Personal Property Taxes and Whiskey Barrels in Tennessee


The Associated Press reported, “Tennessee’s attorney general says the state constitution doesn’t exempt whiskey barrels from property taxes. Attorney General Herbert Slatery’s opinion comes as Jack Daniel’s and others push barrel exemption legislation. That bill says the constitution already exempts them by saying, ‘No article, manufactured of the produce of this State shall be taxed otherwise than to pay inspection fees.’ The opinion concludes whiskey barrels aren’t “manufactured articles” because they aren’t converted into different items.”

The whiskey folks may be attacking the issue in the wrong way and it may be because Jack Daniels makes barrels. I think (based on a recent tour of the George Dickel distillery) that the barrel acts as a catalyst with the whiskey and the barrels are raw materials (and taxable until filled) just like the corn, etc. that goes into the whiskey. The oak and the whiskey mix to produce the flavor. That the barrel is sold at the end of the process is immaterial as the barrel is like the usable by-products in many manufacturing operations. Therefore, all the barrels containing whiskey would be exempt from personal property tax as work in process in a manufacturing operation. 

The Tennessee Code Annotated §57-2-106(a)(4) requires “Tennessee Whiskey” to be “Aged in new, charred oak barrels in Tennessee”. That the new barrel imparts a unique flavor to the whiskey is recognized in this statute. Therefore, the barrel is consumed in the aging process.

Note that George Dickel charges more for whiskey that has been in the barrel longer (granted more of the whiskey evaporates over time), so the interaction between oak and whiskey is a key to the process.

The Attorney General should have been asked, “Is a barrel that imparts favor to whiskey being aged and acts as a catalyst for the whiskey as it ages considered a raw material until filled with whiskey and then becomes “work in process” in the manufacturing of whiskey and, thus, exempt from Tennessee personal property tax?”

Tennessee Taxes on Diabetes

Tennessee Tax on Diabetes
Kirk Low, CPA, Christopher A. Wilson, CPA. Tennessee CPA Journal. March/April 2012.


Diabetes is generally recognized as one of the most costly chronic illnesses in the United States. The American Diabetes Association estimates that medical costs associated with diabetes in Tennessee alone approached $2 billion during 2006. Diabetic patients on average incur nearly two and a half times the annual medical expenses of a person without diabetes, and the daily costs of supplies to monitor and regulate blood glucose levels, as well as to treat the overall effects of diabetes on the body, constitute a significant concern for many diabetics. While the Tennessee sales and use tax exemptions for insulin, insulin pumps, needles and syringes are beneficial in reducing the cost of diabetes, patients nonetheless face increased daily costs, because many items required to live with diabetes are not exempted from sales and use tax.


Tennessee’s application of sales tax on diabetes-related supplies imposes a substantial economic burden on many diabetics in Tennessee, and exempting savings. In a January 2010 article in the Diabetes Forecast, a magazine published by the American Diabetes Association, the author estimated that test strip costs ranged from $104 to $1,820 per year depending on the amount of testing by the patient. Applying the mid-range of Tennessee’s sales tax rates – 9.5 percent – the tax on the test strips would average between $9.88 and $172.90 per year per patient.


Fiscal notes prepared by the Tennessee Legislature also state that exempting test strips from sales tax in Tennessee would result in nearly $3.5 million in annual savings to diabetics. As introduced during the 2010 session of the Tennessee General Assembly, House Bill 2771 proposed to exempt only diabetic test strips, while House Bill 2901 proposed to exempt both test strips and testing equipment. Although neither Bill became law, each the decrease in revenue that would result if such a Bill were enacted as law. The exemption of test strips in House Bill 2771 was nearly a $3.5 million decrease in state and local option sales tax revenue. In regard to House Bill 2901, because the Tennessee Department of Revenue could not determine the total industry sales for all diabetic testing equipment and supplies, the fiscal impact was estimated as exceeding the nearly $3.5 million state and local tax decrease listed for House Bill 2771.


