Is Tennessee use tax due on equipment stored on site before a facility is placed in service?

The use tax moment: stored for use in this state

The use tax is levied at the retail rate on the purchase price of each item "when the tangible personal property is not sold, but is used, consumed, distributed, or stored for use or consumption in this state" (Tenn. Code Ann. § 67-6-203(a)). "Use" means "the exercise of any right or power over tangible personal property incident to the ownership thereof, except that it does not include the sale at retail of that property in the regular course of business" (Tenn. Code Ann. § 67-6-102(108)(A)), and "storage" means "any keeping or retention in this state of tangible personal property for use or consumption in this state, or for any purpose other than sale at retail in the regular course of business," with a proviso that temporary storage pending shipping or mailing to nonresidents of Tennessee is not a taxable use (Tenn. Code Ann. § 67-6-102(101)).

The levy's words matter more than the definition's. The levy reaches storage "for use or consumption in this state," so property kept in Tennessee with no Tennessee use in view is not taxed on the keeping alone. The manual draws the same line. Under the heading "When Use Tax Does Not Apply," it states that use tax does not apply to the temporary storage of tangible personal property in the state for subsequent shipment to another state, to storage for use or distribution in the state where the Tennessee sales or use tax has already been paid, and to inventory held for resale where the taxpayer strictly complies with the rules and regulations that govern sales for resale (Sales and Use Tax Manual, August 2026, ch. 6, p. 83). The first and third situations are the statute's own carve-outs, and the second is property already taxed.

Equipment that outside suppliers ship to the Tennessee plant it was bought for fits none of the three situations. It is kept in Tennessee for use in Tennessee, and taking delivery and holding it is also an exercise of a right incident to ownership. Nothing in the statute ties the taxable moment to accounting treatment or the installation date, so recording the equipment as construction in progress until it is commissioned does not defer the tax; of the statute's carve-outs, only sale at retail in the regular course of business is one a taxpayer is likely to argue. Where the supplier charged no Tennessee tax, the manual places the liability on the purchaser: when a user does not pay sales tax to a dealer, "the user becomes personally liable for the use tax" (id., ch. 3, p. 27).

The definition of "dealer" agrees: it includes any person who has "used, consumed, distributed, or stored for use or consumption in this state, tangible personal property and who cannot prove that the tax levied by this chapter has been paid" (Tenn. Code Ann. § 67-6-102(26)(D)). The credit for tax properly paid in another state (Tenn. Code Ann. § 67-6-313(f), quoted in the manual, ch. 6, p. 89) does not help where no other state's tax was paid either.

The "held for resale" argument and its limits

A taxpayer holding assets under construction may argue that they are held for resale, on the theory that the project could still be abandoned and the equipment sold. The argument borrows the vocabulary of the resale exemption without meeting its terms. A retail sale is "any sale, lease, or rental for any purpose other than for resale, sublease, or subrent" (Tenn. Code Ann. § 67-6-102(89)). "Resale" means "a subsequent, bona fide sale of the property, services, or taxable item by the purchaser," and a sale for resale is one "intended for subsequent resale by the purchaser" (Tenn. Code Ann. § 67-6-102(88)(A)). The Department's rule limits sales for resale to sales to legitimate dealers "actually selling such property or services as such," or of property that "becomes an industrial material or supply in a manufacturing or processing operation" (Tenn. Comp. R. & Regs. 1320-05-01-.62(1)).

Three features defeat the claim for plant equipment, and a fourth raises the cost of asserting it. First, both "use" and "storage" exclude only sale at retail "in the regular course of business," and a manufacturer that would sell plant equipment only if a project were abandoned does not sell equipment in the regular course of its business. Second, intent at purchase controls; equipment bought for the purchaser's own plant was bought for use, and the possibility of selling it later is not intent to resell. Third, the rule's manufacturing branch reaches property that becomes an industrial material or supply, not the machinery and facility equipment that make or house the product, which have their own exemption and conditions, discussed below. Fourth, certificates of resale "may not be used to obtain tangible personal property or taxable services to be used by the purchaser, and not for resale"; such use is grounds for revoking the dealer's registration, and misusing registration and resale certificates to obtain property without paying the tax when due is a misdemeanor (Tenn. Comp. R. & Regs. 1320-05-01-.68(3)).

The one case in which equipment held before installation escapes tax is a dealer's inventory: an equipment distributor that brings machines into a Tennessee warehouse for sale to customers holds them for sale in the regular course of business, and use tax reaches a machine only when the dealer withdraws it for its own use (Sales and Use Tax Manual, August 2026, ch. 6, p. 79). The line is drawn by the nature of the business, not the label on the ledger.

The industrial machinery exemption

Industrial machinery is exempt from Tennessee state and local sales and use tax (Tenn. Code Ann. § 67-6-206(a); Sales and Use Tax Manual, August 2026, ch. 5, p. 59, and ch. 20, p. 271). The core definition covers machinery, apparatus, and equipment "necessary to, and primarily for, the fabrication or processing of tangible personal property for resale and consumption off the premises," used by one that engages in that fabrication or processing as its principal business (Tenn. Code Ann. § 67-6-102(50)(A)(i)). The manual applies the principal business test location by location: manufacturing is a taxpayer's principal business where more than 50 percent of its revenues at a given location come from fabricating or processing tangible personal property for resale (Sales and Use Tax Manual, August 2026, ch. 20, p. 271).

