Sales Tax State Activity Update - December 2004

Tennessee Defines Catalysts as Industrial Machinery

A Tennessee Supreme Court opinion held that catalysts fall within the definition of industrial machinery because they are integral parts of equipment and apparatus used in the manufacturing process.

A manufacturer of chemicals and plastics uses fixed bed, batch and cobalt hydrate catalysts in their production process. The production equipment in question is specifically designed to work in conjunction with the catalysts.

Tennessee statutes define industrial machinery, in pertinent part, as machinery, apparatus and equipment with all associated parts, appurtenances and accessories, which is necessary to, and primarily for, the fabrication or processing of tangible personal property for resale and consumption off the premises, …where the use of such machinery, equipment or facilities is by one who engages in such fabrication or processing as one’s principal business.

The Supreme Court relies on its previous decisions in AFG Indus. Inc. v. Cardwell, 835 S.W.2d 583 (Tenn.1992); Tibbals Flooring Co. v. Olsen, 698 S.W.2d 60 (Tenn. 1985); and Tibbals Flooring Co. v. Huddleston, 891 S.W.2d 196 (Tenn. 1994) which examined the term apparatus within the definition of industrial machinery and established that all components integral to manufacturing or processing are exempt under the definition of industrial machinery, whether or not they fit the traditional concept or imagery of machinery.

In this instance, the taxpayer uses catalysts in conjunction with production equipment that would not operate without the catalysts. The catalysts were used again and again over a period of months or years and triggered chemical reactions that turn raw materials into finished goods for resale and consumption off the premises. Catalysts were exempt as they met the definition of industrial machinery.

The full text may be accessed at: http://www.tsc.state.tn.us/OPINIONS/TSC/PDF/044/Eastman.pdf Tennessee Supreme Court Opinion No. M2002-02114-SC-R11-CV, Eastman Chemical Company v. Ruth E. Johnson, Commissioner of Revenue November 24, 2004

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