Did SC PLR 92-10 impose sales or use tax when exempt manufacturing machines were sold to a lessor and leased back to the manufacturer?

Plain-English summary

South Carolina PLR 92-10 held that the proposed sale, lease, and continued use of manufacturing machines were exempt from sales and use tax.

ABC planned to transfer the machines to a lessor for preferred stock and/or debt and lease them back for periodic payments. The ruling did not need to classify the arrangement as a true sale-leaseback or a financing transaction. The machines' qualifying use controlled the tax result, not who owned them.

The manufacturing process

ABC used the machines at its South Carolina facility to manufacture products for sale. Small material pellets entered an automated delivery system, color concentrates were added, and the materials were fed into the machines. The machines melted and formed the materials into finished products, which cooled and moved away on a conveyor.

The machines had originally been purchased without sales or use tax on the basis of the manufacturing-machine exemption. Some machines from an out-of-state plant also were being transferred to South Carolina.

Why the transfer and lease stayed exempt

Section 12-36-2120(17) exempted machines used in manufacturing, processing, compounding, mining, or quarrying tangible personal property for sale.

The PLR stated that a machine's use determined whether the exemption applied. Ownership did not determine whether its sale, lease, or use was taxable. A qualifying manufacturing machine remained exempt whether owned by the manufacturer or another person.

Because ABC used and would continue using the machines to manufacture products for sale, all three events were exempt:

• ABC's sale of the machines to the lessor;
• the lessor's lease of the machines back to ABC; and
• ABC's use of the leased machines.

The result made the legal distinction between a sale-leaseback and a financing arrangement unnecessary for this ruling.

What this means for you

Manufacturers

The ruling preserved the manufacturing exemption when qualifying machinery moved into a lessor-owned structure but remained in exempt production use.

Equipment lessors and financing companies

Ownership by a separate lessor did not defeat the exemption. The equipment's actual use by the manufacturer was decisive.

Transaction and tax teams

PLR 92-10 did not say transaction form never matters. It said form did not change the result for these machines because the sale, lease, and use each fell within the same manufacturing exemption.

Current transactions

Verify current law and document the equipment's manufacturing function. This nonprecedential ruling addressed only the described machines and facts.

Common questions

Q: Was ABC's sale of the machines to the lessor taxable?

A: No. The ruling exempted the sale because the machines remained used in qualifying manufacturing.

Q: Were the lease payments subject to sales or use tax?

A: No. The lease and use of the qualifying machines were exempt under the ruling.

Q: Did ownership by the lessor end the exemption?

A: No. The ruling said use, not ownership, determined the manufacturing-machine exemption.

Q: Did the PLR decide whether the deal was financing or a true lease?

A: No. That classification was unnecessary because the tax result was exempt either way on the stated facts.

Q: Can another manufacturer rely on PLR 92-10?

A: No. The ruling was temporary, fact-specific, and nonprecedential.

Citations and references

• S.C. Code Ann. § 12-36-2120(17) — manufacturing-machine exemption
• S.C. Code Ann. § 12-4-320 — Tax Commission authority cited by the ruling
• SC Revenue Procedure #87-3 — private-letter-ruling procedure cited by the ruling
• Hercules Contractors and Engineers, Inc. v. South Carolina Tax Commission, 280 S.C. 426, 313 S.E.2d 300 (Ct. App. 1984)
• Southeastern Kusan v. South Carolina Tax Commission, 276 S.C. 487, 280 S.E.2d 57 (1981)

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR92-10.pdf

Original ruling text

SC PRIVATE LETTER RULING #92-10
TO:

ABC, Inc.

TAX MANAGER:

John P. McCormack

SUBJECT:

Manufacturing Machine - Sale/Leaseback
(Sales and Use Tax)

DATE:

December 29, 1992

REFERENCE:

S.C. Code Ann. Section 12-36-2120 (Supp. 1991)

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (Supp. 1991)
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.

Questions:

1. Is the sale of the machines, as described in the Facts, by ABC to the Lessor subject to
   South Carolina sales and use tax?
2. Is the lease of the machines, as described in the Facts, by the Lessor to ABC subject to
   South Carolina sales and use tax?
   Facts:
   ABC Inc. is a wholly owned subsidiary of XYZ. ABC owns a manufacturing facility in South
   Carolina. The taxpayer's products are manufactured at this facility.
   Prior to 1992, XYZ purchased machines for use in the manufacture of its products for sale. Most
   of these machines are located in the South Carolina plant. However, some are located in another
   plant in another state and are being transferred to the plant in South Carolina.
   The taxpayer's products are the end product of a process using various materials. These materials
   are fed in the form of small pellets into an automated material delivery system separating them
   by types. Color concentrates are added at certain stages in the delivery process to determine
   product color.
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The materials are then fed automatically to each machine for processing. Inside the machine, the
materials are melted in order to form the product.
After the product has cooled enough to hold its shape, the items are removed. The product then
falls onto a conveyor and is conveyed away from the machine.
No sales or use tax was paid upon the purchase of these machines on the basis that these
machines are used in the manufacture of tangible personal property for sale and are exempt
under Code Section 12-36-2120(17) and similar provisions under the other state's law.
In late 1992, ABC will sell these machines in exchange for preferred stock and/or debt to a
company ("Lessor") controlled by X. Also on this date, pursuant to a lease arrangement
("lease"), the Lessor will lease these machines back to ABC for a lease term in exchange for
periodic lease payments to be made by ABC. The Lease will be considered to be a true lease for
federal income tax purposes.
Discussion:
The issue with respect to ABC is whether the machines in question fall within the exemption
under Code Section 12-36-2120(17). That section reads, in part:
Exempted from the [sales and use] taxes imposed by this chapter are the gross proceeds
of sales, or sales price of:

(17) machines used in manufacturing, processing, compounding, mining, or quarrying
tangible personal property for sale.
The determination as to whether a particular machine falls within the above exemption is based
on the use of the machine. The ownership does not determine if the sale, lease, or use of a
machine is taxable. If a machine is "used in manufacturing ...tangible personal property for
sale", then the sale, lease, or use of that machine is exempt from the tax, regardless of whether
the machine is owned by the person manufacturing the property for sale or owned by some other
person. See Hercules Contractors and Engineers, Inc. v. South Carolina Tax Commission, 280
S.C. 426, 313 S.E. 2d 300 (S.C. App. 1984) and Southeastern Kusan v. South Carolina Tax
Commission, 276 S.C. 487, 280 S.E. 2d 57 (1981).
Based on the above, and the explanation of the machines as set forth in the Facts, the machines in
question fall within the provisions of Code Section 12-36-2120(17). Therefore, the sale, lease or
use of these machines are exempt from sales and use taxes.
Conclusion:
Since the machines, as described in the Facts, are, and will be, used by ABC in manufacturing
products for sale, it is not necessary to determine if the transactions in question constitute a
sale/leaseback or a financing arrangement. Pursuant to Code Section 12-36-2120(17), the sale,
lease or use of these machines are not subject to the South Carolina sales and use tax.
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