When a government-owned gas utility district sells, installs, and services gas-fired appliances (furnaces, water heaters, ranges, grills, etc.) for customers, which of those transactions are subject to Tennessee sales tax, and does the utility's own government tax exemption cover any of it?

Subject

Sales tax treatment of a government gas utility's appliance sales, installation, and service calls.

Plain-English summary

The Tennessee Department of Revenue answered six questions from a government-owned natural gas utility district that sells, installs, and services gas-fired equipment (furnaces, water heaters, ranges, grills, and more), making clear that the utility's own tax-exempt status doesn't shield its customers from sales tax.

The utility's government exemption is narrow — it only covers items that become real property. When the utility installs equipment that becomes part of the customer's realty (a fixture), the utility itself is legally the "user and consumer" of that property, not the seller — and because the utility is a tax-exempt political subdivision, that specific purchase is exempt. But for anything sold that stays tangible personal property after installation, the utility is acting as a "dealer" making a taxable sale to its customer, and its own tax-exempt status as a government entity does nothing to exempt that transaction — the utility must still collect tax from its customers on those sales.

Whether an item becomes a fixture (exempt) or stays personal property (taxable) is a case-by-case fixtures analysis, turning on the parties' intent as shown by objective factors (type of structure, attachment method, use/purpose) and whether removal would seriously damage the building or destroy the item's character as personal property. The Department declined to rule item-by-item on the specific appliances listed (furnaces, water heaters, logs, etc.) without detailed installation facts for each — that determination has to be made per-installation.

Service calls follow their own rule: repairing tangible personal property is taxable, but repairing real property is not, and untaxed service calls must be billed separately and recorded as such. Rate-change timing for contracts spanning Tennessee's July 15, 2002 sales tax rate increase (6% → 7%, plus a new 2.75% tax on the $1,600–$3,200 band of a single article) follows the date title or possession actually passes — contracts not yet completed by that date pick up the higher rate. Refunds for erroneously collected tax follow Tenn. Code Ann. § 67-1-1802: a claim must be filed by December 31 of the third year after the erroneous payment, and if the tax was collected from customers, the utility must have refunded or credited it to those customers before the state will refund the utility.

What this means for you

Government-owned or tax-exempt utilities and agencies selling equipment/services

Your own tax-exempt status as a government entity does NOT extend to sales you make to your customers — you're still a "dealer" obligated to collect sales tax on taxable sales, even though you might not owe tax on your own purchases of materials that become part of a customer's real property. Sort your product/service lines carefully: items that become fixtures (exempt to you as the installer) versus items that remain personal property after installation (taxable to your customer) require entirely different tax treatment.

Accountants and tax professionals

This ruling is a clean illustration of the Townsend Electric Co. v. Evans "improver of realty is the user/consumer" doctrine intersecting with a governmental exemption (Tenn. Code Ann. § 67-6-329(a)(13)), paired with the standard Magnavox/Hubbard/Harry J. Whelchel fixture-intent test and the General Carpet Contractors/Process Systems contrast on when removability does or doesn't preserve personal-property character. Also useful as a reference for the mechanics of a mid-contract tax rate change (title/possession-passage date controls) and the refund procedure under § 67-1-1802.

Common questions

Q: Does a government agency's general tax exemption cover sales it makes to its own customers?
A: No. A government entity's exemption typically covers its own purchases (e.g., materials that become part of real property it installs), not the taxable sales it makes as a dealer to third-party customers.

Q: How do you determine whether an installed appliance becomes a taxable fixture or stays exempt real property?
A: It's a fact-specific fixtures analysis based on the parties' intent, shown through the type of structure, attachment method, purpose, and whether removal would seriously damage the building or destroy the item's character as personal property — no blanket rule covers every appliance type.

Q: Is a service call to fix a broken appliance always taxable?
A: Only if it involves repairing tangible personal property. A service call involving real property repair, or where no repair is done or contemplated, is not taxable — but nontaxable service charges must be billed separately and recorded as such.

Q: Which tax rate applies to a contract signed before a rate increase but completed after it?
A: The rate in effect when title or possession of the tangible personal property actually passes to the customer controls — not the contract signing date.

