No Sales or Use Tax Due on Materials and Equipment Used to Construct and Install Steam Facility at Tennessee Manufacturing Plant


In a letter ruling published March 16, 2020, the Tennessee Department of Revenue concluded that a contractor’s purchase of materials and equipment for use in the construction and installation of a new steam production facility at a federally owned manufacturing plant was exempt from Tennessee sales and use tax.  Tenn. Letter Rul. No. 20-02 (issued Feb. 10, 2020).

Contractors in Tennessee are subject to use tax on tangible personal property they use in the performance of a contract unless an exemption applies.  Section 67-6-209(e) of the Tennessee Code Annotated exempts, among other things, materials and equipment purchased or used for the construction or installation of, in, or as part of any resource recovery facility owned by the United States or any agency thereof where steam or electric energy is produced.  To qualify for the exemption, the materials and equipment must become a component part of the facility.

Letter Ruling No. 20-02 involved a contractor that operates and manages a federally owned manufacturing plant in Tennessee.  The manufacturing processes at the plant are powered by steam generated by an existing facility on site.  The steam is delivered through a closed loop system.  Steam used in the manufacturing processes becomes water, which is then recovered and converted into steam to be used again to power the manufacturing processes.  The federal government and the contractor entered into an agreement pursuant to which the contractor, directly and through subcontractors, was to construct a new on-site steam facility, including a building and a tank farm.

In ruling that the materials and equipment which become a component part of the new steam facility, including the building and tank farm, would qualify for the sales and use tax exemption under section 67-6-209(e), the Department of Revenue concluded that the steam produced at the facility constitutes a reusable resource and the facility and loop system together operate as a resource recovery system.