For a company that runs on-site photocopy and fax centers under a management-fee contract, which equipment and supplies qualify for the industrial machinery sales tax exemption, and must sales tax be charged on the full contract price?

Subject

Sales and use tax treatment of on-site copy and fax center machinery, supplies, and management-fee billing.

Plain-English summary

The Tennessee Department of Revenue split the tax treatment of an on-site copy-and-fax-center operator's equipment, supplies, and billing into several pieces.

Copy machinery can be exempt, but fax machinery can't. Because "making copies is a reproduction process and thus is a form of printing," the machinery used in the copying and binding/stapling process falls within Tennessee's "industrial machinery" exemption for equipment used in the "business of printing" — but the taxpayer must apply for and receive the Commissioner's approval first, and binding/stapling machinery also needs over 50% of gross sales to come from fabricating tangible personal property for resale. Fax machinery gets no such exemption: sending and receiving facsimiles is a taxable telecommunications service, not printing or fabrication, so the "business of printing" exemption can't be stretched to cover it.

Component parts, chemicals, and paper are exempt — but as different mechanisms. Supplies/fluids that are a necessary component of the copying machinery's mechanical or chemical operation qualify as industrial machinery themselves. Paper, though, is exempt for a different reason: because the copies themselves are the "crucial element" of what's sold to clients (not merely incidental to a service), the whole photocopying transaction is a sale of tangible personal property — so the taxpayer can buy paper tax-free on a resale certificate and collect tax when it sells the copies.

The entire contract price is taxable gross receipts, with no deductions. Even though the contract bundles a monthly management fee (covering copy/fax allowances, equipment rental, personnel, overhead, and management reporting) plus per-copy overage charges and overtime billing, Tennessee's "sales price" definition bars any deduction for the cost of equipment, labor, service costs, or materials — so tax is due, and must be billed to the client, on the full contract amount. A footnote also flags that the same services trigger Tennessee's separate local business tax (a gross-receipts tax on nearly all services), which wasn't specifically asked about but applies regardless.

What this means for you

Copy/print/fax center operators and outsourced office-services providers

Don't assume all your equipment gets the same tax treatment just because it's used in the same operation. Copying/printing/binding machinery can potentially qualify for Tennessee's industrial machinery exemption (after applying for Commissioner approval), while fax equipment cannot — it's a taxable telecommunications function, full stop. And structuring your billing as a flat "management fee" doesn't shrink your tax base: Tennessee taxes the entire contract price with zero deduction for your own costs, so price your contracts assuming 100% of the invoice (not just your markup) is the sales tax base.

Accountants and tax professionals

This ruling applies the "crucial element" test from Thomas Nelson, Inc. v. Olsen and Creasy Sys. Consultants v. Olsen (property that's crucial rather than incidental makes the whole transaction a taxable sale of tangible personal property) alongside the "true object" test recognized in Prodigy Services Corp. v. Johnson, and the industrial-machinery application procedure at TENN. COMP. R. & REGS. 1320-5-1-.106. Also flag the ancillary business-tax exposure under Tenn. Code Ann. § 67-4-708(3)(C) for clients providing bundled management/service contracts — it applies even when not the subject of the specific sales-tax question asked.

Common questions

Q: Does an industrial machinery exemption apply automatically, or does a taxpayer have to apply for it?
A: It's not automatic. The taxpayer must apply to the Commissioner under TENN. COMP. R. & REGS. 1320-5-1-.106 and receive approval before purchasing/leasing the qualifying machinery exempt from tax.

Q: Can a business deduct its equipment, labor, or materials costs from the sales price before charging sales tax?
A: No. Tennessee's "sales price" definition specifically bars deducting the cost of the property sold, materials, or labor/service costs — tax applies to the full contract amount.

Q: Is fax/facsimile equipment eligible for the same exemption as printing/copying equipment?
A: No. Sending and receiving facsimiles is a taxable telecommunications service, not "printing," so machinery dedicated to fax operations doesn't qualify for the printing-related industrial machinery exemption.

