If a contractor moves its fabrication work into a single-member LLC that elects to be taxed as a corporation, does the new entity qualify as a manufacturer for Tennessee's industrial-machinery and business tax exemptions?

Plain-English summary

A Tennessee contractor (the "Parent") both fabricates products and installs them for customers. That dual role is a tax problem: under Tennessee law, a contractor who installs what it makes into real property is not treated as "reselling" tangible personal property, so a fabricate-and-install business usually can't qualify as a manufacturer — and misses out on the manufacturer tax breaks.

To fix that, the Parent set up a new single-member LLC (SMLLC) that it wholly owns, and moved all of the fabrication machinery and staff into it at a separate "New Fabrication Location." The new entity (the "Taxpayer") would only fabricate goods for resale — no installation — selling to the Parent and to third parties. The Parent asked the Department four questions about whether the new structure earns the manufacturer tax benefits.

The answers turn almost entirely on whether the SMLLC elects to be treated as a corporation for federal income tax purposes:

• Q1 — Industrial-machinery (IM) exemption and reduced utility rates, if the SMLLC elects corporate treatment: Yes. By electing corporate status (a "check-the-box" election on IRS Form 8832), the SMLLC becomes a separate entity from the Parent for Tennessee tax. Because it only fabricates goods for resale, more than 50% of its revenue at the location is from fabricating tangible personal property for resale and consumption off the premises — it passes Tennessee's "51% test" — so it qualifies as a manufacturer and gets the IM exemption plus the reduced 1% water / 1.5% energy-fuel rates.
• Q2 — Does the answer change if it stays a disregarded entity? Yes, it changes. Without the corporate election, the SMLLC is disregarded and treated as a mere division of the Parent. Its "sales" to the Parent don't exist (a division can't sell to itself), only its third-party fabrication sales count toward the 51% test, and the Parent's own installation revenue is mixed in — so eligibility can fluctuate.
• Q3 — What if the Parent just moved manufacturing to a new location without creating a separate entity? Maybe. The Parent's eligibility would rise or fall depending on whether more than 50% of its revenue at that location comes from fabrication sales versus installation sales.
• Q4 — Does the corporate-electing SMLLC qualify as a manufacturer for business tax? Yes. Because it is primarily engaged in fabricating goods for resale and consumption off the premises, it qualifies for the business-tax manufacturer exemption under the Tennessee Works Tax Act of 2023.

The throughline: separating pure fabrication into a corporate-electing entity lets the fabrication revenue stand on its own and pass the 51% test, unlocking manufacturer treatment that the combined fabricate-and-install business couldn't reach.

What this means for you

Manufacturers and fabricators that also install

If you both make and install your products, your installation revenue can sink you below the 51% manufacturing threshold and cost you the industrial-machinery exemption, the reduced utility rates, and the business-tax manufacturer exemption. Splitting the pure-fabrication operation into a separate entity that elects corporate treatment can let that fabrication revenue qualify on its own — but the entity must really only fabricate for resale, and the corporate election (Form 8832) is what makes it a separate taxpayer.

The single-member LLC election is the hinge

For Tennessee sales/use and business tax, an LLC is classified the same way it is federally. A single-member LLC that elects to be a corporation is a separate entity; one that stays disregarded is just a division of its owner. As a division it can't make qualifying sales to the owner, and its activity is folded into the owner's revenue mix — which is exactly what can break the 51% test.

The 51% test is per location

Tennessee tests manufacturer status location by location: more than 50% of revenue at that location must come from fabricating or processing tangible personal property for resale and consumption off the premises. Installing your product into real property is not a "resale," so installation revenue does not count toward the manufacturing side.

One catch on intercompany sales

If the fabrication entity elects corporate status and sells to the Parent, those are real sales — the entity must collect Tennessee sales tax on materials sold and delivered to the Parent's job sites (the supplier-to-contractor-dealer rule). The entity wins the manufacturer exemptions, but the goods it sells to the contractor-Parent are still taxable sales.

Common questions

Q: Can splitting fabrication into a separate company get me the manufacturer tax breaks?
A: It can, if the new entity elects to be treated as a corporation and only fabricates tangible personal property for resale (no installation), so that more than 50% of its revenue at the location is from fabrication for resale. Then it passes the 51% test and qualifies for the industrial-machinery exemption, reduced utility rates, and the business-tax manufacturer exemption.

