Could a multistate retailer buy supplies from Tennessee vendors without Tennessee sales tax when it received them at a Tennessee warehouse for later use outside the state?

Plain-English summary

The retailer could not avoid Tennessee sales tax on store supplies bought from Tennessee vendors and delivered to its Tennessee distribution warehouse merely because it later shipped some supplies to stores in other states. The Department treated delivery to the Tennessee warehouse as a Tennessee sale.

The supplies included cleaning products, paper towels, door signs, and office forms used or consumed by the retailer's stores. They were not merchandise held for resale, so the retailer could not properly buy them with a resale certificate. The ruling warned that misuse could make the purchaser liable for the unpaid tax and could support revocation of its dealer registration.

The Department rejected the retailer's import-for-export and temporary-storage arguments. Under the cited Tennessee cases, the export theory did not apply where a Tennessee vendor transferred title or possession to a Tennessee purchaser in Tennessee. The temporary-storage language did not change the result because the underlying sale itself was taxable.

Paying use tax later to the state where a store ultimately consumed the supplies did not postpone Tennessee tax. The ruling said tax was due when the first taxable privilege occurred: the purchase in Tennessee.

What this means for you

Multistate retailers and warehouse operators

Future shipment outside Tennessee did not make supplies tax-free when the retailer first received them in Tennessee for its own use. The place and nature of the initial transaction controlled the ruling.

Purchasing teams

A resale certificate was not available for cleaning, office, and similar operating supplies that the buyer planned to consume rather than resell.

Accountants and tax professionals

The ruling distinguished a taxable Tennessee sale from a later use-tax event. Review the vendor, delivery, title-or-possession transfer, and actual use of the property rather than relying only on its final destination.

Common questions

Q: Did later shipment to an out-of-state store exempt the original purchase? A: No. The supplies were delivered to the Tennessee warehouse in taxable Tennessee sales.

Q: Could the retailer use a resale certificate?
A: No. The retailer bought the supplies for its own use, not for resale.

Q: Did the temporary-storage rule apply?
A: No. The Department said that language did not apply because the underlying Tennessee sale was already taxable.

Q: Could the retailer wait and pay use tax only where each store consumed the supplies? A: No. The ruling said Tennessee tax was due when the taxable purchase first occurred.

Q: Can another retailer rely on this ruling?
A: No. It binds the Department only for the addressed taxpayer and facts.

Citations and references

• Tenn. Code Ann. § 67-6-201 and § 67-6-102(24) — retail-sale tax and the definition of a sale, as cited in the ruling.
• Tenn. Code Ann. § 67-6-102(23)(A) and Tenn. Comp. R. & Regs. 1320-5-1-.68(3) — resale compliance and prohibited certificate use.
• Tenn. Code Ann. § 67-6-211 and § 67-6-102(F)(27) — the export and temporary-storage provisions invoked in the ruling.
• Young Sales Corporation v. Benson, 450 S.W.2d 574 (Tenn. 1970).
• Board of Publication of the Methodist Church, Inc. v. Woods, 609 S.W.2d 501 (Tenn. 1980).
• Jack Daniel Distillery v. Jackson, 740 S.W.2d 413 (Tenn. 1987).
• Nasco, Inc. v. Jackson, 748 S.W.2d 193 (Tenn. 1988).

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/96-04.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING #96-04

WARNING
Letter rulings are binding on the Department only with respect to the individual taxpayer being addressed in the ruling. This presentation of the ruling in a redacted form is informational only. Rulings are made in response to particular facts presented and are not intended necessarily as statements of Department policy.

SUBJECT
Application of the sales and use tax to purchases of supplies in Tennessee by the
[TAXPAYER] for use outside Tennessee.
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 of 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 his detriment.

