Is specialized modular farm equipment (and its software, installation, and warranties) subject to Tennessee sales tax when sold and installed for a farmer?

Plain-English summary

A company develops specialized, portable, modular farming-equipment "Systems" and sells them through dealers, who customize, install, and maintain them for end users who are primarily farmers. The components are standardized and can be removed and reused on other parts of the farm — or on other farms — without harming the real property. A System also includes software (loaded on the equipment and downloadable to the customer's devices) to monitor, control, and automate it, plus an initial warranty; dealers may later sell extra warranties and optional annual software updates. The company asked how Tennessee sales and use tax applies. The Department answered four questions.

1. The equipment is tangible personal property, not an improvement to real property. Tennessee taxes the service of installing "tangible personal property that remains tangible personal property after installation . . . where a charge is made" (§ 67-6-205(c)(6)). Whether an installed item stays personal property or becomes a fixture (part of the realty) is decided by Tennessee's law of fixtures, which turns on the parties' intent — read through how it's attached, whether removal seriously damages the building, and whether removal destroys the item's character as personal property. Here the equipment is standardized, minimally attached, easily removed with little or no damage, and designed to be relocated, modified, reused, or resold, so it remains personal property. (That means absent an exemption, both the sale and the installation charge would be taxable.)

2. For a qualified farmer, the equipment AND its installation are exempt. Tennessee exempts "any appliance used directly and principally for the purpose of producing agricultural products . . . for sale and use or consumption off the premises" (the farm equipment and machinery exemption, § 67-6-207(a)(1)), when sold to a "qualified farmer or nurseryman" (defined in § 67-6-207(e); the buyer must hold a Department exemption certificate). "Directly and principally" means the buyer uses it more than 50% of the time to produce agricultural products, and "production" isn't limited to planting or harvesting. So if a qualified farmer uses the System primarily to produce agricultural products for off-premises sale/consumption, the sale is exempt. Importantly, the installation charge is also exempt — but only when the same dealer both sells and installs the exempt equipment (installation is part of the "sales price," § 67-6-102(79)(A)). If a third party does the install, that installation charge is taxable. (Repair and replacement parts and labor for the qualified equipment are also exempt, § 67-6-207(a)(8).)

3. Add-on warranty and service contracts are taxable. Tennessee taxes the sale of a warranty or service contract (§ 67-6-208), and the farm exemption does not extend to warranty or service contracts. So the dealer's separately sold additional warranties/service contracts on the equipment are subject to sales tax. The upside: because the contract is taxed up front, repairs performed under it are not taxed again (§ 67-6-208(d)).

4. The optional software updates are NOT taxable — they ride the farm exemption. Prewritten computer software (including upgrades) is generally taxable tangible personal property (§ 67-6-102(68)). But because this software is used to operate equipment that itself qualifies for the § 67-6-207(a)(1) farm exemption (it runs the exempt System), the optional annual software updates are exempt too.

The throughline: the modular farm System is taxable in concept (it stays personal property, and installing personal property is a taxable service), but the agricultural exemption sweeps in the equipment, its bundled (same-dealer) installation, its repair parts/labor, and even its operating software — while warranty and service contracts stay taxable because the exemption doesn't reach them.

What this means for you

Manufacturers and dealers of farm equipment and ag-tech systems

If your product is modular and removable, expect Tennessee to treat it as tangible personal property (so installation is normally taxable) — but if your buyer is a qualified farmer or nurseryman using it primarily to produce agricultural products for off-premises sale, the equipment and its operating software are exempt, and so is the installation if your dealership both sells and installs it. Structure the deal so the selling dealer also performs the install; routing installation to a separate contractor turns the install charge taxable.

Farmers and nurserymen buying ag systems

To get the exemption you must be a qualified farmer or nurseryman with the Department's exemption certificate (§ 67-6-207(b)), and you must use the equipment more than 50% of the time to produce agricultural products for sale or off-premises consumption. The machine, its software, and same-dealer installation can come tax-free — but if you buy an extra warranty or service contract, expect to pay sales tax on that, even though repairs under it won't be taxed again.

Watch the software and the warranty lines

Software that operates exempt farm equipment can inherit the exemption — a useful point as more equipment ships with paid software/update subscriptions. But warranties and service contracts are their own taxable category (§ 67-6-208) regardless of the farm exemption. Bill and document those separately.

