A Tennessee manufacturer buys design software with a bundled maintenance plan, plus a long list of welding gases, gear, and shop supplies -- which of these qualify for the sales tax industrial machinery or industrial materials exemptions?

Plain-English summary

A manufacturer registered for Tennessee sales tax bought two very different kinds of things and asked the Department to sort out which qualify for Tennessee's industrial machinery exemption (Tenn. Code Ann. § 67-6-206(a)) or industrial materials exemption (§ 67-6-329(a)(12)):

1. Design software, bundled with a maintenance contract. Engineers use the software to design the parts the company manufactures, before those parts are ever fabricated. The Department ruled this is fully taxable -- both the software and its bundled maintenance/support/upgrades. The reason is a specific limit built into the "industrial machinery" definition: equipment used before raw materials are transported into the manufacturing process doesn't count, no matter how important it is to the business. Since the design software is used at the design stage -- before the manufacturing process itself begins -- it fails the "necessary to and primarily for fabrication" test, even though the Department agreed it's "clearly an important step" in the company's business.

2. A long list of welding supplies, parts, and equipment. Item by item, the Department found:

• Exempt as industrial machinery (necessary to, and primarily for, fabrication, or an "associated part, appurtenance, or accessory" of exempt machinery): gas cylinders, gas-transfer hoses, repair labor/parts/materials for the production welder, grinding discs, welding equipment itself, and the casters on product-transfer carts.
• Exempt as industrial materials (become a component of the finished product, or are consumed within 25 days in direct contact with it): welding wire that becomes part of the product, and aerosol prep spray consumed within 25 days.
• Reduced-rate, not fully exempt: welding gases. Gases sold to a manufacturer get a reduced 1.5% rate automatically; full exemption requires a separate showing (and exemption certificate) that the gas is used exclusively in the process, contacts the product directly, and is consumed in that contact.
• Taxable (with narrow exceptions): safety equipment. General worker safety gear (gloves, hats, sleeves) is not "industrial machinery" because it doesn't fabricate anything and typically exists for worker comfort/safety rather than the manufacturing process itself -- unless it directly touches the product and is used up within 25 days, or is physically an accessory attached to already-exempt machinery (like a safety guard bolted onto a welder).
• Miscellaneous production tools: exempt as industrial machinery only to the extent each specific tool is necessary to and primarily (more than 50% of its use) for fabrication -- tools used mainly for machine maintenance don't qualify.

What this means for you

Manufacturers claiming the industrial machinery exemption

The line the Department drew here is timing-based: exemption generally starts where raw materials enter the manufacturing process, and ends where the finished product leaves it. Pre-production tools like design/engineering software fall outside that window and are taxable even if essential to your business. Within the production window, don't assume every purchase automatically qualifies -- gases get only a reduced rate absent extra proof, and general safety gear is presumptively taxable unless it meets a direct-contact/consumed-in-use test or is physically an accessory to exempt machinery.

Accountants and tax professionals

This ruling is a useful item-by-item template for applying Tenn. Code Ann. § 67-6-102(47)(A)(i)'s four-part industrial-machinery test (manufacturer status; machinery/apparatus/equipment; necessary to fabrication; primarily for fabrication) and Rule 40's 25-day direct-contact consumable rule. Note the reminder that the taxpayer bears the burden of proving any claimed exemption (citing American Airlines v. Johnson and Tibbals Flooring Co. v. Huddleston).

Common questions

Q: Is manufacturing design software exempt from Tennessee sales tax as industrial machinery?
A: Not in this ruling -- because it's used before raw materials reach the manufacturing process, it fails the "necessary to and primarily for fabrication" test, so both the software and its bundled maintenance contract are fully taxable.

Q: Are welding gases exempt from Tennessee sales tax?
A: They get a reduced 1.5% rate automatically when sold to a manufacturer. Full exemption requires proving (and obtaining a certificate for) exclusive use directly in the process, direct contact with the product, and consumption in that contact.

Q: Is safety equipment for production workers exempt?
A: Generally no -- it's taxable unless it directly contacts the manufactured product and is consumed within 25 days, or it's an accessory physically attached to already-exempt machinery.

Q: Can another manufacturer rely on this item-by-item breakdown for its own purchases?
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. Each item's exempt status turns on its specific use in your process -- confirm with a tax professional.

