Can the contractors building a municipal wastewater-treatment plant expansion buy the equipment and construction materials free of Tennessee sales and use tax?

Plain-English summary

A Tennessee municipality owns and operates a wastewater-treatment facility and plans to hire unrelated contractors to build an expansion. The contractors will buy (i) processing equipment — pumps, tanks, piping, and related gear to treat sewage; (ii) concrete and reinforcing materials for the foundations and enclosures; (iii) building materials (masonry, steel, roofing, doors, mechanical and electrical components) for the operating buildings; and (iv) site materials — asphalt and crushed stone for roadways, walkways, and parking. The question: can all of that be bought free of Tennessee sales and use tax?

The Department ruled yes — and unusually broadly, exempting not just the treatment equipment but the buildings and even the site roads.

Start with the contractor's use tax. A contractor or subcontractor that uses tangible personal property to perform a contract is a "dealer" and normally owes the contractor's use tax on what it buys (§ 67-6-209(b)) — unless an exemption applies.

The exemption — industrial machinery, including "pollution control facilities." Tennessee exempts industrial machinery from sales and use tax (§ 67-6-206(a)), and § 67-6-209(c) extends that exemption to contractors installing it. Critically, the statutory definition of "industrial machinery" expressly includes pollution control facilities and reaches their use by a county, municipality, or water-and-wastewater-treatment authority — or a contractor working for one — for water pollution control or sewage systems (§ 67-6-102(44)(A)(i)). So a contractor building a municipal wastewater system stands in the municipality's shoes for the exemption.

Why this exemption is broader than the ordinary one. A regular manufacturer's industrial-machinery exemption covers "machinery, apparatus and equipment… necessary to and primarily for" processing tangible personal property for resale — it generally would not cover the building shell or the parking lot. But "pollution control facilities" has its own, much broader definition (§ 67-6-102(44)(A)(ii)): "any system, method, improvement, structure, device or appliance… used or intended for the primary purpose of eliminating, preventing or reducing air or water pollution," or treating, recycling, or disposing of waste. Because that definition expressly reaches systems, improvements, and structures, the Department concluded the exemption covers:

• the sewage-processing equipment (pumps, tanks, piping);
• the buildings necessary to operate the facility; and
• the roadways, walkways, and parking at the site.

The Department noted the same broad "pollution control facilities" definition appears in the franchise/excise and property-tax statutes for consistency, and that the Legislature added it in 1991 specifically to offset the cost of federally mandated pollution controls — with legislative history citing a municipal sewage system as the very kind of project meant to qualify and access roads as intended to be within scope.

One procedural step. A contractor installing the qualifying machinery must apply to the Department for its own industrial-machinery authorization number; that number lets it buy the materials and equipment for the expansion tax-free.

What this means for you

Municipalities and water/wastewater authorities building or expanding treatment systems

Sewage and wastewater treatment systems qualify as pollution control facilities, so the construction can be done largely tax-free — and the exemption is broad enough to cover the buildings and site work, not just the treatment hardware. The exemption flows through to your contractors building the project; you don't lose it just because a private contractor makes the purchases.

Contractors on municipal environmental projects

If you're building or installing a qualifying pollution-control/wastewater system for a municipality, your purchases of the equipment and construction materials can be exempt under §§ 67-6-206(a) and 67-6-209(c). Apply for your own industrial-machinery authorization number before buying — don't assume you can rely on the municipality's exempt status without it. Keep your exemption documentation clean.

Other manufacturers — don't over-read this

The reason buildings and roads were exempt here is the special breadth of the "pollution control facilities" definition. The standard industrial-machinery exemption for ordinary manufacturing is narrower and generally won't cover the building shell or parking lot. This result is specific to pollution-control facilities.

Accountants and tax professionals

Industrial-machinery exemption: § 67-6-206(a), applied to installing contractors by § 67-6-209(c). Definition: § 67-6-102(44)(A)(i) (industrial machinery, including pollution control facilities; municipal/wastewater-authority use), with the broad "pollution control facilities" definition at § 67-6-102(44)(A)(ii) and the narrower general processing standard at § 67-6-102(44)(A). Contractor's use tax: § 67-6-209(b); "dealer" § 67-6-102(23)(K); use tax § 67-6-203(a); "use" § 67-6-102(94)(A). Parallel pollution-control definitions: §§ 67-4-2108(a)(5) (franchise/excise) and 67-5-604 (property tax). The definition was added by 1991 Tenn. Pub. Acts Ch. 503.