Q: What if my single-member LLC doesn't make the corporate election?
A: It is disregarded and treated as a division of its owner. It can't "sell" to the owner, only its third-party fabrication sales count, and the owner's installation revenue is part of the mix — so the owner's manufacturer eligibility can fluctuate and may be lost.

Q: Why doesn't a fabricate-and-install contractor usually qualify as a manufacturer?
A: Because installing your product into real property is not treated as reselling tangible personal property under Tennessee law, so that revenue doesn't count toward the 51% manufacturing threshold, and a contractor can't claim the manufacturer exemptions on goods it installs.

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 revenue mix and structure may differ, and the 51% test is fact-specific. Confirm with a tax professional.

Citations and references

Entity classification:
- Tenn. Code Ann. § 48-249-1003 and § 48-211-101 (an LLC is classified for Tennessee state and local tax as it is for federal income tax)
- Treas. Reg. § 301.7701-2(a), -3(b), -3(c) ("check-the-box"; a single-member entity is a corporation or disregarded; election on IRS Form 8832)
- Tenn. Dep't of Revenue Letter Ruling 06-40 (Dec. 15, 2006)

Sales & use tax — industrial-machinery exemption and the 51% test:
- Tenn. Code Ann. § 67-6-102(46)(A)(i) and § 67-6-206(b)(2) (industrial-machinery exemption for a business whose principal business is fabricating/processing tangible personal property for resale and consumption off the premises)
- Tenn. Code Ann. § 67-6-209(c) (51% test; a contractor's transfer of property it installs as an improvement to realty is not a sale, and the contractor can't obtain manufacturer exemptions on that basis)
- Tenn. Code Ann. § 67-6-206(b)(1) (reduced rates — 1% on water, 1.5% on energy fuels — for manufacturers)
- Tenn. Comp. R. & Regs. 1320-05-01-.103(1); 1320-05-01-.08 (supplier collects sales/use tax on materials sold and delivered to a contractor-dealer's job site)
- Tenn. Farmers' Coop. v. State ex rel. Jackson, 736 S.W.2d 87 (Tenn. 1987); Beare Co. v. Tenn. Dep't of Revenue, 858 S.W.2d 906 (Tenn. 1993); Alley-Cassetty Coal Co. v. Johnson, 2005 WL 729180 (Tenn. Ct. App. 2005)

Business tax — manufacturer exemption:
- Tenn. Code Ann. § 67-4-712(b)(2) (business-tax exemption for a person primarily engaged in fabricating/processing tangible personal property for resale and consumption off the premises; Tennessee Works Tax Act of 2023, 2023 Public Acts Ch. 377, § 3)
- Tenn. Code Ann. § 67-4-701 et seq.; Tenn. Comp. R. & Regs. 1320-04-05-.28(1) (business tax applied per location)

Related ruling:
- Tenn. Dep't of Revenue Letter Ruling 23-09 (single-member LLC disregarded into a corporate parent for franchise & excise tax)

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/23-08.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.

Whether a wholly owned single member limited liability company qualifies for the sales and use tax
industrial machinery exemption and the business tax exemption for manufacturers if it elects to be
treated as a corporation for federal income tax purposes.

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
detriment.

[REDACTED] (hereinafter the “Parent”), is a Tennessee corporation headquartered in [CITY],
Tennessee, with offices in [REDACTED] and [REDACTED]. Parent operates a [REDACTED] fabrication
plant at its [REDACTED] location and provides design services, [REDACTED – INSTALLATION AND
SERVICES RELATED TO INSTALLING ITS FABRICATED GOODS], project management, and detailing.
Parent is in the business of selling [FABRICATED GOODS] to other contractors, consumers, and users
as well as [INSTALLING GOODS] for others. All [INSTALLATION] services are contractually Parent’s
responsibility, whether it uses its own employees and/or subcontractors.
Parent is expanding its operations in [REDACTED]. It currently leases [REDACTED - PROPERTIES]. The
[PROPERTIES] consist of Parent’s contractor office, a physically separate fabrication facility, and two
buildings used to support fabrication operations. Parent established a new legal entity named
[REDACTED], (the “Taxpayer”) and will transfer all machinery, equipment, and personnel specifically
involved in fabrication to the Taxpayer. The [PROPERTIES] will be resurveyed combining a part
[REDACTED – MULTIPLE ADDRESSES] to become one distinct property location with an entrance
separate from [ADDRESS]. The existing lease agreement with the property owner of the [PROPERTIES]
will be terminated. The Taxpayer will enter into a new agreement with the property owner to lease
[PROPERTY] where it will maintain its fabrication operations (the “New Fabrication Location”). Parent
will enter into an agreement with the property owner to lease the remainder of [ADDRESS] where it
will maintain its contractor operations.
The Taxpayer was formed under Tennessee law as a single member limited liability company
(“SMLLC”) wholly owned by Parent. The Taxpayer will elect to be treated as a corporation for federal
income tax purposes.
The Taxpayer will only fabricate [FABRICATED GOODS] for resale and use off the premises. There will
be no [INSTALLATION SERVICES] provided under any of the Taxpayer’s contracts. At least 51% of the
Taxpayer’s gross sales will be from the sale of [FABRICATED GOODS] at the New Fabrication Location.
The [FABRICATED GOODS] will be sold to Parent and third parties. Title and possession of the
[FABRICATED GOODS] will be passed from the Taxpayer to the customer at the job site to which it is
shipped.