Accountants and tax professionals

Fixtures/TPP: § 67-6-205(c)(6); installation is part of "sales price" (§ 67-6-102(79)(A), (A)(v)); contractor use tax if the item becomes realty (§ 67-6-209(b)). Farm exemption: § 67-6-207(a)(1), with "qualified farmer or nurseryman" at § 67-6-207(e), certificate at (b), and exempt repair parts/labor at (a)(8); "directly and principally" = >50% use (Tennessee Farmers' Coop. v. State ex rel. Jackson; Op. Tenn. Att'y Gen. 09-57), and "production" is broad (Essary v. Huddleston). Warranty/service contracts: § 67-6-208 (and (c)/(d)). Software: § 67-6-102(68). Fixtures cases: Gen. Carpet Contractors; Magnavox (quoting Hickman v. Booth); Harry J. Whelchel Co.; Hubbard; Process Sys.; Memphis Hous. Auth.; Green v. Harper; Keenan v. Fodor; Hermann Holtkamp Greenhouses; ANR Pipeline (property installed under a lease/easement).

Common questions

Q: Is modular farm equipment taxable in Tennessee?
A: As a baseline, yes — it stays tangible personal property, and installing personal property is a taxable service. But sales to a qualified farmer or nurseryman who uses it primarily to produce agricultural products for off-premises sale are exempt under § 67-6-207(a)(1).

Q: Is the installation charge taxed?
A: Installation is part of the sales price, so it follows the equipment. If the equipment is exempt and the same dealer both sells and installs it, the installation is exempt too. If a separate contractor installs it, that installation charge is taxable.

Q: What about the software that runs the equipment?
A: Software is generally taxable, but because this software operates exempt farm equipment, the optional update sales are exempt as well.

Q: Are extended warranties or service contracts exempt for farmers?
A: No. Warranty and service contracts are taxable under § 67-6-208, and the farm exemption doesn't cover them. But repairs done under a taxed contract aren't taxed a second time.

Q: Can I rely on this ruling?
A: No. A Tennessee revenue ruling is advisory and not binding even on the Department, and no taxpayer can rely on it as binding. It interprets the law at a point in time. Confirm your facts with a tax professional.

Citations and references

Tennessee statutes and rules (Tenn. Code Ann. / Tenn. Comp. R. & Regs.):

• § 67-6-207(a)(1) (farm equipment and machinery exemption — directly and principally producing agricultural products for sale/off-premises consumption); § 67-6-207(e) ("qualified farmer or nurseryman"); § 67-6-207(b) (exemption certificate/application, 4-year term); § 67-6-207(a)(8) (exempt repair/replacement parts and labor)
• § 67-6-205(c)(6) (installing TPP that remains TPP, where a charge is made, is a taxable service); § 67-6-209(b) (contractor's use tax if the item becomes realty); Tenn. Comp. R. & Regs. 1320-05-01-.27(2), 1320-05-01-.07(1)
• § 67-6-202(a) (sales tax on sales price of TPP); § 67-6-102(79)(A), (A)(v) ("sales price"; no deduction for installation charges); § 67-6-102(76) ("retail sale"); § 67-6-102(78)(A) ("sale"); § 67-6-102(89)(A) (tangible personal property)
• § 67-6-208 (warranty/service contracts taxable; § 67-6-208(c)(1)-(3) when taxable; § 67-6-208(d) repairs under a taxed contract not taxed again); § 67-6-102(68) (prewritten computer software)

Authorities cited:

