Are charges from a third-party contractor for fabricating, installing, reworking, or repairing parts and inventory during a Tennessee manufacturer's production process subject to sales and use tax?

Plain-English summary

A Tennessee manufacturer makes products using both its own employees and third-party contractors. The contractors do four things, all connected to the manufacturer's production: (1) fabricate portions of the products as part of manufacturing; (2) install parts onto the products; (3) rework (clean/repair) defective parts the manufacturer bought from outside parts suppliers, so they're usable; and (4) repair or clean inventory — raw materials, work-in-process, and finished goods — that gets damaged either during manufacturing or afterward, before it's delivered to purchasers. The manufacturer asked which of these contractor charges Tennessee taxes. The Department's answer: the first three are exempt; the fourth depends on timing.

Fabrication — exempt (industrial materials). Tennessee exempts "industrial materials" bought for future processing or conversion into TPP for resale, where the materials become a component part of the finished product (§ 67-6-329(a)(12); Rule 1320-5-1-.40(1)). The fabricated item the contractor produces becomes a literal component of the manufacturer's finished product, so the fabrication charge is exempt.

Installation — exempt (sale for resale). Installing TPP that remains TPP afterward is normally a taxable service (§ 67-6-205(c)(6)). But a "retail sale" excludes sales for resale (§ 67-6-102(78)), and a sale for resale includes services that become a supply used in manufacturing TPP for resale (Rule 1320-5-1-.62). Because the installation here is part of building the finished product for resale, it's exempt.

Reworking purchased parts — exempt (sale for resale). Cleaning/repairing defective parts so they can be installed in the finished product is, by the same logic, a service that becomes a supply used in manufacturing for resale — exempt.

Repairing/cleaning inventory — it depends on WHEN. Repairs or cleaning performed during the manufacturing process (on direct materials or work-in-process) are exempt as sales for resale, same as above. But repairs or cleaning performed after the manufacturing process is complete — on finished goods sitting in inventory before sale — are taxable. The reason: Tennessee's resale definition specifically excludes "a sale of services to a dealer for use in the business of selling ... tangible personal property," and gives "cleaning, maintaining, or repairing property held as inventory for sale" as an example (§ 67-6-102(77)(B)(ii)). Once the product is finished and just sitting in inventory, the manufacturer is the end user and consumer of the repair/cleaning service — not reselling it — so the charge is taxed.

What this means for you

Manufacturers using third-party contractors

Charges from contractors who fabricate, install, or rework parts as part of building your product for sale are generally exempt as industrial materials or sales for resale. But once your product is finished and sitting in inventory, any further repair or cleaning charges you pay become taxable — the resale exemption doesn't reach maintenance of your own finished-goods stock. Track WHERE in your production timeline a contractor's work happens; that timing decides taxability for repair/cleaning charges specifically.

Third-party fabrication, installation, and repair contractors serving manufacturers

Whether you need to charge your manufacturing customer sales tax depends on what stage of their process you're working in. Get a resale certificate to support exempt treatment, but recognize the resale exemption doesn't cover finished-goods maintenance — that's a taxable repair/cleaning service to the manufacturer as end user.

Accountants and tax professionals

This ruling cleanly separates four contractor-service fact patterns under the same "sale for resale" framework (§ 67-6-102(77); Rule 1320-5-1-.62) plus the industrial-materials exemption (§ 67-6-329(a)(12); Rule 1320-5-1-.40(1)), and shows the limiting effect of § 67-6-102(77)(B)(ii) (inventory-maintenance carve-out) on otherwise-exempt repair/cleaning services. Note the 2010 amendment to the "resale" definition (2010 Tenn. Pub. Acts, ch. 1134, eff. 7/1/2010) doesn't affect the industrial-materials exemption specifically.

Common questions

Q: Are a contractor's fabrication charges taxable when building a manufacturer's product?
A: No — exempt as industrial materials that become a component part of the finished product (§ 67-6-329(a)(12)).

Q: Are a contractor's charges for installing parts on the product taxable?
A: No — exempt as a sale for resale, because the installation is part of manufacturing the product for resale (§ 67-6-102(77); Rule 1320-5-1-.62).

