The Tennessee Department of Revenue (DOR) has issued a letter ruling to a company regarding the taxability of repair services performed in Tennessee on traffic management equipment which is shipped to out-of-state customers.
The company manufactures and sells traffic management equipment, including cameras installed at roadway intersections that assist with regulating traffic flow. The equipment detects traffic that is increasing in a particular direction and adjusts traffic light timing to mitigate roadway congestion.
If the equipment needs to be repaired, out-of-state customers ship the equipment to the company’s repair center in Tennessee. The equipment is repaired in Tennessee then shipped back to the customer via common carrier, FOB origin such that possession of the equipment transfers to the customer upon shipment from the Tennessee facility.
The DOR stated that with respect to transactions occurring before July 1, 2024, repair services on tangible personal property are subject to Tennessee sales tax and the relevant exemption is not applicable to the company’s repair services. The relevant exemption applies to repair services (including parts and labor) with respect to “qualified tangible personal property” where such services are initiated or completed (or both) by a repair person in Tennessee and where such property, after having repair services performed on it, is delivered or shipped outside of Tennessee. Tennessee tax code defines “qualified tangible personal property” in part to include “machinery, apparatus and equipment, with all associated parts, appurtenances and accessories, that is necessary for…Building or improving roads or highways.” The traffic management equipment is not used to build roads, nor does it improve the physical structure of the road. Therefore, the exemption does not apply to the company’s repair services for transactions before July 1, 2024.
However, as a result of a recent law change, beginning July 1, 2024, if the repair service is performed in Tennessee and property is then shipped or delivered by the seller to the out-of-state purchaser, the sale is no longer sourced to Tennessee and is therefore an exempt interstate sale. This serves as a reminder to monitor for legislative changes pertaining to your industry, as they can affect the taxability of the services or products that you sell.
The DOR notes that with respect to transactions occurring before July 1, 2024, the shipping method is not relevant to the taxability of the taxpayer’s repair services. (Letter Ruling #24-05, Tennessee Department of Revenue, June 4, 2024)