Is the sale of customized shop drawings used by contractors to fabricate items taxable in Tennessee, and does it matter whether they're delivered as a printed booklet versus purely electronically?

Plain-English summary

The Taxpayer creates and sells customized, detailed shop drawings for a particular type of fabricated item, used by general contractors and subcontractors to build the actual item on a project. The Taxpayer's owner isn't an architect, engineer, landscape architect, or interior designer. A contractor sends project plans, and the Taxpayer produces a shop drawing — specific to that item, unusable for anything else — detailing dimensions and locations, currently delivered in a printed booklet but soon also available electronically.

The Department's answer turns entirely on the medium of delivery.

Delivered in tangible form (booklet, etc.): taxable. Tennessee sales tax reaches the "transfer of title or possession... of tangible personal property for a consideration." The legal question was whether the shop drawings are themselves the taxable thing being sold, or whether they're merely an "incidental" tangible wrapper around an intangible design service. The Department applied the Tennessee Supreme Court's Thomas Nelson, Inc. v. Olsen test: tangible media that are a "crucial element" of the transaction (like film reels carrying a movie in Crescent Amusement Co. v. Carson) are taxable, while tangible media that are merely "incidental" to genuinely intangible value (like software on now-obsolete magnetic tapes in Commerce Union Bank v. Tidwell, where the value survived even after the tape was destroyed) are not. Here, the shop drawings are crucial — if destroyed, the design "physically vanishes," and the contractor's customers literally need the drawings to build the item; unlike downloaded software, nothing survives independently once the tangible copy is gone. The drawings also don't qualify for the § 67-6-354 architect/engineer prototype-sketch exemption, because the Taxpayer isn't an architect/engineer/landscape-architect/interior-designer and its drawings are used to build the FINAL item, not a prototype. The full fee — including the underlying design-service charge — is taxable as part of the sales price, since design services aren't separately enumerated as taxable but ride along once bundled with a taxable tangible-property sale.

Delivered solely electronically: not taxable. No transfer of tangible personal property occurs in a purely electronic transmission. Tennessee does tax "specified digital products" (§ 67-6-233) — but that category is narrowly defined to cover only digital audio-visual works, digital audio works, and digital books (§ 67-6-102(89)). Shop drawings fall outside that list entirely, so an all-electronic sale isn't taxed under either the tangible-property rule or the digital-products rule. The catch: if the Taxpayer ever transfers even a single tangible copy to a customer — even alongside an electronic copy — the transaction becomes taxable, regardless of the electronic delivery.

What this means for you

Design, drafting, engineering, or technical-drawing businesses

Whether your output is taxable in Tennessee may hinge entirely on delivery format: tangible copies (paper, USB drive, etc.) of crucial, non-incidental work product are taxable as TPP sales (with the design fee folded in); purely electronic delivery of the same content can escape sales tax entirely, unless what you're delivering happens to be specifically an audio-visual work, audio work, or digital book under the specified-digital-products statute.

Businesses transitioning from physical to electronic delivery

Going all-electronic can be a genuine tax-reduction lever for content that doesn't fit the narrow specified-digital-products categories — but watch for inadvertent tangible transfers (a printed backup copy, a customer request for hard copy) that would pull the whole transaction back into taxable territory.

Accountants and tax professionals

This is a clean application of the Thomas Nelson/Crescent Amusement/Commerce Union "crucial vs. incidental" tangible-media line for design/creative work product, distinguishable from the later 2009 advertising-materials statute (§ 67-6-312, see LR 12-33) which specifically displaced that case line for preliminary/final artwork in the advertising-agency context — this ruling shows the older Thomas Nelson framework still governs design/drawing work OUTSIDE that 2009 carve-out.

Common questions

Q: If I deliver the same work product as both a printed copy and a digital file, is only the digital portion taxable?
A: No — providing any tangible copy at all makes the entire transaction taxable, regardless of whether an electronic copy is also provided.

Q: Does electronic delivery of any creative or technical work automatically avoid Tennessee sales tax?
A: Not automatically — it avoids the tangible-personal-property sale rule, but you'd still need to check whether your content falls within the narrow "specified digital products" category (digital audio-visual works, audio works, or digital books).

Q: Why were the shop drawings taxed like the design models in Thomas Nelson rather than like the software in Commerce Union Bank?
A: Because the drawings are immediately usable and crucial to the underlying purpose (building the item) — destroy the drawing and the design value vanishes — unlike software that, once downloaded, retains its value independent of the original tangible storage medium.