Q: Are charges for reworking (cleaning/repairing) defective purchased parts taxable?
A: No — exempt for the same sale-for-resale reasons, since the reworked parts go into the finished product.

Q: Are repair/cleaning charges on inventory taxable?
A: It depends on timing. Exempt if the inventory is repaired/cleaned during the manufacturing process; taxable if it's repaired/cleaned after manufacturing is complete (finished-goods inventory), because the manufacturer is then the end user of the service (§ 67-6-102(77)(B)(ii)).

Q: Can I rely on this letter 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. Confirm your own situation with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.; 2011 codification):

• §§ 67-6-101 to -907 (Retailers' Sales Tax Act); § 67-6-202(a) (sales tax on retail sales of TPP)
• § 67-6-329(a)(12) (industrial materials exemption — component part of finished product)
• § 67-6-205(c)(6) (installation of TPP a taxable service); § 67-6-205(c)(4) (repair services taxable); § 67-6-205(c)(5) (laundering/dry cleaning taxable)
• § 67-6-102(78) (retail sale = sale other than for resale); § 67-6-102(77)(A) (resale / sale for resale definitions); § 67-6-102(77)(B)(ii) (sale for resale excludes services sold to a dealer for use in its business of selling TPP, e.g. cleaning/maintaining/repairing inventory held for sale)
• 2010 Tenn. Pub. Acts, ch. 1134, § 1 (eff. July 1, 2010) (amended "resale" definition; no effect on the industrial-materials exemption)

Tennessee rules:

• Tenn. Comp. R. & Regs. 1320-5-1-.40(1) (1974) ("Rule 40") (industrial materials exemption explained)
• Tenn. Comp. R. & Regs. 1320-5-1-.62 (1974) ("Rule 62") (sale for resale — includes services that become an industrial material/supply in manufacturing)
• Tenn. Comp. R. & Regs. 1320-5-1-.54 (2000) ("Rule 54") (repair services defined); 1320-5-1-.53(1) (1974) ("Rule 53") (laundering/dry cleaning/repair defined)
• Tenn. Comp. R. & Regs. 1320-5-1-.68(1) (2008) (resale certificate required to make an exempt sale for resale)

Cases cited by the ruling:

• Walker's, Inc. v. Farr, 2010 WL 3488631 (Tenn. Ct. App. 2010); Nashville Clubhouse Inn v. Johnson, 27 S.W.3d 542 (Tenn. Ct. App. 2000); Colemill Enterprises, Inc. v. Huddleston, 967 S.W.2d 753 (Tenn. 1998) (the "for any purpose other than resale" language excludes sales for resale from taxation)

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/12-12.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 12-12

WARNING
Letter rulings are binding on the Department only with respect to the individual taxpayer
being addressed in the ruling. This ruling is based on the particular facts and
circumstances presented, and is an interpretation of the law at a specific point in time. The
law may have changed since this ruling was issued, possibly rendering it obsolete. The
presentation of this ruling in a redacted form is provided solely for informational purposes,
and is not intended as a statement of Departmental policy. Taxpayers should consult with a
tax professional before relying on any aspect of this ruling.
SUBJECT
The application of the Tennessee sales and use tax to various transactions between a third party
contractor and a manufacturer.
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 NAME] (the “Taxpayer”) manufactures [PRODUCTS] that are sold to
[PURCHASERS] for resale to consumers [REDACTED]. The Taxpayer manufactures
[PRODUCTS] at its manufacturing facilities, including facilities in Tennessee, using labor
provided by the Taxpayer’s employees as well as third party contractors. [REDACTED].

