If a Tennessee municipality hires a construction management firm on an AIA B801 agency-CM contract, does that contract cause the municipality's own construction purchases to become taxable, or do they stay exempt as government purchases?

Plain-English summary

A Tennessee construction management firm offers AIA B801 "agency CM" contracts to municipalities for their construction projects. Under this contract type, the firm consults on the project -- helping bid work to contractors, issuing purchase orders to vendors on the municipality's behalf, matching invoices, cutting the municipality's checks (using the municipality's own blank check stock) to pay vendors, and helping with payroll paperwork for the municipality's own construction employees. Critically, the firm never buys materials itself, never installs anything, doesn't act as a general contractor, isn't financially responsible for the project (no performance bond), and doesn't control how the trade contractors do their work -- the municipality's own trade contractors and the municipality itself remain the real parties to each purchase.

The firm asked whether hiring it under this kind of contract causes the municipality's construction purchases to lose their normal sales-tax-exempt status. The Department said no. Tennessee exempts "all sales made to the state or any county or municipality within the state" under Tenn. Code Ann. § 67-6-329(a)(4). That exemption belongs to the municipality as the actual purchaser -- and under an AIA B801 agency-CM arrangement, the municipality is still the one acquiring the materials; the construction manager is just administratively processing purchase orders and payments as an agent, not buying or reselling anything itself. So the exemption follows the municipality regardless of the AIA Contract.

The Department also noted (though it wasn't the question asked) that the construction manager's own consulting and payroll-processing fees aren't separately taxable either, since they're not on Tennessee's list of specifically taxable services and aren't bundled into the sale of a taxable good.

What this means for you

Construction management firms working with Tennessee governments

An "agency" construction-management role -- where you administer purchase orders and payments but never take title to materials, never install anything, and aren't financially on the hook for the project -- does not convert your government client's tax-exempt purchases into taxable ones. That result depends on staying purely administrative: no purchasing/reselling materials, no installation, no general-contractor-style control or bonding.

Municipalities and other Tennessee governmental purchasers

Hiring a construction manager under an agency-style contract like AIA B801 doesn't put your sales-tax exemption for construction purchases at risk, as long as the construction manager isn't actually the one buying or reselling the materials.

Accountants and tax professionals

Note the ruling carefully distinguishes an "agency" CM contract (this ruling) from an "at-risk" CM contract, where the firm's employees perform some of the work and the firm itself purchases materials -- the firm's footnote makes clear the at-risk arrangement was NOT addressed here and would likely be analyzed differently (the firm would then look more like a contractor owing contractor's use tax under Tenn. Code Ann. § 67-6-209(b)).

Common questions

Q: Does hiring a construction manager make a municipality's building-material purchases taxable?
A: Not under an AIA B801-style agency contract like the one in this ruling, where the construction manager only administers purchase orders/payments and never buys, sells, installs, or takes financial responsibility for materials. The municipality's exemption under Tenn. Code Ann. § 67-6-329(a)(4) still applies.

Q: Are the construction manager's own consulting and payroll-processing fees taxable?
A: The ruling notes (though not the core question) that these services aren't separately taxable, because they aren't specifically enumerated taxable services under Tennessee's Retailers' Sales Tax Act and aren't bundled into a taxable good or service sale.

Q: Would the answer be different for an "at-risk" construction management contract?
A: The ruling expressly did not address at-risk contracts, where the firm's own employees may perform work and the firm itself purchases materials -- that arrangement would need separate analysis and could trigger contractor's use tax.

Q: Can another construction firm or municipality rely on this ruling?
A: No. A Tennessee letter ruling binds the Department only as to the specific taxpayer and facts it was issued to, and it can be revoked or modified by the Commissioner. Confirm your own contract terms with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.):

• § 67-6-329(a)(4) (Supp. 2010) (sales tax exemption for all sales made to the state or any county or municipality)
• § 67-6-101 et seq. (Retailers' Sales Tax Act)
• § 67-6-102(79), § 67-6-102(81)(A) & (D), § 67-6-102(92)(A) (Supp. 2010) (definitions of "retail sale," "sale," "tangible personal property")
• § 67-6-102(82)(A) (definition of "sales price")
• § 67-6-209(b) (Supp. 2010) (contractor's use tax -- discussed and found not applicable, since the firm did not act as a contractor here)
• § 67-6-102(25)(K) (definition of "dealer" for contractor's-use-tax purposes)

Other sources cited by the ruling:

• Ryder Truck Rental, Inc. v. Huddleston, 1994 WL 420911 (Tenn. Ct. App. 1994) (sales tax on services applies only to specifically enumerated services)

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/11-28.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 11-28
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 the Tennessee sales and use tax to municipalities contracting with a construction
manager.
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 the taxpayer’s detriment.