Common questions

Q: We're a city expanding our wastewater plant. Can the work be done tax-free?
A: Largely yes. A municipal wastewater/sewage system is a "pollution control facility," so the equipment and construction materials qualify for the industrial-machinery exemption, and the exemption flows to your contractors under § 67-6-209(c).

Q: Does the exemption really cover the buildings and the parking lot?
A: For a pollution-control facility, yes. The definition of "pollution control facilities" reaches systems, improvements, and structures — so the operating buildings and the site roadways, walkways, and parking were all within scope here. That's broader than the ordinary manufacturer's machinery exemption.

Q: We're the contractor, not the city. Can we buy tax-free?
A: Yes, but you must apply for your own industrial-machinery authorization number from the Department. That number, not the municipality's status alone, is what lets you make the exempt purchases for the project.

Q: I run a regular factory — does this mean my building is exempt too?
A: No. The building and site work were exempt because this is a pollution-control facility, which has a uniquely broad definition. The standard industrial-machinery exemption for general manufacturing won't cover your building shell or parking lot.

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.):
- § 67-6-206(a) (industrial machinery exempt); § 67-6-209(c) (exemption applies to contractors installing industrial machinery)
- § 67-6-102(44)(A)(i) (definition of "industrial machinery," including pollution control facilities and municipal/wastewater-authority/contractor use for water pollution control or sewage systems); § 67-6-102(44)(A)(ii) (broad definition of "pollution control facilities"); § 67-6-102(44)(A) (general processing standard)
- § 67-6-209(b) (contractor's use tax); § 67-6-102(23)(K) ("dealer"); § 67-6-203(a) (use tax); § 67-6-102(94)(A) ("use"); § 67-6-102(76) (retail sale); § 67-6-102(78)(A) (sale); § 67-6-102(89)(A) (tangible personal property)
- §§ 67-4-2108(a)(5), 67-5-604 (parallel "pollution control facilities" definitions in the franchise/excise and property tax)

Legislative history:
- 1991 Tenn. Pub. Acts Ch. 503 (added the "pollution control facilities" definition to offset federally mandated pollution-control costs; legislative history cites municipal sewage systems and access roads as intended to qualify)

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/20-05.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 20-05
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
The application of an exemption from the Tennessee sales and use tax to equipment and materials
purchased for the expansion of a wastewater treatment plant owned and operated by [A
GOVERNMENTAL ENTITY].
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

The [MUNICIPALITY] (the “Municipality”) is a Tennessee municipality. The Municipality owns and
operates the [WASTEWATER TREATMENT FACILITY] (the “Facility”). The Municipality intends to enter
into a contract for the expansion of the Facility (“Facility Expansion”) and will contract with unrelated
contractors (the “Contractors”) to construct the Facility Expansion. In the course of expanding the
Facility, the Contractors will purchase materials required to construct the Facility Expansion and

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equipment to be used in the expanded Facility. The equipment and materials will consist of (i)
processing equipment, including pumps, tanks, piping, and related equipment necessary to process
sewage, (ii) concrete, reinforcing materials, and other building materials necessary for the
construction of the foundations and enclosures necessary for the processing equipment, (iii) building
materials (masonry, steel, roofing, doors, and mechanical and electrical components) necessary for
the construction of the buildings needed to operate the Facility, and (iv) site materials, including
asphalt, crushed stone and other materials required to construct roadways, walkways, and vehicle
parking at the Facility.
RULING
Are the purchases of materials by the Municipality’s Contractors for the construction of the Facility
Expansion, and the purchase of equipment to be used in the expanded Facility both exempt for
purposes of the Tennessee sales and use tax under TENN. CODE ANN. § 67-6-209(c) (Supp. 2019)?
Ruling: Yes, the purchase of materials by the Municipality’s Contractors for the construction of
the Facility Expansion and the purchase of equipment to be used in the expanded Facility are
both exempt from the Tennessee sales and use tax under TENN. CODE ANN. § 67-6-209(c).
ANALYSIS
Under the Retailers’ Sales Tax Act, 1 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. 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.” 3 “Use” is defined broadly to include “the exercise of any right or power over tangible
personal property incident to the ownership thereof.” 4
TENN. CODE ANN. § 67-6-209(b) states that where a contractor or subcontractor defined as a “dealer” 5
uses tangible personal property in the performance of a contract, or to fulfill contract or subcontract
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 & Supp. 2019)).
1

TENN. CODE ANN. § 67-6-102(76) (Supp. 2019) 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 consideration.” TENN. CODE ANN. § 67-6-102(78)(A). “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

3

TENN. CODE ANN. § 67-6-203(a) (Supp. 2019).