As noted by representatives at the Tennessee Department of Revenue, both sales tax exemption applied to test strips used by prescription in hospital settings. Applying this erroneous assumption, the test strips sold in Tennessee were used by prescription in hospital settings and were therefore exempt. This error likely resulted in a significant reduction in stated fiscal impact of House Bills 2771 and 2901. While Department of Revenue representatives agreed that test strips sold to tax-exempt hospitals for use by such hospitals were exempt from sales and use tax, such representatives opined that no sales tax exemption applied to patient users. The percentage of test strips sold for use by tax-exempt hospitals is recalculated to remove the presumption that 40 percent of test strips sold in Tennessee were exempt, a tax decrease of as much as $5.8 million could result by exempting test strips.


During the 2011 session, House Bills 564 and 1052 were introduced along with companion Senate bills to exempt test strips. The fiscal notes on both sets of bills were identical at a combined state and local revenue loss of nearly $6 million. All of the bills failed to make it out of committee.


Although none of the bills were enacted during the 2010 and 2011 sessions, the Legislature’s adoption of Streamlined Sales Tax Project definitions in the tax code may nonetheless exempt test strips from sales and use tax. Tennessee currently exempts from sales and use tax the sale of drugs dispensed for human use pursuant to a prescription. In 2008, the Legislature adopted the Streamlined Sales Tax Project definition of the term “drug”, which Tenn. Code Ann 67-6-102(35) now defines as a compound, substance or preparation and any component of a compound, substance or preparation, other than food and food ingredients, dietary supplements or alcoholic beverages:

(A) Recognized in the official Pharmacopoeia of the United States, official Homeopathic Pharmacopoeia of the United States, or official National Formulary and supplement to any of them;
(B) Intended for use in the diagnosis, cure, mitigation, treatment or prevention of disease; or
(C) Intended to affect the structure or any function of the body


When purchased by an individual pursuant to a prescription, test strips should constitute an exempt drug for purposes of Tennessee sales and use tax. Specifically, the generally recognized design of diabetic test strips consists of a plastic test strip with a small spot impregnated with glucose oxidase, or some other substance, which undergoes a chemical change when mixed with glucose in a blood sample collected within the strip. Accordingly, a test strip constitutes a drug because it (1) contains a “compound, substance, or preparation, other than food and food ingredients, dietary supplements, or alcoholic beverages” and (2) in regard to diabetics, is obviously “intended for use in the diagnosis … treatment, or prevention of disease.”


Although, as set forth above, test strips should constitute exempt drugs when sold pursuant to a prescription, the Tennessee Department of Revenue has thus far declined to recognize any exemption for test strips. Specifically, after the adoption of the Streamlined Sales Tax definitions, a Tennessee company asked the Department of Revenue if diabetic meters, lancets, lancet devices, diabetic strips and control solution were exempt when “[a]ll of the Taxpayer’s customers are patients with a prescription for the equipment and supplies rented and sold.”  In Tennessee Letter Ruling No. 08-15, dated Feb. 27, 2008, the Department stated the following: Lancets, lancet devices, diabetic strips and control solution, are not included in any statutory exemption; therefore, they are taxable for purposes of the sales and use tax. Diabetic meters, or blood glucose meters, are durable medical equipment as defined by Tenn. Code Ann 67-6-102(29); however, a diabetic meter does not qualify for the exemption because it is required by Tenn. Code Ann. § 67-6-314(2) (Supp. 2007). Rather, a blood glucose meter is intended for use everywhere and is meant to be taken with the patient and used in any place the patient goes.


Parties seeking to change the Department of Revenue’s position regarding the application of sales and use tax to test strips have the option of proceeding legislatively or judicially. As recently proposed in the 2011 session of the Tennessee General Assembly, House Bill 564 also seeks to exempt the sale of diabetic test strips, lancets and diabetic urine test strips from sales and use tax. However, successfully lobbying to enact such legislative changes to the current taxation of diabetic supplies will likely be difficult given Tennessee’s current budget constraints as legislation with large negative fiscal impacts are unlikely to gain support. In order to proceed judicially, a retailer would need to either challenge an audit assessment of sales tax on test strip sales or request a refund of sales tax previously collected and remitted to the Department on such sales. However, in instances where the retailer collected sales tax from customers, the tax code requires that the retailer challenging the tax issue tax refunds or credits to purchasers. Thus, a successful challenge through the courts would produce no economic advantage to the retailer. Furthermore, a retailer of test strips who chooses to litigate this issue would also not gain a competitive advantage since all retailers would be exempt if the courts ruled favorably.