Q: Can another design or drafting business rely on this letter ruling for its own delivery practices?
A: No. A Tennessee letter ruling binds the Department only as to the specific taxpayer and facts it was issued to. This summary is informational only, not legal or tax advice.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-6-102(81)(A) (Supp. 2010) (definition of "sale")
• § 67-6-102(92)(A) (definition of "tangible personal property")
• § 67-6-205 (Supp. 2010) (enumerated taxable services -- design services not included)
• § 67-6-102(82)(A) (definition of "sales price," no deduction for service costs)
• § 67-6-233 (Supp. 2010) (tax on "specified digital products")
• § 67-6-102(89) (definition of "specified digital products")
• § 67-6-354 (2006) (architect/engineer/landscape-architect/interior-designer prototype concept-sketch exemption -- inapplicable here)
• § 67-6-101 et seq. (Retailers' Sales Tax Act)

Case law:

• Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621, 623-24 (Tenn. 1987) (tangible media that is a "crucial element" of a transaction is taxable, not merely incidental)
• Crescent Amusement Co. v. Carson, 213 S.W.2d 27, 28-29 (Tenn. 1948) (film reel rental taxable as TPP)
• Commerce Union Bank v. Tidwell, 538 S.W.2d 405, 408 (Tenn. 1976) (software on magnetic tape/punch cards not taxable -- tangible medium merely incidental, since value survives once downloaded)
• Rivergate Toyota, Inc. v. Huddleston, 1998 WL 83720 (Tenn. Ct. App. Feb. 27, 1998) (entire cost of transaction, including labor/services, taxable when bundled with TPP)

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/11-15.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 11-15
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
The application of the Tennessee sales and use tax to the sale of shop drawings for [TYPE OF
ITEM].
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 Tennessee [TYPE OF ENTITY] that is in the business of creating and selling
customized detailed shop drawings for [TYPE OF ITEM] to customers in Tennessee as well as
in other states. The Taxpayer’s [OWNER(S)] is not an architect, engineer, landscape architect,
or interior designer. [TYPE OF ITEMS] are typically found in [REDACTED].
A general contractor or concrete subcontractor, when awarded a project, sends the Taxpayer the
[TYPE OF] plans for the project. The Taxpayer then produces a shop drawing of each individual

[ITEM]. The shop drawing details the width and height of each individual [ITEM] and shows
the location of all [ITEMS]. The shop drawings are specific to each [ITEM] for which the
Taxpayer has been provided plans, and cannot be used for other [ITEMS]. The shop drawings
are then transferred to the customer in the form of a booklet. However, the Taxpayer has
indicated that it currently is implementing a system that will enable it to transfer the shop
drawings electronically. It plans to utilize this system in the near future in at least some
instances.
QUESTION
Is the sale of the shop drawings provided by the Taxpayer subject to the Tennessee sales and use
tax?
RULING
Yes. The sale of the Taxpayer’s shop drawings is subject to the Tennessee sales and use tax if the
shop drawings are transferred to the customer via a tangible medium. However, if the shop
drawings are transferred solely in electronic form, then the sale is not subject to the Tennessee
sales and use tax.
ANALYSIS
Retail sales of tangible personal property and specifically enumerated services in Tennessee are
subject to sales and use tax under TENN. CODE ANN. § 67-6-101 et seq., unless specifically
exempted from taxation. TENN. CODE ANN. § 67-6-102(79) (Supp. 2010) defines a “retail sale”
as any “sale, lease or rental for any purpose other than for resale, sublease or subrent.” The term
“sale” is defined under the Tennessee sales and use tax laws in part as “any transfer of title or
possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or
by any means whatsoever of tangible personal property for a consideration.”1 TENN. CODE ANN.
§ 67-6-102(81)(A).
The Tennessee sales and use tax applies to the entire fee for design services if the shop drawings
are transferred to the customer via a tangible medium (e.g., in a booklet). If the shop drawings
are transferred to the customer solely via electronic means, however, the fee for design services
is not subject to the Tennessee sales and use tax.
Application of the Tennessee sales and use tax if the shop drawings are transferred via a
tangible medium
When the Taxpayer transfers shop drawings to a customer in the form of a booklet, or via any
other tangible medium, the sale of the shop drawings is subject to the Tennessee sales and use
tax.
As noted above, the retail sale of tangible personal property and specifically enumerated services
in Tennessee is subject to the Tennessee sales and use tax. TENN. CODE ANN. § 67-6-102(81)(A)
defines a “sale” in part as “any transfer of title or possession, or both, exchange, barter, lease or
1

TENN. CODE ANN. § 67-6-102(92)(A) defines “tangible personal property” as “personal property that can be seen,
weighed, measured, felt, or touched.”

