Does a company whose revenue mostly comes from selling renewable-fuel credits (RINs and LCFS credits) still count as a manufacturer eligible for Tennessee's franchise and excise tax industrial-machinery credit?

Plain-English summary

A company (the "Taxpayer") operates an industrial-gas production facility in Tennessee — it makes industrial gas and sells it to a single customer. When that gas goes into the transportation-fuel market it also generates federal Renewable Identification Numbers (RINs) and, for fuel sold into California, Low Carbon Fuel Standard (LCFS) credits. These are tradable environmental credits created automatically when renewable fuel is produced. The Taxpayer sells the RINs and LCFS credits to the same customer under the same agreement as the gas, and never separates or sells them on their own. Across the years at issue, most of the Taxpayer's revenue actually came from selling the RINs and LCFS credits, not the gas itself.

The Taxpayer bought equipment for the facility and wanted to claim Tennessee's franchise and excise (F&E) tax industrial-machinery credit. That credit is only for companies whose principal business is manufacturing — measured by a "51% test": more than half of revenue at the location must come from fabricating or processing tangible personal property for resale. The wrinkle: if the RIN and LCFS credit sales (which are intangible credits, not the physical gas) don't count as manufacturing revenue, the Taxpayer might fail the 51% test.

The Department ruled the Taxpayer does qualify. The RINs and LCFS credits "were generated by the same activity that produced the industrial gas and were not the product of any other effort or activity." The Taxpayer's only activity at its Tennessee location was producing industrial gas. So all of the revenue — gas sales and credit sales alike — "is derived directly from the process of producing industrial gas." That makes manufacturing the Taxpayer's principal business at the location, and its equipment purchases qualify for the industrial-machinery credit.

What this means for you

Manufacturers that earn byproduct or environmental-credit revenue

If your manufacturing process automatically generates saleable credits or byproducts (like RINs, LCFS credits, renewable-energy certificates, or similar), Tennessee's view here is that revenue from selling them can count as manufacturing revenue for the 51% test — as long as the credits arise from the same manufacturing activity and aren't the product of a separate line of business. That can keep you over the 50% manufacturing threshold even when the credits are your biggest revenue line.

What mattered to the Department

Two facts carried the result: (1) the credits were generated by the same activity that made the gas, not by any separate effort, and (2) producing the gas was the Taxpayer's only activity at the Tennessee location. If a taxpayer ran a separate desk buying and reselling third-party credits, or had other non-manufacturing operations at the site, the analysis could come out differently.

The industrial-machinery credit basics (F&E)

The credit is generally 1% of the purchase price of qualifying industrial machinery located in Tennessee, taken against combined franchise and excise tax, capped at 50% of that liability per year, with unused amounts carried forward up to 15 years. Higher credit percentages (up to 10%) are available for larger capital investments. "Industrial machinery" borrows the sales-tax definition — machinery necessary to and primarily for fabricating or processing tangible personal property for resale, used by someone whose principal business is that fabrication or processing.

Accountants and tax professionals

The credit is in § 67-4-2009(3); "industrial machinery" is defined by reference to § 67-6-102(46)(A)(i); the 51%/principal-business test traces to Tenn. Farmers' Coop v. State ex rel. Jackson, 736 S.W.2d 87 (Tenn. 1987). Note the carryforward here is 15 years — this is a 2022 ruling, before the 2023 amendment that extended the industrial-machinery and job-credit carryforward to 25 years (compare Letter Rulings 23-09 and 24-09).

Common questions

Q: My factory's biggest revenue line is selling environmental credits, not products. Can I still be a "manufacturer"?
A: Under this ruling, yes — if those credits are generated by the same manufacturing activity that makes your products and you have no separate non-manufacturing business at the location. All of that revenue can count as manufacturing revenue for Tennessee's 51% test.

Q: What is the industrial-machinery credit worth?
A: Generally 1% of the purchase price of qualifying machinery located in Tennessee (up to 10% for larger investments), taken against combined franchise and excise tax, limited to 50% of that liability per year, with unused credit carried forward up to 15 years.

Q: Would buying and reselling other companies' credits count as manufacturing?
A: This ruling doesn't say it would. The result rested on the credits being a direct product of the Taxpayer's own manufacturing — not a separate trading activity. A standalone credit-trading business would likely be analyzed differently.

