Were a South Carolina motor-vehicle dealer's sales to military non-appropriated fund instrumentalities exempt as sales to the federal government?

Plain-English summary

South Carolina Private Letter Ruling 88-3 concluded that sales to qualifying non-appropriated fund instrumentalities, or NAFIs, were exempt from sales tax as sales to the federal government.

XYZ was a North Charleston motor-vehicle dealer that sometimes sold vehicles to organizations such as officers' clubs, post exchanges, and a Morale Welfare and Recreation Non-Appropriated Fund.

The Commission treated those organizations as instrumentalities of the United States and integral parts of the military services. The federal-government sales-tax exemption therefore applied, effective July 1, 1984.

What is a non-appropriated fund instrumentality?

The ruling quoted federal case law describing a non-appropriated fund activity as an organization that receives initial government funding, repays that funding from its profits, is created and administered by the government, serves government personnel, and operates for the use and benefit of the United States.

Examples in XYZ's facts included:

• an officers' club;
• a post exchange; and
• a Morale Welfare and Recreation Non-Appropriated Fund.

The cited cases characterized these activities as federal instrumentalities and as integral parts of the government's military services.

The South Carolina exemption

Section 12-35-550(42) exempted gross proceeds from sales of tangible personal property to the federal government, subject to the statutory exclusions quoted in the ruling.

The exemption became effective July 1, 1984. The ruling noted that before that date, sales to the federal government by in-state retailers were taxable.

Because qualifying NAFIs were federal instrumentalities, the Commission concluded that sales to them constituted sales to the federal government and fell within the exemption.

The authorities supporting NAFI status

The ruling relied on federal decisions holding that non-appropriated fund activities were federal instrumentalities that performed government functions and shared the government's immunities.

It also cited a 1984 South Carolina Attorney General opinion addressing a Morale Welfare and Recreation Non-Appropriated Fund. That opinion concluded that purchases of tangible personal property used to improve, repair, or equip recreational and social areas on federal property for base personnel were exempt from South Carolina sales tax.

What this means for you

Motor-vehicle and equipment dealers

PLR 88-3 treated a qualifying NAFI purchaser as the federal government for the cited exemption. The ruling's answer depended on the purchaser's federal-instrumentality status, not simply on its connection to military personnel.

Military exchanges and recreation organizations

The organizations described in the ruling were created, administered, and operated as federal instrumentalities for government personnel. The page does not establish that every club, exchange, or recreation organization has that status.

Government contractors and vendors

The exemption addressed sales to the federal government and its qualifying instrumentalities. A vendor's sale to a private contractor serving the government would present different facts not decided by this ruling.

Accountants and tax professionals

The ruling grounded the exemption in both the state statute and federal authorities establishing that NAFIs were arms or instrumentalities of the United States.

Readers applying the ruling today

PLR 88-3 applied an exemption and authorities cited in 1988. Current exemption language, purchaser status, payment and documentation requirements, and vehicle-tax rules must be checked under current law.

Common questions

Q: Were XYZ's vehicle sales to the NAFIs taxable?

A: No. The Commission treated the NAFIs as federal instrumentalities and the sales as exempt sales to the federal government.

Q: What organizations did the ruling identify as NAFIs?

A: Its examples were officers' clubs, post exchanges, and the Morale Welfare and Recreation Non-Appropriated Fund.

Q: When did the exemption apply?

A: The ruling said the federal-government sales exemption was effective July 1, 1984.

Q: Was every military-related buyer automatically exempt?

A: The ruling did not say that. Its conclusion concerned organizations qualifying as federal non-appropriated fund instrumentalities.

Q: Did the ruling cover a sale to a private federal contractor?

A: No. The stated transaction was a sale directly to a qualifying federal instrumentality.

Q: Can another dealer rely on PLR 88-3?

A: No. The ruling states that it applied only to XYZ's specific facts, had no precedential value, and was not intended for general distribution.

Citations and references

• S.C. Code section 12-35-550(42) (1986 Supp.) — sales-tax exemption for tangible personal property sold to the federal government
• S.C. Code section 12-3-170 (1976) and SC Revenue Procedure 87-3 — private-letter-ruling authority
• Bowen v. Culotta, 294 F. Supp. 183 (D.C. Va. 1968) — NAFI character and federal-instrumentality status quoted in the ruling
• Standard Oil Co. of California v. Johnson, 316 U.S. 481 — federal-instrumentality authority quoted in the ruling
• United States v. State Tax Commission of Mississippi, 421 U.S. 599 (1975) — post exchanges and similar facilities as federal instrumentalities
• South Carolina Attorney General Opinion S-OAG-78 (Sept. 6, 1984) — Morale Welfare and Recreation fund purchase exemption cited in the ruling

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR88-3.pdf

Original ruling text

SC PRIVATE LETTER RULING #88-3

TO:

XYZ, Inc.

