When a manufacturer's customers pick up custom goods at its Tennessee facility but register and use them elsewhere, are those sales sourced to Tennessee for franchise and excise apportionment?

Plain-English summary

The taxpayer is an out-of-state manufacturer of custom-built tangible personal property (the kind of property that must be registered, like a vehicle or vessel). Its headquarters and factories are outside Tennessee, but it has a Tennessee facility where it stores the finished goods — and where all of its customers take possession of the property and receive two or three days of training before taking it away to wherever they'll register and use it. Most customers register the property in the state where it will be primarily stored. The question: for Tennessee franchise and excise (F&E) apportionment, can the manufacturer leave these sales out of its Tennessee numerator when the property is registered in another state?

The Department's answer: source by the purchaser's location — registration is not the test.

How F&E apportionment works. A business taxable both inside and outside Tennessee must apportion its net earnings (excise) and net worth (franchise) to Tennessee. Most taxpayers use a three-factor formula — property, payroll, and a triple-weighted receipts factor. The receipts factor is a fraction: Tennessee receipts (numerator) over total receipts everywhere (denominator). The dispute here is which sales go in the numerator.

The sourcing rule for goods. Sales of tangible personal property are sourced to Tennessee when the property is "delivered or shipped to a purchaser… in this state," regardless of the F.O.B. point (§§ 67-4-2012(h)(1), 67-4-2111(h)(1)). The phrase is potentially ambiguous — "in this state" could mean where the purchaser takes delivery or where the purchaser is located. There's no modern Tennessee case directly on point.

The Department looks to Jack Daniel. Under prior law (which keyed the factor to "customers within Tennessee"), the Tennessee Supreme Court in Woods v. Jack Daniel Distillery (Tenn. 1977) held that "within" modifies "customers," not "sales," so the customer's location controls — and sales to purchasers located outside Tennessee are excluded from the numerator because the earnings come from out-of-state markets. Although that case isn't controlling under the current wording, the Department read it as confirming that the purchaser's location — not merely where the purchaser takes possession — is the critical factor.

Registration is not controlling. The Department was explicit: where the property is registered or primarily used may indicate the purchaser's location, but it is not the test. A purchaser could be located in Tennessee yet register the property in another state. So the manufacturer cannot base its sourcing on the state of registration.

The bottom-line test. Putting it together:

• Exclude the receipt from the Tennessee numerator when the goods are delivered to the purchaser in Tennessee but the purchaser has no location in Tennessee.
• Include the receipt in the Tennessee numerator when the purchaser takes delivery in Tennessee and has a location in Tennessee.

In other words, taking possession at the Tennessee facility doesn't, by itself, make every sale a Tennessee sale; but an out-of-state registration won't get a Tennessee-located buyer's sale out of the numerator either. (Sourcing also doesn't turn on where the purchaser is headquartered or domiciled — the question is whether the purchaser has "some sort of location" in Tennessee, particularly combined with taking possession here.)

What this means for you

Multistate manufacturers and sellers of goods apportioning to Tennessee

For the receipts factor, source sales of tangible personal property to where the purchaser is located, looking at delivery in Tennessee plus whether the buyer has a Tennessee location. Don't rely on the state of registration (for registrable goods) or on the F.O.B. point to keep a sale out of the Tennessee numerator — those aren't controlling.

"We deliver everything from a Tennessee dock" is not the whole story

If buyers pick up goods at your Tennessee facility but have no Tennessee location, those receipts can be excluded from the Tennessee numerator. Conversely, delivery in Tennessee to a buyer that does have a Tennessee location is a Tennessee receipt. Track the purchaser's location, not just the delivery dock.

Keep documentation of purchaser location

Because registration and possession can diverge from the purchaser's actual location, keep records that establish where each purchaser is located. That's the fact that drives inclusion or exclusion, and it's what the Department will look to.

Accountants and tax professionals

Apportionment is required by §§ 67-4-2010(a) (excise) and 67-4-2110(a) (franchise); the three-factor formula (property, payroll, triple-weighted receipts) is at §§ 67-4-2012(a)(2), 67-4-2111(a), with the receipts-factor fraction at §§ 67-4-2012(g), 67-4-2111(g). Tangible-personal-property sourcing: § 67-4-2012(h)(1) ("inside this state") and § 67-4-2111(h)(1) ("in this state"); see Tenn. Comp. R. & Regs. 1320-06-01-.33(1)(a) ("within this state"). Controlling-by-analogy authority: Woods v. Jack Daniel Distillery, slip op. (Tenn. Apr. 16, 1977) (under prior § 67-2707(c) (1956), "customers within Tennessee"). Note the single-sales-factor election available to manufacturers and the separate rules for financial institutions and common carriers.

Common questions

Q: Our customers pick up goods at our Tennessee warehouse but register them out of state. Are those Tennessee sales?
A: It depends on the purchaser's location, not the registration. If the purchaser has no Tennessee location, exclude the receipt from the Tennessee numerator even though delivery happened in Tennessee. If the purchaser has a Tennessee location and takes delivery here, include it.