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 franchise & excise tax:
- Tenn. Code Ann. § 67-4-2007(a) (6.5% excise tax on net earnings)
- Tenn. Code Ann. § 67-4-2105(a), -2106(a) (franchise tax on net worth)
- Tenn. Code Ann. § 67-4-2004(38) ("person" subject to F&E includes limited liability companies)

Industrial-machinery credit:
- Tenn. Code Ann. § 67-4-2009(3)(A) (credit for qualifying industrial machinery; ~1% of purchase price)
- Tenn. Code Ann. § 67-4-2009(3)(B) (50% of combined F&E liability cap), (C)(i) (15-year carryforward), (I) (up to 10% for certain capital-investment levels)
- Tenn. Code Ann. § 67-6-102(46)(A)(i) (definition of "industrial machinery")
- Tenn. Code Ann. § 67-6-102(95)(A) (definition of "tangible personal property")

Case:
- Tenn. Farmers' Coop v. State ex rel. Jackson, 736 S.W.2d 87 (Tenn. 1987) (51% gross-sales test for principal business)

Related rulings:
- Tenn. Dep't of Revenue Letter Ruling 23-09 and Letter Ruling 24-09 (later F&E credit-carryover rulings; note the 25-year carryforward enacted in 2023)

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/fae/22-01fe.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 22-01
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 availability of the Tennessee franchise and excise tax industrial machinery credit to an entity
whose revenue is primarily from the sale of renewable information numbers and low carbon fuel
standard credits.
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 [STATE] limited liability company that is wholly owned by [PARENT].
The Taxpayer is [REDACTED].

1

The Taxpayer operates [AN INDUSTRIAL GAS] production facility at [TENNESSEE LOCATION], where it
produces and sells [INDUSTRIAL GAS] (“industrial gas”) to its customer, [REDACTED]. The industrial gas
is produced by [REDACTED]. The Taxpayer uses [EQUIPMENT TO PRODUCE] the industrial gas it sells
to its customer.
When the industrial gas produced by the Taxpayer is sold into the transportation fuel market, it
qualifies for renewable identification numbers (“RINs”) and if sold into California, it also qualifies for
Low Carbon Fuel Standard (“LCFS”) credits. RINs are credits purchased by refiners and importers of
gasoline or diesel fuel to comply with the Renewable Fuel Standard (“RFS”) program, which Congress
created to reduce greenhouse gas emissions and expand the nation’s renewable fuels sector while
reducing reliance on imported oil. 1 Similarly, importers or refiners of fuel in California purchase LCFS
credits to comply with a program created by the California Air Resource Board to reduce petroleum
dependency and achieve air quality benefits. 2
RINs and LCFS credits are generated when renewable fuel is produced. 3 Approximately 1,000 cubic
feet of industrial gas generates 1 MMBTU 4 and 1 MMBTU generates 11.727 RINs. 5 RINs and LCFS
credits may stay with the associated renewable fuel when it is sold or be separated from the
renewable fuel and sold separately. RINs and LCFS credits can be used to demonstrate compliance,
stored for later use, traded between regulated parties, or sold to fellow regulated parties. In the
Taxpayer’s case, the Taxpayer sells all RINs and LCFS credits to [CUSTOMER] under the same
agreement as the industrial gas. The Taxpayer does not separate the RINs and LCFS credits from the
industrial gas and does not sell the credits separately to other parties.
For accounting purposes, the Taxpayer accrues RINs and LCFS credits directly into revenue and
accounts receivable based on when the credits are produced. The Taxpayer does not have an
inventory or other balance sheet related item for RINs and LCFS credits since they are all sold to
[CUSTOMER] with the gas when produced.
During the [YEARS] tax periods, the Taxpayer’s revenue sources were as follows:
Year

Sales of Industrial Gas

Sales of RINs and LCFS credits

[REDACTED]

[PERCENTAGE]

[PERCENTAGE]

[REDACTED]

[PERCENTAGE]

[PERCENTAGE]

[REDACTED]

[PERCENTAGE]

[PERCENTAGE]

See Renewable Fuel Standard Program, ENVIRONMENTAL PROTECTION AGENCY, https://www.epa.gov/renewable-fuel-standardprogram (last visited Sept. 30, 2021).
1

See Low Carbon Fuel Standard, AIR RESOURCES BOARD, https://ww2.arb.ca.gov/our-work/programs/low-carbon-fuel-standard
(last visited Sept. 30, 2021).
2

3

There are other ways to generate LCFS credits, but they are not applicable to this ruling.

MMBTU stands for One million British Thermal Unit, which is a standard unit for measurement for natural gas financial
contracts.