Q: Does this ruling apply to other utility districts or government agencies?
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 fixture, exemption, and dealer-collection principles it applies are of general use.

Citations and references

Statutes, rules, and cases:

• Tenn. Code Ann. § 67-6-329(a)(13) (exemption for sales to the state, counties, or municipalities)
• Tenn. Code Ann. § 67-6-202 (sales tax on tangible personal property); § 67-6-102(a)(32)(F)(vi) (installation of TPP as taxable service)
• Tenn. Code Ann. § 67-6-501, § 67-6-502 (dealer's tax collection obligation, collected from the customer)
• Tenn. Code Ann. § 67-6-102(a)(11), (28) (definitions of "dealer" and "person," incl. utility districts)
• TENN. COMP. R. & REGS. 1320-5-1-.07 (improvers of realty are user/consumer, owe tax on materials)
• Tenn. Code Ann. § 67-6-102(a)(32)(F)(iv); TENN. COMP. R. & REGS. 1320-5-1-.54 (repair services taxable; real-property repair excluded)
• Tenn. Code Ann. § 67-6-102(a)(34)(A) (definition of "sale": transfer of title or possession)
• Tenn. Code Ann. § 67-1-1802 (refund procedure and three-year statute of limitations)
• Townsend Electric Co. v. Evans, 193 Tenn. 536, 246 S.W.2d 967 (1952) (improver of realty is user/consumer, not seller)
• Magnavox Consumer Electronics v. King, 707 S.W.2d 504 (Tenn. 1986); Hubbard v. Hardeman County Bank, 868 S.W.2d 656 (Tenn. Ct. App. 1993); Harry J. Whelchel Company v. King, 610 S.W.2d 710 (Tenn. 1980) (fixture-intent test)
• General Carpet Contractors, Inc. v. Tidwell, 511 S.W.2d 241 (Tenn. 1974); Process Systems, Inc. v. Huddleston, 1996 Tenn. App. LEXIS 695 (fixture vs. personalty outcomes)

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/06-21.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 06-21
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
Application of sales and use tax to appliance sales by a natural gas utility district.
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;
(C) 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 his detriment.

FACTS
[TAXPAYER] is a political subdivision of the state of Tennessee, organized under the
provisions of Tenn. Code Ann. § 7-82-101 et seq. 1
The taxpayer sells, services and installs the following gas fired equipment: (a) heating
and air conditioning systems, (b) floor furnaces, (c) water heaters, (d) logs, (e) fireplaces,
(f) space heaters, (g) dryers, (h) ranges, (i) cooktops, (j) grills and (k) outdoor lights.
The taxpayer requires its customer to sign a contract and make a down payment before
scheduling the work. The contract document states the equipment to be installed, labor to
install and sales tax. The customer is billed at the time the installation is complete.
[LANGUAGE DELETED].
QUESTIONS

1. Is the taxpayer the consumer of installed tangible personal property that becomes
   realty upon installation and therefore exempt from sales or use tax?
2. Is the taxpayer’s sale of tangible personal property taxable?
3. The taxpayer requests guidance in determining taxation of the items lettered (a)
   through (k) above, including those which become real property and those which remain
   tangible personal property when installed.
4. Are taxpayer’s service calls subject to tax?
5. What is the state tax rate on signed, uncompleted contracts as of July 15, 2002?
6. What are the procedures for obtaining a refund, including statutes of limitations, if tax
   has been paid on nontaxable sales?
   RULINGS
7. The taxpayer is the user and consumer of any tangible personal property that it
   installs if the property becomes a part of the realty upon installation. In this case, the
   taxpayer’s exempt status would cause such property to be exempt from the sales or use
   tax.

1

The ruling request uses a cite to an earlier edition of the code, Tenn. Code Ann. § 6-2601. The present
numbering is as given in the body of this ruling.

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2. The taxpayer owes sales tax on the sale of tangible personal property to its customers,
including installed tangible personal property that does not become a part of the realty
upon installation.

