Can a contractor expanding a municipal water-treatment plant buy the treatment piping exempt from Tennessee sales and use tax as industrial machinery?
Plain-English summary
A municipal water utility plans to expand its freshwater treatment plant — the facility that pulls raw water from a river, screens and chemically treats it, and turns it into drinking water sold to homes and businesses. It will hire outside contractors to build the expansion, and those contractors will buy the process piping that moves water through the treatment system. The questions: can the contractors buy that piping without sales tax, and do they owe use tax when they install it?
The Department said the piping is exempt, for both questions, because it qualifies as industrial machinery. Two ideas combine:
- A water utility is a "manufacturer." Tennessee's industrial machinery exemption is for equipment "necessary to, and primarily for" processing tangible personal property for resale. Water is tangible personal property; the plant subjects raw river water to numerous chemical and physical steps to make it drinkable; and it sells that water to customers for consumption off the premises. Under Tennessee case law, selling the processed product off-premises in a taxable transaction satisfies the "for resale" requirement — so the utility is a manufacturer.
- Process piping is industrial machinery, and the exemption flows through to the contractor. The intake/process piping "conveys" water from where treatment begins to the main plant, which counts as "machinery, apparatus, and equipment" (the Eastman Chemical conveyance rule), and it is necessary to and primarily for making the drinking water. Although a contractor normally owes a "contractor's use tax" on property it installs, Tennessee waives that tax where the property is exempt industrial machinery — so the contractors can buy the piping tax-free (after getting their own per-project industrial-machinery authorization) and owe no use tax on installation.
Two boundaries the Department drew: the distribution pipes that carry the finished drinking water out to customers are not part of manufacturing, so they don't qualify; and the pollution-control branch of the exemption doesn't apply, because the plant is treating water drawn from nature, not treating pollution.
What this means for you
Water, wastewater, and other "processing" utilities
If your operation transforms a raw input into a product you sell — even something as basic as treating river water into potable water — you may be a manufacturer for Tennessee's industrial machinery exemption, with all that follows (exempt processing equipment, exempt repair parts and labor). The label "utility" doesn't disqualify you; what matters is whether you process tangible personal property for resale as your principal business.
Contractors building exempt facilities
This ruling is important for contractors. Your default is to owe the contractor's use tax on materials and equipment you install. But when the property is exempt industrial machinery (or otherwise exempt for the owner and the use), § 67-6-209(c) relieves you of that tax. The catch: you must obtain your own industrial-machinery exemption authorization, on a per-project basis — don't assume the owner's status alone covers your purchases.
Draw the line at "the process"
The exemption tracks the manufacturing process, not the whole facility. Piping that moves water through treatment qualified; piping that distributes finished water to customers did not. Map each component to whether it is part of making the product or part of delivering it. And note: the fact that underground water pipes are deemed real property for some purposes doesn't strip them of their identity as industrial machinery (Hoyer-Schlesinger-Turner).
Accountants and advisors
The exemption is § 67-6-206(a)/§ 67-6-102(46)(A)(i); conveyance equipment qualifies under Eastman Chemical and § 67-6-102(46)(D)(ii). The contractor's use tax is § 67-6-209(b) (with the "dealer" definition at § 67-6-102(23)(K) and rate at § 67-6-203); the exempt-use carve-out is § 67-6-209(c). Water is TPP (§ 67-6-102(97)(A)); underground water pipes are deemed realty under § 67-6-102(97)(D) without losing IM status; "resale" off-premises is enough (Rogers Group); manufacturer threshold is Tenn. Farmers' Coop (§ 67-6-206(b)(2)); "primarily" is Woods v. General Oils. Compare RR 00-46 (water-treatment components generally) and LR 97-38 (distribution pipes are not industrial machinery).
Common questions
Q: Is a water utility really a "manufacturer"?
A: For the industrial machinery exemption, yes. Water is tangible personal property, the plant processes raw water into drinking water through many steps, and it sells that water to customers for off-premises consumption — which satisfies the "processing for resale" requirement.
Q: Doesn't the contractor owe use tax on what it installs?
A: Usually yes — the "contractor's use tax." But when the installed property is exempt industrial machinery, Tennessee relieves the contractor of that tax (§ 67-6-209(c)). The contractor must get its own per-project industrial-machinery authorization to buy the items tax-free.
Q: Is all the piping exempt?
A: No. The process piping that carries water through treatment qualifies. The distribution piping that delivers finished drinking water to customers is not part of manufacturing and does not qualify.
Q: The pipes are installed underground — aren't they just real property?
A: For some purposes Tennessee deems underground water pipes to be real property, but that does not change their identity as industrial machinery for the exemption.