Q: Does the state where the property is registered control the sourcing?
A: No. Registration (or primary-use) location may indicate where the purchaser is, but it isn't controlling — a Tennessee buyer might register elsewhere.

Q: Does the F.O.B. point or shipping term matter?
A: No. The statute sources tangible-personal-property sales by delivery to the purchaser "in this state" regardless of the F.O.B. point or other conditions of sale.

Q: What about the purchaser's headquarters or domicile?
A: Sourcing doesn't depend on where the purchaser is headquartered or domiciled. The question is whether the purchaser has a location in Tennessee, especially together with taking possession here.

Q: Can I rely on this ruling?
A: Not as binding. This is a Revenue Ruling — advisory only and not binding even on the Department, and not on other taxpayers. Confirm your own facts with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.):
- § 67-4-2012(h)(1) (excise: tangible-personal-property sourcing to a purchaser in Tennessee, regardless of F.O.B. point); § 67-4-2111(h)(1) (franchise: same rule)
- §§ 67-4-2012(a)(2), 67-4-2111(a) (three-factor formula with triple-weighted receipts factor); §§ 67-4-2012(g), 67-4-2111(g) (receipts factor fraction)
- §§ 67-4-2010(a), 67-4-2110(a) (apportionment required for taxpayers taxable in and outside Tennessee)
- § 67-4-2007(a) (6.5% excise tax on net earnings); §§ 67-4-2105(a), 67-4-2106(a) (franchise tax on net worth); § 67-4-2004(38) ("persons" include corporations, LLCs, limited partnerships)

Regulation:
- Tenn. Comp. R. & Regs. 1320-06-01-.33(1)(a) (tangible-personal-property sourcing — "within this state")

Case law:
- Woods v. Jack Daniel Distillery, slip op. (Tenn. Apr. 16, 1977) (under prior § 67-2707(c) (1956), "within" modifies "customers," so the customer's location determines sourcing)

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/fae/20-09fe.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
REVENUE RULING # 20-09
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.
SUBJECT
The sourcing of receipts from sales of tangible personal property for Tennessee franchise and excise
tax apportionment purposes.
SCOPE
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.
FACTS
The Taxpayer, a manufacturer of custom-built tangible personal property, is headquartered outside
Tennessee. The Taxpayer sells the custom-built tangible personal property to customers located both
inside and outside Tennessee. The Taxpayer’s manufacturing facilities are located outside Tennessee.
The Taxpayer does, however, have a Tennessee facility it uses to store the tangible personal property
after the manufacturing process is complete.
The custom-built tangible personal property is of a type that is required to be registered. Most
purchasers register the property in the state where it will be primarily stored. Regardless of the state
of registration, customers register the property at the same time it is being manufactured and before
the customer takes title to or possession of the property.
All the Taxpayer’s customers take possession of the custom-built tangible personal property at the
Taxpayer’s Tennessee facility. The customer receives training at the Tennessee facility for two or three
days prior to removing the custom-built tangible personal property to its location of registration.

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RULING
Will the Taxpayer exclude from the numerator of its Tennessee franchise and excise tax
apportionment formula receipts from sales of its custom-built tangible personal property destined
for a location outside Tennessee, as evidenced by the place of registration?
Ruling: The Taxpayer should source receipts from the sale of its custom-built tangible
personal property according to the location of the purchaser. While the place of registration
may be indicative of the purchaser’s location, it is not controlling for purposes of the sourcing
of receipts under TENN. CODE ANN. §§ 67-4-2012(h)(1) and -2111(h)(1) (Supp. 2019).
The Taxpayer will exclude from the numerator of its Tennessee apportionment formula
receipts from the sale of custom-built tangible personal property that is delivered to a
purchaser in Tennessee when the purchaser has no location in Tennessee. When the
purchaser takes delivery of the custom-built tangible personal property in Tennessee, the
Taxpayer must include the receipt in the numerator of its Tennessee apportionment formula
if the purchaser of the Taxpayer’s custom-built tangible personal property has a location in
Tennessee.
ANALYSIS
Tennessee imposes an excise tax at the rate of 6.5% on the net earnings of all persons, as defined
under TENN. CODE ANN. § 67-4-2004(38) (Supp. 2019), doing business within Tennessee. 1 Tennessee
also imposes a franchise tax at the rate of $0.25 per $100, or major fraction thereof, on the net worth
of a person doing business in Tennessee, pursuant to TENN. CODE ANN. §§ 67-4-2105(a) (Supp. 2019)
and -2106(a) (2013). Persons subject to the Tennessee franchise and excise taxes include, but are not
limited to, entities such as corporations, limited partnerships, and limited liability companies. 2
TENN. CODE ANN. § 67-4-2010(a) (2013) provides that a taxpayer that has business activities taxable both
inside and outside the state of Tennessee shall allocate or apportion its net earnings or losses for
Tennessee excise tax purposes. Similarly, TENN. CODE ANN. § 67-4-2110(a) (2013) provides that a
taxpayer that has business activities taxable both inside and outside the state of Tennessee shall
allocate or apportion its net worth for Tennessee franchise tax purposes. Unless it is a financial
institution, a common carrier, or a manufacturer that has made an election to use a single sales factor
formula, a taxpayer must use the three-factor apportionment formula set forth under TENN. CODE ANN.
§§ 67-4-2012(a)(2) and 67-4-2111(a) (Supp. 2019), which utilizes a property factor, a payroll factor, and
a triple-weighted receipts factor. The receipts factor “is a fraction, the numerator of which is the total
receipts of the taxpayer in [Tennessee] during the tax period, and the denominator of which is the
total receipts of the taxpayer everywhere during the tax period.” 3
Receipts are sourced to Tennessee based on whether such receipts derive from sales of tangible
personal property or from sales other than sales of tangible personal property. Generally, when the
1

