Tennessee – Taxability of Manufacturer’s Purchase of Third-Party Services

SALT Report 2025 – The Tennessee Department of Revenue issued a ruling regarding the taxability of transactions that occur between a third party contractor and a manufacturer. The Taxpayer, in this case, manufactures tangible personal property for resale using labor provided by its employees and third-party contractors.

The third-party contractors provide the following services:

  • Product fabrication,
  • Installation of parts,
  • Reworking, cleaning, or repairing defective parts purchased by the Taxpayer from parts suppliers, and
  • Repair and cleaning of materials, works in process, finished goods, and items that are damaged in the manufacturing process or prior to delivery

The Department determined the taxability of charges between the Taxpayer and the third-party contractors as follows:

Charges made by third-party contractors for the fabrication of tangible personal property, as part of the manufacturing process, are exempt from sales and use tax as sales of industrial materials.  In this situation, the fabricated items are considered industrial materials because the Taxpayer purchases the items for manufacture into property for resale. Further, the fabricated items become component parts of the Taxpayer’s finished products.

Charges by third-party contractors for the installation of tangible personal property or to rework parts are exempt as industrial supplies used in the manufacture of tangible personal property. These charges are exempt because the 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.

Charges by third-party contractors to repair or clean items of tangible personal property during the manufacturing process are exempt as sales for resale. In this case, repair or cleaning services are used by the Taxpayer incidental to the manufacturing process, therefore the services sold by a third party contractor become a supply that will be used in the processing or manufacture of tangible personal property for resale.

However, charges to repair or clean items after completion of the manufacturing process are taxable because the Taxpayer is considered the end user and consumer of the repair services performed on finished goods inventory.

For Further Information:

Tennessee Department of Revenue – Letter Ruling Number 12-12