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rental, conditional or otherwise, in any manner or by any means whatsoever of tangible personal
property for a consideration.” (Emphasis added.) The sale of intangible intellectual property, on
the other hand, is not subject to the Tennessee sales and use tax.2
The requirement that there be consideration is clearly met in the Taxpayer’s case, because the
Taxpayer transfers ownership and possession of the shop drawings to its customers for a fee.
Thus, if the transaction is characterized as a sale of tangible personal property under the
Tennessee sales and use tax laws, then the transfer of the shop drawings will be subject to the
sales and use tax. However, if the transaction is characterized under the Tennessee sales and use
tax laws as a sale of a service or a sale of intangible intellectual property, to which the
Taxpayer’s shop drawings are merely incidental, then the transfer will not be subject to the sales
and use tax. The issue then is whether the transaction in question constitutes a sale of tangible
personal property or whether it constitutes a sale of services or intangible intellectual property to
which the shop drawings are merely incidental.
The Tennessee Supreme Court addressed this issue in Thomas Nelson, Inc. v. Olsen, 723 S.W.2d
621 (Tenn. 1987). In that case, the taxpayer commissioned an advertising firm for the creation
and development of design ideas for the marketing of the taxpayer’s publications. As part of the
design ideas, the firm created advertising design models of promotional material, which it
transferred to the taxpayer in tangible form. The state maintained that the transaction was
taxable because a transfer of tangible personal property had occurred. The taxpayer argued that
the models were incidental to the creative services that it received and therefore were nontaxable.
Id at 623. The court rejected the taxpayer’s argument and held that the advertising design
models were not merely incidental to the services provided, but rather were a “crucial element”
of the transaction. Id. at 624. Thus, the court found that the models were subject to the
Tennessee sales and use tax.
The Tennessee Supreme Court emphasized the necessity of the models in conveying the design
ideas, observing that if a model was destroyed, “the commissioned idea literally physically
vanished.” Id. The court compared the design models to film reels in Crescent Amusement Co.
v. Carson, 213 S.W.2d 27 (Tenn. 1948). In that case, the Tennessee Supreme Court held that the
rental of a motion picture contained on a film reel was the rental of tangible personal property
and subject to the Tennessee sales and use tax. Id. at 29. The court stated that the intangible
license to the motion picture separate and apart from the tangible film reel was without value
because the taxpayer would have been unable to exhibit the movie without the film reel. Id. at
28.
However, the Thomas Nelson court distinguished the design models from magnetic tapes and
punch cards containing software in Commerce Union Bank v. Tidwell, 538 S.W.2d 405 (Tenn.
1976). In Commerce Union, the Tennessee Supreme Court found that the sale of software
contained on magnetic tapes and punch cards did not constitute a sale of tangible personal
property.3 The court stated that although the software was contained on tangible magnetic tapes
and punch cards, such tangible transfer media were “merely incidental” to the sale of intangible
2

As noted, specifically enumerated services are also subject to Tennessee sales and use tax under TENN. CODE ANN.
§ 67-6-205 (Supp. 2010). However, design services such as those offered by the Taxpayer are not one of the
enumerated services.
3

The Tennessee legislature has since amended the definition of “tangible personal property” to include prewritten
computer software. See TENN. CODE ANN. § 67-6-102(92)(A).