Citations and references

Tennessee statutes and rules (Tenn. Code Ann. unless noted):

• § 67-6-206(a), (b) (Supp. 2010) (industrial machinery exemption; reduced 1.5% gas/energy-fuel rate; full gas exemption with certificate)
• § 67-6-102(47)(A)(i), (D)(ii), (F) (Supp. 2010) ("industrial machinery" and "manufacturer" definitions; transport-equipment inclusion; pre-/post-process, maintenance, worker-comfort exclusions)
• § 67-6-329(a)(12) (Supp. 2010) (industrial materials exemption -- component parts, direct-fabrication use)
• Tenn. Comp. R. & Regs. 1320-5-1-.40 (Rule 40) (1974) (25-day direct-contact consumable materials exemption)
• § 67-6-101 et seq. (Retailers' Sales Tax Act); § 67-6-102(79), § 67-6-102(81)(A), § 67-6-102(92)(A) (Supp. 2010) (retail sale/sale/tangible personal property)
• § 67-6-231(a), (b)(1)(A)-(C) (Supp. 2010) (software and bundled maintenance contracts taxable); § 67-6-102(71) ("prewritten computer software")
• § 67-6-202(a) (Supp. 2010) (tax on sales price of entire transaction, including maintenance fees)

Tennessee cases cited by the ruling:

• Woods v. General Oils, Inc., 558 S.W.2d 433 (Tenn. 1977) (tanks storing pre-fabrication raw materials are not industrial machinery; definition of "primarily")
• Tenn. Farmers' Coop. v. State ex rel. Jackson, 736 S.W.2d 87 (Tenn. 1987) (manufacturing is "principal business" if over 50% of revenue is from fabrication/processing)
• Eastman Chemical Co. v. Johnson, 151 S.W.3d 503 (Tenn. 2004) ("machinery, apparatus, and equipment" includes devices conveying materials between process stages)
• Quaker Oats Co. v. Jackson, 745 S.W.2d 269 (Tenn. 1988) (Rule 40's 25-day direct-contact consumable exemption)
• American Airlines, Inc. v. Johnson, 56 S.W.3d 502 (Tenn. Ct. App. 2000); Rogers Group, Inc. v. Huddleston, 900 S.W.2d 34 (Tenn. Ct. App. 1995); Tibbals Flooring Co. v. Huddleston, 891 S.W.2d 196 (Tenn. 1994); United Canners, Inc. v. King, 696 S.W.2d 525 (Tenn. 1985) (taxpayer bears burden of proving an exemption)
• W. Pipeline Constructors, Inc. v. Dickinson, 310 S.W.2d 455 (Tenn. 1958); Tenn. Farmers Assur. Co. v. Chumley, 197 S.W.3d 767 (Tenn. Ct. App. 2006); Beare Co. v. Tenn. Dept. of Revenue, 858 S.W.2d 906 (Tenn. 1993) (undefined statutory terms given ordinary/common meaning)

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/11-30.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 11-30
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 applicability of the Tennessee sales and use tax industrial machinery exemption to software,
software maintenance agreements, and various welding supplies, parts, and equipment.
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.
FACTS
[TAXPAYER] is a [STATE – NOT TENNESSEE] company that is registered in Tennessee for
sales and use tax purposes. The Taxpayer is in the business of manufacturing [TYPES OF
PRODUCTS] for resale.
The Taxpayer purchases computer software from a major computer software company that
specializes in [TYPE OF] software. The software is installed on each of the [EMPLOYEE’S]
computers and used in the design process of the products manufactured. Included with the
[TYPE OF] software is a maintenance contract that provides system administration support,
unlimited support via the telephone and the Internet, and free upgrades to the software as they
become available. There is no breakdown on the purchase invoice between the software and the
1

maintenance services.
maintenance fee.

The Taxpayer pays a one-time charge upfront and then a yearly

The Taxpayer also purchases a variety of welding supplies, parts, and equipment from
[COMPANY 1]. All of these items are used directly in the welding of the Taxpayer’s product.
The Taxpayer currently is paying sales tax on its purchase of each item. The Taxpayer provided
a list of [NUMBER] items that it purchases from [COMPANY 1].1 The following is a list of
general categories into which these items fall.
1.

Gases used for the welding of [PRODUCT] parts

2.

Cylinders that contain the gases

3.

Hoses used to transfer the gases

4.

Labor, materials, and repair parts for repair of the production welder

5.

Safety equipment used by production workers

6.

Grinding discs used in welding

7.

Welding wire that becomes part of the product

8.

Welding equipment used in production

9.

Caster on production carts used to transfer product during welding

10.

Aerosol used to prep product during welding that comes in direct contact with the
product and is consumed within 25 days

11.

Miscellaneous tools used during production

The Taxpayer also purchases a large number of items from [COMPANY 2]. Each of these items
is used in the production process, although not necessarily used directly in the welding of the

1

This letter ruling will not discuss each item on the list individually but instead will discuss the general categories
into which each of the items falls.