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FACTS
[TAXPAYER] is a construction management firm located in [CITY], Tennessee. The Taxpayer
offers AIA B801 CMa contracts (hereinafter the “AIA Contracts”)1 to local governments in
Tennessee such as municipalities, who utilize the Taxpayer’s construction management services
for construction projects.
Under the AIA Contract, the Taxpayer consults with the municipality on aspects of its
construction project such as the hiring of construction employees, bidding the project out to
multiple prime contractors, issuing contracts and purchase orders to the contractors,
troubleshooting any problems that may arise, meeting with the architect and municipality to
advise as to cost-saving measures, and helping the municipality complete close-out documents.
Within this process, the Taxpayer also issues purchase orders on behalf of the municipality to the
municipality’s vendors for materials. The municipality provides the purchase orders in electronic
format and the Taxpayer prints the purchase orders using the Taxpayer’s computers and printers.
The municipality mails the invoices it receives from its vendors to the Taxpayer, who then
matches the invoice to the purchase order. Finally, the Taxpayer processes the municipality’s
payments to those vendors by printing checks using blank checks provided by the municipality.
The Taxpayer sends the purchase order, the original invoice, and the check to the municipality so
the checks can be signed and sent to the vendors.
The Taxpayer does not function as a general contractor in the construction project, makes no
sales of tangible personal property to the municipality, and does not install or otherwise handle
tangible personal property that is used in the construction project.
Under the AIA Contract, the Taxpayer also provides payroll functions to the municipality. The
Taxpayer processes the municipality’s construction employees’ payroll with municipality
provided checks. These payroll checks, along with the associated timesheets and reports, are
forwarded to the municipality for signatures and distribution.
The Taxpayer does not place its employees on the municipality’s payroll, and does not provide
its own employees. The Taxpayer merely assists the municipality in locating, screening, and
hiring their own construction personnel. The municipality, with the Taxpayer’s consultation,
hires its own employees to complete the project under the municipality’s existing employee
policies. In addition, the Taxpayer does not control the details of the municipal construction
project. The AIA Contract provides in pertinent part:
With respect to each Contractor’s own work, the Construction Manager
shall not have control over or charge of and shall not be responsible for
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The “AIA B801 contract” is the standard name for this type of contract, which is used in the construction
management industry. The Taxpayer also offers “at-risk” contracts, in which the Taxpayer acts much like a general
contractor. Under the at-risk contract, the Taxpayer’s employees perform some of the work in the construction
project; in addition, the Taxpayer purchases materials for use in the construction project. The Taxpayer does not
enter into both an AIA Contract and an At-Risk Contract to a municipality with respect to the same project. Rather,
the Taxpayer and the municipality will enter into either one contract or the other. Note that the Taxpayer’s at-risk
contracts are not at issue in this letter ruling.

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construction means, methods, techniques, sequences or procedures, or for
safety precautions and programs in connection with the Work of each of
the Contractors, since these are solely the Contractor’s responsibility
under the Contract for Construction. The Construction Manager shall not
be responsible for a Contractor’s failure to carry out the Work in
accordance with the respective Contract Documents. The Construction
Manager shall not have control over or charge of acts or omissions of the
Contractors, Subcontractors, or their agents or employees, or any other
persons performing portions of the Work not directly employed by the
Construction Manager.
The Taxpayer does not provide the municipality with a performance bond, or become financially
responsible for the quality or completion of time of the project. Rather, each trade contractor
contracts directly with the municipality and provides a performance bond for their own scope of
work. In addition, the Taxpayer does not provide any equipment or tools to the municipality for
use in the construction project. Each trade contractor provides their own equipment and tools. In
the event that the municipality completes the construction project, the municipality either buys or
rents its own equipment and tools. The Taxpayer is paid a lump-sum fee for its services under the
AIA Contract.
The Taxpayer has requested clarification on the issue of whether its AIA Contract would render
the municipality’s purchases taxable in order to provide potential clients with a correct
understanding of the application of the Tennessee sales and use tax.
QUESTIONS

1. Are the municipality’s construction-related purchases exempt from the Tennessee sales and
   use tax?
2. Does the fact that the municipality enters into the AIA Contract cause those purchases to
   become subject to the Tennessee sales and use tax?
   RULINGS
3. Yes. A Tennessee municipality’s construction-related purchases are exempt for purposes of
   the Tennessee sales and use tax.
4. No. The fact that a Tennessee municipality enters into an AIA Contract does not cause
   purchases made by the municipality to become subject to the Tennessee sales and use tax.
   ANALYSIS
   Under the Retailers’ Sales Tax Act, TENN. CODE ANN. § 67-6-101 et seq., retail sales of tangible
   personal property and certain enumerated services in Tennessee are subject to the sales and use

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tax, unless an exemption from taxation applies.2
1.

Purchases by a Municipality

A Tennessee municipality’s construction-related purchases are exempt for purposes of the
Tennessee sales and use tax.
As noted above, under the Retailers’ Sales Tax Act, retail sales of tangible personal property and
certain enumerated services in Tennessee are subject to taxation, unless an exemption applies. In
particular, TENN. CODE ANN. § 67-6-329(a)(4) (Supp. 2010) exempts “[a]ll sales made to the
state or any county or municipality within the state.”
Therefore, purchases made by a municipality within the state of Tennessee are not subject to the
Tennessee sales and use tax. This exemption extends to the purchase of materials by the
municipality for its construction project.
2.

