Do a city's contractors owe Tennessee use tax on the equipment and materials they buy to build a municipal wastewater pilot-treatment plant and reclaimed-water pump station?

Plain-English summary

A Tennessee city is adding wastewater capacity by building two things: a pilot treatment facility (to test advanced water-treatment technologies) and a reclaimed-water booster pump station (to push treated, reclaimed water out to part of the city). The city will own and operate both, but unrelated contractors will build them and buy the materials and equipment. Normally a contractor owes Tennessee's "contractor's use tax" on the property it uses to fulfill a construction contract — so the question was whether an exemption applied.

The Department ruled that the materials and equipment for both projects are exempt as industrial machinery. Tennessee's industrial-machinery exemption covers "pollution control facilities" used for water-pollution control — and it expressly extends to a municipality, and to a contractor working under a contract with the municipality, for use in water-pollution control or sewage systems. "Pollution control facilities" is defined broadly as any system, structure, device, or appliance used or intended primarily to eliminate, prevent, or reduce water pollution.

Both projects fit. The pump station distributes reclaimed water, which is part of how the city reduces water pollution (wastewater can't simply be discharged untreated; reusing it disposes of large volumes), and it only handles reclaimed water from the treatment center. The pilot facility applies advanced treatment processes to that water and helps the city design its future full-scale plant — reducing pollution both directly and as part of the broader system. Because both qualify, the contractors owe no use tax on the materials or equipment — including the buildings, and even site work like roadways and parking that support the facility.

Finally, most of the pilot equipment is leased. Those lease payments are also exempt under the government-entity exemption: sales (including leases) made directly to a Tennessee county or municipality are not taxed if the government is the purchaser, takes title on delivery, pays the vendor directly, and gives each vendor a properly executed exemption certificate. Here the city pays the lessors directly, so the leases are exempt as long as it provides those certificates.

What this means for you

Cities, counties, and water/wastewater authorities

Equipment and materials for water-pollution-control and sewage projects you own can be bought free of Tennessee sales and use tax under the industrial-machinery exemption — and the exemption is generous enough to reach the buildings that house the equipment and supporting site work. Reclaimed-water/reuse infrastructure counts as pollution control because it's part of disposing of treated wastewater.

Contractors building public water and sewer projects

You normally owe contractor's use tax on the materials and equipment you install. But when you're building a municipality's water-pollution-control or sewage facility under contract with that municipality, the industrial-machinery exemption flows to your purchases — so you can buy those materials and equipment tax-free. Keep documentation tying the purchases to the qualifying public contract.

Vendors leasing equipment to a government project

A lease to a city or county is exempt only if the government itself is the customer of record, takes title on delivery, pays you directly, and gives you a valid exemption certificate. A pass-through arrangement works as long as the government is truly the one paying you and provides the certificate.

Accountants and tax professionals

The exemption runs through § 67-6-206(a) and the industrial-machinery definition in § 67-6-102(46)(A)(i)–(ii), which expressly covers municipalities and their contractors for water-pollution-control and sewage systems and broadly defines "pollution control facilities." The leased-equipment piece relies on the government-entity exemption in § 67-6-329(a)(4) and Rule 1320-05-01-.55. Compare prior Ruling 20-05 on buildings and site work.

Common questions

Q: Does a contractor owe Tennessee use tax on materials for a public wastewater project?
A: Not when the project is a municipality's water-pollution-control or sewage facility built under contract with that municipality. The industrial-machinery exemption applies to the contractor's purchases of materials and equipment, so no contractor's use tax is due.

Q: Is a reclaimed-water pump station really "pollution control"?
A: Yes, in the Department's view. Reusing treated water is part of disposing of wastewater that can't be discharged untreated, so equipment that distributes reclaimed water is part of the city's water-pollution-control system. The pump station here only handled reclaimed water from the treatment center.