Tennessee Changes Sales Taxation of Freight

Sandra McClarty, CPA, Kirk Low, CPA. Tennessee CPA Journal. December 2007.


Effective Jan. 1, 2008, all delivery charges invoiced on taxable sales delivered in Tennessee are subject to Tennessee  sales tax. This change was enacted by the Tennessee legislature in June 2007 when legislation was adopted to accelerate the implementation of all Streamline Sales Tax Project (SSTP) definitions . These definitions are part of the SSTP statutes originally passed in 2003 with a delayed effective date. Other SSTP statutes such as: 1) the requirement that sales delivered or shipped to the customer be sourced to the delivery or shipping destination; 2) modifications to the single article on local option sales taxes; and 3) implementation of certain privilege taxes in lieu of sales tax have a delayed effective date of July 1, 2009. 

As many of you may recall, the SSTP statutes require Tennessee to change from origin sourcing to destination sourcing when determining the applicable sales tax rate to be charged on sales delivered to a Tennessee address. Concerns from the local governments regarding local tax revenue shifts as well as businesses and taxpayers regarding the administrative difficulty and cost of such a change resulted in the legislature postponing STTP statutes twice. 

Tennessee Code Annotated §67-6-102 adopted effective Jan. 1, 2008, changes the definition of “sales price” to include delivery charges. Thus, if the sale is taxable, the freight is taxable. This statute reads, in pertinent part, as follows: 

(A) “Sales price” applies to the measure subject to sales tax and means the total amount of consideration, including cash, credit, property and services, for which persona l property or services are sold, leased or rented, valued in money, whether received in money or otherwise, without any deduction for the following: 

  • The seller ‘s cost of the property sold; 
  • The cost of materials used, labor or service cost, interest, losses, all costs of transportation to the seller, all taxes imposed on the seller and any other expense to the seller; 
  • Charges by the seller for any services necessary to complete the sale, other than delivery and installation charges; 
  • Delivery charges; 
  • Installation charges; and 
  • The value of exempt personal property given to the purchaser where taxable and exempt personal property have been bundled together and sold by the seller as a single product or piece of merchandise. 

The Tennessee Department of Revenue has indicated that delivery charges will include charges for transportation, delivery, shipping, shipping and handling, incoming freight, outgoing freight, packing, crating and postage. This change replaces the current Tennessee Rule 1320-5-1-.71 which specifies that certain freight charges are exempt if the title or risk passed at the origin shipping point. 

To avoid tax on freight, the taxable item must be delivered by a dependent third-party hired by the buyer and the delivery charges must be billed to and paid by the buyer direct to the third-party. 

If a sale includes both taxable and non-taxable personal property or services, a single delivery charge must be allocated between these two types of items. The Department of Revenue has indicated that it will accept an allocation based upon sales prices or the weights of the respective items. An Important Notice is expected to be issued shortly to clarify this issue.

In addition, please watch for that notice to clarify the following: 

  • Stand-alone transportation charges – Transportation services provided by passenger or cargo transportation companies or messenger services remain nontaxable services. 
  • Direct mailing of printed materials – The postage and mailing services provided by businesses such as printers will not be taxable if the materials are mailed to a mass audience and recipients are not billed for the price of the printed materials. The invoices must itemize the postage and the services charges for preparing the materials for mailing. 

Relief related to the taxation of delivery charges has been provided to certain taxpayers such as contractors, subcontractors and material vendors of tangible personal property. In order to treat the delivery charges as provided for in Tennessee Rule 1320-5-1-.71, a lump sum or unit price construction contract must have been entered prior to Jan. 1 2008 or awarded by the state and other political subdivisions of the state where the bird was opened prior to Jan. 1 2008.

These taxpayers will need to file a claim for refund if they meet the criteria above and their vendor charges them the sales tax in excess of that which would otherwise be due under Rule 1320-5-1-.71. Note that this relief does not apply to other types of buyers. It specifically refers only to contractor, subcontractors and material vendors who meet the criteria discussed previously. See Tennessee Code Annotated §67-6-541(b), (l), (2) and (3) for further information.