1

Third party contractors provide the following to the Taxpayer, incidental to the manufacturing
process: 1) the fabrication of portions of [PRODUCTS] as part of the manufacturing process; 2)
the installation of parts on [PRODUCTS]; 3) production reworking, i.e., reworking, cleaning, or
repairing defective parts purchased by the Taxpayer from parts suppliers;1 and 4) the repair and
cleaning of inventories of direct materials, work in process, finished goods,2 and [REDACTED]
that are damaged during or subsequent to the manufacturing process and before delivery to
[PURCHASERS].
[PRODUCTS] are sometimes damaged in the manufacturing process, or following the
manufacturing process and before delivery of the product to the [PURCHASER]. Repairing
those manufactured [PRODUCTS] during and after the manufacturing process is an essential
step in the process of producing a finished product for sale.
RULINGS
1.

Are charges made by third party contractors to the Taxpayer for the fabrication of
tangible personal property, incidental to the process of manufacturing [PRODUCTS] by
or at the direction of the Taxpayer for sale to customers in the ordinary course of
business, subject to the Tennessee sales and use tax?
Ruling: No. Charges made by third party contractors to the Taxpayer for the fabrication
of tangible personal property, incidental to the process of manufacturing [PRODUCTS]
by or at the direction of the Taxpayer for sale to customers in the ordinary course of
business, are exempt for purposes of the Tennessee sales and use tax as sales of industrial
materials

2.

Are charges made by third party contractors to the Taxpayer for the installation of
tangible personal property, incidental to the process of manufacturing [PRODUCTS] by
or at the direction of the Taxpayer for sale to customers in the ordinary course of
business, subject to the Tennessee sales and use tax?
Ruling: No. Charges made by third party contractors to the Taxpayer for the installation
of tangible personal property, incidental to the process of manufacturing [PRODUCTS]
by or at the direction of the Taxpayer for sale to customers in the ordinary course of
business, are exempt for purposes of the Tennessee sales and use tax as sales of industrial
supplies used in the manufacture of tangible personal property for resale.

3.

Are charges made by third party contractors for reworking parts purchased by the
Taxpayer from parts suppliers, incidental to the process of manufacturing [PRODUCTS]
by or at the direction of the Taxpayer for sale to customers in the ordinary course of
business, subject to the Tennessee sales and use tax?

1

Production rework involves cleaning and/or repairing defective parts purchased by the Taxpayer so that the parts
are suitable for installation as component parts of the [PRODUCTS] manufactured by the Taxpayer. [REDACTED].
2

In the case of finished goods, the repair services are necessary to place the finished [PRODUCTS] in a condition so
that they can be sold to [PURCHASERS] for subsequent resale to the [PURCHASERS’] customers.

2

Ruling: No. Charges made by third party contractors for reworking parts purchased by
the Taxpayer from parts suppliers, incidental to the process of manufacturing
[PRODUCTS] by or at the direction of the Taxpayer for sale to customers in the ordinary
course of business, are exempt for purposes of the Tennessee sales and use tax as sales of
industrial supplies used in the manufacture of tangible personal property for resale.
4.

Are charges made by third party contractors to the Taxpayer for repairing and cleaning
inventories of direct materials, work in process, and finished goods, incidental to the
process of manufacturing [PRODUCTS] by or at the direction of the Taxpayer for sale to
customers in the ordinary course of business, subject to the Tennessee sales and use tax?
Ruling: Charges made by third party contractors to the Taxpayer for repairing or cleaning
items of tangible personal property during the process of manufacturing [PRODUCTS]
are exempt for purposes of the Tennessee sales and use tax as sales for resale.
The Taxpayer is the end user and consumer of repair services performed with respect to
its finished goods inventory. Charges made by third party contractors to the Taxpayer for
repairing or cleaning items of tangible personal property after completion of the
manufacturing process are therefore subject to the sales and use tax.
ANALYSIS

Retail sales of tangible personal property and specifically enumerated services in Tennessee are
subject to the sales and use tax under the Retailers’ Sales Tax Act, TENN. CODE ANN. §§ 67-6101 to -907 (2011), unless an exemption from taxation applies.
1.