Q: Are the buildings and parking lots exempt too, or just the treatment equipment?
A: The Department included the materials for the buildings needed to operate the facility, and even roadways, walkways, and parking at the site, within the scope of the exemption.

Q: What about equipment the city leases instead of buys?
A: Lease payments are exempt under the government-entity exemption if the city is the purchaser, takes title on delivery, pays the vendor directly, and provides each vendor a properly executed exemption certificate.

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. Private (non-government) projects and facilities that aren't really pollution control would be analyzed differently. Tennessee sales tax is state-administered, so there is no separate self-collected city tax.

Citations and references

Statutes and rules:
- Tenn. Code Ann. § 67-6-209(b) (contractor's use tax on property used to perform a contract)
- Tenn. Code Ann. § 67-6-206(a) (industrial-machinery exemption)
- Tenn. Code Ann. § 67-6-102(46)(A)(i) (industrial machinery; pollution-control use by a municipality or its contractor in water-pollution-control / sewage systems)
- Tenn. Code Ann. § 67-6-102(46)(A)(ii) (broad definition of "pollution control facilities")
- Tenn. Code Ann. § 67-6-102(23)(K) (definition of "dealer")
- Tenn. Code Ann. § 67-6-329(a)(4) (government-entity exemption for direct purchases) and Tenn. Comp. R. & Regs. 1320-05-01-.55 (requirements)

Prior ruling:
- Tenn. Dep't of Revenue Letter Ruling 20-05 (materials for buildings and for roadways/walkways/parking at a pollution-control facility are within the exemption)

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/23-03.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 of a pilot treatment facility and pumping station for additional
wastewater capacity.

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.

The City of [REDACTED] is a Tennessee municipality (the “Municipality”). The Municipality intends to
enter into a contract for the construction of a pilot treatment facility and a reclaimed water booster
pump station (collectively, the “Facility”) for additional wastewater capacity.
The Municipality will own and operate the Facility. The Municipality will contract with unrelated
contractors (the “Contractors”) to construct the Facility. In the course of constructing the Facility, the
Contractors will purchase materials required to construct the Facility and equipment to be used in the
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.
Reclaimed Water Booster Pump Station
The purpose of the reclaimed water booster pump station (the “pump station”) is to increase the
quantity of flow and pressure of the reclaimed water that is delivered to the southeast portion of the
Municipality. Reclaimed water is a sustainable alternative to potable water that the Municipality uses
for irrigation customers that is produced from wastewater effluent.
The pump station will consist of a masonry building and shingled roof with four pumps housed inside
the building. The building will also house various electrical panels and instrumentation for remote
control of the pumps and will be conditioned to prevent overheating/freezing of the equipment during
the summer/winter months. The pump station will also include a davit crane that will be suspended
above the pumps to aid in the removal of a pump from the pump base to the roll-up door for loading
when repair or replacement of a pump becomes necessary. The pump station includes various valves
for isolation and flow control, in addition to ductile iron piping for appropriate restraining of
joints. The pump station will rest on a slab on grade and is intended to remain in place permanently.
The pump station will pull water from the reclaimed water distribution system and pump to allow the
Municipality to increase the pressure into the distribution system in the southeast portion of the
Municipality. The pump station will only be used for reclaimed water that is produced from the
treatment facility in the northern part of the Municipality.
Pilot Treatment Facility
The purpose of the pilot treatment facility is to determine appropriate treatment technologies, based
on the water quality of the Municipality’s wastewater and reclaimed water. The Municipality will use
the information gained in its proposal for full construction of a new clean water facility in the
southeast area of the Municipality.
The pilot treatment facility is a temporary metal building that will be constructed adjacent to the pump
station on the same site that will provide smaller scale advanced technologies for the evaluation of