TENN. CODE ANN. § 67-4-2007(a) (Supp. 2019).

2

TENN. CODE ANN. § 67-4-2004(38) (Supp. 2019).

3

TENN. CODE ANN. §§ 67-4-2012(g) and 67-4-2111(g).

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purchaser is not the United States government, sales of tangible personal property are sourced to
Tennessee whenever the property is “delivered or shipped to a purchaser, other than the United
States government, inside this state regardless of the F.O.B. point or other conditions of the sale.” 4
The language of the statute is potentially ambiguous in that the phrase “inside this state” could refer
to either the location where the purchaser takes delivery of the property or the place where the
purchaser is located. There are no Tennessee court decisions under current law that address this
potential ambiguity. However, there is one unpublished Tennessee Supreme Court decision under
prior law that provides insight regarding this question.
Prior law stated that the sales factor of a manufacturer’s apportionment formula was based in part
on “[t]he ratio of the gross sales to customers within Tennessee to the total gross sales from all
sources.” 5 In Woods v. Jack Daniel Distillery, slip op. S. Ct. Tenn. (April 16, 1977), the Tennessee Supreme
Court held that sales destined to purchasers located outside Tennessee should be excluded from the
sales factor numerator because earnings from such sales are derived from markets outside
Tennessee. In upholding the trial court decision, the Tennessee Supreme Court explained that the
word “within” contained in the statutes modifies “customers” and not “sales,” such that the location of
the customer determines whether the sale is excluded from the sales factor numerator.
While not controlling with respect to the current statutory language, the Tennessee Supreme Court’s
decision in Woods v. Jack Daniel Distillery suggests that the purchaser’s location – as opposed to where
the purchaser takes possession of the property – is the critical factor in determining whether a sale of
tangible personal property is sourced to Tennessee.
Significantly, neither the applicable statutes, corresponding rule, nor the case discussed above
suggest that the determination of whether the purchaser is “inside,” “within,” or “in” Tennessee
depends on where the purchaser is headquartered, domiciled, or primarily resides. On the contrary,
the use of the broad terms “inside,” “within,” or “in” strongly suggest that the receipt must be sourced
to Tennessee if the purchaser has some sort of location in Tennessee and particularly if the purchaser
takes possession of the property in Tennessee.
The Taxpayer specifically inquired as to whether it will exclude from the numerator of its Tennessee
apportionment formula receipts from the sale of its custom-built tangible personal property when the
property is registered by the purchaser in a state other than Tennessee. Where the property is
registered or primarily used may be an indication of the purchaser’s location; importantly, however,
the state of registration or primary use is not controlling. A purchaser could very well be located in
Tennessee but choose to register and use the property in another state. Accordingly, the Taxpayer
should not base its sourcing of receipts on the place where the tangible personal property is
registered.

TENN. CODE ANN. § 67-4-2012(h)(1). Note that TENN. COMP. R. & REGS. 1320-06-01-.33(1)(a) (2016) provides that sales of tangible
personal property are sourced to Tennessee when the property is delivered or shipped to a purchaser “within this state,” while
TENN. CODE ANN. § 67-4-2111(h)(1) uses the language “in this state.”

4

See TENN. CODE ANN. § 67-2707(c) (1956) (emphasis added). It should be noted that the old statutory term “customers within
Tennessee” is substantially similar to the present statutory terms “purchaser . . . inside this state” and “purchaser . . . in this
state” found in TENN. CODE ANN. §§ 67-4-2012(h)(1) and 67-4-2111(h)(1).

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Instead, the Taxpayer should exclude from the numerator of its Tennessee apportionment formula
receipts from the sale of its custom-built tangible personal property that is delivered to a purchaser
in Tennessee when the purchaser has no location in Tennessee. When the purchaser takes delivery
of the custom-built tangible personal property in Tennessee, the Taxpayer must include the receipt in
the numerator of its Tennessee apportionment formula if the purchaser of the Taxpayer’s custombuilt tangible personal property has a location in Tennessee.

APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

10/14/2020

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