Q: Can paper used for copies be purchased tax-free?
A: Yes, on a resale certificate — because the finished copies are being resold to the client as tangible personal property, the paper going into them is a purchase for resale.

Q: Does this ruling bind the Department the way a letter ruling does?
A: No. This is a Revenue Ruling, which is advisory only and not binding on the Department for any taxpayer — even the one who requested it. It shows the Department's reasoning but carries less weight than a letter ruling.

Citations and references

Statutes, rules, and cases:

• Tenn. Code Ann. § 67-6-206(a); § 67-6-102(a)(19)(A), (C) (industrial machinery exemption and definition, incl. pre-press/press/printing machinery)
• TENN. COMP. R. & REGS. 1320-5-1-.67(2) (printing/binding as taxable fabrication unless for resale)
• TENN. COMP. R. & REGS. 1320-5-1-.106 (industrial machinery exemption application procedure)
• Tenn. Code Ann. § 67-6-102(a)(35) (definition of "sales price," no deduction for costs)
• Tenn. Code Ann. § 67-6-102(a)(32)(F) (taxable services, incl. telecommunications/facsimile)
• Tenn. Code Ann. § 67-4-708(3)(C), § 67-4-702(a)(19) (Business Tax Act — services as a taxable privilege)
• AFG Indus., Inc. v. Cardwell, 835 S.W.2d 583 (Tenn. 1992) (exemptions strictly construed against the taxpayer)
• Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621 (Tenn. 1987); Creasy Sys. Consultants v. Olsen, 716 S.W.2d 35 (Tenn. 1986) ("crucial element" test)
• Prodigy Services Corp., Inc. v. Johnson, 125 S.W.3d 413 (Tenn. Ct. App. 2003) (true object test)
• AT&T v. Johnson, 2002 WL 3124708 (Tenn. Ct. App. 2002) (facsimile transmission as taxable telecom service)

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/07-01.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 07-01

WARNING
Revenue rulings are not binding on the Department. This presentation of the ruling
in a redacted form is information only. Rulings are made in response to particular
facts presented and are not intended necessarily as statements of Departmental
policy.

SUBJECT
Application of the sales and use tax to an on site copy and fax center.

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 on 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
Taxpayer will operate and manage on-site copy and fax centers for its clients. Based on
client needs, the Taxpayer may provide personnel only, personnel and supplies, or
personnel, supplies and equipment.
The services provided by the Taxpayer include the following:
On Site Copy and Fax Center
At the client’s facility, the Taxpayer’s personnel will make copies of original documents
submitted by the client and provide related copy services (binding, stapling, numbering,
etc.). The Taxpayer provides the personnel, supplies and equipment required to produce
the copies.
At the client’s facility, the Taxpayer’s personnel will operate facsimile equipment for
incoming and outgoing faxes and deliver the faxes as per the client’s request.
All direct costs, administrative expenses and overhead are paid directly by the Taxpayer.
All personnel provided by the Taxpayer will be part-time or full-time permanent
employees of the Taxpayer, paid by the Taxpayer, and entitled to benefits under the
Taxpayer’s policies. Generally, it is expected that personnel involved in these operations
will work primarily at the client’s facility, but occasionally separate facilities are
established.
Generally, the machinery and equipment used by the Taxpayer at the client’s premises in
the copy center is rented or owned by the Taxpayer. On occasion, the client will sell its
equipment to the Taxpayer who will then use the equipment to perform the services.
Billing for services rendered
Under the contract, the client is billed for a “monthly management fee.” Generally,
clients are billed under a one to five year contract term at a monthly management fee for
a defined level of services including:
A.
An allowance covering a stated number of copies and facsimiles, all rental and
other charges for the equipment provided by the Taxpayer and all charges for related
supplies.
B.