1.

Will the Taxpayer qualify for the sales and use tax exemption for industrial machinery and
reduced rates for water and energy fuel as provided by TENN. CODE ANN. § 67-6-206?
Ruling: Yes. The Taxpayer will be treated as a separate entity from Parent and will qualify for
the sales and use tax exemption for industrial machinery and reduced tax rates for water and
energy fuel.

2.

Does the answer change if the Taxpayer does not elect to be treated as a corporation and
remains a disregarded entity for federal income tax purposes?

2

Ruling: Yes, the answer changes. The Taxpayer would be disregarded for Tennessee sales and
use tax purposes and treated as a division of Parent. It would not be able to sell to the Parent,
and its sales to third parties would be that of the Parent. Parent’s eligibility may fluctuate
based on where it derives most of its revenues.
3.

If Parent moved its manufacturing operations as described above to a separate location and
did not create a separate entity, would Parent qualify for an industrial machinery exemption
as a manufacturer at the New Fabrication Location?
Ruling: Maybe. Parent’s eligibility for the industrial machinery exemption will fluctuate based
on where it derives most of its revenues.

4.

Will the Taxpayer qualify as a manufacturer for business tax purposes?
Ruling: Yes. The Taxpayer, having elected to be treated as a corporation for federal income tax
purposes, will qualify as a manufacturer for business tax purposes because it is primarily
engaged in the fabrication of [GOODS] for resale and consumption off the premises.

For Tennessee state and local tax purposes, a limited liability company is classified in the same
manner as it is classified for federal income tax purposes, unless otherwise provided. 1 Treas. Reg. §
301.7701-2(a) (current through July 17, 2023, 88 FR 45372) provides that a business entity with only
one owner is classified as a corporation or is disregarded as an entity separate from its owner. A
disregarded entity’s activities are treated in the same manner as a sole proprietorship, branch, or
division of the owner.2
Treas. Reg. § 301.7701-3(b) (current through July 17, 2023, 88 FR 45372) provides that, by default, a
business entity with one owner is classified as disregarded as an entity separate from its owner. Treas.
Reg. § 301.7701-3(c), known as the “check-the-box” provision,3 allows for a business entity to elect on
Form 8832 to be treated as an association taxable as a corporation. If a SMLLC has made a valid
election to be taxable as a corporation, then it will be treated as a separate entity for Tennessee state
and local tax purposes. If a SMLLC does not make an election or elects to be treated as a disregarded
entity on Form 8832, then it will be disregarded as an entity separate from its owner for Tennessee
state and local tax purposes, unless an applicable statute requires otherwise. 4

TENN. CODE ANN. § 48-249-1003 (current through 2023 Reg. Sess. of the 113th Gen. Assembly) provides that for state and local
tax purposes, “a foreign or domestic LLC shall be treated as a partnership or an association taxable as a corporation as such
classification is determined for federal income tax purposes.” TENN. CODE ANN. § 48-211-101 (current through 2023 Reg. Sess. of
the 113th Gen. Assembly) provides almost identical language. These statutes show the legislature’s intent to classify limited
liability companies for Tennessee state and local tax purposes in the same manner that they are classified for federal income
tax purposes. See also Tenn. Dept. of Rev. Ltr. Rul. 06-40 (Dec. 15, 2006).
1

2

Treas. Reg. § 301.7701-2(a) (current through July 17, 2023, 88 FR 45372).