Q: Can my business rely on this ruling?
A: No. A Tennessee letter ruling binds the Department only as to the taxpayer it was issued to and cannot be relied on by anyone else; it can be revoked or modified. Use it to understand the Department's reasoning, then confirm your own facts.
Citations and references
Statutes (Tennessee Code Annotated):
- § 67-6-206(a) — exempts "industrial machinery"
- § 67-6-102(46)(A)(i) — definition of industrial machinery (necessary to, and primarily for, processing TPP for resale)
- § 67-6-102(46)(D)(ii) — equipment transporting raw materials/finished goods to and from storage qualifies
- § 67-6-209(b) — contractor's use tax on TPP used to perform a contract
- § 67-6-209(c) — no contractor's use tax where the contractor and use would be exempt (e.g., industrial machinery)
- § 67-6-203 — use tax rate
- § 67-6-102(23)(K) — definition of "dealer" (a contractor using TPP to perform a contract)
- § 67-6-102(97)(A) — "tangible personal property" (includes water)
- § 67-6-102(97)(D) — underground pipes/tanks/pipelines carrying water are deemed real property (without changing IM identity)
- § 67-6-206(b)(2) — manufacturer = more than 50% of a location's revenue from processing TPP for resale
Cases:
- Eastman Chemical Co. v. Johnson, 151 S.W.3d 503 (Tenn. 2004) — devices conveying materials between steps qualify
- Hoyer-Schlesinger-Turner Inc. v. Benson, 479 S.W.2d 223 (Tenn. 1972) — industrial machinery keeps its identity when affixed to real property
- Rogers Group, Inc. v. Huddleston, 900 S.W.2d 34 (Tenn. Ct. App. 1995) — "resale" is met by transfer off-premises in a taxable transaction
- Tenn. Farmers' Coop v. State ex rel. Jackson, 736 S.W.2d 87 (Tenn. 1987) — manufacturer threshold
- Woods v. General Oils, Inc., 558 S.W.2d 433 (Tenn. 1977) — "primarily" means first of all, principally, fundamentally
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/24-07.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.
Application of Tennessee sales and use tax to contractors purchasing equipment and materials to
expand a freshwater treatment facility.
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.
[REDACTED] (the “Utility”) is the municipal utility system owned by the [TENNESSEE MUNICIPALITY]
and is governed by [MUNICIPAL BOARD]. It is not separately incorporated and is established pursuant
to Tenn. Code Ann. § 7-52-101 et seq. and Tenn. Code Ann. § 7-35-401 et seq. The Utility has not applied
for an Industrial Machinery Authorization.
The Utility owns and operates a freshwater treatment facility in [TENNESSEE MUNICIPALITY] (the
“Facility”). The Facility draws water from an area river, filters the water and chemically treats the water
so that the water can be used for residential and commercial water purposes, such as drinking water,
water used for other household purposes, irrigation, and commercial applications including
manufacturing.
The treatment process involves adding chemical coagulants to the incoming water. The water and
chemicals are then rigorously mixed to ensure proper contact between the water and coagulants. The
chemically treated water is then sent to flocculation basins where it is slowly mixed to allow the
coagulants to combine with particles in the water to form larger, heavier particles. After the slow
mixing step, the water is then sent to sedimentation basins where the larger, heavier particles are
settled out of the water and removed. After settling, the water is sent through a filtration step to
remove finer, lighter particles that are too small to settle out in the sediment basins. After filtration,
water is disinfected using a combination of a chemical disinfectant and ultraviolet light disinfection.
After disinfection, the water is stored briefly and then pumped to the distribution system where it is
sold to the Utility’s customers through Utility owned water meters.
The Utility intends to enter into contracts with unrelated contractors (the “Contractors”) to construct
an expansion of the Facility. The Utility will own and operate the expanded Facility. In the course of
expanding the Facility, Contractors will purchase materials required to construct the expansion of the
Facility as well as equipment to be used in the expanded Facility. The equipment and materials will
consist of 1) processing equipment, including pumps, tanks, piping, piping accessories, and related
equipment necessary to process water drawn from the water source (“raw water”), and 2) concrete,
reinforcing materials and other building materials necessary for the construction of the foundations
and enclosures necessary for the processing equipment (“Equipment and Materials”).
The piping required for the Facility expansion includes process yard piping systems, including piping
required to transport preliminarily treated water to the Facility’s main processing location, piping
required to transport treated water to storage, and piping required to transport treated water to the
distribution piping system for delivery to the Utility’s residential and commercial customers.
The Facility’s source of water supply is a river that is [DISTANCE AND DIRECTION FROM THE] Facility.