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wastewater treatment for the southeast area of the Municipality. The building will have a metal roof
and will be divided into four areas, the laboratory, the electrical room, the mechanical room, and the
process room. The laboratory will include tabletops and cabinets where the wastewater will be
measured and analyzed. The process room will house the pilot equipment for treatment, along with
electrical wiring and instrumentation controls. Valves and restrained fittings will be used to isolate
flow and prevent flow disruption. Pipe material will be either PVC or ductile iron, depending on the
area of the pilot facility. The building will rest on a slab on grade. Several roll-up garage doors are
included to facilitate the installation/removal of the process equipment and will extend the full 18foot height of the building.
The water for use by the pilot treatment facility will also pull from the reclaimed water distribution
system located in the northern part of the Municipality. The Municipality is piloting advanced
treatment processes to see what levels of treatment can be obtained with the water. Depending on
the level of treatment obtained in the pilot treatment facility, the Municipality will pursue reuse
options when it designs its larger treatment facility that will eventually be constructed in the southeast
area of the Municipality.
Most of the equipment used in the pilot treatment facility will be leased. The Municipality’s consultant
has negotiated three equipment lease agreements with three different vendors. In each case, the
vendor will arrange for delivery of the equipment to the project site and a vendor representative will
set up the equipment. The consultant will pass the lease payments through on the Municipality’s
invoices so that the Municipality is making the lease payments.
The Municipality’s employees will operate the pilot treatment facility but will send samples to an
external laboratory for analysis. The pilot treatment facility will be in operation for one year once the
final construction has been completed. At the conclusion of the project, the building will remain on
the property, and the leased equipment will be returned to the individual vendors. Any smaller
equipment the Municipality purchases directly, such as glassware and small instruments used for
laboratory analysis, will be moved to the treatment facility in the northern part of the Municipality.

1.

Are the purchases of materials by the Municipality’s Contractors for the construction of the
pump station and the purchases of the equipment to be used in the pump station subject to
Tennessee sales and use tax under TENN. CODE ANN. § 67-6-209(b) (2022)?
Ruling: No. The purchases of materials by the Municipality’s Contractors for the construction
of the pump station and the purchases of equipment to be used in the pump station are
exempt from Tennessee sales and use tax pursuant to TENN. CODE ANN. § 67-6-206(a) (2022).

2.

Are the purchases of materials by the Municipality’s Contractors for the construction of the
pilot treatment facility and the purchases of the equipment to be used in the pilot treatment
facility subject to Tennessee sales and use tax under TENN. CODE ANN. § 67-6-209(b)?
Ruling: No. The purchases of materials by the Municipality’s Contractors for the construction
of the pilot treatment facility and the purchase of equipment to be used in the pilot treatment

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facility are exempt from Tennessee sales and use tax pursuant to TENN. CODE ANN. § 67-6206(a).
3.

Are the payments for leased equipment used in the pilot treatment facility subject to the
Tennessee sales and use tax?
Ruling: The Municipality qualifies for the governmental entity exemption in TENN. CODE ANN.
§ 67-6-329(a)(4) (2022). As long as the Municipality complies with the requirements listed in
TENN. COMP. R. & REGS. 1320-05-01-.55, the equipment lease payments will not be subject to
Tennessee sales and use tax.

TENN. CODE ANN. § 67-6-209(b) (2022) states that where a contractor or subcontractor defined as a
“dealer”1 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.” 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. 2
Pump Station
The purchases of materials by the Municipality’s Contractors for the construction of the pump station
and the purchases of the equipment to be used in the pump station are not subject to Tennessee
sales and use tax because they are exempt as purchases of industrial machinery.
TENN. CODE ANN. § 67-6-206(a) (2022) exempts “industrial machinery” from the sales and use tax.
“Industrial machinery” is defined in pertinent part in TENN. CODE ANN. § 67-6-102(46)(A)(i) (2022) as
[m]achinery, apparatus and equipment . . . 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.

TENN. CODE ANN. § 67-6-102(23)(K) (2022) 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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2

TENN. CODE ANN. § 67-6-209(c) (2022).

