A Tennessee blood and plasma processor must run federally required disease tests on the blood it turns into products for sale. Are the chemical reagents used in that testing exempt from Tennessee sales and use tax?

Plain-English summary

A Tennessee company collects donated whole blood and source plasma and turns it into blood products and source plasma that it sells to customers (including for pharmaceutical manufacturing). Federal law requires it to test every donation for communicable diseases like HIV and hepatitis; if a sample is contaminated, the whole unit is destroyed. The testing uses chemical reagents — substances added to the blood or plasma sample that react to reveal infections and are used up in the process. The company asked whether those reagents are subject to Tennessee sales and use tax.

The Department said the reagents are exempt — but only when two conditions are met. Tennessee taxes tangible personal property generally, but § 67-6-329(a)(12) exempts "industrial materials" used directly in processing or manufacturing property into goods for resale, and the Department's Rule 1320-5-1-.40(2) spells out the practical test: materials and supplies that come into direct contact with the product and are consumed within 25 consecutive calendar days in processing are not taxable.

Two pieces fit together to make the reagents qualify:

• Turning blood into products is "processing." "Processing" isn't defined in the statute, so the Department used the Tennessee Supreme Court's definition from Beare Co. — "a transformation or conversion of materials or things into a different state or form... the actual operation incident to changing them into marketable products." Separating and converting whole blood into blood products and source plasma fits.
• The disease testing is a necessary step in that processing. Because federal law requires the testing, and a unit that fails is destroyed rather than sold, the testing is built into making a sellable product — not an optional add-on.

So the reagents are exempt industrial materials — provided they actually touch the blood or plasma being processed and are consumed within 25 days. Reagents that don't meet both conditions wouldn't qualify.

Because this is a Revenue Ruling, it is advisory and not binding on the Department.

What this means for you

Manufacturers and processors generally

This is a useful illustration of Tennessee's "industrial materials" / Rule 40(2) exemption, which reaches well beyond machinery to the consumables a manufacturer uses up making its product. The recurring test is concrete: does the material come into direct contact with the product being processed, and is it consumed within 25 consecutive calendar days? Catalysts, chemicals, and testing agents that meet both can be bought tax-free even though they never end up in the finished good. Materials that don't directly contact the product, or that last longer than 25 days, fall outside this exemption.

Blood, plasma, laboratory, and life-sciences businesses

Converting donated blood and plasma into sellable products is processing/manufacturing for Tennessee sales-tax purposes, and federally mandated testing that's a prerequisite to selling a unit is part of that processing. The reagents that contact the samples and are consumed in testing can qualify as exempt industrial materials. The same logic can apply to other consumed, direct-contact inputs in a regulated production line — but each input has to clear the direct-contact and 25-day tests.

Accountants and tax professionals

The exemption rests on § 67-6-329(a)(12) plus Rule 1320-5-1-.40(2), with "processing" supplied by Beare Co. v. Tennessee Department of Revenue (quoting Ohio's Gressel Produce). The decisive facts were (1) the federal testing mandate (21 C.F.R. §§ 610.40, 640.67) that makes testing a necessary processing step, and (2) the two Rule 40(2) conditions — direct contact and consumption within 25 days. Document both for any consumable you treat as exempt.

Common questions

Q: Are chemical reagents and consumables exempt from Tennessee sales tax for manufacturers?
A: They can be, under the "industrial materials" exemption (§ 67-6-329(a)(12)) and Rule 1320-5-1-.40(2), if the material comes into direct contact with the product being processed and is consumed within 25 consecutive calendar days. Here, blood- and plasma-testing reagents met both conditions and were exempt.

Q: Why does disease testing count as part of processing?
A: Federal law requires the company to test donated blood and plasma before it can sell the resulting products, and a contaminated unit is destroyed. That makes the testing a necessary step in turning the raw material into a marketable product — i.e., part of "processing."

Q: What's the 25-day rule?
A: Rule 40(2) treats materials and supplies that contact the product and are consumed within 25 consecutive calendar days in processing as not subject to sales and use tax. A reagent (or other consumable) that isn't consumed within that window, or doesn't directly contact the product, would not qualify on this basis.

Q: Can I rely on this revenue ruling?
A: No. A Tennessee revenue ruling is advisory and is not binding on the Department, and the result depends on the specific facts. Use it as guidance and confirm your own situation with a tax professional.