Charges for the fabrication of tangible personal property

Charges made by third party contractors to the Taxpayer for the fabrication of tangible personal
property, incidental to the process of manufacturing [PRODUCTS] by or at the direction of the
Taxpayer for sale to customers in the ordinary course of business, are exempt for purposes of the
Tennessee sales and use tax as sales of industrial materials.
The Taxpayer has indicated that third party contractors fabricate tangible personal property for it
as part of the manufacturing process.
Retail sales in Tennessee of tangible personal property are subject to the sales and use tax under
TENN. CODE ANN. § 67-6-202(a) (2011), unless an exemption from taxation applies.3 In the
Taxpayer’s case, charges for the fabrication of tangible personal property are exempt for
purposes of the Tennessee sales and use tax as sales of industrial materials.
TENN. CODE ANN. § 67-6-329(a)(12) (2011) exempts from the Tennessee sales and use tax
“industrial 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 or are used directly in fabricating, dislodging, or sizing.” TENN. COMP. R. &
3

[REDACTED].

3

REGS. 1320-5-1-.40(1) (1974) (“Rule 40(1)”) explains that “[m]aterials and taxable services
bought for future processing, manufacturing or conversion into articles of tangible personal
properly for resale, where such materials become a component part of the finished products,” are
not subject to the sales and use tax. Note that 2010 Tenn. Pub. Acts, Chapter 1134, § 1 (effective
July 1, 2010) amended the definition of “resale” to exclude certain transactions from the scope of
the definition of “sale for resale.” However, this amendment has no effect on the exemption for
industrial materials under TENN. CODE ANN. § 67-6-329(a)(12).
In the Taxpayer’s case, the fabricated item of tangible personal property is an industrial material.
The Taxpayer purchases the fabricated item for the manufacture of, or conversion into, articles of
tangible personal property for resale. Additionally, the fabricated item becomes a component part
of the Taxpayer’s finished products, i.e., its [PRODUCTS]. Accordingly, charges for the
fabrication of tangible personal property are exempt for purposes of the Tennessee sales and use
tax under TENN. CODE ANN. § 67-6-329(a)(12) as sales of industrial materials.
2.

Charges for the installation of tangible personal property

Charges made by third party contractors to the Taxpayer for the installation of tangible personal
property, incidental to the process of manufacturing [PRODUCTS] by or at the direction of the
Taxpayer for sale to customers in the ordinary course of business, are exempt for purposes of the
Tennessee sales and use tax as sales of industrial supplies used in the manufacture of tangible
personal property for resale.
As explained above, retail sales of specifically enumerated services in Tennessee are subject to
the sales and use tax. TENN. CODE ANN. § 67-6-205(c)(6) (2011) imposes the sales tax on the
“installing of tangible personal property that remains tangible personal property after installation
and the installing of computer software, where a charge is made for the installation, whether or
not the installation is made as an incident to the sale of tangible personal property or computer
software, and whether or not any tangible personal property or computer software is transferred
in conjunction with the installation service.”
Thus, charges for the installation of tangible personal property that remains tangible personal
property after installation are subject to taxation. Here, the third party contractor charges the
Taxpayer for the installation of tangible personal property that remains tangible personal
property after installation. Therefore, the transaction will be subject to taxation unless an
exemption applies. In the Taxpayer’s case, charges for such installation are exempt for purposes
of the Tennessee sales and use tax because such services are bought for future processing,
manufacturing or conversion into articles of tangible personal property for resale, and become a
component part of the finished products.
TENN. CODE ANN. § 67-6-102(78) (2011) defines a “retail sale” as any “sale, lease, or rental for
any purpose other than for resale, sublease, or subrent.” (Emphasis added.) Sales for resale are
therefore exempt for purposes of the Tennessee sales and use tax.4 TENN. CODE ANN. § 67-64

The phrase “for any purpose other than for resale” has been construed as an exemption that excludes sales for
resale from taxation. See Walker’s, Inc. v. Farr, 2010 WL 3488631, 3 (Tenn. Ct. App. 2010) (citing Nashville
Clubhouse Inn v. Johnson, 27 S.W.3d 542, 544 (Tenn. Ct. App. 2000) and Colemill Enters., Inc. v. Huddleston, 967
S.W.2d 753, 756 (Tenn. 1998)). Note that TENN. CODE ANN. § 67-6-102(77) requires that all sales for resale be in