4

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.”
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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.” Consequently, 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. 6
One such exemption is found in TENN. CODE ANN. § 67-6-206(a) (Supp. 2019). TENN. CODE ANN. § 67-6206(a) exempts “industrial machinery” from the sales and use tax. “Industrial machinery” is defined in
pertinent part as
[m]achinery, apparatus and equipment with all associated parts,
appurtenances and accessories, including hydraulic fluids, lubricating oils, and greases
necessary for operation and maintenance, repair parts and any necessary repair or
taxable installation labor therefor, . . . or pollution control facilities primarily used for
air pollution control or water pollution control, where the use of such machinery,
equipment or facilities is by one who engages in such fabrication or processing as
one’s principal business, . . . or such use by a county, municipality, or water and
wastewater treatment authority created by private act or pursuant to the Water and
Wastewater Treatment Authority Act, compiled in title 68, chapter 221, part 6, or a
contractor pursuant to a contract with the county, municipality, or water and
wastewater treatment authority for use in water pollution control or sewage systems. 7
Under TENN. CODE ANN. § 67-6-209(c), this exemption applies to contractors installing industrial
machinery.
As the language above reflects, Tennessee’s exemption for industrial machinery expressly extends to
“pollution control facilities.” “Pollution control facilities” are broadly defined as including the following:
any system, method, improvement, structure, device or appliance appurtenant
thereto used or intended for the primary purpose of eliminating, preventing or
reducing air or water pollution, or for the primary purpose of treating, pretreating,
recycling or disposing of any hazardous or toxic waste, solid or liquid, when such
pollutants are created as a result of fabricating or processing by one who engages in
fabricating or processing as such person’s principal business activity, which, if released
without such treatment, pretreatment, modification or disposal, might be harmful,
detrimental or offensive to the public and the public interest. 8
A similar definition of pollution control facilities is used in the franchise and excise tax section and the
property tax section of the Tennessee Code, providing consistency among tax types. 9

6

TENN. CODE ANN. § 67-6-209(c).

7

TENN. CODE ANN. § 67-6-102(44)(A)(i).

8

TENN. CODE ANN. § 67-6-102(44)(A)(ii).

9

TENN. CODE ANN. § 67-5-604 and 67-4-2108(a)(5).

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By expressly defining “pollution control facilities” the Legislature extended the industrial machinery
exemption as applied to such facilities to include systems, improvements and structures primarily
used in the reduction, prevention, treatment, and disposal of waste. In contrast, the standard
industrial machinery exemption applies to “machinery, apparatus and equipment with all associated
parts, appurtenances and accessories…necessary to and primarily for” processing tangible personal
property for resale. 10 Accordingly, although included under the definition of “industrial machinery,”
the exemption for “pollution control facilities” is broader in scope than the exemption as applied to
manufacturers generally.
For purposes of this analysis, the broader definition of “pollution control facilities” applies. Thus, the
Municipality’s Contractors may purchase any system, method, improvement, structure, device, or
appliance appurtenant thereto used or intended for the primary purpose of eliminating, preventing,
or reducing water pollution tax exempt. Under this broader definition, materials for the construction
of the buildings necessary to operate the Facility are included within the scope of the exemption.
Materials for the construction of roadways, walkways, and vehicle parking at the Facility are also
included within the scope of this exemption. 11
A contractor installing qualified industrial machinery for the Municipality may apply to the Tennessee
Department of Revenue for its own industrial machinery authorization number. Such an industrial
machinery authorization number will enable the Contractor to purchase the industrial machinery for
the Facility Expansion exempt from the Tennessee sales and use tax.

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APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

6/16/2020

TENN. CODE ANN. § 67-6-102(44)(A).

The definition of “pollution control facilities” was added to the law in 1991. The legislative history of 1991 Tenn. Pub. Acts Ch.
503 indicates a legislative intent to create a tax exemption to offset the cost of pollution control requirements imposed by
federal law. See, comments of Representative Kisber before the House Conservation Committee on March 6, 1991, relative to
House Bill 771. Further, on May 29, 1991, before the Fiscal, Ways and Means Committee, Senator Dunnavant specifically cites
a municipal sewage system as an example of the kind of system to be affected by the bill. Finally, Representative Hillis, before
the House Conservation Committee on March 6, 1991, relative to House Bill 771, specifically mentions access roads as intended
to be within the scope of the exemption; see, e.g., Tenn. Dept. of Rev. Letter Ruling 96-00, November 17, 2000.

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