AIA Contract

The fact that a Tennessee municipality enters into an AIA Contract with the Taxpayer for
construction management services does not cause purchases made by the municipality to become
subject to the Tennessee sales and use tax.
Under TENN. CODE ANN. § 67-6-329(a)(4), sales made to the state, or any county or municipality
within the state, are exempt from the Tennessee sales and use tax. Thus, if the state of Tennessee,
or any county or municipality within the state of Tennessee, purchases materials for use in
construction projects, the purchases will be exempt from the Tennessee sales and use tax. The
municipality’s eligibility to claim the exemption under TENN. CODE ANN. § 67-6-329(a)(4) with
respect to its own purchases remains unchanged regardless of its contractual relationship with the
Taxpayer.
The facts indicate that when the Taxpayer is operating under an AIA Contract with a
municipality, the municipality itself acquires the materials for use in its construction project.
Importantly, the Taxpayer does not purchase any materials, install any materials, or provide any
of its own employees to the municipality. Rather, the Taxpayer merely processes purchase orders
and payments for the municipality as part of its management services. Specifically, the Taxpayer
issues purchase orders on behalf of the municipality to the municipality’s vendors for materials.
The municipality provides the purchase orders in electronic format and the Taxpayer prints the
purchase orders using the Taxpayer’s computers and printers. The municipality mails the
invoices it receives from its vendors to the Taxpayer, who then matches the invoice to the
purchase order. The Taxpayer processes the municipality’s payments to those vendors by
printing checks using blank checks provided by the municipality. The Taxpayer sends the
2

TENN. CODE ANN. § 67-6-102(79) (Supp. 2010) defines a “retail sale” as a “sale, lease, or rental for any purpose
other than for resale, sublease, or subrent.” A “sale” is defined in pertinent 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,” and includes “the furnishing of any of the things or
services taxable” under the Tennessee sales and use tax laws. TENN. CODE ANN. § 67-6-102(81)(A)&(D). TENN.
CODE ANN. § 67-6-102(92)(A) defines the term “tangible personal property” in relevant part as “personal property
that can be seen, weighed, measured, felt, or touched, or that is in any other manner perceptible to the senses.”

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purchase order, the original invoice, and the check to the municipality so the checks can be
signed and sent to the vendors. These services are simply part of the Taxpayer’s management
service offered under the AIA Contract.
In addition, the Taxpayer does not act as a general contractor when operating under the AIA
Contract. The Taxpayer does not place its employees on the municipality’s payroll, and does not
provide its own employees to the municipality to perform the work in the construction project.
The Taxpayer does not become financially responsible for the completion of the municipal
construction project or provide a performance bond. Finally, the Taxpayer does not control the
details of the municipal construction project when operating under the AIA Contract. The AIA
Contract specifically provides, “[w]ith respect to each Contractor’s own work, the Construction
Manager shall not have control over or charge of and shall not be responsible for construction
means, methods, techniques, sequences or procedures, or for safety precautions and programs in
connection with the Work of each of the Contractors, since these are solely the Contractor’s
responsibility under the Contract for Construction.” Therefore, the AIA Contract does not cause
the municipality’s purchases to become taxable.
Although not at issue in this letter ruling, note that the Taxpayer’s services under the AIA
Contract are not subject to Tennessee sales and use tax. The Retailers’ Sales Tax Act also
imposes the sales tax on certain services. The sales tax does not apply to all services; rather, it
only applies to retail sales of those services specifically enumerated by the statute. Ryder Truck
Rental, Inc. v. Huddleston, 1994 WL 420911 (Tenn. Ct. App. 1994). Additionally, even if a
service is not specifically enumerated by the statute, the service may be subject to the sales tax
where charges for the service are included in the sales price of a taxable good or service. See
TENN. CODE ANN. § 67-6-102(82)(A) (defining the term “sales price”). In this case, the
Taxpayer’s consulting and payroll services are not specifically enumerated under the Retailers’
Sales Tax Act and are not sold in conjunction with taxable goods or services, and are thus not
subject to the Tennessee sales and use tax.
Note as well that contractors are generally liable for the “contractor’s use tax” when the
contractor uses tangible personal property in the performance of the contract. Specifically, TENN.
CODE ANN. § 67-6-209(b) (Supp. 2010) provides that where a contractor or subcontractor
defined as a “dealer”3 uses tangible personal property in the performance of the contract, or to
fulfill contract or subcontract obligations, “such contractor or subcontractor shall pay a tax at the
rate prescribed by § 67-6-203 measured by the purchase price of such property.” However, in
this case, the Taxpayer is not acting as a contractor; the contractor’s use tax under TENN. CODE
ANN. § 67-6-209(b) therefore does not apply.

3

TENN. CODE ANN. § 67-6-102(25)(K) defines a “dealer” in pertinent part as one who uses “tangible personal
property, whether the title to such property is in such person or some other entity, and whether or not such other
entity is required to pay a sales or use tax, in the performance of such person's contract or to fulfill such person's
contract obligations, unless such property has previously been subjected to a sales or use tax, and the tax due thereon
has been paid.”

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Kristin Husat
Senior Tax Counsel
APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:
06/20/2011

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