4

102(77)(A) provides that the term “resale” means “a subsequent, bona fide sale of the property,
services, or taxable item by the purchaser.” A “sale for resale” is defined under TENN. CODE
ANN. § 67-6-102(77)(A) as “the sale of the property, services, or taxable item intended for
subsequent resale by the purchaser.” TENN. COMP. R. & REGS. 1320-5-1-.62 (1974) (“Rule 62”)
explains that “sales for resale” include “those whereby a supplier of materials, supplies,
equipment and services makes such tangible personal property or services available to legitimate
dealers actually selling such property or services as such, or which becomes an industrial
material or supply in a manufacturing or processing operation.” (Emphasis added.) In other
words, a sale for resale may include a service that becomes a supply in the manufacture,
processing, or fabrication of tangible personal property.
In particular, a sale for resale may include a service that will be used in the processing or
manufacture of tangible personal property for resale. TENN. CODE ANN. § 67-6-329(a)(12)
exempts “[i]ndustrial materials and explosives for future processing, manufacture or conversion
into articles of tangible personal property for resale where the industrial materials and explosives
become a component part of the finished product or are used directly in fabricating, dislodging,
or sizing.” Rule 40(1) explains this exemption, stating that “[m]aterials and taxable services
bought for future processing, manufacturing or conversion into articles of tangible personal
properly for resale, where such materials become a component part of the finished products are
not subject to Sales or Use Tax.” (Emphasis added.) Note that 2010 Tenn. Pub. Acts, Chapter
1134, § 1 (effective July 1, 2010) amended the definition of “resale” to exclude certain
transactions from the scope of the definition of “sale for resale.” However, this amendment has
no effect on the exemption for industrial materials under TENN. CODE ANN. § 67-6-329(a)(12).
Thus, for a particular transaction to qualify as a sale for resale, the third party contractor must be
a supplier of materials, supplies, equipment, or services. Additionally, one of the following
requirements must also be met: either 1) the Taxpayer must be a legitimate dealer actually selling
the installation services it purchases from the third party contractor as such; or 2) the installation
services sold to the Taxpayer must become a supply that will be used in the processing or
manufacture of tangible personal property for resale.
In the Taxpayer’s case, the third party contractor installs tangible personal property, and is thus
properly characterized as a supplier of services. Such installation services are used by the
Taxpayer incidental to its manufacturing process; therefore, the installation services sold by the
third party contractor become a supply that will be used in the processing or manufacture of
tangible personal property for resale.
Accordingly, charges for such installation of tangible personal property are exempt for purposes
of the Tennessee sales and use tax as sales of industrial supplies used in the manufacture of
tangible personal property for resale.

strict compliance with the rules and regulations promulgated by the Commissioner of Revenue. A dealer must obtain
a resale certificate from the purchaser in order to make an exempt sale for resale of tangible personal property or
services in Tennessee. See TENN. COMP. R. & REGS. 1320-5-1-.68(1) (2008). Alternatively, the purchaser may
present a Streamlined Sales and Use Tax Certificate of Exemption or a Tennessee Sales and Use Tax Blanket
Certificate of Resale in lieu of a certificate of resale.

5

3.