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2

RULING
For the [YEARS] tax periods, is the Taxpayer eligible to claim the Tennessee franchise and excise tax
industrial machinery credit under TENN. CODE ANN. § 67-4-2009(3) (Supp. 2021) with respect to
purchases of equipment the Taxpayer made during those tax periods?
Ruling: Yes. The Taxpayer’s purchases of equipment during the [YEARS] tax periods qualify for
the industrial machinery tax credit in TENN. CODE ANN. § 67-4-2009(3) (Supp. 2021) because the
Taxpayer’s principal business during the [YEARS] tax periods was manufacturing.
ANALYSIS
Tennessee imposes an excise tax at the rate of 6.5% on the net earnings of all persons doing business
within Tennessee. 6 Tennessee also imposes a franchise tax rate at the rate of $0.25 per $100, or major
fraction thereof, on the net worth of a person doing business in Tennessee. 7 Persons subject to
Tennessee franchise and excise taxes include, but are not limited to, limited liability companies. 8
Taxpayers who purchase qualifying industrial machinery that will be located in Tennessee are entitled
to take an industrial machinery credit against their combined Tennessee franchise and excise tax
liability for the period in which the purchase occurs. 9 The industrial machinery credit is generally equal
to 1% of the purchase price of the qualifying machinery. 10 For Tennessee franchise and excise tax
purposes, qualifying industrial machinery includes “industrial machinery” as defined in TENN. CODE
ANN. § 67-6-102, 11 as well as certain additional computer-related assets.
TENN. CODE ANN. § 67-6-102 (46)(A)(i) (Supp. 2021) defines “industrial machinery” as “machinery . . . that
is necessary to, and primarily for, the fabrication or processing of tangible personal property for resale
and consumption off the premises . . . where the use of such machinery, equipment or facilities is by
one who engages in such fabrication or processing as one’s principal business.” 12 Manufacturing is a
taxpayer’s principal business if more than fifty percent of its revenue at a given location is derived
from fabricating or processing tangible personal property 13 for resale. 14
6

TENN. CODE ANN. § 67-4-2007(a) (Supp. 2021).

7

TENN. CODE ANN. § 67-4-2105(a) (Supp. 2021) and -2106(a) (2013).

8

TENN. CODE ANN. § 67-4-2004(38) (Supp. 2021).

9

TENN. CODE ANN. § 67-4-2009(3)(A) (Supp. 2021).

Id. With certain exceptions, the credit shall not exceed fifty percent of the combined franchise and excise tax liability shown
by the return before the credit is taken. TENN. CODE ANN. § 67-4-2009(3)(B). Any unused credit may be carried forward for a
maximum of fifteen years. TENN. CODE ANN. § 67-4-2009(3)(C)(i). Note that industrial machinery credits of up to ten percent of
the purchase price are available to qualifying taxpayers making certain levels of capital investments. See, e.g., TENN. CODE ANN.
§ 67-4-2009(3)(I).
10

11

See TENN. CODE ANN. § 67-6-102(46) (Supp. 2021).

12

TENN. CODE ANN. § 67-6-102(46)(A)(i).

“Tangible personal property” means “personal property that can be seen, weighed, measured, felt or touched, or that is in
any manner perceptible to the senses.” TENN. CODE ANN. § 67-6-102(95)(A).
13

14
Tenn. Farmers’ Coop v. State ex rel. Jackson, 736 S.W. 2d 87, 91-92 (Tenn. 1987) (holding that the Commissioner’s 51 percent
test based on gross sales is not erroneous for determining a taxpayer’s principal business).

3

For the [YEARS] tax periods, the Taxpayer’s revenue was derived from the sale of industrial gas and
the credits that were created when the industrial gas was produced. These particular RINs and LCFS
credits were generated by the same activity that produced the industrial gas and were not the product
of any other effort or activity undertaken by the Taxpayer. Furthermore, the Taxpayer’s only activity
at its location in Tennessee was the production of industrial gas. Therefore, all of the revenue
described above is derived directly from the process of producing industrial gas at the Tennessee
location.
Consistent with these facts, the Taxpayer’s principal business at its Tennessee location during the
[YEARS] tax periods was manufacturing. Accordingly, the Taxpayer’s purchases of equipment used
primarily for the production of industrial gas during the [YEARS] tax periods qualify for the industrial
machinery tax credit in TENN. CODE ANN. § 67-4-2009(3).

APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

2/2/2022

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