Was a manufacturer's annual charge for cylinders holding exempt welding gas also exempt under this South Carolina PLR?

Plain-English summary

The taxpayer manufactured stairs, handrails, and other metal products and bought gas for welding machines used in production. Its supplier charged an annual cylinder fee, delivered the first cylinder filled with gas, and exchanged each empty cylinder for another filled cylinder whenever the taxpayer bought more gas.

The Department concluded that the welding gas was exempt or excluded because it was used directly in manufacturing tangible personal property for sale. The filled cylinders were incidental to the sale and delivery of that exempt gas, so the annual cylinder charge received the same sales-and-use-tax treatment.

The conclusion was narrow. Welding gas used outside qualifying manufacturing was taxable along with the cylinder charge, and an empty cylinder sold by itself was taxable as a storage tank rather than an incidental delivery container.

What this means for you

Manufacturers using welding gas

The exemption depended on the gas's direct manufacturing use. The ruling relied on the described production of tangible personal property for sale, not merely the fact that the purchaser was called a manufacturer.

Welding-supply companies

A recurring charge for exchange cylinders could follow the tax treatment of the gas when the supplier always provided filled cylinders as part of the gas sale. A separately sold empty cylinder did not.

Businesses with mixed gas uses

Gas and cylinder charges associated with repair, nonmanufacturing, or other taxable uses were outside the ruling's favorable conclusion.

Common questions

Q: Why was the welding gas exempt?
A: The ruling found it was used directly in welding machines that manufactured tangible personal property for sale.

Q: Why did the annual cylinder fee share the exemption?
A: Each cylinder was filled with the gas being sold and used incident to its sale and delivery.

Q: Would an empty cylinder be exempt?
A: No. The ruling treated an empty cylinder sold by itself as a taxable storage tank.

Q: Did all welding gas qualify?
A: No. Gas used for purposes other than qualifying manufacturing was taxable.

Q: Can another manufacturer rely on this PLR?
A: No. It bound the Department only for the requesting taxpayer and the specific represented facts.

Citations and references

• S.C. Code § 12-36-2120(9) (fuel used to generate heat or power in manufacturing)
• S.C. Code § 12-36-120(2)-(4) (manufacturing inputs and containers used incident to sale and delivery)
• S.C. Code § 12-36-2120(14) (container exemption)
• S.C. Regulations 117-302.1 and 117-302.5(B)(7) (direct manufacturing use and taxable storage tanks)

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR08-1.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P.O. Box 125, Columbia, South Carolina 29214
Website Address: http://www.sctax.org

SC PRIVATE LETTER RULING #08-1

SUBJECT:

Charges for Gas Cylinders Provided to a Manufacturer
(Sales and Use Tax)

REFERENCES: S. C. Code Ann. Section 12-36-120 (2000)
S. C. Code Ann. Section 12-36-2120(9) & (14) (2000)
SC Regulation 117-302.1 (Supp. 2007)
AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (2005)
SC Revenue Procedure #05-2

SCOPE:

A Private Letter Ruling is an advisory opinion issued to a specific
taxpayer by the Department to apply principles of law to a specific set
of facts or a particular tax situation. It is the Department’s opinion
limited to the specific facts set forth, and is binding on agency
personnel only with respect to the person to whom it was issued and
only until superseded or modified by a change in statute, regulation,
court decision, or another Departmental advisory opinion, providing
the representations made in the request reflect an accurate statement of
the material facts and the transaction was carried out as proposed.

Question:
Is an annual charge by a welding supply company to MNO, Inc. for gas cylinders when
purchasing gas for use in welding machines used in manufacturing tangible personal
property for sale (as described in the facts) subject to the sales and use tax?
Conclusion:
The sale of gas by a welding supply company to MNO, Inc. for use in welding machines
used in manufacturing tangible personal property for sale (as described in the facts) is
exempt or excluded from the sales and use tax under Code Sections 12-36-2120(9) and
12-36-120.

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Since a cylinder was provided by the welding supply company to MNO, Inc. as part of
the initial sale of gas and a cylinder is being provided as part of each subsequent sale of
gas (as described in the facts), then the cylinders are incidental to the sale of the gas since
they are filled with the gas being sold. As such, each sale by the welding supply company
to MNO, Inc. of gas for use in welding machines used in manufacturing tangible personal
property for sale, and the annual charge by the welding supply company to MNO, Inc. for
the cylinders containing the gas being sold (as described in the facts), are exempt or
excluded from the sales and use tax under Code Sections 12-36-2120(9) and 12-36-120.
Note: The sale of welding gas for uses other than manufacturing tangible personal
property for sale is subject to the sales and use tax. As such, the entire sale of the welding
gas and cylinder for uses other than manufacturing tangible personal property for sale is
subject to the sales and use tax. In addition, the sale of an empty cylinder is subject to the
tax since the cylinder is not being used incident to the sale and delivery of gas and is a
storage tank subject to the tax. (See SC Regulation 117-302.5(B)(7).)
Facts:
MNO, Inc. (“MNO”) is engaged in the business of manufacturing stairs, handrails, and
other miscellaneous metal products for sale.
In its manufacturing process, MNO uses welding machines in manufacturing its various
products and purchases gas for use in these welding machines.
As part of its purchase of gas for use in its welding machines, MNO pays its welding
supply company an annual fee for the gas cylinders in which it receives the gas. Payment
for the gas is made as the gas is purchased during the year. With each purchase of gas,
MNO returns an empty gas cylinder to the welding supply company and receives another
gas cylinder containing the gas it has purchased.
As part of this purchase arrangement, MNO has never received an empty cylinder from
its welding supply company. Upon entering this agreement, MNO paid the initial annual
fee, purchased the gas needed for its welding machines, and received the first cylinder
containing the purchased gas. With each subsequent purchase of gas, MNO exchanged an
empty cylinder for one containing the gas purchased as described above.
The issue at hand is whether this separate charge for the gas cylinder is subject to the tax.
Discussion:
Code Section 12-36-2120(9) exempts from the sales and use tax the gross proceeds of
sales and sales price of:
coal, or coke or other fuel sold to manufacturers, electric power
companies, and transportation companies for:
(a) use or consumption in the production of by-products;

