SALT Report 1920 – The Tennessee Department of Revenue issued a letter ruling regarding the taxability of receipts derived from the sale of automotive parts to a third party. The Third party uses the parts to manufacture products that will be sold for resale.
The Taxpayer does not have a place of business in Tennessee however; he does lease warehouse space in the state to store the automotive parts that the third party has agreed to purchase. When the third party needs a part, it sends an employee to the warehouse to retrieve it. After removing the part from the warehouse, the third party informs the Taxpayer as to which part was taken. The Taxpayer then invoices the third party for that part.
The third party is contractually bound to purchase any excess parts if there is a change in its ordering schedule. The contract ensures that all of the parts shipped to Tennessee and temporarily stored at the warehouse will be purchased by the third party.
The Department ruled The Taxpayer’s sales are considered wholesale sales under Tennessee Code § 67-4-702(a)(24)(B) which states that wholesale sales or sales at wholesale “include the sale of 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.”
In the Taxpayer’s case, the automotive parts are considered an industrial material. The Taxpayer sells the automotive parts to the third party for future processing, manufacture or conversion into articles of tangible personal property for resale. Additionally, the automotive parts become a component part of the finished product.
Based on the above facts, the Department ruled that the Taxpayer’s receipts derived from sales of automotive parts to the third party are subject to tax.
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