Charges for reworking parts purchased from parts suppliers

Charges made by third party contractors for reworking parts purchased by the Taxpayer from
parts suppliers, incidental to the process of manufacturing [PRODUCTS] by or at the direction of
the Taxpayer for sale to customers in the ordinary course of business, are exempt for purposes of
the Tennessee sales and use tax as sales of industrial supplies used in the manufacture of tangible
personal property for resale.
As noted above, retail sales in Tennessee of specifically enumerated services are subject to the
sales and use tax. Such taxable services include the repair of certain tangible personal property.
Specifically, TENN. CODE ANN. § 67-6-205(c)(4) imposes the sales tax on the “performing, for a
consideration, of any repair services to any kind of tangible personal property or computer
software.” TENN. COMP. R. & REGS. 1320-5-1-.54 (2000) (“Rule 54”) further explains and
clarifies this provision. In particular, Rule 54(2) provides that the terms “repair services” and
“repairs” of tangible personal property include the following, when provided to a user and
consumer: mending, correction, or adjustment made for any defect or defective portion;
refinishing; and any cleaning that is a necessary part of any repair work.
The Taxpayer has indicated that production rework involves reworking, cleaning, and repairing
defective parts purchased by the Taxpayer so that the parts are suitable for installation as
component parts of the [PRODUCTS] manufactured by the Taxpayer. Such parts are received in
a defective state by the Taxpayer from the supplier and must be reworked in order to be used in
the manufacturing process.
The production rework services are properly characterized as a repair service, because such
services include the mending, correction, or adjustment of defective parts; the refinishing of such
defective parts; and/or cleaning that is a necessary part of the reworking. The Taxpayer is the
user of such services. Therefore, the transaction will be subject to taxation unless an exemption
applies.
In the Taxpayer’s case, charges for the production reworking services are exempt for purposes of
the Tennessee sales and use tax because such services are bought for future processing,
manufacturing or conversion into articles of tangible personal properly for resale.
TENN. CODE ANN. § 67-6-102(78) defines a “retail sale” as any “sale, lease, or rental for any
purpose other than for resale, sublease, or subrent.” (Emphasis added.) Sales for resale are
therefore exempt for purposes of the Tennessee sales and use tax. TENN. CODE ANN. § 67-6102(77)(A) provides that the term “resale” means “a subsequent, bona fide sale of the property,
services, or taxable item by the purchaser.” A “sale for resale” is defined under TENN. CODE
ANN. § 67-6-102(77)(A) as “the sale of the property, services, or taxable item intended for
subsequent resale by the purchaser.” Rule 62 explains that “sales for resale” include “those
whereby a supplier of materials, supplies, equipment and services makes such tangible personal
property or services available to legitimate dealers actually selling such property or services as
such, or which becomes an industrial material or supply in a manufacturing or processing
operation.” (Emphasis added.) In other words, a sale for resale may include a service that
becomes a supply in the manufacture, processing, or fabrication of tangible personal property.

6

In particular, a sale for resale may include a service that will be used in the processing or
manufacture of tangible personal property for resale. TENN. CODE ANN. § 67-6-329(a)(12)
exempts “[i]ndustrial materials and explosives for future processing, manufacture or conversion
into articles of tangible personal property for resale where the industrial materials and explosives
become a component part of the finished product or are used directly in fabricating, dislodging,
or sizing.” Rule 40(1) explains this exemption, stating that “[m]aterials and taxable services
bought for future processing, manufacturing or conversion into articles of tangible personal
properly for resale, where such materials become a component part of the finished products are
not subject to Sales or Use Tax.” (Emphasis added.) Note that 2010 Tenn. Pub. Acts, Chapter
1134, § 1 (effective July 1, 2010) amended the definition of “resale” to exclude certain
transactions from the scope of the definition of “sale for resale.” However, this amendment has
no effect on the exemption for industrial materials under TENN. CODE ANN. § 67-6-329(a)(12).
Thus, for a particular transaction to qualify as a sale for resale, the third party contractor must be
a supplier of materials, supplies, equipment, or services. Additionally, one of the following
requirements must also be met: either 1) the Taxpayer must be a legitimate dealer actually selling
the repair services it purchases from the third party contractor as such; or 2) the repair services
sold to the Taxpayer must become a supply that will be used in the processing or manufacture of
tangible personal property for resale.
In the Taxpayer’s case, the third party contractor repairs tangible personal property, and is thus
properly characterized as a supplier of services. Such repair services are used by the Taxpayer
incidental to its manufacturing process; therefore, the repair services sold by the third party
contractor become a supply that will be used in the processing or manufacture of tangible
personal property for resale.
Accordingly, charges for such repairs of tangible personal property are exempt for purposes of
the Tennessee sales and use tax as sales of industrial supplies used in the manufacture of tangible
personal property for resale.
4.