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property. Id. at 408. Unlike the motion picture in Crescent Amusement and the design ideas in
Thomas Nelson, neither of which could be utilized apart from the tangible media in which they
were embodied, the software, once downloaded onto a computer, retained its value even when
the magnetic tapes and punch cards were destroyed. Id. The court elaborated on this idea by
pointing out that the software as contained on the tapes and punch cards was actually not ready
to be used until it was downloaded onto a computer, and that the tapes and punch cards were
therefore valueless once the software was downloaded. Id.
Much like the design models in Thomas Nelson and the film reels in Crescent Amusement, the
Taxpayer’s shop drawings are a crucial element of the transaction, rather than merely incidental
to the design process. The Taxpayer’s customers need the drawings in order to build the [TYPE
OF ITEM]. Like the design models, if the shop drawings were destroyed, the Taxpayer’s ideas
would “physically vanish;” the design ideas cannot exist independently of the shop drawings. In
fact, without the transfer of the shop drawings, the Taxpayer’s services would be useless.
Furthermore, unlike the software in Commerce Union, the shop drawings are ready to be used
upon transfer to the customer and need no further processing.
In fact, the Taxpayer, in creating its shop drawings, is using [TYPE OF] plans that have been
previously created by an architect or other licensed professional. In other words, the Taxpayer is
basically producing a tangible product based on an intangible concept created by someone else;
no new intangible intellectual property is being created.
Therefore, the transfer of the Taxpayer’s shop drawings in the form of a booklet or other tangible
medium constitutes a transfer of tangible personal property, rather than a transfer of intangible
intellectual property, for the purposes of the Tennessee sales and use tax.4
The sales price of the shop drawings equals the fee charged for the entire project, including any
charges for design services. Design services such as those offered by the Taxpayer are not a
specifically enumerated service listed under TENN. CODE ANN. § 67-6-205 (Supp. 2010), and
thus are not subject to sales and use taxation. However, when a sale of tangible personal
property takes place in conjunction with the provision of services, the sales price of the tangible
personal property includes any charges for related services. The definition of “sales price” under
TENN. CODE ANN. § 67-6-102(82)(A) “applies to the measure subject to sales tax” and is defined
in pertinent part as “the total amount of consideration … for which personal property” is sold.
(Emphasis added.) No deduction is permitted for the seller’s cost of the property sold, labor
costs, charges for services necessary to complete the sale, delivery charges, and so on. Id. Thus,
charges for design services that lead to the development and creation of tangible personal
property for retail sale to a customer are taxable as part of the sale of tangible personal property
and cannot be separated out from the charges for the tangible personal property. See Rivergate
Toyota, Inc. v. Huddleston, No. 01A01-9602-CH-00053, 1998 WL 83720 (Tenn. Ct. App.
4

Note that the Taxpayer’s shop drawings are not exempt from the Tennessee sales and use tax under TENN. CODE
ANN. § 67-6-354 (2006), which provides an exemption from the Tennessee sales and use tax for “any concept
sketch, drawing, or model by an architect, engineer, landscape architect or interior designer that is used in the
development of a prototype for manufacture or production.” (Emphasis added.) First, the exemption applies only to
drawings used to develop prototypes, and not to drawings used in producing the final, completed building. The
Taxpayer’s drawings are used to manufacture the actual [TYPE OF ITEM] themselves, not prototypes of the [TYPE
OF ITEMS]. Second, the Taxpayer is not an architect, engineer, landscape architect, or interior designer, as required
by the exemption. Therefore, the Taxpayer’s shop drawings are not exempt from sales and use taxation under TENN.
CODE ANN. § 67-6-354.

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February 27, 1998) (holding that the taxpayer was liable for use tax on the “entire cost of the
transaction,” which included costs allocable to labor, services, and other expenses). Therefore,
the sales price of the shop drawings equals the fee charged for the entire project, including any
charges for design services.
Accordingly, when the Taxpayer transfers shop drawings to a customer in the form of a booklet,
or via any other tangible medium, the sale of the shop drawings is subject to the Tennessee sales
and use tax.
Application of the Tennessee sales and use tax if the shop drawings are transferred solely via
electronic means
When the Taxpayer transfers shop drawings to a customer solely via electronic means, the sale of
the shop drawings is not subject to the Tennessee sales and use tax.
As noted above, the Tennessee sales and use tax is imposed on the retail sale of tangible personal
property in Tennessee. TENN. CODE ANN. § 67-6-102(81)(A) defines the term “sale” in part as
“any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or
otherwise, in any manner or by any means whatsoever of tangible personal property for a
consideration.” (Emphasis added.) In the case of the electronic transmission of the shop
drawings, no transfer of tangible personal property occurs between the Taxpayer and its
customer.
However, certain electronically transferred products are subject to the sales and use tax. TENN.
CODE ANN. § 67-6-233 (Supp. 2010) imposes a tax on the sale, lease, license, or use of
“specified digital products.” “Specified digital products” are defined to mean “electronically
transferred digital audio-visual works, digital audio works, and digital books.” TENN. CODE ANN.
§ 67-6-102(89). Electronically transferred shop drawings do not come within the scope of this
definition and are therefore not considered specified digital products that are subject to taxation.
Accordingly, no sale of tangible personal property takes place for purposes of the Tennessee
sales and use tax when the Taxpayer transfers shop drawings to the customer solely in electronic
form. Note, however, that the transaction is subject to the Tennessee sales and use tax if at any
time possession of the shop drawings is transferred by the Taxpayer to its customer in tangible
form, regardless of whether the customer also receives the shop drawings via electronic means.

Elizabeth Henderson
Tax Counsel

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

June 6, 2011

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