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“Pollution control facilities” is broadly defined to include “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.” 3
The broader definition of “pollution control facilities” is instructive here. The Municipality and its
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.4
The pump station increases the quantity of flow and pressure of the reclaimed water that is delivered
to the southeast portion of the Municipality. Making use of reclaimed water is a part of a system for
reducing water pollution because municipal wastewater cannot simply be discharged without being
treated; water reuse allows for the disposal of large quantities of wastewater. The pump station is a
piece of the Municipality’s water pollution control system because it allows for reclaimed water to be
distributed to areas where that water may be used. As for the pump station’s primary use, it is
primarily used for the control of water pollution because it only pulls reclaimed water from a water
treatment center.
Because of its role in distributing treated water as a part of a system designed to reduce water
pollution, the pump station would qualify as a pollution control facility. Accordingly, the purchase of
materials by the Municipality’s Contractors for the construction of the pump station and the purchase
of equipment to be used in the pump station are exempt from Tennessee sales and use tax as
purchases of industrial machinery.
Pilot Treatment Facility
The purchases of materials by the Municipality’s Contractors for the construction of the pilot
treatment facility and the purchase of equipment to be used in the pilot treatment facility are also
exempt from Tennessee sales and use tax as purchases of industrial machinery. The purpose of the
pilot treatment facility is to determine appropriate treatment technologies, based on the water quality
of the Municipality’s current wastewater and reclaimed water. The Municipality plans to use the
information it gains from the pilot treatment facility to pursue viable reuse options when it designs its
larger treatment facility that it plans to eventually construct in the southeast area of the Municipality.
Determining appropriate water treatment technologies for the Municipality is a part of the
Municipality’s system for reducing water pollution. “Pollution control facilities” is broadly defined to
include “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.” 5
The water used in the pilot treatment facility is pulled from the reclaimed water distribution system.
The pilot treatment facility then applies advanced treatment processes to that reclaimed water. In a
narrow context, the pilot treatment facility is reducing the pollution in the water that it pulls when it
3

TENN. CODE ANN. 67-6-102(46)(A)(ii) (2022) .

See Tenn. Dept. Rev. Ltr. Rul. 20-05 (June 16, 2020) (where materials for the construction of the buildings necessary to operate
a Pollution Control 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 the exemption).
4

5

TENN. CODE ANN. 67-6-102(46)(A)(ii).

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subjects that water to advanced treatment processes. In a broader context, the use of the pilot
treatment facility is intended for the purpose of reducing water pollution in the Municipality. In either
context, the pilot treatment facility qualifies as a pollution control facility. Accordingly, the purchase
of materials by the Municipality’s Contractors for the construction of the pilot treatment facility and
the purchase of equipment to be used in the pilot treatment facility are exempt from Tennessee sales
and use tax as purchases of industrial machinery.
Equipment Lease Payments
Sales made directly to a county or municipality in Tennessee are not subject to sales and use tax,
provided the county or municipality furnishes the vendor with a properly executed exemption
certificate. In addition, in order to qualify for the exemption, the county or municipality must be the
party making the purchase of property or taxable service, must obtain title to the property or service
immediately upon delivery, and must make payment directly to the dealer supplying the property or
service. 6
As noted above, the Municipality’s consultant has negotiated three equipment lease agreements with
three different vendors. In each case, the vendor will arrange for delivery of the equipment to the
project site and a vendor representative will set up the equipment for use by the Municipality’s
employees. The consultant will pass the lease payments through on the Municipality’s invoices so that
the Municipality is making the lease payments directly to the vendor. As long as the Municipality
provides each vendor with a properly executed exemption certificate, the lease payments will not be
subject to Tennessee sales and use tax.

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APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

April 4, 2023

TENN. CODE ANN. § 67-6-329(a)(4) (2022); TENN. COMP. R. & REGS. 1320-05-01-.55 (2022).

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