Citations and references

Tennessee statutes and rules:

• § 67-6-329(a)(12), Tenn. Code Ann. (exemption for "industrial materials" used directly in processing/manufacturing property into TPP for resale)
• Tenn. Comp. R. & Regs. 1320-5-1-.40(2) ("Rule 40(2)" — materials/supplies that directly contact the product and are consumed within 25 consecutive calendar days in processing are not taxable)
• § 67-6-101 et seq. (Retailers' Sales Tax Act — retail sales of TPP are generally taxable)

Federal regulations cited:

• 21 C.F.R. § 610.40 (mandatory testing of donated blood for communicable diseases); 21 C.F.R. § 640.67 (source-plasma testing); 21 C.F.R. § 606.3(e) (definition of "plasmapheresis")

Cases cited by the ruling:

• Beare Co. v. Tenn. Dep't of Revenue, 858 S.W.2d 906 (Tenn. 1993) (definition of "processing" — transformation/conversion into a different state or form), quoting Gressel Produce Co. v. Kosydar, 297 N.E.2d 532 (Ohio 1973)

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/14-13.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
REVENUE RULING # 14-13
Revenue rulings are not binding on the Department. 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 exemption under TENN. CODE ANN. § 67-6329(a)(12) (Supp. 2014) for industrial materials.
SCOPE
Revenue Rulings are statements regarding the substantive application of law and statements of
procedure that affect the rights and duties of taxpayers and other members of the public. Revenue
Rulings are advisory in nature and are not binding on the Department.
FACTS
The Taxpayer is a U.S. Food and Drug Administration (“FDA”) registered manufacturer and
distributor of blood products and an FDA licensed producer of source plasma.
The Taxpayer maintains its corporate headquarters in Tennessee. The Taxpayer’s Tennessee
operations include [NUMBER OF] whole blood donation centers and a laboratory for testing
and processing blood and source plasma. Outside of the state, the Taxpayer owns and operates
[NUMBER OF] whole blood donation facilities and [NUMBER OF] plasma donation facilities.
The Taxpayer is also affiliated, through common ownership, with [NUMBER OF] other
companies that operate whole blood and plasma collection centers inside and outside of
Tennessee. The Taxpayer purchases all of the whole blood collected by its affiliated companies’
blood donation centers.
The Taxpayer’s Tennessee laboratory facility tests samples of each donor’s whole blood
extracted at its blood donation centers as well as blood purchased from its related companies. It
also tests samples of source plasma collected at the Taxpayer’s plasma donation centers as well
as source plasma specimens collected by its affiliated companies.
Blood Products
The Taxpayer processes whole blood to make human serum, recovered plasma, frozen plasma,
red blood cells, leukocytes, platelet rich plasma, and platelet concentrates (the “Blood Products”)
for sale to customers. After whole blood is extracted from individual donors and sent to the

Taxpayer’s Tennessee laboratory, the Taxpayer separates a blood sample from each donor’s
whole blood. The Taxpayer performs several tests on each blood sample, including a federallymandated1 test for infection from the following communicable diseases:
(1) Human immunodeficiency virus (HIV), type 1;
(2) Human immunodeficiency virus (HIV), type 2;
(3) Hepatitis B virus;
(4) Hepatitis C virus;
(5) Human T-lymphotropic virus, type I; and
(6) Human T-lymphotropic virus, type II.
The Taxpayer uses a variety of machines and reagents to test the blood samples for the listed
communicable diseases. The reagents that the Taxpayer adds to the blood samples trigger a
chemical reaction indicating the presence or absence of specific antibodies, viruses, or proteins.
The reagents are consumed in the testing process. If the tests show that any of the listed
communicable diseases are present in the blood sample, all blood, blood components, and
samples from that particular donor are destroyed, and the donor is permanently prohibited from
making future donations.
After the whole blood is cleared for use, the Taxpayer’s laboratory personnel mechanically
separate the whole blood into the Blood Products to meet the specifications of each customer’s
particular order. The Taxpayer uses different physical and chemical processes to break down the
blood into the various components.2 The Taxpayer then ships the Blood Products directly to its
customers.
Source Plasma
The Taxpayer processes whole blood to make source plasma (the “Source Plasma”) for sale to
customers. Personnel at the Taxpayer’s plasma donation centers and the donation centers of the
Taxpayer’s affiliates screen potential plasma donors to determine their medical histories. Once
approved, the donors proceed to the donor floor where plasmapheresis, the plasma extraction
process, takes place.
“Plasmapheresis” is defined under federal law as “the procedure in which blood is removed from
the donor, the plasma is separated from the formed elements, and the red blood cells are returned
to the donor.”3 Trained technicians connect the individual donor to the automated plasmapheresis
machine using a disposable harness. The harness contains the tubing device through which all
blood and other fluid products flow both from and into the individual donor. The machine
extracts whole blood from the individual through a needle attached to one end of the disposable
harness. An anticoagulant is added to the blood, and the blood is spun at high speeds in a
centrifuge to extract the plasma from the whole blood. The plasma proceeds to a packaging
1