3. The Department declines to rule on this question. However, guidance is given in the
   “Analysis” section that follows.
4. Service calls made in connection with the repair of real property are not subject to
   tax. Service calls where repair of tangible personal property is performed or
   contemplated are subject to tax.
5. In accordance with the ruling to Question 1 above, no tax is due with respect to
   tangible personal property that becomes a part of the realty upon installation. If the
   contract is for the sale of tangible personal property, including installed tangible personal
   property that does not become a part of the realty upon installation, the tax is due as of
   the date of sale. A sale occurs on the date that title, possession, or both passes to the
   customer. It would appear that title or possession would not have passed before July 15,
   2002 on those contracts described as “uncompleted,” therefore, the state tax rate of seven
   percent (7%) would apply. If there is a sale of a single article of tangible personal
   property with a sale price greater than $1,600.00, an additional state tax of two and threequarters percent (2.75%) is due on the portion of the sale price between $1,600.01 and
   $3,200.00.
6. Refunds are governed by Tenn. Code Ann. § 67-1-1802. The statute of limitations
   provides that a refund claim must be filed on or before December 31 of the third calendar
   year following the date of the erroneous tax payment. The Department will refund tax
   collected from the taxpayer’s customers only if the taxpayer has credited or refunded
   such tax to its customers.
   ANALYSIS
   1.

The taxpayer is the user and consumer of any tangible personal property that
becomes realty upon installation, but the taxpayer’s exempt status would cause
such property to be exempt from the sales or use tax.

It has long been established that persons who erect or apply tangible personal property
that becomes a part of realty are not making a “sale” for sales and use tax purposes;
rather, such person is the user and consumer of such property. Townsend Electric Co. v.
Evans, 193 Tenn. 536, 246 S.W.2d 967 (1952). TENN. COMP. R. & REGS. 1320-5-1-.07
recognizes this and provides that, in general, persons improving real property, either their
own real property or for others, are users and consumers and therefore must pay the sales
or use tax on material for use in making such improvements.
When the taxpayer purchases tangible personal property that becomes realty upon
installation, the taxpayer is the user and consumer of such property. As the user and
consumer of the property, generally, the taxpayer would be liable for the sales and use

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tax. However, there is an important exemption contained in Tenn. Code Ann. § 67-6329(a)(13), which exempts “[a]ll sales made to the state of Tennessee or any county or
municipality within the state[.]” Therefore, as a political subdivision of the state of
Tennessee, organized under the provisions of Tenn. Code Ann. § 7-82-101 et seq., the
taxpayer is not subject to sales and use tax on the tangible personal property it purchases
for its own use.

2.

The taxpayer owes sales tax on the sale of tangible personal property to its
customers, including installed tangible personal property that does not become a
part of the realty upon installation.

In the case of sales of tangible personal property, including installed tangible personal
property that does not become a part of the realty upon installation; the taxpayer is not the
user and consumer. Tenn. Code Ann. § 67-6-202 generally imposes sales tax on all sales of
tangible personal property (unless specifically exempted from the tax). The service of
installation of tangible personal property that remains tangible personal property upon
installation is a taxable service. Tenn. Code Ann. § 67-6-102(a)(32)(F)(vi). Tenn. Code
Ann. § 67-6-501 imposes the tax on the dealer. “Dealer” generally means any person
engaging in activities subject to the sales or use tax. Tenn. Code Ann. § 67-6-102(a)(11).
“Person” includes governmental agencies, with particular mention of utility districts that
sell property and services that are subject to sales tax. 2 Tenn. Code Ann. § 67-6102(a)(28). As a utility district, the taxpayer is a dealer for the sales of all property and
services. As a dealer, the taxpayer has the obligation to collect sales and use tax when it
sells taxable property and services to its customers. The taxpayer’s exemption from other
taxes does not shelter taxpayer from its collection obligations. It should be noted, however,
that Tenn. Code Ann. § 67-6-502 provides that, insofar as possible, the tax is to be
collected from the customer.
3.

The taxpayer requests guidance in determining whether specified items
become exempt from sales and use tax as real property or remain taxable tangible
personal property after installation.