Charges for repair and cleaning of direct materials, work in process and finished goods

Charges made by third party contractors to the Taxpayer for repairing or cleaning items of
tangible personal property during the process of manufacturing [PRODUCTS] are exempt for
purposes of the Tennessee sales and use tax as sales for resale. Charges made by third party
contractors to the Taxpayer for repairing or cleaning items of tangible personal property after
completion of the manufacturing process are subject to the sales and use tax.
As noted above, retail sales of specifically enumerated services in Tennessee are subject to the
sales and use tax. Such taxable services include the repair or cleaning of certain tangible personal
property.
Specifically, charges for the repair and/or cleaning of tangible personal property are subject to
the Tennessee sales tax, unless an exemption applies. TENN. CODE ANN. § 67-6-205(c)(4)
imposes the sales tax on the “performing, for a consideration, of any repair services to any kind
of tangible personal property or computer software.” Rule 54(2) explains that the terms “repair
services” and “repairs” of tangible personal property include the following, when provided to a

7

user and consumer: mending, correction, or adjustment made for any defect or defective portion;
refinishing; and any cleaning that is a necessary part of any repair work. Additionally, TENN.
CODE ANN. § 67-6-205(c)(5) imposes the sales tax on the “laundering or dry cleaning of any kind
of tangible personal property, excluding coin-operated laundry, dry cleaning or car wash
facilities, where a charge is made for the laundering or dry cleaning.” TENN. COMP. R. & REGS.
1320-5-1-.53(1) (1974) (“Rule 53(1)”) explains this provision, stating that the “washing, drying,
or cleaning of any kind of tangible personal property … and repair or alteration of any tangible
personal property, for use and consumption” is subject to the sales tax.
The Taxpayer has indicated that the services at issue involve the repair and/or cleaning of
inventories of direct materials, work in process, finished goods, and [REDACTED] that are
damaged during or subsequent to the manufacturing process and before delivery to
[PURCHASERS]. In the case of finished goods, the services are necessary to place the finished
[PRODUCTS] in a condition so that they can be sold to [PURCHASERS] for subsequent resale
to the [PURCHASERS’] customers.
The services at issue are properly characterized as a repair service and/or a cleaning service,
because such services include the mending, correction, or adjustment of defective parts; the
refinishing of such defective parts; cleaning that is a necessary part of the repair work; and/or
cleaning that is not performed in conjunction with a repair. Therefore, the sale of such a service
will be subject to taxation, unless an exemption applies.
Repair or cleaning of items during the manufacturing process
Charges made by third party contractors to the Taxpayer for repairing or cleaning items of
tangible personal property during the process of manufacturing [PRODUCTS] are exempt for
purposes of the Tennessee sales and use tax as sales for resale.
TENN. CODE ANN. § 67-6-102(78) defines a “retail sale” as any “sale, lease, or rental for any
purpose other than for resale, sublease, or subrent.” (Emphasis added.) Sales for resale are
therefore exempt for purposes of the Tennessee sales and use tax. TENN. CODE ANN. § 67-6102(77)(A) provides that the term “resale” means “a subsequent, bona fide sale of the property,
services, or taxable item by the purchaser.” A “sale for resale” is defined under TENN. CODE
ANN. § 67-6-102(77)(A) as “the sale of the property, services, or taxable item intended for
subsequent resale by the purchaser.” Rule 62 explains that “sales for resale” include “those
whereby a supplier of materials, supplies, equipment and services makes such tangible personal
property or services available to legitimate dealers actually selling such property or services as
such, or which becomes an industrial material or supply in a manufacturing or processing
operation.” (Emphasis added.)
Accordingly, a sale for resale may include a service that becomes a supply in the manufacture,
processing, or fabrication of tangible personal property. In particular, a sale for resale may
include a service that will be used in the processing or manufacture of tangible personal property
for resale. TENN. CODE ANN. § 67-6-329(a)(12) exempts “[i]ndustrial materials and explosives
for future processing, manufacture or conversion into articles of tangible personal property for
resale where the industrial materials and explosives become a component part of the finished
product or are used directly in fabricating, dislodging, or sizing.” Rule 40(1) explains this