2

product. A list of [NUMBER] such items was supplied by the Taxpayer; many of these items
fall into one of the above categories.2
QUESTIONS

1. Is the purchase of the computer software together with the software maintenance contract
   subject to the Tennessee sales and use tax? If so, do any exemptions from the sales and use
   tax apply?
2. Are the Tennessee sales and use tax industrial machinery exemption and the gas and energy
   fuel special tax rate, found at TENN. CODE ANN. § 67-6-206(a) and (b) (Supp. 2010), and the
   industrial materials exemption, found at TENN. CODE ANN. § 67-6-329(a)(12) (Supp. 2010),
   applicable to the welding supplies, parts, and equipment supplied by [COMPANY 1]?
   RULINGS
3. Yes. The purchase of the computer software and the software maintenance contract is subject
   to the Tennessee sales and use tax. No exemptions apply.3
4. All of the items supplied by [COMPANY 1], qualify as industrial machinery or industrial
   materials and are thus exempt for purposes of Tennessee sales and use taxation under TENN.
   CODE ANN. § 67-6-206(a) and (b) (Supp. 2010) or TENN. CODE ANN. § 67-6-329(a)(12)
   (Supp. 2010), with the following exceptions:
   a. Gases used in the welding process are taxed at a reduced rate of 1.5 percent. However,
   the gases are exempt for purposes of sales and use taxation if they meet specific
   qualifications under TENN. CODE ANN. § 67-6-206(b)(3).
   b. Safety equipment used by the Taxpayer’s production workers is not “industrial
   machinery” and therefore does not qualify for the industrial machinery exemption, unless
   the safety equipment comes in direct contact with the manufactured product and is
   consumed within twenty-five days, or unless the safety equipment is an associated part,
   appurtenance, or accessory to the machinery, apparatus, or equipment that is necessary to
   and primarily for the fabrication of the items manufactured by the Taxpayer.
   ANALYSIS
5. Computer Software

2

The Taxpayer has also asked which of the [NUMBER] listed items purchased from [COMPANY 2] would be
exempt from the Tennessee sales and use tax under the industrial machinery exemption. While many of the listed
items could be included in the categories discussed in this ruling, the list provided is too comprehensive to analyze
each item. It is the intent of this ruling to discuss the industrial machinery exemption under TENN. CODE ANN. §§
67-6-206 (Supp. 2010) and 67-6-102(47) (Supp. 2010) and the rules related to this exemption, as well as provide
basic guidelines that the Taxpayer can use in determining the applicability of the exemption to the items that it
purchases from [COMPANY 2].
3

Computer software can potentially qualify for the industrial machinery exemption. For a complete discussion on
why the Taxpayer’s computer software does not qualify for this exemption, see sub-part (a) under the analysis of
Question #2.

3

The sale to the Taxpayer of the computer software, together with the software maintenance
contract, is subject to the Tennessee sales and use tax.
Retail sales of tangible personal property in Tennessee are subject to the 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 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.” TENN. CODE ANN. § 67-6102(81)(A). Additionally, TENN. CODE ANN. § 67-6-102(92)(A) defines “tangible personal
property” in pertinent part as “personal property that can be seen, weighed, measured, felt, or
touched,” and specifically includes prewritten computer software.4 Finally, TENN. CODE ANN.
§ 67-6-231(a) (Supp. 2010) provides that the retail sale, lease, licensing or use of computer
software in Tennessee is subject to the sales and use tax, regardless of whether the software is
delivered electronically, delivered by use of tangible storage media, loaded or programmed into a
computer, created on the premises of the consumer, or otherwise provided.
Thus, a sale of tangible personal property has occurred if there is 1) a transfer of title or
possession to the property 2) for a consideration. The computer software purchased by the
Taxpayer is prewritten computer software and as such is tangible personal property under TENN.
CODE ANN. § 67-6-102(92)(A). The software is installed on the Taxpayer’s computers; thus, a
transfer of possession of the software occurs. Additionally, there is consideration because the
Taxpayer pays a one-time fee up-front for the possession of this software. Accordingly, the sale
to the Taxpayer of the computer software is subject to the Tennessee sales and use tax.
The maintenance contract is also subject to the Tennessee sales and use tax. Maintenance
contracts such as those provided to the Taxpayer are taxable pursuant to TENN. CODE ANN. § 676-231(b)(1)(A) (Supp. 2010), which provides in pertinent part that the retail sale of computer
software maintenance contracts are taxable if “[t]he computer software maintenance contract is
sold as part of or in connection with a sale of computer software that is subject to the tax levied
by this chapter.”5 Thus, any charges for support services or any other goods or services offered
as part of the maintenance contract are also subject to the Tennessee sales and use tax.
Computer software could potentially qualify as industrial machinery and thus be exempt from
sales and use taxation under TENN. CODE ANN. § 67-6-206(a) (Supp. 2010). However, as
discussed under the analysis of Question #2, the software as purchased and used by the Taxpayer
does not qualify for this exemption. There are no other exemptions under the Tennessee sales
and use tax laws that would be applicable to the sale of the computer software to the Taxpayer.
Therefore, the computer software purchased by the Taxpayer is subject to the Tennessee sales
and use tax. The maintenance contract is also subject to the Tennessee sales and use tax as part
4