The Utility will construct an intake structure in the river with screening to remove large and small
solids from the raw water and a pump station in close proximity to the intake structure (approximately
200 feet) to facilitate drawing water from the river. Water drawn from the river at the screening
structure and through the pump station will undergo preliminary treatment that is integral to the
Facility’s processing the water into drinking water.
The preliminary screening process that occurs at the screening structure and the pump station
includes fine and coarse screening, and large particulate removal. Water quality sampling begins at
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the pump station and along an approximately [LENGTH] pipe (the “Piping”) that transports the
preliminarily treated water to the Facility’s main processing location. The Piping is used to transport
water that is preliminarily processed at the intake screening structure and at the pump station. The
Piping is installed underground on property with respect to which the Utility has easements that allow
the Utility to install the Piping, and repair and maintain the Piping. The Utility has the authority to
remove the Piping in its discretion.
The pump station will include infrastructure needed to allow for possible installation of additional
chemical treatment such as a potassium permanganate system to provide pre-oxidizing organic
removal to aid in the removal of PFAS (polyfluoroalkyl substances) and other potential contaminants
of concern as may be necessary to meet future regulatory requirements. The chemicals will be
injected at the pump station and mix with and react with the water as it is pumped. The preliminarily
treated water will undergo testing for turbidity, flow, and pressure to aid in further chemical treatment
processes. The Piping also will serve as a geothermal temperature moderation heat exchange
contactor to aid in temperature stabilization of the preliminary treatment process. The water that has
undergone preliminary treatment is transported to the Facility’s main processing location through the
Piping where the preliminarily treated water moves through several processes to produce drinking
water.
1.
Can the Contractors purchase the Piping exempt from sales and use tax? 1
Ruling: Yes. The Piping qualifies as industrial machinery and contractors may purchase the
Piping without payment of sales tax.
2.
Are Contractors required to accrue and remit use tax when the Contractors use the Piping to
expand the Facility?2
Ruling: No. Contractors are not required to accrue and remit use tax on the Piping when
installing the Piping to expand the facility.
TENN. CODE ANN. § 67-6-209(b) (2022) states that where a contractor or subcontractor defined as a
“dealer”3 uses tangible personal property in the performance of a contract, or to fulfill a contract or
1 The Tennessee Department of Revenue previously issued a comprehensive Revenue Ruling that addresses the
components of a water treatment facility. See Tenn. Dept. of Revenue Rev. Rul. 00-46 (Nov. 17, 2000). To the extent
that the Equipment and Materials are substantially similar in form and function to the items described in RR 0046, then RR 00-46 will provide the guidance for those items.
2 See footnote 1.
3 TENN. CODE ANN. § 67-6-102(23)(K) (Supp. 2023) 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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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.” Thus, 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. 4
The use tax imposed against contractors does not apply where the contractor, and the purpose for
which tangible personal property is used, would be exempt from the sales and use tax. This exclusion
from tax is included in TENN. CODE ANN. § 67-6-209(c) and applies when a contractor constructs an
improvement to real property that is exempt as industrial machinery and when a contractor installs
equipment that is exempt as industrial machinery.5
Whether Contractors can be authorized to purchase the Piping without paying sales tax will turn on
whether the Piping qualifies as industrial machinery. Whether Contractors are required to accrue and
remit use tax when the Contractors use the Piping to expand the Facility will also turn on whether the
Piping qualifies as industrial machinery. Industrial machinery is exempt from sales and use tax under
TENN. CODE ANN. § 67-6-206(a).6
“Industrial machinery” is defined in pertinent part under Tenn. Code Ann. § 67-6-102(46)(A)(i) 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, 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.
Therefore, in order for a purchase of tangible personal property to qualify as exempt industrial
machinery, four requirements must be met. First, the use of the tangible personal property must be
by, or in the case of a contractor, on behalf of, a manufacturer. A manufacturer is one who engages
in such fabrication or processing for resale and consumption off the premises as one’s principal
4 TENN. CODE ANN. § 67-6-209(c) (2022).
5 See generally Hoyer-Schlesinger-Turner Inc. v. Benson, 479 S.W. 2d 223, 225 (Tenn. 1972) (finding that industrial
machinery does not lose its identity as industrial machinery merely by its affixation to real property during the
process of installation). It should be noted that Tenn. Code Ann. § 67-6-102(97)(D) deems pipes, tanks, and
pipelines real property when they are installed underground or attached to a building and they are used for
carrying water, among other things. While this provision clarifies how to treat pipes when they are installed for
sales and use tax purposes, it does not change an items identity as industrial machinery.
