within the system will be recovered and continuously recycled and used in powering the
manufacturing processes occurring at [MP]. The steam is therefore a reusable resource and the
Facility operates as a “resource recovery facility where steam is produced” for purposes of TENN. CODE
ANN. § 67-6-209(e). As [MP] is owned by the United States government, the materials and equipment
purchased by the Taxpayer or its subcontractors that become a component part of the Facility are
exempt from the Tennessee sales and use tax under TENN. CODE ANN. § 67-6-209(e).20
It is important to note that both the physical building and the [TANK FARM] qualify for the exemption.
In the Taxpayer’s case, the [TANK FARM] will be used exclusively in the steam production process.
Thus, the [TANK FARM] is used in or as a part of the resource recovery facility where steam is produced
and the materials and equipment that become a component part of the [TANK FARM] are exempt
from the Tennessee sales and use.

EXEMPTION CERTIFICATES

14

Id. at 698-99 (citing WEBSTER’S NEW INTERNATIONAL DICTIONARY).

15

Id. at 699.

16

Id.

17

Id.

18

TENN. COMP. R. & REGS. 1320-05-01-.102(1).

19

TENN. COMP. R. & REGS. 1320-05-01-.102(2).

The Taxpayer acknowledged in its ruling request that the exemption, if applicable, “does not cover construction equipment,
tools, and other supplies not actually incorporated into the steam plant project, and that the subcontractors must pay tax on
those items.”
20

5

In order to purchase items that are exempt pursuant to TENN. CODE ANN. § 67-6-209(e) without
payment of the tax, the Taxpayer and its subcontractors must follow the procedures set forth in TENN.
COMP. R. & REGS. 1320-05-01-.102(2), which states the contractors or subcontractors purchasing the
tangible personal property used in the [resource recovery facility where steam is produced] may
furnish their supplier an exemption certificate for each purchase in lieu of the Sales and Use Tax on
such sales.21
Additionally, as noted above, the Taxpayer plans to use subcontractors to purchase the [MACHINERY
AND EQUIPMENT] that will be used directly in the steam production process. To the extent the
Taxpayer’s subcontractors are purchasing industrial machinery, the Taxpayer’s subcontractors may
not use the Taxpayer’s industrial machinery authorization to make exempt purchases. However, they
may apply for their own respective exemption authorization numbers, which will apply only to the
Taxpayer’s project.
TENN. CODE ANN. § 67-6-209(b) requires a contractor or subcontractor to pay Tennessee sales or use
tax on purchases of tangible personal property used in the performance of a contract. This is because
the contractor or subcontractor is the user and consumer of such tangible personal property.
However, TENN. CODE ANN. § 67-6-206(a) (2018) provides that no tax is due on industrial machinery.
The definition of “industrial machinery” includes all qualifying items that are used by a manufacturer.
TENN. CODE ANN. § 67-6-102(44)(A)(i) (2018). Therefore, if an item qualifies for the industrial machinery
exemption, the purchase of the item is exempt, regardless of who actually makes the purchase and
installs the item. Further emphasizing this fact, TENN. CODE ANN. § 67-6-209(c) (2018) states that the
contractor’s use tax described above shall not apply if the contractor or subcontractor and the
purchases made by the contractor or subcontractor would otherwise be exempt.
Thus, a subcontractor installing qualified industrial machinery for the Taxpayer may apply to the
Tennessee Department of Revenue for its own industrial machinery authorization number. Such an
industrial machinery authorization number will enable the subcontractor to purchase the industrial
machinery for the Facility exempt from the Tennessee sales and use tax.

APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

2/10/2020

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 https://www.tn.gov/content/dam/tn/revenue/documents/forms/sales/f1306701.pdf (last visited January
10, 2020).
21

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