“Prewritten computer software” is “computer software … that is not designed and developed by the author or other
creator to the specifications of a specific purchaser” and includes prewritten upgrades. TENN. CODE ANN. § 67-6102(71).
5

TENN. CODE ANN. § 67-6-231(b)(1)(B) and (C) (Supp. 2010) also provides that computer software maintenance
contracts are subject to the Tennessee sales and use tax if the contract applies to computer software installed on
computers located in Tennessee or if the location of the software is unknown but the purchaser’s residential or
business address is in Tennessee.

4

of the sale of the software. The tax is based on the sales price of the entire transaction, including
the monthly maintenance fees. TENN. CODE ANN. § 67-6-202(a) (Supp. 2010).

2. Software, welding supplies, parts, and equipment
   Under the Retailers’ Sales Tax Act, TENN. CODE ANN. § 67-6-101 et seq., the sale of tangible
   personal property, which includes computer software, welding supplies, parts, and equipment, is
   generally subject to the Tennessee sales and use tax. However, TENN. CODE ANN. § 67-6-206
   exempts “industrial machinery” from the sales and use tax, providing that “[a]fter June 30, 1983,
   no tax is due with respect to industrial machinery.”6 “Industrial machinery” is defined in
   pertinent part as “machinery, apparatus and equipment with all associated parts, appurtenances
   and accessories, including hydraulic fluids, lubricating oils, and greases necessary for operation
   and maintenance, repair parts and any necessary repair or taxable installation labor therefor, that
   is necessary to, and primarily for, the fabrication or processing of tangible personal property for
   resale and consumption off the premises … where the use of such machinery, equipment or
   facilities is by one who engages in such fabrication or processing as one’s principal business.”
   TENN. CODE ANN. § 67-6-102(47)(A)(i).
   Equipment used to transport raw materials from storage to the manufacturing process and to
   transport the finished product to storage after completion of the manufacturing process is treated
   as industrial machinery pursuant to TENN. CODE ANN. § 67-6-102(47)(D)(ii). However, TENN.
   CODE ANN. § 67-6-102(47)(F) specifically excludes from the definition of “industrial
   machinery” any machinery, apparatus, or equipment used prior to or after the use of the
   equipment described above; equipment used for maintenance; and equipment used for the
   convenience or comfort of the workers. Additionally, items, including tanks, used primarily to
   store raw materials before fabrication or processing begins are not industrial machinery. Woods
   v. General Oils, Inc., 558 S.W.2d 433, 436 (Tenn. 1977).
   Therefore, in order for the Taxpayer’s software, welding supplies, parts, and equipment to be
   exempt from the Tennessee sales and use tax as industrial machinery, four requirements must be
   met. First, the Taxpayer must be a manufacturer. Second, the software and welding items must
   be machinery, apparatus or equipment. Third, the software and welding items must be necessary
   to the fabrication or processing of the products sold by the Taxpayer. Fourth, the software and
   welding items must be primarily for the fabrication of the products sold by the Taxpayer.
   Under the facts presented, the taxpayer qualifies as a manufacturer. A manufacturer is defined
   under TENN. CODE ANN. § 67-6-102(47)(A)(i) as “one who engages in [the] fabrication or
   processing [of tangible personal property for resale and consumption off the premises] as one’s
   6

The burden is on the Taxpayer to establish entitlement to an exemption from taxation. The Tennessee Supreme
Court has stated that “[a]lthough the rule is well-established that taxing legislation should be liberally construed in
favor of the taxpayer and strictly construed against the taxing authority, it is an equally important principle of
Tennessee tax law that ‘exemptions from taxation are construed against the taxpayer who must shoulder the heavy
and exacting burden of proving the exemption.’” Am. Airlines, Inc. v. Johnson, 56 S.W.3d 502, 506 (Tenn. Ct. App.
2000) (quoting Rogers Group, Inc. v. Huddleston, 900 S.W.2d 34, 36 (Tenn. Ct. App. 1995)). The Tennessee
Supreme Court has also stated that the burden is on the taxpayer to establish the exemption, and any well-founded
doubt is sufficient to defeat a claimed exemption from taxation. Am. Airlines, 56 S.W.3d at 506 (citing Tibbals
Flooring Co. v. Huddleston, 891 S.W.2d 196, 198 (Tenn. 1994); United Canners, Inc. v. King, 696 S.W.2d 525, 527
(Tenn. 1985)).