Federal Form 8832 provides the applicable boxes to check. https://www.irs.gov/pub/irs-pdf/f8832.pdf (last visited July 19,
2023).
3

See, e.g., TENN. CODE ANN. §§ 67-4-2006(a)(6) (2022); 67-4-2007(d) (2022); and 67-4-2106(c) (2022). These statutes apply to
persons subject to the franchise and excise taxes.
4

3

The sales and use tax industrial machinery exemption is granted to entities whose principal business
is the fabrication or processing of tangible personal property for resale and consumption off the
premises.5 An activity is a taxpayer’s principal business if more than fifty percent of its revenues at a
given location are derived from fabricating or processing tangible personal property for resale; this is
known as the “51% test.”6 Each location of a taxpayer will be considered separately in determining
whether the taxpayer qualifies or is disqualified as a manufacturer at that location. 7
Contractors who fabricate and install products to realty, such as [REDACTED], typically will not qualify
as a manufacturer.8 This result is driven by the fact that under Tennessee law, contractors are not
considered the reseller of tangible personal property that they install.
1. The Taxpayer will qualify for the sales and use tax exemption for industrial machinery and reduced
rates for water and energy fuel.
Because the Taxpayer elects to be treated as a corporation for Federal income tax purposes, it will be
treated as a separate entity from Parent for Tennessee sales and use tax purposes. This separation
will allow its sales of [FABRICATED GOODS] to be included in the 51% test, while its parent’s sales of
contracting services will be excluded. Because the Taxpayer only fabricates [FABRICATED GOODS] for
resale at the New Fabrication Location to third parties and Parent, which is a separate entity, more
than 50% of the Taxpayer’s revenue will be from sales of [FABRICATED GOODS] fabricated for resale
and consumption off the premises.9 Accordingly, the Taxpayer will qualify as a manufacturer at the
New Fabrication Location and will be eligible for the industrial machinery exemption from sales and
use tax and reduced rates for water and energy fuel.10
2. Under the facts provided, the Taxpayer will not qualify for the sales and use tax exemption for
industrial machinery and reduced rates for water and energy fuel if it does not elect to be treated
as a corporation because the Taxpayer will be treated as a division of Parent; and, Parent’s eligibility
may fluctuate based on where it derives most of its revenues.
If the Taxpayer does not elect to be treated as a corporation for federal income tax purposes and is
treated as an entity disregarded as separate from Parent for federal income tax purposes, it will be
5

TENN. CODE ANN. § 67-6-102(46)(A)(i) (2022); TENN. CODE ANN. § 67-6-206(b)(2) (2022).

Tenn. Farmer’s Coop. v. State ex rel. Jackson, 736 S.W.2d 87, 91-92 (Tenn. 1987); see also Beare Co. v. Tenn. Dep’t of Revenue, 858
S.W.2d 906, 908 (Tenn. 1993).
6

TENN. CODE ANN. § 67-6-209(c) (2022); see also Alley-Cassetty Coal Co., Inc. v. Johnson, No. M2003-02327-COA-R3-CV, 2005 WL
729180 *6 (Tenn. Ct. App. March 29, 2005).
7

The transfer of tangible personal property by a contractor who contracts for the installation of such tangible personal property
as an improvement to realty does not constitute a sale, except as otherwise provided, and the contractor shall not be permitted
on this basis to obtain the benefit of any exemptions or reduced tax rates available to manufacturers. TENN. CODE ANN. § 67-6209(c) (2022); see also TENN. COMP. R. & REGS. 1320-05-01-.103(1) (2000).
8

The Taxpayer will have to collect sales tax on its sales to Parent pursuant to TENN. COMP. R. & REGS. 1320-05-01-.08 (1984), which
states that “suppliers making sales of materials and supplies to contractor-dealers and delivering such materials and supplies
to a job site for use, or tagging or marking particular materials and supplies for a particular job being performed by the
contractor-dealer, shall collect the applicable Sales and Use Tax on those sales.”
9

Tax at the rate of one percent (1%) is imposed with respect to water when sold to or used by manufacturers. Tax at the rate
of one and one-half percent (1.5%) shall be imposed with respect to gas, electricity, fuel oil, coal and other energy fuels when
sold or used by manufacturers. TENN. CODE ANN. § 67-6-206(b)(1).
10