Fee for personnel, travel, staff support and other overhead costs.

C.

Management report and counseling to the clients.

For copies and facsimiles which exceed the monthly allowance, the client is charged a
fixed price per copy/facsimile. The fixed price includes the cost of supplies.

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The contract also provides for overtime billing at a specified rate should the Taxpayer’s
personnel work overtime on the site.
All amounts paid are treated under this contract as taxable gross receipts with no
deduction taken for the cost of equipment, labor or service cost and other related
materials used. The client is billed sales tax on the entire gross receipts as per the
contract.

QUESTIONS
1.

Would machinery or equipment purchased, rented or leased by the Taxpayer
in connection with providing the services described above qualify for a sales
and use tax exemption?

2.

Would supplies and materials purchased by the Taxpayer and used in the
various operations be exempt from sales tax?

3.

Would all amounts paid under this contract be considered as taxable gross
sales? If yes, can the Taxpayer take a deduction from the gross sales for the
cost of equipment, labor or service cost and other related materials used in
performing services under the contract? Should the client be billed for taxes
on the entire amount as per the contract?

RULINGS
1.

Machinery utilized in the pre-press and press operations and machinery or
equipment utilized in the binding and stapling processes qualify for the
industrial machinery exemption from sales and use tax. Machinery and
equipment used for sending and receiving facsimiles are subject to tax.

2.

Supplies and materials that become a component part in the machinery used
for copying and the fluids and chemicals necessary for the operation of the
copying machinery will be exempt from sales and use tax. In addition, the
purchase of the paper used for making copies will also be exempt from sales
and use tax as a sale for resale.

3.

Yes. All amounts paid under the contract are taxable. The Taxpayer may not
take a deduction from the gross sales for the cost of the equipment, labor or
service cost or other related materials used in performing the contract. The
client should be billed for sales tax on the entire amount of the contract.

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ANALYSIS
1.

Machinery utilized in the pre-press and press operations and machinery or
equipment utilized in the binding and stapling processes qualify for the
industrial machinery exemption from sales and use tax.

TENN. COMP. R. & REGS. 1320-5-1-.67(2) states that printing and binding are subject to
sales and use tax unless the product is manufactured for resale:
The printing and binding of paper, books, forms, letters, and the like is a
fabrication thereof, and is subject to the Sales or Use Tax unless the
fabrication is a part of a manufacturing process for resale. It is immaterial
whether the customer furnishes any or all the paper or other materials used
in the fabrication work. . . .
Because printing and binding constitute the fabrication of tangible personal property, the
industrial machinery and equipment used in the process may be exempt from sales and
use tax as industrial machinery under Tenn. Code Ann. § 67-6-206(a). Industrial
machinery is defined by Tenn. Code Ann. § 67-6-102(a)(19) as:
(A) Machinery, 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 therefore, which 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. . . .
*

*

*

(C) Machinery utilized in the pre-press and press operations in the
business of printing, including plates and cylinders and including the
component parts and fluids or chemicals necessary for the specific
mechanical or chemical actions or operations of such machinery, plates
and cylinders, regardless of whether or not the operations occur at the
point of retail sales.1
Statutes granting exemptions from tax are strictly construed against the taxpayer. AFG
Indus., Inc. v. Cardwell, 835 S.W.2d 583, 584-585 (Tenn. 1992). And exemptions from
taxation will not be read into a taxing statute by implication. Hamilton National Bank v.
McCanless, 144 S.W.2d 768 (Tenn. 1940).

1
It should be noted that only part (A) of the definition of industrial machinery requires that fifty-one percent (51%) of
the use of the machinery or equipment be for the purpose of the fabrication or processing of tangible personal property,
whereby, part (C) does not share this requirement.

