Are the reusable wooden patterns a metal casting foundry uses to make sand molds exempt from Tennessee sales and use tax as industrial machinery, even though the patterns never directly touch the finished metal casting?

Subject

Whether reusable patterns used to make sand molds qualify for the industrial machinery sales tax exemption.

Plain-English summary

The Tennessee Department of Revenue ruled that reusable wooden patterns a metal casting foundry uses to make sand molds qualify as exempt "industrial machinery" for Tennessee sales and use tax purposes — even though the pattern itself never physically touches the finished metal casting.

Each wooden pattern is a box holding a replica of the part to be cast; sand and binder are poured into it to form a sand mold, the mold is removed from the pattern, molten metal is poured into the mold, and after the metal solidifies the sand mold is broken apart and discarded (with the sand reused). The same wooden pattern is reused over and over to make a new mold for every unit produced. Before 1984, Tennessee's industrial machinery exemption required equipment to be "directly used" in manufacturing — defined narrowly as actual physical contact with the material being transformed, with no intervening person or thing — a test that could exclude even genuinely essential equipment (as it did for a debris-removal loader in Azcon Corporation v. Olsen, even while cranes that directly fed scrap metal into a shredder qualified). In 1984 the legislature relaxed that standard, replacing "directly used" with "necessary to, and primarily for" fabrication or processing.

Under that more relaxed test, the pattern easily qualifies: it's impossible to make the sand mold — and therefore impossible to make the casting — without it, so it's "necessary to" the fabrication process, and because the pattern has no other use besides creating these molds, it's also "primarily for" that fabrication. The Department noted this holds even though the pattern's involvement ends before the molten metal ever enters the picture (it shapes the mold, not the metal directly) — a result that likely would have failed under the old pre-1984 direct-contact standard.

What this means for you

Manufacturers and foundries with reusable tooling, patterns, jigs, or molds

Whether your tooling qualifies as exempt "industrial machinery" no longer turns on whether it physically touches your raw material — it turns on whether it's a necessary and primarily-dedicated step in your fabrication process. Reusable patterns, molds, jigs, and similar production tooling that create an intermediate product (like a sand mold) used to shape your final good can qualify, even with an intervening step (like the sand mold itself) between the tooling and the finished product.

Accountants and tax professionals

This ruling is a useful, concise history of Tennessee's industrial machinery exemption standard shift: the old "direct contact, no intervening person or thing" test from Phillips & Buttorff Mfg. Co. v. Carson and Woods v. General Oils, Inc., illustrated by the Azcon Corporation v. Olsen crane/loader distinction and the Jersey Miniere Zinc Co. v. Jackson drilling equipment case, versus the current "necessary to, and primarily for" standard adopted by 1984 Tenn. Pub. Acts 762 and codified at Tenn. Code Ann. § 67-6-102(a)(19)(A). Useful precedent whenever a client's production tooling doesn't directly contact the finished product but is still indispensable to making it.

Common questions

Q: Does exempt manufacturing equipment have to physically touch the raw material being processed?
A: Not anymore. Since a 1984 legislative change, the standard is whether the equipment is "necessary to, and primarily for" fabrication — not whether it makes direct physical contact with the material, as the pre-1984 rule required.

Q: Does equipment that only creates an intermediate step (like a mold) rather than touching the final product still qualify?
A: Yes, as this ruling shows — the pattern only shapes the sand mold, never the metal itself, but it's still exempt because making the mold is a necessary and exclusively-dedicated part of the fabrication process.

Q: Would this equipment have qualified under the pre-1984 rule?
A: Likely not, or at least it would have been a much harder case — the old rule required direct contact with the material being transformed, which the pattern doesn't have (it only touches the sand mold).

Q: Does this ruling apply to other manufacturers' tooling or patterns?
A: No. A Tennessee letter ruling binds the Department only for the specific taxpayer and facts addressed and cannot be relied on by others, though the "necessary to and primarily for" standard it applies is of general application under the statute.

Citations and references

Statutes and cases:

• Tenn. Code Ann. § 67-6-102(a)(19)(A) (definition of "industrial machinery": necessary to, and primarily for, fabrication/processing of tangible personal property for resale)
• 1984 Tenn. Pub. Acts 762 (legislative change from "directly used" to "necessary to" standard)
• Phillips & Buttorff Mfg. Co. v. Carson, 217 S.W.2d 1 (Tenn. 1949); Woods v. General Oils, Inc., 558 S.W.2d 433 (Tenn. 1977) (pre-1984 direct-contact standard)
• Azcon Corporation v. Olsen, 1983 Tenn. LEXIS 619 (Tenn. 1983) (essential-but-not-exempt debris loader vs. exempt direct-contact cranes)
• Jersey Miniere Zinc Co. v. Jackson, 774 S.W.2d 928 (Tenn. 1989) (drills/loading vehicles operating directly on minerals, exempt)

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/06-07.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING #06-07

WARNING

Letter rulings are binding on the Department only with respect to the individual
taxpayer being addressed in the ruling. This presentation of the ruling in a redacted
form is informational only. Rulings are made in response to particular facts
presented and are not intended necessarily as statements of Department policy.