Whether tangible personal property that is installed remains tangible personal property
after installation or becomes part of the realty must be determined on a case-by-case basis
by applying the law of fixtures to the factual circumstances that exist. The primary test
for distinguishing tangible personal property from fixtures is not so much the manner in
which the property is affixed to the realty as it is the intention with which the property is
connected with the realty. The Tennessee Supreme Court has stated the test as follows:
2

Tenn. Code Ann. § 7-82-105 states that “[s]o long as a district shall own any system, the property and
revenue of such system shall be exempt from all state, county, and municipal taxation.” However, the
definition of “person” in the sales tax statute was expanded to include utility districts and other
governmental agencies in the same legislation that extended the sales tax to sales of energy fuels and water.
Ch. 38, Public Acts of 1963. Therefore, it is clear that the intent of Ch. 38 of the Public Acts of 1963 was
to subject a public utility’s sales of tangible personal property and services to the sales tax, as applicable.
See also Atty. Gen. Op., October 28, 1966.

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“In Tennessee only those chattels are fixtures which are so attached to the
freehold that, from the intention of the parties and the use to which they
are put, they are presumed to be permanently annexed, or a removal
thereof would cause serious injury to the freehold. The usual test is said to
be the intention with which a chattel is connected with realty. If it is
intended to be removable at the pleasure of the owner, it is not a fixture.”
Magnavox Consumer Electronics v. King, 707 S.W.2d 504, 507 (Tenn. 1986)(quoting
Hickman v. Booth, 173 S.W. 438 (Tenn. 1914)).
Such intent may be shown by examining both objective and subjective factors. See
Hubbard v. Hardeman County Bank, 868 S.W.2d 656, 660 (Tenn. Ct. App. 1993).
Objective factors include the type of structure, the mode of attachment, and the use and
purpose of the property. Harry J. Whelchel Company v. King, 610 S.W.2d 710, 713-714
(Tenn. 1980). The subjective factor is the expressed intent, if any, of the parties. See, Id.
Tangible personal property becomes a part of the realty, though, if removing it would
seriously damage the building to which it is affixed. Process Systems, Inc. v. Huddleston,
1996 Tenn. App. LEXIS 695 (Tenn. Ct. App. October 25, 1996)(citing Memphis Housing
Authority v. Memphis Steam Laundry-Cleaners, Inc., 463 S.W.2d 677, 679 (Tenn. 1971)).
Tangible personal property also becomes realty if removal would destroy its essential
character as personalty. Id. (citing Green v. Harper, 700 S.W.2d 565, 567 (Tenn. Ct.
App. 1985)).
Thus, whether the personal property at issue becomes part of the realty depends on the
particular factual circumstances that exist. For example, the court in General Carpet
Contractors, Inc. v. Tidwell, 511 S.W.2d 241 (Tenn. 1974), examined carpet which was
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. Id. at 243. In another case, the court found that
removal of the conveyor system at issue would damage the building and destroy the
essential character of the conveyor system. Process Systems, Inc., supra. Accordingly,
the conveyer system was held to be an improvement to real property. Id.
The ruling request does not set forth the facts with respect to any individual installation
of the property in question. Therefore, the Department is not in a position to rule on this
question based on the facts as supplied. 3
4.

Service calls made in connection with the repair of real property are not subject to
tax, but service calls where repair of tangible personal property is performed or
contemplated are subject to tax.

3

The Department could possibly issue a ruling on detailed facts concerning a specific item of property that
is installed, i.e., “The taxpayer will install a [item] at the property of John Doe located at 123 Main Street,
Anytown, Tennessee. The item is attached by means of [description]. John Doe owns the property which
is his personal residence.”