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In order to qualify for the exemption, the Taxpayer must apply for an industrial
machinery exemption. The rules for applying for the exemption are found in TENN.
COMP. R. & REGS. 1320-5-1-.106, which reads as follows:
(1) Persons who wish to make purchases or leases of industrial machinery
shall apply to the commissioner for authority to make such purchases
exempt from tax. This application shall give such information as the
commissioner may require. If the commissioner finds from such
information that the applicant is entitled to make purchases or leases of
industrial machinery, authority shall be permanent in nature and shall
continue until such time as the business ceases operation or until such time
as the business changes in character such that it is no longer operating
within the scope of its original application. Any misrepresentation made
on the application by the taxpayer will subject the taxpayer to any
applicable tax, penalty and interest. . . .
According to the American Heritage Dictionary, Fourth Edition, a definition of printing is
“to produce something in printed form by means of a printing press or other reproduction
process.” Making copies is a reproduction process and thus is a form of printing. Since
the Taxpayer is engaged in “the business of printing,” the machinery utilized in the
conduct of the business of printing falls within the definition of “industrial machinery” in
accordance with Tenn. Code Ann. § 67-6-102(a)(19)(C), and is eligible for the
exemption; provided that, the appropriate documentation is filed and approved by the
Commissioner. In addition, the machinery and equipment used in the binding and
stapling process will be exempt from sales and use tax provided over fifty percent (50%)
of gross sales are from the fabricating or processing of tangible personal property, i.e.
booklets, brochures, etc. for resale. Tenn. Code Ann. § 67-6-102(a)(19)(A).
Printing, as the term is used in Tenn. Code Ann. § 67-6-102(a)(19)(C), does not include
the sending and receiving of facsimiles. The exemption from sales and use tax for
machinery, component parts and chemicals used in the “business of printing” must be
read narrowly and cannot be expanded to include the machinery used for sending and
receiving of facsimiles. The Taxpayer therefore, is not entitled to an exemption for the
machinery used in the sending and receiving of facsimiles because the sending and
receiving of facsimiles is a taxable telecom service. As a specifically taxable service, the
sending and receiving of facsimiles does not constitute the processing or fabrication of
tangible personal property for resale. AT&T v. Johnson, 2002 WL 3124708 (Tenn. Ct.
App. 2002), perm. app. denied (Tenn. 2003). Therefore, the machinery also does not fall
under Tenn. Code Ann. § 67-6-102(a)(19)(A) and is not exempt under this provision.

2.

Supplies and materials that become a component part in the machinery used
for copying and the fluids and chemicals necessary for the operation of the
copying machinery would be exempt from sales and use tax. Paper used to
make copies may be purchased on a resale certificate.

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Supplies and Materials
Component parts and necessary fluids or chemicals are also included in the definition of
industrial machinery under Tenn. Code Ann. § 67-6-102(a)(19)(C). Accordingly, any
supplies and materials which become a component part of the machinery used for
copying would be exempt from sales and use tax. In addition, any fluids or chemicals
that are necessary for the mechanical and chemical actions and operations of the copy
machines would also be exempt as industrial machinery.
Paper
The sales tax does not apply to all services; it applies only to those services specifically
enumerated by the statute. Ryder Truck Rental, Inc. v. Huddleston, 1994 WL 420911
(Tenn. Ct. App. 1994). The taxable services are listed in the definition of “retail sale.”
Tenn. Code. Ann. §67-6-102(a)(32)(F).
It should be noted, however, that naming or characterizing a sale as a service does not
cause the transaction to escape taxation when the transaction is essentially a transfer of
tangible personal property. If the tangible personal property is a “crucial element” of the
total transaction, the transaction is a sale of tangible personal property. See Thomas
Nelson, Inc. v. Olsen, 723 S.W.2d 621 (Tenn. 1987), Creasy Sys. Consultants v. Olsen,
716 S.W.2d 35 (Tenn. 1986). But see Prodigy Services Corp., Inc. v. Johnson, 125
S.W.3d 413 (Tenn. Ct. App. 2003)(where the court more recently applied the “true
object” test and found that telecommunications services were not the true object of the
taxpayer’s computer information services; thus, the information services were not
taxable).
Some transactions are essentially sales of services, and the courts have recognized that
although property may be transferred to the client incidental to the sale of nontaxable
items, such incidental property does not transform the sale into a taxable sale of tangible
personal property. Commerce Union Bank v. Tidwell, 538 S.W.2d 405 (Tenn. 1976).
With respect to such “incidental” tangible personal property, the Tennessee Supreme
Court has held “when the primary function and purpose of the taxpayer is to provide
services, the ownership, use and maintenance of certain types of personal property and
equipment are necessary in order to enable it to furnish the services, so that the taxpayer,
not its client, is the ultimate user or consumer within the meaning of sales and use tax
statutes.” Nashville Mobilphone Co. v. Woods, 655 S.W.2d 934, 937 (Tenn. 1983).
Applying the above analysis, the Taxpayer’s services involving photocopying are
essentially transfers of tangible personal property. 2 The photocopies generated are the
crucial, not incidental, element of the Taxpayer’s transaction with its clients and, as such,
constitute the sale of tangible personal property; therefore, sales tax must be collected
and remitted by the Taxpayer. Because the Taxpayer is in the business of selling