SUBJECT

Whether patterns used to make sand molds for cast metal products are exempt as
industrial machinery.

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 upon 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;

(G) 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 the
taxpayer's detriment.

FACTS
[TAXPAYER] is a metal casting foundry supplying cast metal products in [CERTAIN

INDUSTRIES]. The facility is located in Tennessee. The wooden patterns are an
essential and integral piece of their manufacturing process. The metal castings supplied

by [TAXPAYER] are produced through a process that is one repetitive integrated system.
The pattern itself is a wooden box containing a replica of the casting to be produced. A
single pattern is used to create multiple sand molds. Sand and binder are mixed together
and poured into the wooden pattern in order to create a sand mold. After the binder sets,
the sand mold is extracted from the wooden pattern and becomes the component in which
the molten metal is poured into in order to create the final shape of the product to be sold.
Although the wood pattern does not contact the resultant iron or steel casting directly, it
is impossible to make the metal casting without the pattern. The wood patterns are
continuously required in the production process to create a dimensionally correct
impression in the sand mold for the liquid metal to be poured into in order for it to
solidify to the correct dimensions. After the metal casting has solidified, the sand mold is
broken apart. The sand from the broken mold is collected and some or all of the sand is
re-used. The wooden pattern is used over and over again to make a sand mold each time
a new unit of the taxpayer’s product is fabricated.

ISSUE

Are the wooden patterns used to create sand molds considered “necessary to and
primarily for” the fabrication of the taxpayer’s product for the purposes of the industrial
machinery exemption from sales and use taxes?

RULING

Yes. Patterns used to create sand molds are “necessary to and primarily for” the
manufacture of tangible personal property for purposes of the industrial machinery
exemption from sales and use taxes.

ANALYSIS

Prior to 1984, the industrial machinery exemption applied only to machinery which was
“directly and primarily” used in the manufacturing process. “Directly” was defined by
the Tennessee Supreme Court as “in direct contact with, and without the intervention of
any person or thing.” Phillips & Buttorff Mfg. Co. v. Carson, 217 S.W.2d 1, 5 (Tenn.
1949); Woods v. General Oils, Inc., 558 S.W.2d 433, 436 (Tenn. 1977). For example, in
Azcon Corporation v. Olsen, 1983 Tenn. LEXIS 619 (Tenn. 1983), the taxpayer
processed scrap metal into steel bars. Exempt items included certain cranes and loaders
which came into direct contact with the scrap metal, either in transporting and feeding it
into the shredder or in receiving it as it emerged. Id. However, a loader which removed
debris from the shredder was not industrial machinery. Id. The Azcon court held that
exempt items must be used in the actual fabrication or processing of a product for resale,
and the fact that the machinery may be important, even essential, to a continuous
operation was not the proper test. Id. In another case involving taxes paid between 1981
and 1983, the Tennessee Supreme Court held that drills and explosive loading vehicles
were exempt because they operated directly upon the minerals to be mined. Jersey
Miniere Zinc Co. v. Jackson, 774 S.W.2d 928, 930 (Tenn. 1989).

It is no longer required that every exempt item come into direct contact with the raw
material being physically transformed into a finished product. In 1984, the legislature
broadened the industrial machinery exemption. In addition to other changes, the
legislature removed the language requiring that exempt machinery be “directly used” in
the manufacture of tangible personal property, substituting instead the requirement that it
be “necessary to” the manufacturing process. 1984 Tenn. Pub. Acts 762. The apparent
purpose of the change was to replace the old direct contact test the court in Azcon said
could exclude even essential machinery for manufacturing with a more relaxed
requirement.

Tenn. Code Ann. § 67-6-102(a)(19)(A) now defines industrial machinery as:

Machinery, apparatus and equipment with all associated parts,
appurtenances and accessories . . . necessary for operation and
maintenance, repair parts and any necessary repair or taxable installation
labor therefor, which is necessary to, and primarily for, the fabrication
or processing of tangible personal property for resale and consumption off
the premises, or pollution control facilities primarily used for air pollution
control or water pollution control, where the use of such machinery,
equipment or facilities is by one who engages in such fabrication or
processing as one's principal business . . . (Emphasis added).

The wooden patterns are equipment that is “necessary to” the fabrication of cast metal
products because the patterns are necessary to create the sand molds. The sand molds are
used to shape the molten metal into their final shape as finished products. Without the
wooden patterns, it would be impossible to create the sand molds that are essential to the
metal casting. Moreover, the sand mold is broken apart after the metal casting has
solidified. Thus, the wooden pattern is an integral part of the manufacturing process of
making each and every individual unit of the taxpayer’s product. The wooden patterns
have no other use and are used only to create sand molds, therefore, they also fulfill the
“primarily for” requirement. Accordingly, the wooden patterns used to create sand molds
are “necessary to and primarily for” the manufacture of tangible personal property for
purposes of the industrial machinery exemption from sales and use taxes. Assuming that
all other requirements for the exemption are met, the wooden patterns would be exempt
as industrial machinery.

Deborah A. Toon
Tax Counsel

APPROVED: Loren L. Chumley
Commissioner

DATE: 4/7/06