Could authorized Rule 68 taxpayers claim current-return credits for tax paid on qualifying pollution-control items and buy new items without paying tax upfront?

Plain-English summary

The two taxpayers could claim credits on current returns for Tennessee sales or use tax already paid on qualifying pollution-control items, or seek refunds instead, but only with evidence supporting both qualification and payment. Their existing Rule 68 authority also let them purchase tangible personal property without paying sales tax at the time of purchase and later self-report use tax on items they actually used.

The taxpayers were non-Tennessee corporate subsidiaries operating government facilities in Tennessee. They had already received Department authority under Rule 68 to use a resale certificate for all tangible-personal-property purchases and remit use tax only on items actually used.

Section 67-6-346 provided a 100% credit for sales and use tax paid on pollution control required to bring the purchaser into compliance with federal, state, or local pollution-control law. The purchaser could alternatively apply for a refund or authority to make exempt purchases.

The benefit was limited to a purchaser that itself had to comply with the pollution-control requirements. On audit, the taxpayers would need evidence that each item qualified and that Tennessee sales or use tax had actually been paid. Insufficient proof could result in tax and interest.

What this means for you

Businesses buying required pollution-control property

The historical credit depended on why the property was acquired: it had to be required to bring the purchaser itself into compliance with pollution-control law or regulation. Equipment that merely related to another party's compliance was not covered by the ruling's reasoning.

Taxpayers choosing between a credit and refund

The ruling allowed either a current-return credit or a refund application for qualifying tax already paid. Both routes required proof of qualification, payment to the Department, and compliance with the statutory time limit.

Rule 68 taxpayers

The two taxpayers did not need a separate point-of-sale exemption determination for each purchase. Their existing authority allowed tax-free purchasing with a resale certificate and later self-reporting of use tax on property actually used.

Recordkeeping and audit teams

Keep invoices, tax-payment records, the compliance mandate, and technical evidence connecting each item to required pollution control. The ruling expressly warned that insufficient evidence could produce an assessment plus interest.

Common questions

Q: Was the credit limited to tax actually paid? A: Yes. A current-return credit was available only to the extent Tennessee sales or use tax had been paid to the Department.

Q: Could the taxpayers request a refund instead? A: Yes, for qualifying tax paid within the statutory period.

Q: Did any pollution-related purchase qualify? A: No. The purchaser itself had to be required to comply with the pollution-control law or regulation, and the item had to qualify under Section 67-6-346.

Q: Could the Rule 68 taxpayers buy pollution-control items without upfront sales tax? A: Yes. Their existing authority covered tangible personal property generally, including pollution-control items, with use tax self-reported on items actually used.

Q: What proof would an audit require?
A: Evidence that the items qualified as required pollution control and that the claimed tax was actually paid.

Citations and references

• Tenn. Code Ann. § 67-6-346 — pollution-control sales and use tax credit, refund, or purchase authority.
• Tenn. Comp. R. & Regs. 1320-5-1-.68(4) — authorized use of a resale certificate for purchases and self-reporting of use 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/98-29.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING #98-29

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
Procedure of taking credits available under Tenn. Code Ann. § 67-6-346. 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 TAXPAYERS] are [STATE A - NOT TENNESSEE] corporations and wholly owned subsidiaries of [PARENT] Corporation. The Taxpayers are under contract with the [GOVERNMENT AGENCY] to manage, maintain, and operate certain of

the [GOVERNMENT AGENCY’S] facilities in [CITY Z], Tennessee, although the Taxpayers are separate entities that perform different functions with respect to the facilities. The Taxpayers have both applied for and received authority under TENN. COMP. R. & REGS. 1320-5-1-.68(4) to make all purchases of tangible personal property without the payment of tax using a resale certificate and are permitted to remit tax only on those items actually used by the Taxpayers. ISSUES

1. Whether the Taxpayers may take credits on current tax returns for tax
   previously paid on items they believe qualify as pollution control under Tenn. Code Ann. § 67-6-346.
2. Whether the Taxpayers may purchase items they believe are exempt as
   pollution control under Tenn. Code Ann. § 67-6-346 without paying sales or use tax. RULINGS
3. Provided they can demonstrate that they qualify under Tenn. Code Ann. § 676-346, the Taxpayers may take credits on current tax returns for qualifying
   pollution control, but only to the extent that sales or use tax was paid to the Department. In the alternative, the Taxpayers may apply for a refund of sales or use tax paid on qualifying pollution control items.
4. The Taxpayers are Rule 68 taxpayers and accordingly need not pay tax at the
   time of any purchase.
   ANALYSIS
5. The recent amendment to Tenn. Code Ann. § 67-6-346 provides that
   There shall be a credit of one hundred percent (100%) of the sales and use tax paid with respect to pollution control required to bring the purchaser into compliance with pollution control laws or regulations, whether federal, state, or local. Instead of taking the credit available under this section . . . the purchaser may apply to the commissioner of revenue for a refund of the taxes paid or for authority to make purchases exempt from the tax. It should be noted that the benefit of this provision is only available to purchasers who themselves are required to comply with the pollution control laws or regulations. The Taxpayer should also be aware that during an audit, evidence will be required to demonstrate that the items are qualified pollution control under Tenn. Code Ann. § 67-6-346 and that tax was actually paid on the items. In the 2

face of insufficient evidence, the Taxpayers will be assessed the tax plus all applicable interest. The Taxpayers may take a credit for sales and use taxes paid for qualfying pollution control. In the alternative, the Taxpayers may apply to the Department for a refund. The Taxpayers must demonstrate that the items are qualified pollution control and that sales or use tax had been paid within the statutory period.

2. TENN. COMP. R. & REGS. 1320-5-1-.68(4) allows a taxpayer, upon application
   to the Department, to submit a resale certificate for all purchase of tangible personal property and to self report use tax on those items actually used. The Taxpayers have authority under this rule. Accordingly, they may purchase tangible personal property, including pollution control items, without the payment of sales tax at the time of purchase.

______
Caroline R. Krivacka
Tax Counsel

APPROVED: _______
Ruth E. Johnson
Commissioner
DATE:

6-12-98

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