5

principal business.” Manufacturing is a taxpayer’s principal business if more than fifty percent
of its revenues at a given location are derived from fabricating or processing tangible personal
property for resale. Tenn. Farmers’ Coop. v. State ex rel. Jackson, 736 S.W.2d 87, 91-92 (Tenn.
1987). The Taxpayer has indicated that it is principally engaged in the fabrication of [TYPES
OF PRODUCTS], and these [TYPES OF PRODUCTS] are sold to others for use and
consumption off the premises. The Taxpayer is therefore a manufacturer that may be entitled to
the exemption provided in TENN. CODE ANN. § 67-6-206(a). Whether the Taxpayer meets the
remaining three requirements of the industrial machinery exemption is discussed below in the
analysis for each listed category.
Furthermore, TENN. CODE ANN. § 67-6-329(a)(12) (Supp. 2010) also exempts from the
Tennessee sales and use tax industrial materials used “for future processing, manufacture or
conversion into articles of tangible personal property for resale where the industrial materials …
become a component part of the finished product or are used directly in fabricating, dislodging,
or sizing.” See also TENN. COMP. R. & REG. 1320-5-1-.40 (1974) (“Rule 40”) (exempting
“[m]aterials and taxable services bought for future processing, manufacturing or conversion into
articles of tangible personal property for resale, where such materials become a component part
of the finished products” and materials or supplies that come in direct contact with the
manufactured product during manufacturing and are consumed within twenty-five days).
a. Software used to design manufactured parts
The software purchased by the Taxpayer, because it is used prior to the transportation of raw
materials to the manufacturing process, is not “necessary to” or “primarily for” the
manufacturing process and as such is not “industrial machinery” under TENN. CODE ANN.
§ 67-6-102(47)(A)(i) and (F). Thus, the computer software cannot qualify for the industrial
machinery exemption found under TENN. CODE ANN. § 67-6-206(a).
The computer software purchased by the Taxpayer meets the first two requirements for
industrial machinery. As discussed above, the Taxpayer is a manufacturer for the purposes
of the industrial machinery exemption. The second requirement also is satisfied. Neither the
Tennessee Code nor the Tennessee courts have defined the term “apparatus” for purposes of
Tennessee sales and use taxation. The Tennessee Supreme Court has stated that when a statute
does not define a term, it is proper to look to common usage to determine the term’s meaning. See,
e.g., Tenn. Farmers Assur. Co. v. Chumley, 197 S.W.3d 767, 782-83 (Tenn. Ct. App. 2006);
Beare Co. v. Tenn. Dept. of Revenue, 858 S.W.2d 906, 908 (Tenn. 1993). WEBSTER’S NINTH
NEW COLLEGIATE DICTIONARY 96 (1991) defines the term “apparatus” as “a set of materials
or equipment designed for a particular use” or “an instrument or appliance designed for a
specific operation.” The software clearly meets this definition.
However, the software is not necessary to or primarily for the manufacturing process. The
terms “necessary” and “primarily” are also undefined by the Tennessee Code and the
Tennessee courts for Tennessee sale and use tax purposes. The common definition of the
term “necessary” is “that which cannot be dispensed with; essential; indispensable; …
inherent in the situation; unavoidable from the premises … rendering some essential and
intimate service.” WEBSTER’S NEW TWENTIETH CENTURY DICTIONARY (2nd ed. 1964).
Thus, in order for machinery, equipment, or apparatus to be “necessary” to the manufacturing
process, it must be essential to the manufacturing process as engaged in by a taxpayer. Here,
the Taxpayer uses the software to design the parts that it manufactures, so it is clearly an
important step in the Taxpayer’s business.
6