See 21 C.F.R. § 610.40 (2014). Additionally, the Taxpayer tests the blood sample to determine blood type and Rh
(Rhesus factor) and conducts a serological test for syphilis.
2

For example, to produce the Taxpayer’s Red Blood Cell product, the Taxpayer extracts red blood cells from the
whole blood by using centrifugation and removes the plasma layer.
3

21 C.F.R. § 606.3(e) (2014).

bottle for freezing and shipment, and the remaining cell components are returned to the
individual by the same intravenous needle.
A specimen of the Source Plasma is extracted for testing, and the remaining Source Plasma is
immediately placed into inventory and fast-frozen in free-standing freezers located at the plasma
donor center.
Once the plasma has been separated and inventoried, the Source Plasma specimens are sent to
the Taxpayer’s Tennessee laboratory. The Taxpayer performs a series of federally-mandated4
tests for the same communicable diseases for which it tests the whole blood samples. The
screening tests employ testing machines and use a variety of reagents, all of which are consumed
during the tests. If the Taxpayer determines that any of the viruses or communicable diseases for
which it tests are present in a specimen, it destroys the unit of plasma from which the sample was
drawn, and the donor is prohibited from donating in the future.
In addition to testing for viral contamination, the Taxpayer tests to determine if the Source
Plasma is suitable for fractionation. Fractionation is a process that separates the proteins in the
Source Plasma into various components and renders the plasma suitable for the manufacture of
injectable therapeutic products. If the Source Plasma is suitable for fractionation, the Taxpayer
sells it to customers for use in pharmaceutical manufacturing. If plasma passes screening for
communicable diseases but is not suitable for fractionation, it is downgraded and further
processed by the Taxpayer at its Tennessee laboratory.
RULING
Are the reagents that that the Taxpayer utilizes in testing the whole blood used to produce the
Blood Products and in testing the Source Plasma exempt from the Tennessee sales and use tax?
Ruling: The reagents the Taxpayer utilizes in the testing of whole blood used to produce
the Blood Products and in the testing of the Source Plasma are exempt from the
Tennessee sales and use tax as industrial materials used in the processing of tangible
personal property for resale if the reagents come in direct contact with the whole blood
used to produce the Blood Products or Source Plasma and are consumed within twentyfive days.

ANALYSIS
Under the Retailers’ Sales Tax Act, TENN. CODE ANN. § 67-6-101 et seq., the sale of tangible
personal property is generally subject to the Tennessee sales and use tax. However, TENN. CODE
ANN. § 67-6-329(a)(12) (Supp. 2014) 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 . . . are used directly in fabricating, dislodging,
or sizing.” TENN. COMP. R. & REGS. 1320-5-1-.40(2) (1974) (“Rule 40(2)”) explains that
“[m]aterials and supplies coming in direct contact with and which are consumed within twenty4

21 C.F.R. § 640.67 (2014)

five (25) consecutive calendar days, in the processing of manufactured products” are not subject
to the sales and use tax.
Because the Retailer’s Sales Tax Act does not define the term “processing,” the Tennessee
Supreme Court in Beare Co. v. Tenn. Dep’t of Revenue defined the term for purposes of sales
and use tax exemptions as “essentially a transformation or conversion of materials or things into
a different state or form from that in which they originally existed—the actual operation incident
to changing them into marketable products.”5
By extracting and converting whole blood into Blood Products and Source Plasma, the Taxpayer
engages in the processing of Blood Products and Source Plasma for resale. Because the Taxpayer
is required by federal law to test any donated whole blood and Source Plasma for communicable
diseases,6 and because the Taxpayer destroys a unit of whole blood or Source Plasma from which
the sample is taken if the sample shows evidence of a communicable disease, its use of the
reagents and testing of the whole blood and Source Plasma is a necessary step in the processing
of Blood Products and Source Plasma for resale. To perform the mandatory testing for both the
whole blood in processing Blood Products and the Source Plasma, the Taxpayer purchases
reagents that it adds to the whole blood and source plasma samples.
Based on the foregoing, if the Taxpayer utilizes the reagents for testing purposes in the
processing of Blood Products or Source Plasma, and if the reagents come into direct contact with
the whole blood used to produce the Blood Products or Source Plasma and are consumed within
twenty-five days, such materials will be exempt from the sales and use tax pursuant to TENN.
CODE ANN. § 67-6-329(a)(12) and Rule 40(2).

Grant Marshall
Assistant General Counsel

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

November 6, 2014

5

858 S.W.2d 906, 908 (Tenn. 1993) (quoting Gressel Produce Co. v. Kosydar, 297 N.E.2d 532, 535 (Ohio 1973)).

6

See 21 C.F.R. §§ 610.40; 640.67