United States

Tennessee: Court of Appeals Holds Door Parts Held for Sale Not Subject to Property Tax

Dec 07, 2015
From KPMG TaxWatch

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Recently, a Tennessee appeals court held that a retailer was not subject to personal property taxes on door component parts held in inventory. The taxpayer, a Tennessee-based company, sold doors, doorframes, hinges, casings, moldings, and other component door parts. The parts were either sold individually or assembled into a completed door, upon customer request. In 2011, the Shelby County Assessor of Property (Assessor) sent notices of assessment to the taxpayer asserting that the company underreported its tangible personal property on its personal property tax schedules. Under Tennessee property tax law, taxpayers must report and pay tax on all tangible personal property owned and held for use, including machinery, supplies, and raw materials. An exclusion exists for finished goods and inventory held for sale. The Assessor classified the door parts as raw materials, while the taxpayer asserted that they were inventory held for sale.

After unsuccessful appeals to the State Board of Equalization and Tennessee Assessment Appeals Commission, the taxpayer filed suit in chancery court. The chancery court concluded that the door parts were finished goods inventory, rather than raw materials. The Assessor subsequently appealed. The appeals court noted that the State Board defined “raw materials,” in part, as items of tangible personal property held by a manufacturer. Thus, for the taxpayer to be subject to property taxes on the door parts, it had to be considered a manufacturer. Approximately 55 percent of the taxpayer’s business involved the sale of individual door parts. Although there was no statutory definition of a “manufacturer” for purposes of the property tax, other tax statutes defined a manufacturer as one whose principal business (meaning over 50 percent) was fabricating or processing tangible personal property for resale. In the instant case, only 45 percent of the taxpayer’s sales involved the assembly of door parts into completed doors. As such the court concluded that the taxpayer was not a manufacturer and the door parts were not raw materials subject to property taxes. For more information on Central Woodwork, Inc. v. Cheyenne Johnson, Shelby County Assessor of Property, please contact Justin Stringfield at 615-248-5510.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.