Were processing equipment, control-building materials, and access-road materials for a municipal sewage-treatment expansion exempt from Tennessee sales and use tax?

Plain-English summary

The contractor's processing equipment, control-building materials, and access-road materials for the municipal biosolids-treatment expansion were exempt from Tennessee sales and use tax. The project expanded a city-owned facility that treated and processed sewage sludge.

The ordinary rule described in the ruling taxed materials sold to or used by contractors to improve real property, including contractor use tax when the property had not previously borne sales or use tax. The industrial-machinery exemption supplied the exception here.

The cited definition covered pollution-control machinery, equipment, facilities, and appurtenant structures used by a county, municipality, or its contractor in water-pollution control or sewage systems. The Department applied that definition to pumps, tanks, piping, fittings, accessories, the control building, and the project's access roads.

The ruling also relied on legislative history for the 1991 amendment. It said lawmakers intended to offset federally imposed pollution-control costs and specifically discussed municipal sewage systems and access roads.

What this means for you

Municipal utility contractors

The exemption in this ruling extended beyond treatment machinery to the structure housing the process and the access roads serving the pollution-control facility.

Cities and wastewater operators

The city-owned sewage system and the contractor's work for the city fit the statutory municipal-use language quoted by the Department.

Accountants and tax professionals

Document how each material, machine, improvement, or structure is appurtenant to and primarily used for pollution control. The ruling applied a 1996 version of Tennessee law, so confirm current statutory language and exemption procedures before claiming similar treatment today.

Common questions

Q: Were the pumps, tanks, piping, fittings, and accessories exempt? A: Yes. The ruling treated that sewage-processing equipment as exempt industrial machinery.

Q: Were materials for the control building exempt? A: Yes. The Department included the building materials used for the pollution-control facility.

Q: Were access-road materials exempt?
A: Yes. The ruling said access roads were within the intended scope of the exemption.

Q: Are contractor materials normally exempt?
A: No. The ruling began from the rule that materials used to improve real property are taxable unless a statutory exemption applies.

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

Citations and references

• Tenn. Code Ann. § 67-6-101 et seq. and § 67-6-209 — sales and use tax and contractor use tax, as cited in the ruling.
• Tenn. Code Ann. § 67-6-206 — industrial-machinery exemption.
• Tenn. Code Ann. § 67-6-102(12)(A) and (iv) — industrial machinery and pollution-control facilities, as cited in the ruling.
• 1991 Tenn. Public Acts 503 — amendment adding the cited pollution-control definition.

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/96-08.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING #96-08
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 materials and equipment 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 his detriment. FACTS
[THE TAXPAYER] has entered into a contract for the construction of an expansion of a Biosolids Treatment Facility for the city of [A TENNESSEE CITY], Tennessee. The facility is owned by the City of [A TENNESSEE CITY]. The facility is used for the

treatment and processing of sewage sludge. A major part of the contract is the construction of a Sludge Control Building along with access roads to the building. These facilities are described in the attached contract drawings. Specific materials to be used for which exemption is sought include the following:

1. All processing equipment, comprised of pumps, tanks, piping, fittings and
   accessories constructed to treat sewage.
2. All concrete used for construction of this pollution control facility.
3. All site materials (paving, crushed rock) provided as part of the pollution
   control facility.
4. Building materials (masonry, steel, roofing, doors, finishes, specialties,
   mechanical, electrical) utilized for the construction of the Control Building.

ISSUE
Whether materials and equipment to be used in fulfillment of the above-described contract will be subject to sales and use tax. RULING Processing equipment, comprised of pumps, tanks, piping, fittings and accessories constructed to treat sewage would be exempt from sales and use tax. Materials used for construction of the control building would be exempt from sales and use tax. Materials used for the construction of access roads would be exempt. ANALYSIS The Sales and Use Tax, T.C.A. § 67-6-101, et seq., imposes a sales tax on all sales of tangible personal property or specifically taxable services to a consumer or any person for any purpose other than for resale, unless subject to an exemption. T.C.A. § 67-6-209 imposes a contractor’s use tax on tangible personal property used by a contractor in fulfillment of a contract if that property was not previously subject to sales or use tax. Materials sold to or used by a contractor to improve real property are subject to sales or use tax unless exempted by law. T.C.A. Section 67-6-206 exempts industrial machinery from the sales and use tax. "Industrial machinery" is defined in relevant part by T.C.A. Section 67-6-102 (12) to mean: (A) Machinery, apparatus and equipment with all associated parts, appurtenances and accessories, . . . , or pollution control facilities

primarily used for air pollution control or water pollution control, where the use of such machinery, equipment or facilities is . . . or such use by a county or municipality or a contractor pursuant to a contract with such county or municipality for use in water pollution control or sewage systems,

(iv) As used in this chapter, "pollution control facilities" means 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, or for the primary purpose of treating, pretreating, recycling or disposing of any hazardous or toxic waste, solid or liquid, when such pollutants are created as a result of fabricating or processing by one who engages in fabricating or processing as such person's principal business activity, which, if released without such treatment, pretreatment, modification or disposal, might be harmful, detrimental or offensive to the public and the public interest; The cited definition of pollution control facilities was added into the law by 1991 Tenn. Public Acts 503. The legislative history of that act indicates a legislative intent to create a tax exemption to offset the cost of pollution control requirements imposed by federal law. See, comments of Rep. Kisber before the House Conservation Committee on March 6, 1991 relative to House Bill 771. Further, on May 29, 1991, before the Fiscal, Ways and Means Committee, Sen. Dunnavant specifically cites a municipal sewage system as an example of the kind of system to be affected by the bill. Finally, Rep. Kisber, before the House Conservation Committee on March 6, 1991 relative to House Bill 771, specifically mentions access roads as intended to be within the scope of the exemption. Applying these statutory provisions to the facts, the exemption for industrial machinery would apply to the use by the taxpayer as a contractor with the city of [A TENNESSEE CITY] of materials and equipment for a sewage system, which would include machinery, equipment and 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. Materials used for the construction of access roads would also be within the scope of the exemption.

Steve Thomas
Senior Tax Counsel

APPROVED: Ruth E. Johnson
Commissioner

DATE: 2-8-96