• Tennessee Farmers' Coop. v. State ex rel. Jackson, 736 S.W.2d 87, 90-92 (Tenn. 1987); Op. Tenn. Att'y Gen. No. 09-57 (Apr. 16, 2009) ("directly and principally" = >50%; meaning of "produce"/"production"); Essary v. Huddleston, No. 02A01-9408-CH-00179, 1995 WL 384985, at *3 (Tenn. Ct. App. June 29, 1995) (production not limited to planting/harvesting)
• Law of fixtures: Gen. Carpet Contractors, Inc. v. Tidwell, 511 S.W.2d 241 (Tenn. 1974); Magnavox Consumer Elects. v. King, 707 S.W.2d 504, 507 (Tenn. 1986) (quoting Hickman v. Booth, 173 S.W. 438 (Tenn. 1914)); Harry J. Whelchel Co. v. King, 610 S.W.2d 710 (Tenn. 1980); Hubbard v. Hardeman Cnty. Bank, 868 S.W.2d 656 (Tenn. Ct. App. 1993); Process Sys., Inc. v. Huddleston, 1996 WL 614526 (Tenn. Ct. App. 1996); Memphis Hous. Auth. v. Memphis Steam Laundry-Cleaner, Inc., 463 S.W.2d 677 (Tenn. 1971); Green v. Harper, 700 S.W.2d 565 (Tenn. Ct. App. 1985); Keenan v. Fodor, 2012 WL 3090303 (Tenn. Ct. App. 2012); Hermann Holtkamp Greenhouses, Inc. v. Metro. Nashville & Davidson Cnty., 2010 WL 366697 (Tenn. Ct. App. 2010); ANR Pipeline Co. v. Tenn. Bd. of Equalization, 2002 WL 31840689 (Tenn. Ct. App. 2002) (property installed under a lease/easement)

Related guidance:

• Tenn. Dep't of Revenue Ltr. Rul. 19-06 and Rev. Rul. 20-11 (same § 67-6-205(c)(6) installation hook and law-of-fixtures test)

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/19-07.pdf

Original ruling text

Revenue rulings are not binding on the Department. This ruling is based on the particular
facts and circumstances presented, and is an interpretation of the law at a specific point in
time. The law may have changed since this ruling was issued, possibly rendering it obsolete.
The presentation of this ruling in a redacted form is provided solely for informational
purposes, and is not intended as a statement of Departmental policy. Taxpayers should
consult with a tax professional before relying on any aspect of this ruling.

The application of the Tennessee sales and use tax to [SPECIALIZED FARMING] equipment.

Revenue Rulings are statements regarding the substantive application of law and statements of
procedure that affect the rights and duties of taxpayers and other members of the public. Revenue
Rulings are advisory in nature and are not binding on the Department.

[TAXPAYER] (the “Taxpayer”) is [REDACTED] that is developing [SPECIALIZED FARMING EQUIPMENT].
The Taxpayer plans to sell [SPECIALIZED FARMING EQUIPMENT] systems (the “Systems”) to farmers
in Tennessee. The Taxpayer does not sell directly to end users; the Taxpayer sells to dealers (the
“Dealers”) who then sell, install, and provide maintenance for the Systems to end users who are
primarily farmers. The purpose of the Systems is to allow farmers to [REDACTED].
A System typically includes the following [REDACTED] equipment:
1.
2.
3.
4.
5.

[REDACTED]
[REDACTED]
[REDACTED]
[REDACTED]
[REDACTED]

The Taxpayer’s [REDACTED] equipment is portable and modular. Each System can be customized to
fit various farm locations and sizes. The component items of equipment, however, are standardized
and can be removed and reused in other locations on the farm or on other farms without any injury
to the real property.
When selling a System, Dealers customize the System based on the customer’s needs. Dealers then
itemize the necessary individual components and charge a separate installation fee for the entire
System. Each System also includes a [TIME PERIOD] warranty. Upon expiration of the initial
warranty, Dealers may offer repair services and/or an additional warranty or service contract.
The initial System purchase also includes software that has been installed on the hardware and that
can be downloaded and installed on customers’ computers and mobile devices. The software allows
a customer to monitor and control the System remotely. The software can also set up automation
1

to turn [SYSTEM COMPONENTS] on or off based on data received by the System. The initial
download of the software to customers’ computers and mobile devices is included with purchase of
a System. Software runs on the System equipment and customers’ devices; the software is not
cloud-based.
Customers are currently provided annual software updates at no additional charge. In the future,
Dealers will offer optional annual software updates for direct download for additional fees. The
software updates will be offered in the form of a maintenance agreement. These annual software
updates are not required for continued operation of the System once it is installed.

1.

Are the Dealer’s sales and installations of [SPECIALIZED FARMING] equipment sales of
tangible personal property or improvements to real property?
Ruling: The sales and installations of [SPECIALIZED FARMING] equipment are sales of
tangible personal property because the Dealer sells and installs tangible personal property
that remains tangible personal property after installation.