The definition has edges that matter on a plant expansion. It includes equipment used in transporting raw materials from storage to the manufacturing process and finished goods from the end of the process to storage (Tenn. Code Ann. § 67-6-102(50)(D)(ii)), but it "does not include machinery, apparatus and equipment used prior to or after" that transport equipment, and it "does not include equipment used for maintenance or the convenience or comfort of workers" (Tenn. Code Ann. § 67-6-102(50)(F)). The manual's list of items that generally do not qualify includes HVAC systems designed for employee comfort and for purposes other than product integrity, electrical systems not devoted to the operation of qualified industrial machinery, transportation systems within manufacturing facilities that are not used in the manufacturing process, and light fixtures (Sales and Use Tax Manual, August 2026, ch. 20, p. 273).

The exemption is not self-executing. A manufacturer applies to the Department of Revenue separately for each manufacturing location and must receive the Department's certificate of exemption for industrial machinery (Sales and Use Tax Manual, August 2026, ch. 20, p. 277), and the Department's rule states that authority "must be obtained prior to the purchase in order for the machinery to qualify as industrial machinery for tax purposes" (Tenn. Comp. R. & Regs. 1320-05-01-.106(2)). The commissioner may allow retroactive application on grounds the rule lists, which include a major restructuring or change in ownership, the entity having been misled by state officials into believing authority was not required, and other grounds the commissioner finds satisfactory (id.). A contractor installing exempt machinery cannot use the manufacturer's certificate and applies for its own authorization number for each project (Sales and Use Tax Manual, August 2026, ch. 6, p. 87, and ch. 20, p. 277). The definition also contains a separate category for computer equipment used in a qualified data center (Tenn. Code Ann. § 67-6-102(50)(K)), which the library's article on Tennessee's qualified data center exemption addresses.

The plant expansion example

A manufacturer adds a production line and an administrative wing to its Tennessee plant. Over one quarter, outside suppliers deliver $8,000,000 of equipment, none of them charging Tennessee tax, and the manufacturer records all of it as construction in progress until the line is commissioned two quarters later. It obtained industrial machinery authorization for the location, which it had not previously held for the plant, before ordering most of the production machinery, but $500,000 of that machinery was ordered and delivered first.

The $6,500,000 of production machinery bought under the authorization is exempt, at delivery and later. The $500,000 bought before the authorization issued does not qualify unless the commissioner allows retroactive application (Tenn. Comp. R. & Regs. 1320-05-01-.106(2)); without that, it is taxable on receipt. The remaining $1,000,000 is equipment outside the definition: comfort heating and cooling for the plant floor and the wing, maintenance equipment, shipping dock equipment that moves finished goods out of storage onto outbound trucks, and office and computer equipment for the administrative staff (Tenn. Code Ann. § 67-6-102(50)(F); Sales and Use Tax Manual, August 2026, ch. 20, p. 273). The taxable base is therefore $1,500,000, and the liability belongs to the quarter of delivery, not the quarter of commissioning. The state portion at 7 percent is $105,000, before the local option tax and the single article tax, which are computed article by article as the next section describes.

The measure, and what happens when the invoices are missing

The use tax is measured by the purchase price of each item (Tenn. Code Ann. § 67-6-203(a)), and "purchase price" has the same meaning as "sales price" (Tenn. Code Ann. § 67-6-102(85)), which is "the total amount of consideration, including cash, credit, property, and services, for which personal property or services are sold, leased, or rented" (Tenn. Code Ann. § 67-6-102(92)(A)).

The rate layers are computed per article. The state rate of 7 percent applies to the full price; the local option tax applies only to the first $1,600 of the price of a single article in most jurisdictions, with two counties setting lower limits; and a state single article tax of 2.75 percent applies to the portion of a single article's price between $1,600 and $3,200 (Tenn. Code Ann. § 67-6-702(a)(1); Sales and Use Tax Manual, August 2026, ch. 9, pp. 105, 107 to 108). Where the local rate is 2.75 percent, a $20,000 comfort cooling unit from the example bears $1,488 ($1,400 of state tax, $44 of local tax, and $44 of single article tax), about 7.44 percent, so a combined rate applied to the construction in progress total overstates the liability and the state rate alone understates it. The library's article on what a state-rate-only voluntary disclosure estimate misses explains why the local layer belongs in any estimate.

Missing invoices do not eliminate the liability; a dealer who cannot prove the tax was paid is within the statute (Tenn. Code Ann. § 67-6-102(26)(D)). The base can be rebuilt from the fixed asset ledger, the construction in progress detail, and purchase and payment records, separating purchases that bore tax and purchases made under the industrial machinery authorization from those that did neither.