The term “primarily” has been defined by the Tennessee Supreme Court for purposes of the
industrial machinery exemption as “first of all; principally; or fundamentally” and as “first in
rank or importance, chief, principal, basic or fundamental.” Woods v. General Oils, Inc, 558
S.W.2d 433, 436 (Tenn. 1977). (citing WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY
(1961); Breen v. Indus. Acc. Bd., 436 P.2d 701 (Mont. 1968); Twentieth Century Mfg. Co. v.
United States, 444 F.2d 1109 (Ct. Cl. 1971)). The machinery, equipment, or apparatus
satisfies this test if more than fifty percent of its use is in the manufacturing operation. The
Taxpayer’s software is used solely for the design of the manufactured parts.
However, the manufacturing process is confined by TENN. CODE ANN. § 67-6-102(47)(F),
which excludes such machinery, equipment, or apparatus that is used prior to the use of
equipment that transports raw materials from storage to the manufacturing process.
Therefore, the manufacturing process begins with the delivery of raw materials, and anything
that occurs prior to this step is not considered part of the manufacturing. Here, the software
is used for the design of the manufactured parts. With respect to the entire manufacturing
process, this step takes place before the actual manufacturing begins and before the
transportation of raw materials used in the manufacturing process takes place. Accordingly,
the computer software is not “necessary to” or “primarily for” the manufacturing process and
thus is not industrial machinery for Tennessee sales and use tax purposes. As a result, the
software cannot qualify for the industrial machinery exemption found under TENN. CODE
ANN. § 67-6-206(a).
b. Gases used for the welding of [PRODUCT] parts
Gases are subject to a reduced Tennessee sales and use tax rate when sold to a manufacturer.
However, gases may be exempt from the Tennessee sales and use tax if they meet certain
qualifications.
Under TENN. CODE ANN. § 67-6-206(b)(1), a reduced sales tax rate of 1.5% is imposed with
respect to gases when they are sold to or used by a manufacturer. However, TENN. CODE
ANN. § 67-6-206(b)(3), exempts the above substances from the sales and use tax if it is
established to the satisfaction of the Commissioner “that they are exclusively used directly in
the manufacturing process, coming into direct contact with the article being fabricated or
processed by the manufacturer, and being expended in the course of the contact.” If the
gases meet this test, then the manufacturer must obtain an exemption certificate from the
Commissioner and must purchase the gases under this certificate.
Because the Taxpayer is a manufacturer under the sales and use tax laws, the gases the
Taxpayer uses for the welding of [PRODUCT] parts qualify for the reduced tax rate under
TENN. CODE ANN. § 67-6-206(b)(1). Furthermore, if the Taxpayer can show that the gases
are used exclusively in the manufacturing process, that they come in direct contact with the
[PRODUCT], and that they are expended in the course of such contact, then the gases will be
exempt from the Tennessee sales and use tax with a certificate of exemption.
c. Cylinders that contain the gases
The cylinders that contain the gases used for the welding of [PRODUCT] parts are industrial
machinery and are exempt from the Tennessee sales and use tax under TENN. CODE ANN.
§ 67-6-206(a).
7

“Industrial machinery” as defined in pertinent part by TENN. CODE ANN. § 67-6102(47)(A)(i) includes “[m]achinery, apparatus and equipment with all associated parts,
appurtenances and accessories.” (Emphasis added.) The production welder is a piece of
machinery or equipment that is necessary to and primarily for the fabrication of the items
manufactured by the Taxpayer. The definition of industrial machinery specifically includes
all associated parts, appurtenances and accessories to equipment or machinery that qualifies
under the definition. The cylinders that contain the gases used in the welding process are
appurtenant to the welder. Therefore, the cylinders are exempt from the Tennessee sales and
use tax under the industrial machinery exemption.
d. Hoses used to transfer the gases to the welder
The hoses that transfer the gases to the welder are industrial machinery and are exempt from
the Tennessee sales and use tax under TENN. CODE ANN. § 67-6-206(a).
“Industrial machinery” as defined in pertinent part by TENN. CODE ANN. § 67-6102(47)(A)(i) includes “[m]achinery, apparatus and equipment with all associated parts,
appurtenances and accessories.” (Emphasis added.) The production welder is a piece of
machinery or equipment that is necessary to and primarily for the fabrication of the items
manufactured by the Taxpayer. The definition of industrial machinery specifically includes
all associated parts, appurtenances and accessories to equipment or machinery that qualifies
under the definition. The hoses that transfer the gases used in the welding process are
“appurtenances and accessories.” (Emphasis added.) The production welder is a piece of
machinery or equipment that is necessary to and primarily for the fabrication of the items
manufactured by the Taxpayer. The definition of industrial machinery specifically includes
all associated parts, appurtenances and accessories to equipment or machinery that qualifies
under the definition. The hoses that transfer the gases used in the welding process are
appurtenant to the welder. Therefore, the hoses are exempt from the Tennessee sales and use
tax under the industrial machinery exemption.
e. Labor, materials, and repair parts for the repair of the production welder
The labor, materials, and repair parts for the repair of the production welder are exempt from
the Tennessee sales and use tax under TENN. CODE ANN. § 67-6-206(a) as industrial
machinery.
“Industrial machinery” as defined in pertinent part by TENN. CODE ANN. § 67-6102(47)(A)(i) includes “[m]achinery, apparatus and equipment with all associated parts,
appurtenances and accessories, including … repair parts and any necessary repair or taxable
installation labor therefor.” (Emphasis added.) The production welder is a piece of
machinery or equipment that is necessary to and primarily for the fabrication of the items
manufactured by the Taxpayer. The definition of “industrial machinery” specifically
includes repair parts and repair labor for equipment or machinery that qualifies under the
definition. Therefore, the labor, materials, and repair parts are exempt from the Tennessee
sales and use tax under the industrial machinery exemption.
f. Safety equipment used by production workers