SUBJECT:

(Sales Tax) Non-Appropriated Funds Instrumentalities

REFERENCE:

S.C. Code Ann. Section 12-35-550(42) (1986 Supp.)

AUTHORITY:

S.C. Ann. Section 12-3-170 (1976)
SC Revenue Procedure #87-3

SCOPE:

A Private Letter Ruling is a temporary document issued to a taxpayer, upon
request, and it applies only to the specific facts or circumstances related in the
request. Private Letter Rulings have no precedential value and are not
intended for general distribution.

Question:
Does the exemption for sales to the Federal Government under Code Section 12-35-550(42)
apply to sales to organizations known as Non-Appropriated Funds Instrumentalities (NAFI's)?
Facts:
The taxpayer, XYZ, Inc., sells motor vehicles in North Charleston. From time to time, vehicles
are sold to NAFI's. NAFI's include such activities as the Officers' Club, Post Exchange and the
Morale Welfare and Recreation Non-Appropriated Fund.
Code Section 12-35-550(42) exempts from the sales tax:
The gross proceeds of the sale of tangible personal property to the Federal Government,
not including gross proceeds subject to the tax under Section 12-35-1140 and Section 1235-1150 of the 1976 Code.
The exemption became effective July 1, 1984. Prior to that date, sales to the Federal
Government by in-state retailers were taxable.
Discussion:
In Bowen v. Culotta, D.C. Va 1968, 294 F. Supp. 183, the court stated:
A non-appropriated fund activity is one to which the government has initially provided
funds to permit it to begin operations. The governmental loan is repaid out of the profits
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earned by the activity. Thus, the activity is created by the government with government
funds for government personnel, and is administered by government employees for the
use and benefit of the United States.
The court further held:
Plaintiff was employed in a non-appropriated fund activity. These activities are
instrumentalities of the United States and are integral parts of the government's military
services. Standard Oil Company of California v. Johnson, 316 U.S. 481, 62 S.Ct 1168, 86
L.Fd. 1611; United States v. Holcombe, 176 F.Supp. 297, 303 (E.D. Va. 1959) affirmed
277 F.2d 143 (4th Cir. 1960); United States v. Forfari, supra; Nimco v. Davis, 92 U.S.
App. D.C. 293, 204 F.2d 734 (1953); Edelstein v. South Past Officers Club, 118 F.Supp.
40 (E.D. Va. 1951). Non-appropriated fund activities of the government "share in
fulfilling the duties entrusted to it and partake of whatever immunities it may have under
the constitution and federal statutes." Standard Oil Co. v. California v. Johnson, 316 U.S.
481, 485, 62 S.Ct 1168, 1170. (emphasis added)
In Opinion of Attorney General S-OAG-78 (September 6, 1984) the case of United States v.
State Tax Commission of Mississippi, 421 U.S. 599, 44 L. Ed 2d 404, 95 S.Ct 1872 (1975) was
cited and read in part:
...post exchanges and similar facilities are instrumentalities of the United States: it is clear
hat the ship's stores, officers' clubs and post exchanges "as operated are arms of the
government deemed by it essential for the performance of governmental function..."
(Citations omitted)
The opinion concluded that "sales of tangible personal property purchased by the Morale
Welfare and Recreation Non-Appropriated Fund and used to improve, repair or equip areas on
Federal property for recreation and social activities of personnel of the base are exempt from the
South Carolina sales tax."
Conclusion:
Sales to NAFI's constitute sales to the Federal Government and are therefore exempt pursuant to
Code Section 12-35-550(42), effective July 1, 1984.

SOUTH CAROLINA TAX COMMISSION
s/S. Hunter Howard Jr.
S. Hunter Howard, Jr., Chairman
s/John M. Rucker
John M. Rucker, Commissioner
s/A. Crawford Clarkson Jr.
A. Crawford Clarkson, Jr., Commissioner
Columbia, South Carolina
January 27
, 1988
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