Penalties, interest, waiver, and voluntary disclosure

A manufacturer that reports zero use tax while taxable equipment sits on site has underpaid. The delinquency penalty is 5 percent of the tax for each month or portion of a month until payment, to a maximum of 25 percent; a 10 percent negligence penalty may be added, negligence including "any failure to make a reasonable attempt to comply with the law"; and fraud carries 100 percent in lieu of the others (Tenn. Code Ann. § 67-1-804; Sales and Use Tax Manual, August 2026, ch. 3, pp. 35 to 36). Interest accrues at a rate the Department computes each July 1 under a statutory formula (Tenn. Code Ann. § 67-1-801(a)); the rate for July 1, 2026 through June 30, 2027 is 10.75 percent, and for periods before an assessment interest accrues at the rate in effect on the date of the assessment, regardless of the tax period involved (Sales and Use Tax Manual, August 2026, ch. 3, p. 38).

Penalties can be waived; interest cannot. The commissioner may waive penalties that are not the result of gross negligence or willful disregard of the law where a good and reasonable cause set out in the statute applies, and the authority never extends to interest (Tenn. Code Ann. § 67-1-803; Sales and Use Tax Manual, August 2026, ch. 3, p. 36). For a deficiency, the causes the manual lists are good faith reliance on an interpretation of a law or regulation that was unclear and misleading at the time, reliance on factual but not legal misrepresentations by business associates, and a factual mistake corrected by voluntary payment of the deficiency and interest without demand (id., citing Tenn. Code Ann. § 67-1-803(c)(1)). The commissioner may also waive where the taxpayer shows that "it has done everything it could reasonably be expected to do as an ordinarily intelligent and reasonably prudent businessperson" (id. at p. 37). A placed-in-service theory adopted without advice is a weak candidate for the unclear-law ground, and a mistaken view of the law is not a factual mistake, so voluntary correction before Department contact fits the general standard or the voluntary disclosure program better.

The Department describes the voluntary disclosure agreement as one that resolves prior liability, registers the taxpayer, offers "a limited look back period," and "abates or reduces the penalty applied," and requires that the Department not have contacted the taxpayer about a previous liability (Tennessee Department of Revenue, Voluntary Disclosures 1, General Information). For most filers the look-back reaches returns due within three years of January 1 of the current year (Voluntary Disclosures 2, Filing Information), and the Department states that it will abate the non-filing penalty in most instances but that "interest cannot be waived" (Voluntary Disclosures 3, Penalty and Interest).

Two cautions apply to a manufacturer already registered. The taxpayer "generally should not be registered for the tax type that is the subject of the agreement" (Voluntary Disclosures 1), so a manufacturer that has been filing zero use tax on an existing account raises eligibility with the Discovery Unit first; the alternative is amended returns with a penalty waiver request. And an assessment must be made within three years from December 31 of the year a return was filed, but where no return was filed, or a false or fraudulent return was filed with intent to evade, at any time (Tenn. Code Ann. § 67-1-1501(b); Sales and Use Tax Manual, August 2026, ch. 3, p. 34). A registered manufacturer's filed returns therefore start the period even where they omitted the use tax, absent intent to evade, while a taxpayer that never registered has no period running at all.

The multistate pattern

Most states with a sales tax impose use tax on storage or first use in the state, without regard to when the property is placed in service. Washington's use tax (RCW 82.12.020(1)) treats as use the first act of dominion or control in the state, including "installation, storage, withdrawal from storage, distribution, or any other act preparatory to subsequent actual use or consumption within this state" (RCW 82.12.010(6)(a)). Texas imposes tax "on the storage, use, or other consumption in this state of a taxable item" (Tex. Tax Code § 151.101(a)); "storage" excludes "the keeping or retaining of tangible personal property for sale in the regular course of business" (Tex. Tax Code § 151.011(e)), and neither "use" nor "storage" includes keeping property to transport it outside the state for use solely outside it (Tex. Tax Code § 151.011(f)(1)), the same two lines Tennessee draws. A manufacturer with plants in several states can expect the same timing in each, with each state's manufacturing exemptions tested separately.

Practice notes

The use tax on plant equipment attaches when the equipment is first stored for use in Tennessee, which for equipment delivered to the plant it was bought for is the day of receipt, and classification as construction in progress does not defer it. Production machinery is exempt when the manufacturer holds industrial machinery authorization for the location at the time of purchase, so the sound sequence puts the authorization, and each installing contractor's project number, in place before machinery orders ship. Maintenance, worker comfort, shipping dock and administrative equipment are taxable on receipt whatever the authorization covers, as is machinery bought before the authorization issued, absent retroactive application. A resale claim holds only where the taxpayer sells such equipment in the regular course of its business. The base is reconstructed from the fixed asset ledger, the construction in progress detail and purchase records, with the local option cap and the single article tax applied per article. Interest runs at the rate in effect when the liability is assessed and cannot be waived. Where no Department contact has occurred, the choice lies between voluntary disclosure and amended returns with a penalty waiver request, with eligibility settled with the Discovery Unit first. G&G State Tax Group provides use tax exposure analysis and voluntary disclosure representation for manufacturers alongside its state and local tax practice.