2.

Does the sale and installation of [SPECIALIZED FARMING] equipment, qualify for the farm
equipment and machinery exemption under TENN. CODE ANN. § 67-6-207(a)(1) (2018) if the
buyer is a qualified farmer or nurseryman?
Ruling: The sale of [SPECIALIZED FARMING] equipment, to a buyer who is a qualified farmer
or nurseryman as defined in TENN. CODE ANN. § 67-6-207(e), qualifies for the farm equipment
and machinery exemption in TENN. CODE ANN. § 67-6-207(a)(1) because the buyer is using the
[SPECIALIZED FARMING] equipment directly and principally for the purpose of producing
agricultural products for sale and use or consumption off the premises. Charges for
installation of exempt [SPECIALIZED FARMING] equipment are also exempt from Tennessee
sales and use tax when the Dealer both sells and installs the exempt [SPECIALIZED
FARMING] equipment.

3.

Are the Dealer’s sales of additional warranty or service contracts covering the equipment in
the system subject to the Tennessee sales and use tax?
Ruling: Yes. The Dealer’s sales of additional warranty or service contracts covering the
equipment in the system are subject to the Tennessee sales and use tax pursuant to TENN.
CODE ANN. § 67-6-208 (2018).

4.

Are the Dealer’s sales of optional annual software updates subject to the Tennessee sales
and use tax?
Ruling: No. While sales of software updates are generally subject to the Tennessee sales and
use tax, the Dealer’s sales of optional annual software updates are exempt from the
Tennessee sales and use tax pursuant to TENN. CODE ANN. § 67-6-207(a)(1) (2018) because the
software is used to operate equipment that is used directly and principally for the purpose
of producing agricultural products for sale and use or consumption off the premises.

2

Tangible Personal Property
1

Under the Retailers’ Sales Tax Act, the retail sale in Tennessee of tangible personal property and
2
specifically enumerated services are subject to the sales tax, unless an exemption applies. One
specifically enumerated service taxable at retail is the installing of “tangible personal property that
remains tangible personal property after installation . . . where a charge is made for the
3
installation.” Thus, the Dealer’s sale and installation of [SPECIALIZED FARMING] equipment will be
subject to the Tennessee sales and use tax if the [SPECIALIZED FARMING] equipment remains
4
tangible personal property following installation, unless an exemption applies. If, on the other
hand, the [SPECIALIZED FARMING] equipment becomes affixed to realty upon installation, the sale
and installation of the [SPECIALIZED FARMING] equipment will not be subject to the Tennessee sales
5
and use tax.
The issue of whether an item of tangible personal property becomes part of realty depends upon
6
the application of the law of fixtures to the particular factual circumstances. The question of when
7
an item is considered a fixture is resolved by ascertaining the intent of the parties. “Only those
chattels are fixtures which are so attached to the freehold that, from the intention of the parties and
the uses to which they are put, they are presumed to be permanently annexed, or a removal thereof
8
would cause serious injury to the freehold.” Therefore, if the property is “intended to be removable

1

Tennessee Retailers’ Sales Tax Act, ch. 3, §§ 1-18, 1947 Tenn. Pub. Acts 22, 22-54 (codified as amended at TENN. CODE ANN.
§§ 67-6-101 to -907 (2018)).
2

“Retail sale” is defined as “any sale, lease, or rental for any purpose other than for resale, sublease, or subrent.” TENN. CODE
ANN. § 67-6-102(76) (2018). TENN. CODE ANN. § 67-6-102(78)(A) defines “sale” in pertinent part to mean “any transfer of title or
possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever
of tangible personal property for a consideration.”
3

TENN. CODE ANN. § 67-6-205(c)(6) (2018). “Tangible personal property” includes “property that can be seen, weighed,
measured, felt, or touched, or that is in any other manner perceptible to the senses.” TENN. CODE ANN. § 67-6-102(89)(A).
4

Installation charges are subject to sales and use tax as part of the sales price. See TENN. CODE ANN. § 67-6-102(79)(A) (defining
“sales price” to include installation charges); TENN. COMP. R. & REGS. 1320-05-01-.27(2) (2016) (providing that installation
services provided with the sale of tangible personal property are a part of the sales price of the tangible personal property
sold).
5