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exemption, stating that “[m]aterials and taxable services bought for future processing,
manufacturing or conversion into articles of tangible personal properly for resale, where such
materials become a component part of the finished products are not subject to Sales or Use Tax.”
(Emphasis added.) Note that 2010 Tenn. Pub. Acts, Chapter 1134, § 1 (effective July 1, 2010)
amended the definition of “resale” to exclude certain transactions from the scope of the
definition of “sale for resale.” However, this amendment has no effect on the exemption for
industrial materials under TENN. CODE ANN. § 67-6-329(a)(12).
Thus, for a particular transaction to qualify as a sale for resale, the third party contractor must be
a supplier of materials, supplies, equipment, or services. Additionally, one of the following
requirements must also be met: either 1) the Taxpayer must be a legitimate dealer actually selling
the repair or cleaning services it purchases from the third party contractor as such; or 2) the
repair or cleaning services sold to the Taxpayer must become a supply that will be used in the
processing or manufacture of tangible personal property for resale.
In the Taxpayer’s case, the third party contractor repairs or cleans tangible personal property, and
is thus properly characterized as a supplier of services. When such repair or cleaning services are
used by the Taxpayer incidental to its manufacturing process, the services sold by the third party
contractor become a supply that will be used in the processing or manufacture of tangible
personal property for resale.
Accordingly, charges made by third party contractors to the Taxpayer for repairing or cleaning
items of tangible personal property during the process of manufacturing [PRODUCTS] are
exempt for purposes of the Tennessee sales and use tax as sales for resale.
Repair or cleaning of items subsequent to the manufacturing process
The Taxpayer is the end user and consumer of repair services performed with respect to its
finished goods inventory. Charges made by third party contractors to the Taxpayer for repairing
or cleaning items of tangible personal property after completion of the manufacturing process are
therefore subject to the sales and use tax.
As discussed above, for a particular transaction to qualify as a sale for resale, the third party
contractor must be a supplier of materials, supplies, equipment, or services. Additionally, one of
the following requirements must also be met: either 1) the Taxpayer must be a legitimate dealer
actually selling the repair or cleaning services it purchases from the third party contractor as
such; or 2) the repair or cleaning services sold to the Taxpayer must become a supply that will be
used in the processing or manufacture of tangible personal property for resale.
TENN. CODE ANN. § 67-6-102(77)(B)(ii), however, limits the term “sale for resale” by providing
that a sale for resale “does not include a sale of services to a dealer for use in the business of
selling, leasing, or renting tangible personal property or computer software.” Services “used in
the business” of selling tangible personal property “include, but are not limited to, services such
as cleaning, maintaining, or repairing property that is held as inventory for sale, lease, or rental.”
Id. (Emphasis added.) Thus, the purchase of cleaning or repair services for use with respect to
inventory generally does not qualify as a sale for resale.

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TENN. CODE ANN. § 67-6-102(77)(B)(ii) does not supersede the separate and specific exemption
for industrial materials and supplies set forth in TENN. CODE ANN. § 67-6-329(a)(12), Rule 40(1),
and Rule 62 as explained above. It does, however, clarify that the repair of inventory held for
sale, lease or rental does not constitute the sale of repair services for resale “as such” for
purposes of Rule 62.
In the Taxpayer’s case, the third party contractor repairs or cleans tangible personal property, and
is thus properly characterized as a supplier of services. However, the Taxpayer is the end user
and consumer of repair services performed with respect to its finished goods inventory. TENN.
CODE ANN. § 67-6-102(77)(B)(ii). Thus, when such repair or cleaning services are used by the
Taxpayer after completion of the manufacturing process, the services sold by the third party
contractor do not become a supply that will be used in the processing or manufacture of tangible
personal property for resale. Nor are the repair or cleaning services resold by the Taxpayer “as
such” for purposes of TENN. CODE ANN. § 67-6-102(77) and Rule 62, because the Taxpayer does
not sell repair services.
As a result, charges made by third party contractors to the Taxpayer for repairing or cleaning
items of tangible personal property after completion of the manufacturing process are subject to
the sales and use tax.

Kristin Husat
General Counsel

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

July 24, 2012

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