Did a curtain-wall fabricator qualify as a manufacturer when revenue from contracts that included installation could exceed half of annual revenue?

Plain-English summary

The curtain-wall fabricator did not qualify as a manufacturer for Tennessee's industrial-machinery exemption because it had not shown that more than half of the location's revenue came from sales contracts rather than contracts that included installation. The Department focused on contract revenue, not the smaller installation-cost component within each project.

The company designed and fabricated curtain walls, windows, and entrances in Tennessee, then either sold the completed units or installed them at construction sites. Installation represented about 29% of project cost, but contracts including installation could produce 30% to 70% of annual revenue.

The ruling said fabrication would be the principal business only if revenue from sales of fabricated tangible property exceeded 50% of total revenue at the location. The taxpayer's fluctuating mix did not establish that test consistently.

A separate installation company would change the stated structure. If the fabricator sold its completed materials to that company and otherwise met the requirements, its revenue would clearly come from sales of tangible personal property and it would qualify for the industrial-machinery exemption.

What this means for you

Fabricators that also install

Do not measure manufacturing status merely by labor, material, or installation cost percentages. The ruling compared revenue from sales contracts with revenue from contracts that included installation.

Construction groups

Entity and contract structure mattered. Separating fabrication sales from installation services could change which company met the principal-business test.

Accountants and tax professionals

Maintain location-specific revenue records that distinguish product-sale contracts from installation contracts. The ruling required more than a predicted or occasionally favorable mix.

Common questions

Q: Did performing some installation automatically prevent manufacturer status? A: No. The ruling said some installation did not disqualify the company if sales-contract revenue still exceeded 50%.

Q: Why did the company fail the test?
A: It could not show that sales contracts generated more than half of total revenue or would do so consistently.

Q: Did the Department use the 29% installation-cost figure? A: No. It compared revenue from installation contracts with revenue from sales contracts.

Q: Would a separate installation affiliate solve the issue? A: The ruling said the fabricator would qualify if it sold the fabricated materials to a separate installer and met all other requirements.

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

Citations and references

• Tenn. Code Ann. § 67-6-206 and § 67-6-102(12)(A) — industrial machinery and the principal-business manufacturing test, as cited in the ruling.
• Tennessee Farmers' Coop. v. State, 726 S.W.2d 87 (Tenn. 1987) (verbatim official citation; the citation database returned an ambiguous reporter match under a different case name, so the State's text is preserved).
• Covington Pike Toyota, Inc. v. Cardwell, 829 S.W.2d 132 (Tenn. 1992).

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/97-45.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 97-45

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 Determination of status as manufacturer with respect to commercial construction projects. 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 the taxpayer’s detriment. FACTS
[THE TAXPAYER] is a wholly owned subsidiary of [CORPORATION A]. The Taxpayer is located in [CITY], Tennessee. [CORPORATION A] is in the business of designing, engineering, procurement of materials, fabrication and assembly, and sometimes installation of curtain walls, windows, and entrances for commercial construction projects. The design and engineering activities consist of drawings, calculations, and materials take-offs primarily for the manufacture of the work. The Taxpayer orders the components from various manufacturers. The materials used, including aluminum, glass, insulation, steel, and stone, are prepared for fabrication into complete units ready for installation. The fabrication and assembly generally consist of receiving, fabricating, assembly, glazing, and packing of the materials for delivery to construction sites outside of Tennessee. Some projects also involve field installation of the fabricated or assembled material at the construction site. Installation is more commonly performed for domestic rather than international projects. Other projects involve the purchase of the assembled units from the Taxpayer without installation services. Most of the engineering, material procurement, and fabrication or assembly will occur in the Taxpayer’s Tennessee facility. The actual materials will be sourced throughout the world. The costs of various parts of construction projects for 1997 are as follows: Engineering Materials and Other Purchases Fabrication and Assembly Field Installation (including labor, tools & equipment, but not including any of the above)

10%
50%
11%

29%

The majority of the cost of a project which includes installation, then, is the cost of the engineering, materials, and fabrication, rather than installation. Taking into account the cost of materials in an installation contract, the percentage of total revenue from installation contracts, as opposed to sales contracts, varies between 30-70%. Because of the nature of the business, the Taxpayer cannot predict what percentage of gross revenue will come from installation contracts in any given year.

ISSUES

1. Whether the Taxpayer is a manufacturer for purposes of the industrial
   machinery exemption in Tenn. Code Ann. § 67-6-206.
2. Whether, if [CORPORATION A] establishes a separate company to perform
   installation, the Taxpayer would then be deemed a manufacturer. RULINGS
3. The Taxpayer does not qualify as a manufacturer for the purposes of the
   industrial machinery exemption.
4. If the Taxpayer sold the fabricated materials to a separate company
   performing installation, the Taxpayer would be considered a manufacturer provided that all other requirements are met. ANALYSIS The industrial machinery authorization is granted to entities whose principal business is the fabrication or processing of tangible personal property for resale and consumption off the premises. Tenn. Code Ann. § 67-6-102(12)(A). An activity is the principal business if revenues generated from that activity constitute more than 50% of the total revenues generated at the specific location. Tennessee Farmers’ Coop. v. State, 726 S.W. 2d 87 (Tenn. 1987). Generally, exemptions from taxation are only allowed when the statute grants the exemption in clear and unmistakable terms. All doubts must be resolved against the exemption, and statutes that confer exemptions are to be strictly construed against the taxpayer. Covington Pike Toyota, Inc. v. Cardwell, 829 S.W. 2d 132 (Tenn. 1992). The Taxpayer will be deemed a manufacturer if its principal business is the fabrication or processing of tangible personal property for resale. Provided that more than 50% of revenues generated result from the sale of tangible personal property fabricated or processed by the Taxpayer, the remaining activities are immaterial.
5. The Taxpayer designs and purchases component parts of the curtain walls
   and other units, then assembles the parts into a unit ready for installation. If the Taxpayer performed no installation and only manufactured the units, clearly the Taxpayer would be deemed a manufacturer and would qualify for an industrial machinery number and all associated tax benefits. The fact that the Taxpayer performs some installation of its products does not prevent it from being deemed a manufacturer assuming all other requirements

are met, in particular, that revenues are derived primarily from sales contracts as opposed to installation contracts. As set forth in the facts above, predicted revenue for the upcoming fiscal year includes approximately 29% from installation. This breakdown of revenue, however, does not associate any product revenues with the installation revenue. Revenue from installation contracts, including the charges for the units, constitute anywhere between 30-70% of annual revenue. Sales contract revenue would correspondingly fluctuate between 30-70% of revenue. The comparison for purposes of determining the primary source of revenue is not a percentage breakdown of total revenue, which necessarily involves a lesser installation component in light of the total costs for engineering, materials, and fabrication. The relevant comparison is between revenue generated from installation contracts to revenue generated from sales contracts. Based on the facts provided, the Taxpayer has not demonstrated sufficiently that revenue from sales contracts constitutes more than 50% of total revenue or will consistently do so in the future. Accordingly, the Taxpayer does not qualify as a manufacturer for the purposes of the industrial machinery exemption.

2. If [CORPORATION A] established a separate company to perform
   installation services, the Taxpayer’s primary source of revenue would clearly result from the sale of tangible personal property and the Taxpayer would be entitled to the industrial machinery exemption.

______
Caroline R. Krivacka
Tax Counsel

APPROVED: _______
Ruth E. Johnson
Commissioner
DATE:

10-29-97