4

treated as a disregarded entity for Tennessee sales and use tax purposes. In this situation, the
Taxpayer will be treated as a division of Parent, and its sales to the Parent will not exist.
For purposes of the 51% test, only the revenue from sales of [FABRICATED GOODS] fabricated at the
New Fabrication Location that is sold to third parties (the “Fabrication Sales”) will be considered
properly derived from fabrication of tangible personal property for resale. Any transfer of
[FABRICATED GOODS] from the division to Parent, which uses the [FABRICATED GOODS] in performing
its [INSTALLATION SERVICES], does not constitute a sale, and will not be considered to be receipts
derived from sales of fabricated tangible personal property for resale or consumption off the
premises. Instead, when Parent [INSTALLS] its [FABRICATED GOODS] for others, those sales are
considered installation sales (“Installation Sales”).11
To qualify for the industrial machinery authorization, Parent would need to sell to third parties, with
more than 50% of its revenues being from Fabrication Sales. If the Parent does not meet the 51% test,
it is not permitted to obtain the benefit of any exemptions or reduced tax rates available to
manufacturers under § 67-6-102(46)(E) or § 67-6-206.12 Under Parent’s operational structure outlined
in the facts, whether Parent qualifies as a manufacturer may fluctuate depending on its revenue from
Fabrication Sales in relation to its revenue from Installation Sales.
3. Parent’s eligibility for the industrial machinery exemption will fluctuate based on where it derives
most of its revenues.
Parent derives its revenues from multiple sources. The [FABRICATED GOODS] fabricated at the New
Fabrication Location is sold in two types of transactions: Fabrication Sales and Installation Sales. Only
the revenue derived from the Fabrication Sales will count towards whether Parent is a manufacturer
under the 51% test. Parent may qualify for the industrial machinery authorization at the New
Fabrication Location if its facts indicate that it derives more than 50% of its revenues from Fabrication
Sales. As addressed above in section 2, whether Parent qualifies as a manufacturer may fluctuate
depending on its revenue from Fabrication Sales in relation to its revenue from Installation Sales.
4. The Taxpayer will qualify as a manufacturer for business tax purposes.
The business tax is a privilege tax on the privilege of doing business by making sales of tangible
personal property and services within Tennessee and its local jurisdictions. 13 Tenn. Code Ann. § 67-4712(b)(2), as amended by the Tennessee Works Tax Act of 2023, 2023 Public Acts Ch. 377, § 3, provides
an exemption from the business tax for “[a] person primarily engaged in the fabrication or processing
of tangible personal property for resale and consumption off the premises with respect to the sales
of such property made from the manufacturing location or from a storage or warehouse facility that
is situated within a ten-mile radius of the manufacturing location.”
For business tax purposes, a “manufacturer” is generally the same as it is for purposes of the sales
and use tax industrial machinery exemption, and includes establishments primarily engaged in

11

See TENN. CODE ANN. § 67-6-209(c).

12

Id.

13

See TENN. CODE ANN. § 67-4-701 et seq. and TENN. COMP. R. & REGS. 1320-04-05-.01, et seq.

5

fabricating [FABRICATED GOODS]. Similar to sales and use tax, the business tax exemption for
manufacturers will be applied on a location-by-location basis.14
To sum up the qualifications for the manufacturer’s exemption to the business tax, a taxpayer must:
1) qualify for the exemption on a per location basis;15 2) be engaged in fabricating and processing
tangible personal property for resale and consumption off the premises;16 3) derive more than 50%
of the business’s gross receipts from manufacturing; and 4) make its sales from the manufacturing
location or from a storage or warehouse facility situated within a ten-mile radius of the manufacturing
location.17
The Taxpayer is primarily engaged in the fabrication of [FABRICATED GOODS] for resale and
consumption off the premises at the New Fabrication Location in Shelbyville, thus satisfying all four
requirements to be exempt from business tax. Accordingly, the Taxpayer qualifies as a manufacturer
eligible for the manufacturing exemption to the business tax if the Taxpayer elects to be treated as a
corporation for federal tax purposes.

APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

August 24, 2023

“A business which engages in business activity in several places, in different locations and through different outlets, must
obtain a license from and pay the initial license fee to the appropriate local officer and must pay at least the minimum business
tax to the Department for each place, location or outlet; and it must report gross sales and tax due for each separate location.”
TENN. COMP. R. & REGS. 1320-04-05-.28(1) (September 16, 2016).
14

15

Id.

16

TENN. CODE ANN. § 67-4-712(b)(2).

17

Id.

6