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The safety equipment used by the Taxpayer’s production workers generally is not considered
industrial machinery and is not exempt from the Tennessee sales and use tax under TENN.
CODE ANN. § 67-6-206(a).
TENN. CODE ANN. § 67-6-102(47)(A)(i) requires that the equipment used by a manufacturer
be “necessary to, and primarily for, the fabrication or processing of tangible personal
property.” (Emphasis added.) The term “fabrication” is not defined by the sales tax statutes;
thus, it must be given its ordinary and commonly accepted meaning. W. Pipeline
Constructors, Inc. v. Dickinson, 310 S.W.2d 455, 458 (Tenn. 1958).
“Fabricate” means “to construct by combining or assembling; to make.” WEBSTER’S II NEW
COLLEGE DICTIONARY (1995).
Safety equipment used by the Taxpayer’s workers, such as gloves, hats, and sleeves, are not
used to make or construct the manufactured items. Furthermore, if the safety equipment is
used for the convenience or comfort of the workers, then such items are excluded from the
definition of “industrial machinery” under TENN. CODE ANN. § 67-6-102(47)(F). Therefore,
such safety equipment is subject to the Tennessee sales and use tax.
However, there are two circumstances in which safety equipment may be exempt. First, if
the safety equipment used by the Taxpayer comes in direct contact with the manufactured
product during the manufacturing process and is consumed within twenty-five days, then the
equipment is not subject to the Tennessee sales and use tax. Rule 40(2); Quaker Oats Co. v.
Jackson, 745 S.W.2d 269, 270-271 (Tenn. 1988). Second, if the safety equipment is an
associated part, appurtenance, or accessory to any machinery, apparatus, or equipment that is
necessary to and primarily for the fabrication of the items manufactured by the Taxpayer,
then such safety equipment is industrial machinery under TENN. CODE ANN. § 67-6102(47)(A)(i). For example, a guard that is attached to a piece of machinery for safety
reasons could become appurtenant to that machinery and could thus qualify as industrial
machinery.
g. Grinding discs used in welding
The grinding discs used in welding are industrial machinery and are exempt from the
Tennessee sales and use tax under TENN. CODE ANN. § 67-6-206(a).
“Industrial machinery” as defined in pertinent part by TENN. CODE ANN. § 67-6102(47)(A)(i) includes “[m]achinery, apparatus and equipment with all associated parts,
appurtenances and accessories.” (Emphasis added.) The grinding discs become part of the
grinders that are pieces of machinery or equipment that is necessary to and primarily for the
fabrication of the items manufactured by the Taxpayer. The definition of industrial
machinery specifically includes all associated parts, appurtenances and accessories to
equipment or machinery that qualifies under the definition. Therefore, because the grinding
discs are part of the grinders, the grinding discs are exempt from the Tennessee sales and use
tax under the industrial machinery exemption.
Additionally, if the grinding discs come in direct contact with the manufactured product and
are consumed within twenty five days, then Rule 40(2) will also exempt them from the
Tennessee sales and use tax.
h. Welding wire that becomes part of the product
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Welding wire that becomes part of the product manufactured by the Taxpayer is exempt from
Tennessee sales and use tax under Rule 40.
TENN. CODE ANN. § 67-6-329(a)(12) states that “[i]ndustrial materials … for future
processing, manufacture or conversion into articles of tangible personal property for resale
where the industrial materials … become a component part of the finished product” are not
subject to the Tennessee sales and use tax. See also Rule 40(1). During the manufacturing
process, the welding wire is incorporated into and becomes a component part of the finished
product. Thus, the welding wire is exempt from the Tennessee sales and use tax.
i. Welding equipment used in production
The welding equipment used in production is industrial machinery and is exempt from the
Tennessee sales and use tax under TENN. CODE ANN. § 67-6-206(a).
“Industrial machinery” as defined in pertinent part by TENN. CODE ANN. § 67-6102(47)(A)(i) includes “equipment … that is necessary to, and primarily for, the fabrication
or processing of tangible personal property.” (Emphasis added.) The welding equipment is
necessary to the welding process and production of the product. The equipment is bought
specifically for the welding of the product and is used only for this purpose. Therefore, the
items of welding equipment are exempt from the Tennessee sales and use tax under the
industrial machinery exemption.
j. Casters on production carts used to transfer product during welding
The casters on the production carts that are used to transfer the product manufactured by the
Taxpayer during the welding process are industrial machinery and are exempt from the
Tennessee sales and use tax under TENN. CODE ANN. § 67-6-206(a).
“Industrial machinery” as defined in pertinent part by TENN. CODE ANN. § 67-6102(47)(A)(i) includes “[m]achinery, apparatus and equipment with all associated parts,
appurtenances and accessories.” (Emphasis added.) The Tennessee Supreme Court has
interpreted the phrase “machinery, apparatus, and equipment” to include “the devices
conveying the materials and components from one part of the manufacturing or fabricating
process to another.” Eastman Chemical Co. v. Johnson, 151 S.W.3d 503, 509-510 (Tenn.
2004).7 This interpretation would clearly include the production cart that is used to transfer
the Taxpayer’s product during the welding process. Additionally, the production cart is
necessary to transfer the product during production and is used solely for this purpose. The
definition of industrial machinery specifically includes all associated parts, appurtenances
and accessories to equipment or machinery that qualifies under the definition. The casters
are part of the production cart. Therefore, the casters are exempt from the Tennessee sales
and use tax under the industrial machinery exemption.
k. Aerosol used to prep the product during welding