FACTS
The [TAXPAYER] purchases supply items (those used or consumed by the stores such as cleaning supplies, paper towels, door signs, or office forms) from vendors located both within and without Tennessee. With the exception of a few vendors in the [CITY NAME], Tennessee area who use their own delivery trucks, all items are delivered to
[THE TAXPAYER]’s distribution warehouse in [A TENNESSEE CITY]. From its distribution warehouse, [THE TAXPAYER] ships supplies to its various retail locations across the entire United States. At the time of shipment, [THE TAXPAYER] accrues and remits use tax to the taxing authority governing the locale where the retail location is located, including Tennessee. ISSUE Whether the [TAXPAYER] and/or its related joint ventures may purchase supplies in Tennessee for use outside Tennessee without the payment of Tennessee sales tax. RULING The [TAXPAYER] and/or its related joint ventures may not purchase supplies for use outside Tennessee without the payment of Tennessee sales tax. If the [TAXPAYER] and/or its related joint ventures purchase such property without the payment of sales tax through the misuse of a Certificate of Resale then the purchaser will be held liable for the sales tax not paid. Use of a Certificate of Resale to purchase tangible personal property for the purchaser’s own use is prohibited and is grounds for the revocation of the dealer’s registration. ANALYSIS T.C.A. Section 67-6-201 levies a tax at the rate of six percent (6%) of the sales price of each item or article of tangible personal property when sold at retail in this state. The term “sale” is generally defined as “any transfer of title or possession.” T.C.A. Section 67-6-102(24). A sale of tangible personal property occurs in Tennessee if title or possession of the property is transferred to the purchaser in Tennessee. Under the facts presented, purchases from Tennessee vendors which are delivered to the taxpayer’s warehouse in [A TENNESSEE CITY] are Tennessee sales subject to sales tax in Tennessee. As stated in the facts, the taxpayer has avoided paying sales tax on these purchases through the use of its Certificate of Resale. T.C.A. Section 67-6-102 (23) (A) provides as follows: "Retail sales" or "sale at retail" means a taxable sale of tangible personal property or specifically taxable services to a consumer or to any person for any purpose other than for resale. "Retail sales" or "sales at retail" means

and includes all such transactions as the commissioner, upon investigation, finds to be in lieu of sales. Any sales for resale must, however, be in strict compliance with rules and regulations promulgated by the commissioner. Any dealer making a sale for resale which is not in strict compliance with rules and regulations shall be personally liable for and pay the tax; Sale and Use Tax Rule 1320-5-1-.68 provides in relevant part as follows: (3) Certificates of resale may not be used to obtain tangible personal property or taxable services to be used by the purchaser, and not for resale; such use shall be grounds for the Commissioner to revoke the registration certificate of the dealer wrongfully making use of such certificate of resale. In addition to this penalty it is a misdemeanor to misuse the certificate of personal property or taxable services without the payment of the Sales or Use Tax when it is due. The taxpayer may not use a resale certificate to purchase supply items for its own use. Use of a Certificate of Resale to purchase tangible personal property for the purchaser’s own use is prohibited and is grounds for the revocation of the dealer’s registration. The taxpayer argues that it should be allowed to purchase supplies for its own use outside Tennessee tax-exempt pursuant to T.C.A. Section 67-6-211 and Young Sales Corporation v. Benson, 450 S.W. 2d 574 (Tenn. 1970). These contentions have been squarely addressed and rejected by the Tennessee Supreme Court. In the case of Board of Publication of the Methodist Church, Inc. v. Woods, 609 S.W.2d 501 (Tenn. 1980), the plaintiff similarly argued for an exemption for items purchased in Tennessee for use outside Tennessee. The Court held that the import-for-export exemption from sales tax does not apply when the transfer of title is from a vendor located in Tennessee to a purchaser also located in Tennessee even though the purchaser intends to and does export the merchandise.” Id. at 504. The Court further specifically distinguished Young Sales Corp. v. Benson, 450 S.W.2d 574 (Tenn. 1970), relied on by the taxpayer in this ruling request, noting that in that case there was no allegation that a sale or transfer of possession to a buyer took place in Tennessee. Id. The Supreme Court subsequently upheld and reaffirmed these conclusions in Jack Daniel Distillery v. Jackson, 740 S.W.2d 413 (Tenn. 1987), The taxpayer also argues that an exemption is conferred by T.C.A. Section 67-6102(F)(27) which provides that “. . . temporary storage pending shipping or mailing of tangible personal property to non-residents of Tennessee should not constitute a taxable use in Tennessee.” This provision has no application to the facts presented since a sale is made in Tennessee and is clearly subject to sales tax here. To the extent that the taxpayer purchases these items without the payment of tax through the misuse of its resale certificate, it will be held directly liable for the sales tax not paid. Nasco, Inc. v. Jackson 748 S.W.2d 193 (Tenn. 1988).

Finally, the taxpayer argues that it should not be held liable for sales tax in Tennessee since it intends to pay use tax in the state of the item’s ultimate destination, including Tennessee if the item is assigned to a retail location here. Sales or use tax is due upon the initial exercise of the taxable privilege. In this case, the taxable privilege is initially exercised when the items are purchased in Tennessee for use by the purchaser. Sales tax is therefore due in Tennessee at that time and cannot be delayed in favor of paying a use tax at a later point in time.

Steve Thomas
Senior Tax Counsel

APPROVED: Ruth E. Johnson
Commissioner

DATE: 1-8-96