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The repair of tangible personal property is a taxable service pursuant to Tenn. Code Ann.
§ 67-6-102(a)(32)(F)(iv). However, repair to real property is not among the taxable
services listed in Tenn. Code Ann. § 67-6-102(a)(32)(F). A service is taxable only if: (1)
it is included in the statute listing the taxable services Ryder Truck Rental, Inc. v.
Huddleston, 1994 Tenn. App. LEXIS 444, or (2) if it is performed as part of the sale of
tangible personal property. Tenn. Code Ann. § 67-6-102(a)(32).
TENN. COMP. R. & REGS.1320-5-1.54 provides guidance on repair services, stating in
pertinent part:
(1) All charges for repair services and repairs of any kind of
tangible personal property, such as automobiles, clothing, watches
and jewelry, office equipment, machinery, tires, etc., including all
parts and/or labor, are subject to the Sales Tax. This includes
occasions when there may be no new parts involved in the
transaction, and occasions when a customer may furnish any or
all of the parts necessary for the repair work. Any factor entering
into the consideration charged for repair services and repairs such
as "service call," minimum charge, hourly or flat rates, mileage,
etc., shall be subject to the Sales Tax.
(2) For the purposes of this rule, "repair services" and “repairs"
of tangible personal property shall mean and include any one or all
of the following for a user and consumer; … "service calls"
where any repair work is done or contemplated; … Repair
services and repairs of tangible personal property shall not include
any maintenance or other work on … fixtures attached to and
a part of any real property; … service calls where no repair is
contemplated; . . . In the event any services and repairs are not
taxable, the charges therefor must be billed separately to the
customer and indicated as such on the books and records of the
dealer.
(Emphasis supplied.) From the foregoing, it is clear that a service call for the purpose of
making a repair to tangible personal property is subject to tax. Likewise, it is clear that a
service call involving real property, or a service call where no repair is done or
contemplated, is not subject to tax. The charges for such nontaxable services and repairs,
however, must be billed separately to the customer and reported separately on the
taxpayer’s books.
5.

It would appear that title or possession would not have passed before July 15,
2002 on those contracts described as “uncompleted,” therefore, a sale would not
have occurred and the state tax rate of seven percent (7%) would apply.

Effective July 15, 2002, the general state sales tax rate was raised from six percent (6%)
to seven percent (7%). At the same time, a state tax at the rate of an additional two and

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three-quarters percent (2.75%) was enacted applicable to the portion of the sale price of a
single article falling between $1,600.01 and $3,200.00. Ch. 856, Pub. Acts 2002,
codified at Tenn. Code Ann. § 67-6-202.
Ch. 856 of the Public Acts of 2002 also contained provisions for relief of taxpayers who
had entered into fixed price or lump sum contracts for the improvement of real property
on or before the effective date of July 15, 2002. However, as explained above, the
taxpayer incurs no tax liability on contracts involving items that become part of the
realty.
With respect to contracts involving items that remain tangible personal property upon
installation, Ch. 856 of the Public Acts of 2002 contains no provision for relief. Dealers
must collect sales tax on retail sales “at the rate provided by law of the retail sales price,
as of the moment of sale[.]” Tenn. Code Ann. § 67-6-501(c) (emphasis added).
A “sale” of tangible personal property is defined by statute as “any transfer of title or
possession, or both[.]” Tenn. Code Ann. § 67-6-102(a)(34)(A). Therefore, the rate in
effect when either title or possession passes to the customer is the proper rate. For a
contract for sale of tangible personal property not completed prior to the date of the tax
rate increase, the higher rate, as well as the additional tax on a single article, applies.
Accord, Atty. Gen. Op. 02-087, August 20, 2002.

6. Refunds are governed by Tenn. Code Ann. § 67-1-1802.
   In the event the taxpayer has remitted tax paid to the Department in error, refunds are
   controlled by Tenn. Code Ann. § 67-1-1802 which reads in part:
   (a) (1) The commissioner of revenue, with the approval of the
   attorney general and reporter, …. is empowered and directed to
   refund to taxpayers all taxes collected or administered by the
   commissioner that are, on the date of payment, paid in error or paid
   against any statute, rule, regulation or clause of the constitution of
   this state or of the United States. …. The authority granted in this
   subdivision (a)(1) extends only to taxes for which a claim is filed,
   with the commissioner under oath and supported by proper proof,
   within three (3) years from December 31 of the year in which the
   payment was made. …. Sales or use taxes which were collected
   from or passed on to customers by the taxpayer shall not be
   refunded unless the taxpayer has refunded or credited the sales or
   use tax to its customers.
   If the taxpayer has remitted tax in error, it must file a refund claim with the Department,
   under oath and supported by proper proof, no later than December 31 of the third
   calendar year following the year in which the tax was paid. If the refund is for tax that
   has been collected from customers, the “proper proof” must include evidence that the tax
   has been refunded or credited to the customers.

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Karla R. Hyatt
Senior Tax Counsel

APPROVED: Loren L. Chumley
Commissioner

DATE: 6/20/06

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