Is Manufacturing Equipment Taxable in Tennessee?
Tennessee’s manufacturing equipment exemption for industrial machinery is provided to entities whose primary business is fabricating tangible personal property for resale and consumption off-premises. This manufacturing exemption is determined on a per-location basis, and is in part determined by the federal tax structure. as well as the federal tax structure of the business.
Tennessee’s Manufacturing Exemption Criteria
The Tennessee manufacturing equipment exemption criteria requires more than 50% of the business’s gross receipts to be derived from fabricating or processing tangible personal property for resale. The 50% gross receipts test was the subject of a recent private letter ruling issued by the Tennessee Department of Revenue1. Per the ruling, the exemption hinges, at least to a certain extent, on whether the taxpayer – a single member LLC (“SMLLC”) – would be disregarded for Tennessee sales and use tax purposes and treated as a division of Parent.
Federal Tax Structure and Impact on the Exemption
If a SMLLC elects to be treated as a disregarded entity for federal tax purposes, it will also be disregarded as an entity separate from its parent for Tennessee sales and use tax purposes and treated as a division of the parent entity. To determine whether the industrial machinery exemption applies, we must now consider the overall revenue of the parent and whether it meets the greater than 50% requirement. The disregarded entity’s sales to its parent are now disregarded for purposes of qualifying for the exemption, and the Parent’s multiple revenue sources will be considered. If the manufacturing sales from the disregarded entity are the only fabrication/processing sales of the parent entity and make up less than 51% of the total revenue of the parent entity, neither the SMLLC nor the parent entity can claim Tennessee’s industrial machinery exemption.
Tennessee Manufacturing Exemption for C-Corporation
In contrast, if the SMLLC elected to file as a corporation for federal income tax purposes, it is treated as a separate entity from its parent for Tennessee sales and use tax purposes as well. Therefore, its revenue, and consequently the applicability of the exemption, will be determined separately from its parent. If the taxpayer exclusively fabricates goods for resale to its parent entity as well as to unrelated third parties, the taxpayer qualifies for the exemption since more than 50% of its gross receipts are derived from fabricating or processing tangible personal property for resale.
Why Choose Clarus Partners?
Navigating the complex world of sales and use taxes can be tricky at best. Why not choose a partner that has the tax technical skills to not only understand the nuances of Tennessee’s manufacturing exemption, but can tackle any of your other sales and use tax compliance or consulting-based needs as well? Why not choose Clarus Partners? Reach out to one of our experts here to get your questions answered.
- Letter Ruling # 23-08, Tennessee Department of Revenue (August 24, 2023). ↩︎