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(b) the generation of heat or power used in manufacturing tangible
personal property for sale. For purposes of this item, "manufacturer" or
"manufacturing" includes the activities of a processor;
(c) the generation of electric power or energy for use in manufacturing
tangible personal property for sale; or
(d) the generation of motive power for transportation. For the purposes
of this exemption, "manufacturer" or "manufacturing" includes the
activities of mining and quarrying;
Code Section 12-36-120 defines the terms “wholesale sale” and “sale at wholesale” to
mean, in part, the sale of:
(2) tangible personal property to a manufacturer or compounder as an
ingredient or component part of the tangible personal property or products
manufactured or compounded for sale;
(3) tangible personal property used directly in manufacturing,
compounding, or processing tangible personal property into products for
sale;
SC Regulation 117-302.1 states with respect to the exclusions authorized above in Code
Section 12-36-120:
Purchases of tangible personal property are not subject to the tax under
Code Section 12-36-120 if the tangible personal property:
(a) becomes an ingredient or component part of tangible personal
property manufactured or compounded for sale; or,
(b) is used directly in manufacturing, compounding or processing
tangible personal property for sale. By "used directly" is meant that the
materials or products so used come in direct contact with and contribute
to bring about some chemical or physical change in the ingredient or
component properties during the period in which the fabricating,
converting or processing takes place. It is not necessary that such
materials or products be used up or entirely consumed, provided there
is a compliance with the requirements set forth herein.
These exclusions apply to:
(a) odorants purchased by gas companies and used in compounding gas
for sale.

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(b) chemicals, such as soda, ash, alum, chlorine, etc., used in treating
water for sale by municipalities and others engaged in the business of
processing or compounding water for sale.
(c) refrigerants used by manufacturers to produce ice for sale.
(d) acetylene, oxygen, and other gases sold to manufacturers or
compounders which enter into and become an ingredient or component
part of the tangible personal property or products which he
manufactures or compounds for sale, or which are used directly in
fabricating, converting, or processing the materials or products being
manufactured or compounded for sale.
(e) plates attached by the manufacturer to his product for identification
purposes and which become a part of the product.
These exclusions do not apply to sales of acetylene, oxygen, and other
gases for use by [repairmen], welders, dentists, junk dealers, and others
[and these sales] are subject to the sales or use tax, whichever applies.
(Emphasis added.)
Therefore, the sale of the gas for use in welding machines used in manufacturing tangible
personal property for sale is exempt or excluded from the sales and use tax under Code
Sections 12-36-2120(9) and 12-36-120.
The next issue concerns the taxability of the cylinders.
With respect to containers, the law provides an exclusion and an exemption. Code
Section 12-36-120 defines the terms “wholesale sale” and “sale at wholesale” to mean, in
part, the sale of:
(4) materials, containers, cores, labels, sacks, or bags used incident to the sale and
delivery of tangible personal property ....
Code Section 12-36-2120 exempts from the tax:
(14) wrapping paper, wrapping twine, paper bags, and containers, used incident to
the sale and delivery of tangible personal property.
As such, South Carolina considers the vendor to be the user or consumer of the container
when such is used incident to the sale and delivery of the item being sold. Purchases of
such containers by the welding supply company are therefore not subject to the tax.
However, when the welding supply company sells the gas, then the purchase of the
cylinder is an expense of the welding supply company and all charges by the welding
supply company for the gas and the cylinder used to deliver the gas are either subject to
the tax or exempt, depending on whether or not the gas being sold qualifies for an
exemption.

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Based on the above, the sale of gas by a welding supply company to MNO, Inc. for use in
welding machines used in manufacturing tangible personal property for sale (as described
in the facts) is exempt or excluded from the sales and use tax under Code Sections 12-362120(9) and 12-36-120. Since a cylinder was provided by the welding supply company to
MNO, Inc. as part of the initial sale of gas and a cylinder is being provided as part of
each subsequent sale of gas (as described in the facts), then the cylinders are incidental to
the sale of the gas since they are filled with the gas being sold. As such, each sale by the
welding supply company to MNO, Inc. of gas for use in welding machines used in
manufacturing tangible personal property for sale, and the annual charge by the welding
supply company to MNO, Inc. for the cylinders containing the gas being sold (as
described in the facts), are exempt or excluded from the sales and use tax under Code
Sections 12-36-2120(9) and 12-36-120.
Note: The sale of welding gas for uses other than manufacturing tangible personal
property for sale is subject to the sales and use tax. As such, the entire sale of the welding
gas and cylinder for uses other than manufacturing tangible personal property for sale is
subject to the sales and use tax. In addition, the sale of an empty cylinder is subject to the
tax since the cylinder is not being used incident to the sale and delivery of gas and is a
storage tank subject to the tax. (See SC Regulation 117-302.5(B)(7).)
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Ray N. Stevens
Ray N. Stevens, Director
February 29
, 2008
Columbia, South Carolina

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