Tennessee – Taxability of Equipment and Materials Used for Pollution Control

SALT Report 2319 – The Tennessee Department of Revenue issued a letter ruling regarding whether the pollution control credit and the industrial machinery exemption can be used by a city landfill. The Taxpayer in this case, partners with municipalities to design, construct, and manage landfills in Tennessee. The municipality owns the land, obtains the zoning and permits, and then contracts with the Taxpayer to construct, operate, and manage the landfills for the life of the sites.

In their ruling the Department stated that there are two “exemptions” for pollution control devices. The first, is provided in TCA § 67-6-346 and is primarily a credit, rather than an exemption. The second exemption for pollution control devices is when they qualify as industrial machinery as defined in TCA § 67-6-206(a). In some cases, taxpayers that purchase pollution control devices may be entitled to both the pollution control credit and the industrial machinery exemption.

Pollution Control Credit

This provides a 100% credit of the sales and use tax paid for “any system, method, improvement, structure, device or appliance…that is required and primarily used to bring the purchaser into compliance with pollution control laws…when such pollution is created in the course of the purchaser’s regular business activities.” However, in order to qualify for the pollution control credit, the purchaser must be the one who created the pollution that it is seeking to control.

Based on that definition, the Department determined that the materials and equipment purchased by the Taxpayer to construct and operate the solid waste landfills do not qualify for the pollution control credit because the statute specifically states that the pollution control credit is not available to persons “primarily engaged in processing, treating, or controlling pollution created by others.” Although some new pollutants may be created as a result of the Taxpayer’s activities, the primary purpose of the landfill is to process, treat, or control pollution created by others.

Industrial Machinery Exemption

This exemption can apply in two different ways. The first is if the Taxpayer is purchasing devices for use in or as a part of a pollution control facility. The second is if the Taxpayer is purchasing devices for use in water pollution control or sewage systems pursuant to a contract with a county or municipality, or is itself a county or municipality. This exemption extends to items purchased by contractors for use in water pollution control and in certain circumstances may apply to landfills.

In this case, the Taxpayer contracts with counties and municipalities to construct and operate various landfills. Therefore, items purchased by the Taxpayer that will be used primarily for “water pollution control or sewage systems” pursuant to a contract with a municipality or county will qualify for the exemption.

For Further Information

Tennessee Department of Revenue – Letter Ruling #13-06

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