However, the Dealer would be liable for use tax with respect to all tangible personal property used in the performance of its
contract, unless the Dealer had already paid sales and use tax on the purchase of such items or such items are otherwise
exempt from the sales and use tax. See TENN. CODE ANN. § 67-6-209(b) (2018); TENN. COMP. R. & REGS. 1320-05-01-.07(1) (2000)
(“contractors engaged in constructing or improving real property, whether on a lump sum or a cost-plus basis, are purchasers
and consumers of the materials used by them, and are required to pay the Sales or Use Tax on such materials or equipment
purchased or imported into this State for use in connection with their contracts.”).
6

See, e.g., Gen. Carpet Contractors, Inc. v. Tidwell, 511 S.W.2d 241 (Tenn. 1974) (holding that for sales and use tax purposes, the
dispositive issue regarding whether a contractor is improving realty is whether the property being installed becomes a fixture
to the realty).
7

Id. at 242-43.

8

Magnavox Consumer Electronics v. King, 707 S.W.2d 504, 507 (Tenn. 1986) (quoting Hickman v. Booth, 173 S.W. 438 (Tenn.
1914)).

3

9

at the pleasure of the owner, it is not a fixture.” However, when property is installed upon real
property pursuant to a non-ownership interest in the real property, such as a lease or easement,
Tennessee courts have determined that the key question becomes whether the parties intend that
the owner of the property being installed has the ability to remove the property from the land,
10
asking whether the installed property remains “separate and apart from the freehold.“
Therefore, if the property is intended to be removable at the pleasure of the owner, it is not a
11
12
fixture. Both objective and subjective factors may show such intent. Objective factors include the
13
type of structure, the mode of attachment, and the use and purpose of the property. The
14
subjective factor is the expressed intent, if any, of the parties.
Courts have also found that tangible personal property becomes a part of realty if removing the
15
personalty would seriously damage the building to which it is affixed. Further, courts have held
that tangible personal property is more akin to a fixture if removal would destroy its essential
16
character as personalty.
For example, the Tennessee Supreme Court in Harry J. Whelchel Co. analyzed both the stated intent
and the objective factors noted above of farmers who purchased and installed grain bins on their
17
farms. The Court reached the conclusion that the grain bins at issue were personalty. Although the
bins were large in size and bolted to a concrete base, the court found that they were attached to the
concrete base solely for the purpose of preventing them from blowing over in a high wind when
18
empty. Additionally, the bins were financed as personal property, sold at foreclosure as personal
19
property, and installed by lessees on leased farms. Likewise, the Tennessee Court of Appeals in
Keenan found that a large ornamental gate remained personalty despite having a substantial
20
concrete foundation poured for its support that would leave craters were it removed. The court

9

Id.

10

ANR Pipeline Co., et al. v. Tenn. Bd. of Equalization, Nos. M2001-01098-COA-R12-CV, M2001-01117-COA-R12-CV, M2001-01119COA-R12-CV, 2002 WL 31840689, at *3 (Tenn. Ct. App. Dec. 19, 2002), perm. app. denied, June 30, 2003.
11

Id.

12

Hubbard v. Hardeman Cnty. Bank, 868 S.W.2d 656, 660 (Tenn. Ct. App. 1993).

13

Harry J. Whelchel Co. v. King, 610 S.W.2d 710, 713-14 (Tenn. 1980).

14

Id.

15

See Process Sys., Inc. v. Huddleston, No. 101801-I, 1996 WL 614526, at *3 (Tenn. Ct. App. Oct. 25, 1996) (citing Memphis Hous.
Auth. v. Memphis Steam Laundry-Cleaner, Inc., 463 S.W.2d 677, 679 (Tenn. 1971)).
16

See id. (finding that conveyor system’s essential character would be destroyed upon removal, which required cutting system
components into pieces with an acetylene torch) (citing Green v. Harper, 700 S.W.2d 565, 567 (Tenn. Ct. App. 1985)).
17

610 S.W.2d at 714.

18

Id.

19

Id.

20

Keenan v. Fodor, No. M2011-01475-COA-R3CV, 2012 WL 3090303, at *8-9 (Tenn. Ct. App. July 30, 2012).