6 There is also an industrial machinery exemption for pollution control facilities that allows for purchases made
by contractors for a qualified pollution control facility to be exempt from sales and use tax. TENN. CODE ANN. §§ 676-102(46)(A)(i). This exemption does not apply because the freshwater treatment facility is treating water drawn
from its natural environment, not treating pollution.
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business.7 Second, the tangible personal property purchased must be machinery, apparatus or
equipment. Third, the tangible personal property must be necessary to the fabrication or processing
of the products sold by the manufacturer. Fourth, the tangible personal property must be primarily
for the fabrication of the products sold by the manufacturer.
The first requirement is met because the Facility only processes raw water into potable water for
resale. The raw water is subject to numerous chemical and physical processes that make it drinkable,
and water is included in the statutory definition of tangible personal property.8 In analyzing the
meaning of “resale” as it relates to “the fabrication or processing of tangible personal property for
resale and consumption off the premises,” Tennessee courts have found that the “resale” requirement
under the definition of “industrial machinery” is met when the property is transferred off the premises
in a taxable transaction.9 A manufacturer need not make a sale for resale to a wholesaler or retailer
to qualify for the industrial machinery exemption. It is sufficient that the water is sold to customers
for consumption off the premises.
The second requirement is met because the Piping constitutes “machinery, apparatus, and
equipment.” In the case of Eastman Chemical Co. v. Johnson, 151 S.W. 3d 503, 509-10 (Tenn. 2004), the
Tennessee Supreme Court has interpreted the phrase “machinery, apparatus, and equipment” to
include “the devices conveying the materials and components from one part of the manufacturing or
fabricating process to another.” Further reinforcing that items which convey material in the
manufacturing process qualify as industrial machinery, TENN. CODE ANN. § 67-6-102(D)(ii) provides that
equipment used in transporting raw materials from storage to the manufacturing process, and
transporting finished goods from the end of the manufacturing process to storage, qualify as
industrial machinery if they are necessary to and primarily for the fabrication and processing of
tangible personal property. Here, the Piping conveys preliminarily treated water from the intake
structure, which is where the manufacturing process begins when the incoming raw water is filtered,
to the Facility where another manufacturing process takes place. As such, the Piping constitutes
“machinery, apparatus, and equipment.”
The third requirement is met because the Piping is necessary to the processing of raw water into
potable water. The term “necessary” is not defined by the Tennessee Code or the Tennessee courts
for Tennessee sales and use tax purposes. A common definition of “necessary” is “absolutely needed:
required.”10 The Piping is absolutely needed to move raw water through the treatment system so that
it can be processed into potable water. The Piping also serves as a geothermal temperature
moderation heat exchange contactor to aid in temperature stabilization of the preliminary treatment
process. This additional function is part of the process of turning preliminarily treated water into
7 Tenn. Farmers’ Coop v. State ex rel. Jackson, 736 S.W.2d 87, 91-92 (Tenn. 1987) (holding that manufacturing 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).
8 Tenn. Code Ann. § 67-6-102(97)(A).
9 See Rogers Group, Inc. v. Huddleston, 900 S.W.2d, 34, 36 (Tenn. Ct. App. Jan. 6, 1995) (finding that “fabricating or
processing for resale” focuses on the property’s use or consumption off the premises, and that the transfer of
the property in a taxable transaction for use and consumption off the premises is identical to a sale).
10 MERRIAM-WEBSTER’S COLLEGIATE DICTIONARY (11th ed. 2007).
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potable water. The pipes that convey potable water from the Facility to be distributed to customers
are not necessary to the manufacturing process and are not included in the Piping.11
The fourth requirement is met because the Piping is primarily for the processing of raw water into
potable water. The term “primarily” has been defined by the Tennessee Supreme Court for purposes
of the industrial machinery exemption as “first of all; principally; or fundamentally” and as “first in rank
or importance, chief, principal, basic or fundamental.” Woods v. General Oils, Inc. 558 S.W. 2d 433, 436
(Tenn. 1977) (citing WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY (1961)). Here, the Piping is used
exclusively to move raw water through the treatment and screening system and to the Facility where
it can be fully processed into potable water.
Having met the requirements analyzed above, the Piping qualifies as industrial machinery exempt
from Tennessee sales and use tax. The Contractors may purchase the Piping materials exempt from
sales and use tax after they have applied for and received their own industrial machinery exemption
authorization number on a per project basis. Additionally, the Contractors are not required to accrue
and remit use tax on the Piping to expand the Facility.
APPROVED:
David Gerregano
Commissioner of Revenue
DATE:
August 21, 2024
See Tenn. Dept. of Revenue Ltr. Rul. 97-38 (Sept. 5, 1997) (finding that pipes that are a major part of a
distribution system do not qualify as industrial machinery).
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