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The Tennessee Supreme Court was quoting the Tennessee Court of Appeals. The Tennessee Supreme Court
ultimately reversed the lower court’s decision in Eastman Chemical Co. While it agreed with the lower court’s
interpretation of the phrase “machinery, apparatus and equipment,” it did not agree with the lower court’s
application of the interpretation.

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The aerosol used to prep the product during welding is exempt from the Tennessee sales and
use tax under Rule 40 and TENN. CODE ANN. § 67-6-329(a)(12).
Rule 40(2) states that “[m]aterials and supplies coming in direct contact with and which are
consumed within twenty-five (25) consecutive calendar days, in the processing of
manufactured products” are exempt from the Tennessee sales and use tax. Under TENN.
CODE ANN. § 67-6-329(a)(12), industrial materials that are used directly in the fabricating
process are specifically exempt from sales and use taxation.
The aerosol used during the welding process is consumed within twenty-five days and is used
directly on the products manufactured by the Taxpayer. Therefore, the aerosol is exempt
from the Tennessee sales and use tax under Rule 40 and the industrial materials exemption.
l. Miscellaneous tools used during production
The miscellaneous tools used during production are industrial machinery and are exempt
from the Tennessee sales and use tax under TENN. CODE ANN. § 67-6-206(a), if the tools are
necessary to and primarily for the fabrication of the Taxpayer’s products.
“Industrial machinery” as defined in pertinent part by TENN. CODE ANN. § 67-6102(47)(A)(i) includes “apparatus … that is necessary to, and primarily for, the fabrication
or processing of tangible personal property.” (Emphasis added.) The tools the Taxpayer
uses during production clearly meet the definition of apparatus.8 Therefore, if the tools the
Taxpayer uses are necessary to and primarily for the fabrication of the Taxpayer’s products,
then they will be considered industrial machinery. As discussed under the analysis to
Question #1, a tool is necessary to the production if it is essential to the manufacturing
process as engaged in by a taxpayer, and a tool is primarily for the production if more than
fifty percent of its use is in the manufacturing operation.
The circular flared end brush, the clamp 12-inch regular dute, and the standard 18-inch tongs
used by the Taxpayer during production are necessary to the manufacturing process and are
used only for this purpose. Therefore, these specific tools, and any other tools used during
production that qualify as industrial machinery, are exempt from the Tennessee sales and use
tax as industrial machinery.
Note that if any of the miscellaneous tools purchased by the Taxpayer are used primarily in
the maintenance of the machinery and equipment used in the manufacturing process, then
such tools will not qualify for the industrial machinery exemption.

Elizabeth Henderson
Tax Counsel
APPROVED: Richard H. Roberts
Commissioner of Revenue
DATE: 06/23/2011
8

See the discussion under sub-part (a) under the analysis for Question #2 for the definition of “apparatus.”

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