4

lent greater significance to the person’s stated intention that the gate would be moveable and that it
21
was designed so as to be moveable if necessary.
On somewhat different facts, the Tennessee Court of Appeals in Hubbard reached a similar
22
conclusion in holding that two one-story branch bank buildings were personal property. The court
based its ruling on the fact that the leased buildings were constructed to be portable, such that they
could be moved or sold as market conditions or need for the buildings changed, and the leases
23
expressly provided the buildings were not to become fixtures.
In contrast, the Tennessee Supreme Court in General Carpet Contractors examined carpet that was
24
laid using the tackless strip method and was therefore easily removable. The court found that the
carpet became realty because the parties installed it with the intent that it remain in place for the
length of its useful life. The method of installation simply allowed for easy replacement of the carpet
25
when it was worn out. Similarly, the Tennessee Court of Appeals found in Process Systems, Inc. that
removal of a conveyor system would damage the building in which it was installed and would
26
destroy the system’s essential character. Accordingly, the court held the conveyer system was an
27
improvement to real property.
Likewise, the Tennessee Court of Appeals found in Hermann Holtkamp Greenhouses, Inc. that a
person’s greenhouses became realty upon installation based on their enormous square footage,
28
built-in restrooms and lunchrooms, and concrete tunnels. The court expressed that each of these
29
facts reflected an intention that the greenhouses remain permanently installed on the property.
In the Taxpayer’s case, the totality of the circumstances indicates that the [SPECIALIZED FARMING]
equipment remains tangible personal property following installation. The [SPECIALIZED FARMING]
equipment is standardized and is minimally attached to the real estate. It is easily removed and
causes little or no damage upon removal. The [SPECIALIZED FARMING] equipment is designed to be
moved (it can be removed and relocated within the farm or to other farms as the owner’s needs
change), modified, reused, and potentially resold. Finally, the [SPECIALIZED FARMING] equipment’s
30
removal would not destroy its essential character as personalty.
21

Id.

22

868 S.W.2d at 660.

23

Id.

24

511 S.W.2d at 243.

25

Id.

26

1996 WL 614526 at *3.

27

Id.

28

Hermann Holtkamp Greenhouses, Inc. v. Metro. Nashville & Davidson Cnty., No. M2009-00345-COA-R3-CV, 2010 WL 366697, at
*9 (Tenn. Ct. App. Feb. 2, 2010).
29

Id.

30

See Process Sys., Inc., 1996 WL 614526, at *3.

5

For the foregoing reasons, it appears the parties intend for the [SPECIALIZED FARMING] equipment
to remain personalty following its installation. Thus, the [SPECIALIZED FARMING] equipment must be
treated as tangible personal property and charges for both the sale and installation of the
[SPECIALIZED FARMING] equipment are subject to the Tennessee sales and use tax, unless an
exemption applies.
Farm Equipment and Machinery Exemption
31

As noted above, under the Retailers’ Sales Tax Act, the retail sale in Tennessee of tangible personal
property and specifically enumerated services is subject to the sales tax, unless an exemption
32
applies. TENN. CODE ANN. § 67-6-207 (2018) provides various exemptions for sales to qualified
33
farmers or nurserymen of certain farm equipment, machinery, and other agricultural items. In
particular, TENN. CODE ANN. § 67-6-207(a)(1) exempts “any appliance used directly and principally for
the purpose of producing agricultural products, including nursery products, for sale and use or
consumption off the premises, but excluding an automobile, truck, household appliances or
property that becomes real property when erected or installed.” Thus, to qualify for the exemption
the [SPECIALIZED FARMING] equipment purchased by a qualified farmer or nurseryman must be
used directly and principally for the purpose of producing agricultural products for sale and use or
consumption off the premises.
An item is considered to be used “directly and principally” for the purpose of producing agricultural
products if it is used more than 50% of the time by a farmer in the production of agricultural
34
products. The terms “produce” and “production” are not statutorily defined for purposes of TENN.
CODE ANN. § 67-6-207(a)(1). However, Tennessee’s Attorney General has opined that these terms, for

