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Original Author: Hemsley, Sid
Date of Material: 04/25/2002

Purchasing--Bids, proposals and specifications
Purchasing--Laws and regulations

Purchasing Law and Sales Tax Liability

Reviewed Date: 06/21/2021
MTAS was asked whether a city can 'split' purchases for goods or services to bring purchases under dollar limits contained in the city's purchasing law and whether a contractor who installs material purchased by the city for city projects is required to pay the sales tax on such material.

June 12, 2000

You have two questions:

1. Is it legal for a city to “split” purchases for goods or services for the purpose of bringing purchases under dollar limits contained in the city’s purchasing law?

2. Is a contractor who installs or applies material purchased by the city for city projects required to pay the sales tax on such material?

The answer to question 1 is that it is not legal for a city to split purchases of goods or services for the purpose of evading purchasing laws. There may be some instances in which purchases that would otherwise trigger competitive bid laws can legally be broken down into separable parts, but generally such instances will probably be uncommon.

The answer to question 2 is that a contractor who installs or applies materials purchased by the city for city projects is required to pay a use tax, which is equal to the sales tax.

Analysis of Question 1

The Municipal Purchasing Law found at Tennessee Code Annotated, section 6-56-301 et seq., requires municipal purchases exceeding $2,500 (can be raised to $10,000 by ordinance) to be awarded after public advertisement and competitive bidding [Tennessee Code Annotated, section 6-56-306]. The same law generally prohibits breaking purchases into pieces in order to evade that law [Tennessee Code Annotated, section 6-56-304(1) and (4)].

However, the Municipal Purchasing Law exempts from its application purchases made by municipalities having charter provisions or private act requirements governing competitive bidding and purchasing [Tennessee Code Annotated, section 6-56-302].

The City has such a charter provision. Article IV, Section 5, of the charter provides:

That all contracts for more than $1,000 shall be awarded to the lowest responsible bidder meeting specifications, after publication, advertisement, and competition, as may be prescribed by ordinance; but no contract for any public work or improvement costing over $1,000 shall be awarded except on condition that the contractor give bond with some bonding company authorized to do business in the State of Tennessee as surety, in sum equal to the contract price.

But exemption does not permit the city to break purchases into parts to circumvent the city’s competitive bidding law contained in its charter. Competitive bidding laws are construed strictly against the government. [Computer Shoppe, Inc. v. State, 780 S.W.2d 729 (Tenn. App. 1989); Browning-Ferris Industries v. City of Oak Ridge, 644 S.W.2d 400 (Tenn. App. 1982)]. Those cases say that competitive bid laws are intended to help the government obtain the best work and materials for the lowest price, provide bidders with fair means to compete for government contracts, and to protect the public from the self-dealing, extravagance and favoritism of government officials. For those reasons, the courts would look unfavorably upon any municipal purchasing practice that had the effect of thwarting those purposes. Generally, breaking contracts into parts thwarts one or more of those purposes.

It is also said in 10 McQuillin, Municipal Corporations, section 29.33, that:

Where a municipality is prohibited from letting contracts involving an expenditure of more than a specified sum without submitting the same to competitive bidding, it cannot divide the work and let it under several contracts, the amount for each falling below the amount required for competitive bidding. However, legally separable and factually separate transactions, each of which is below the amount require for competitive bidding, but in the aggregate exceeding such amount, do not require such bidding merely because they were ratified by a single act. And under a statutory requirement that “all contracts for the performance of any work in any such village exceeding fifty dollars” be let to the lowest bidder, the corporate authorities may repair the highways by a day’s work even though the total expense of the entire work may exceed fifty dollars.

In most cases it should be fairly easy to determine what are (and what are not) legally and factually separate transactions, and what are transactions designed to evade the competitive bidding law.

Analysis of Question 2

Shelby County v. King, 620 S.W.2d 493 (1981), clearly stands for the proposition that a municipality is exempt from the sales tax with respect to materials that it purchases for municipal projects, but that a contractor who installs, applies or otherwise uses such materials, is liable for the use tax on those materials. The use tax is equal to the sales tax. In that case Shelby County purchased materials used by the contractor to construct a criminal justice center. The Court held that under the Sales Tax Law, the use tax was due from the contractor on the materials (although the County was ultimately liable for the tax under a contractual agreement with the contractor to indemnify him for all taxes under the Sales Tax Law incurred in the construction of the center). [Also see Tidwell v. Goodyear Tire and Rubber Company, 520 S.W.2d 721 (1975); and United States v. Boyd, 363 S.W.2d 193 (1962), which stand for the proposition that materials subject to the use tax cannot be laundered by passing them through two or more public hands].


Sidney D. Hemsley
Senior Law Consultant

Main Document(s):
file Puchasing Law and Sales Tax Liability Public.doc