2

The facsimile services are taxable as telecommunications services under Tenn. Code Ann. § 67-6-102(a)(32)(F)(iii).

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tangible personal property in the form of copies, it may purchase the paper it uses for
making copies on a resale certificate.
3.

The Taxpayer may not take a deduction from the gross sales for the cost of the
equipment, labor or service cost or other related materials used in performing
the contract.

The sales 3 tax due is computed based on the sales price of the tangible personal
property. “Sales price” is defined in Tenn. Code Ann. § 67-6-102(a)(35) as, “the total
amount for which a taxable service or tangible personal property is sold, including any
services that are a part of the sale of tangible personal property. . . .” Accordingly, the
Taxpayer’s clients should be billed and the Taxpayer should remit sales tax on the total
sales price of each contract. 4
Deborah A. Toon
Tax Counsel
Approved:

Date:

Loren L. Chumley
Commissioner of Revenue

01/16/07

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Although not specifically requested, the Taxpayer should note that Tenn. Code Ann. § 67-4-708(3)(C) of the Business
Tax Act specifically makes services taxable: “making sales of services or engaging in the business of furnishing or
rendering services” is a taxable privilege unless the services are specifically excluded. Services are defined by Tenn.
Code Ann. § 67-4-702(a)(19) as, “every activity, function or work engaged in by a person for profit or monetary gain
except as otherwise provided in this part.” The Taxpayer is providing management, copying and faxing services to its
clients. These activities fall within the scope of Tenn. Code Ann. § 67-4-708(3)(C). The Taxpayer, therefore, also
owes business tax on the services it provides.

The business tax has been described as a “gross receipts” tax. Stalcup v. City of Gatlinburg, 577 S.W.2d 439, 440
(Tenn.1978); IBM Credit Corp. v. County of Hamilton, 830 S.W.2d 77, 78 (Tenn. Ct. App. 1992). Thus, in order to
determine the amount of taxes due, it is necessary to first determine the sales price of the services sold. Tenn. Code
Ann. § 67-4-702(a)(17) defines “sales price” as “the total amount for which ... services rendered [are] sold ... without
any deduction therefrom on account of the ... labor or service cost ... or any other expense whatsoever.”
The sales price for the Taxpayer’s services is the total amount paid by the client under the contract. The Taxpayer may
not take a deduction for labor or service costs or any other costs of doing business. The Taxpayer should bill the client
for tax on the total contract price for the services.
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Legislation related to the Streamlined Sales and Use Tax Agreement, effective July 1, 2007, may result in changes
regarding the application of sales and use tax sales of certain items of tangible personal property. The Department of
Revenue encourages you to visit our website at www.tennessee.gov/revenue for updates.

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