31

Tennessee Retailers’ Sales Tax Act, ch. 3, §§ 1-18, 1947 Tenn. Pub. Acts 22, 22-54 (codified as amended at TENN. CODE ANN.
§§ 67-6-101 to -907 (2018)).
32

“Retail sale” is defined as “any sale, lease, or rental for any purpose other than for resale, sublease, or subrent.” TENN. CODE
ANN. § 67-6-102(76) (2018). TENN. CODE ANN. § 67-6-102(78)(A) defines “sale” in pertinent part to mean “any transfer of title or
possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever
of tangible personal property for a consideration.”
33

TENN. CODE ANN. § 67-6-207(e) provides that the term “qualified farmer or nurseryman” means “a person who meets one (1)
or more of the following criteria: (1) The person is the owner or lessee of agricultural land from which one thousand dollars
($1,000) or more of agricultural products were produced and sold during the year, including payments from government
sources; (2) The person is in the business of providing for-hire custom agricultural services for the plowing, planting,
harvesting, growing, raising or processing of agricultural products or for the maintenance of agricultural land; (3) The person
is the owner of land that qualifies for taxation under the Agricultural Forest and Open Space Land Act of 1976, compiled in
chapter 5, part 10 of this title; (4) The person’s federal income tax return contains one (1) or more of the following: (A)
Business activity on IRS schedule F, profit or loss from farming; and (B) Farm rental activity on IRS form 4835, farm rental
income and expenses or schedule E, supplemental income and loss; and (5) The person otherwise establishes to the
satisfaction of the commissioner that the person is actively engaged in the business of raising, harvesting or otherwise
producing agricultural commodities as defined in § 67-6-301(c)(2).” Persons seeking to become qualified farmers or
nurserymen must apply to the Commissioner of Revenue for authority to make purchases exempt from tax. TENN. CODE ANN.
§ 67-6-207(b). If the Commissioner finds that an applicant is entitled to be a qualified farmer or nurseryman, the
Commissioner will issue a certificate granting the authority to make purchases exempt from tax for a period of four years, or
until the applicant is no longer operating within the scope of his original application. Id.
34

See Tennessee Farmers’ Coop. v. State ex rel. Jackson, 736 S.W.2d 87, 90-92 (Tenn. 1987); Op. Tenn. Att’y Gen. No. 09-57 (Apr.
16, 2009).

6

purposes of the exemption, are properly considered to mean “to bring forth;” “to create by physical
35
or mental effort;” “to manufacture;” or “to give rise to,” and the “act or process of producing.”
36
Notably, the production of agricultural products is not limited to planting or harvesting.
The [SPECIALIZED FARMING] equipment is installed to create a functioning System. The System’s
purpose is [REDACTED]. As long as the System is used at least 51% of the time by a farmer in the
production of agricultural products, for sale and use or consumption off the premises, it will qualify
for the exemption.
Charges for the installation of exempt [SPECIALIZED FARMING] equipment are also exempt from
Tennessee sales and use tax when the seller both sells and installs the exempt [SPECIALIZED
FARMING] equipment.
TENN. CODE ANN. § 67-6-202(a) (2018) imposes the sales tax on the “sales price of each article of
tangible personal property when sold at retail in this state.” The term “sales price” is defined in
pertinent part as “the total amount of consideration, including cash, credit, property, and services,
for which personal property or services are sold, leased, or rented, valued in money, whether
37
received in money or otherwise. TENN. CODE ANN. § 67-6-102(79)(A)(v) (2018) disallows any
deduction from the sales price for installation charges.” Thus, installation charges are part of the
sales price of tangible personal property.
The sale and installation of tangible personal property that remains tangible personal property is
subject to tax when the seller both sells and installs the tangible personal property. Conversely,
when the seller both sells and installs exempt tangible personal property that remains tangible
personal property upon installation, both the tangible personal property and the installation will be
exempt. However, if the seller contracts with a third party to install the exempt [SPECIALIZED
38
FARMING] equipment, the installation charges will be subject to Tennessee sales and use tax.
Additionally, the sale of repair and replacement parts, including labor to repair the qualified
[SPECIALIZED FARMING] equipment, is also exempt from sales tax when purchased by a qualified
39
farmer or nurseryman.
Additional Warranty or Service Contracts
Pursuant to TENN. CODE ANN. § 67-6-208(a) (2018), the retail sale of, use of, or subscription to a
warranty or service contract is subject to the Tennessee sales and use tax. A warranty or service
contract covering the repair or maintenance of tangible personal property is subject to Tennessee
35

Tenn. Op. Att’y Gen. No. 09-57 (April 16, 2009).

36

See, e.g., Essary v. Huddleston, No. 02A01-9408-CH-00179, 1995 WL 384985 at *3 (Tenn. Ct. App. June 29, 1995) (unpublished)
(holding that a tractor was used directly and principally for the purpose of producing timber products where the farmer’s
primary use of the tractor was to prevent soil erosion around growing trees).
37

TENN. CODE ANN. § 67-6-102(79)(A).

38

TENN. CODE ANN. § 67-6-205(c)(6) imposes the Tennessee sales and use tax on the service of installing tangible personal
property that remains tangible personal property after installation.
39

TENN. CODE ANN. § 67-6-207(a)(8).

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sales and use tax when (1) the contract is sold in connection with the sale of tangible personal
property that is subject to the Tennessee sales and use tax, (2) the contract applies to tangible
personal property located in Tennessee, or (3) the location of the tangible personal property
covered by the contract is unknown but the purchaser’s residential street address or primary
40
business address is in Tennessee.
Here the purchase of a System includes a [TIME PERIOD] warranty and the Dealer may separately
sell additional warranty or service contracts. Such contracts are either sold in connection with the
41
sale of tangible personal property that is subject to the Tennessee sales and use tax or, in the case
of sales to qualified farmers or nurserymen, apply to tangible personal property located in
42
Tennessee.
As noted above, TENN. CODE ANN. § 67-6-207 provides various exemptions for sales to qualified
43
farmers or nurserymen of certain farm equipment, machinery, and other agricultural items. The
exemptions found in TENN. CODE ANN. § 67-6-207, however, do not extend to sales of warranty or
service contracts. Accordingly, the Dealer’s sales of additional warranty or service contracts covering
the equipment are subject to Tennessee sales or use tax. Because these contracts are taxable on the
front-end, any repairs made under the warranty or service contract will not be subject to additional
44
tax.
Software Updates/Maintenance Agreements
45

As previously stated, under the Retailers’ Sales Tax Act, the retail sale in Tennessee of tangible
personal property and specifically enumerated services are subject to the sales and use tax, unless
an exemption applies. Tangible personal property includes “prewritten computer software,” which is
defined in TENN. CODE ANN. § 67-6-102(68) in pertinent part as “computer software, including
prewritten upgrades, that is not designed and developed by the author or other creator to the
46
specifications of a specific purchaser.”
When Dealers offer annual software updates, they will be selling potentially taxable tangible
personal property. However, because the software is used to operate equipment that is used
directly and principally for the purpose of producing agricultural products for sale and use or
40

TENN. CODE ANN. § 67-6-208(c)(1)-(3) (2018).

41

TENN. CODE ANN. § 67-6-208(c)(1).

42

TENN. CODE ANN. § 67-6-208(c)(2).

43

TENN. CODE ANN. § 67-6-207(e).

44

TENN. CODE ANN. § 67-6-208(d).

45

Tennessee Retailers’ Sales Tax Act, Ch. 3, §§ 1-18, 1947 Tenn. Pub. Acts Ch. 22, §§ 22-54 (codified as amended at TENN. CODE
ANN. §§ 67-6-101 to -907 (2018)).
46

TENN. CODE ANN. § 67-6-102(68) further provides that “‘[p]rewritten computer software’ or a prewritten portion of the
computer software that is modified or enhanced to any degree, where the modification or enhancement is designed and
developed to the specifications of a specific purchaser, remains prewritten computer software.” Note, however, that “where
there is a reasonable, separately stated charge or an invoice or other statement of the price given to the purchaser for the
modification or enhancement, the modification or enhancement shall not constitute prewritten computer software.” Id.

8

consumption off the premises, it qualifies for the exemption in TENN. CODE ANN. § 67-6-207(a)(1).
Accordingly, the Dealer’s sales of computer software updates will be exempt from Tennessee sales
and use tax.

APPROVED:
David Gerregano
Commissioner of Revenue

DATE:

10/14/19

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