When could ZIP Company avoid South Carolina sales or use tax on machinery temporarily stored, repaired, and tested before shipment to a new factory in Mexico?

Plain-English summary

South Carolina PLR 93-7 considered machinery and equipment kept in Anderson for six to nine months for repair, reconditioning, testing, and coordinated shipment to a new Mexican factory. Tax generally applied unless the property fit one of four routes described in the ruling: it was exempt manufacturing machinery; it was equipment used directly in manufacturing; it had been bought and substantially first used outside South Carolina for its primary purpose; or it fit a statutory exclusion for temporary storage before sole out-of-state use or further processing into property used solely outside the state.

Repair parts for qualifying manufacturing machines were exempt, while parts for nonexempt machines were taxable. Supplies such as paint and solder that lost their identity during repair were taxable even when used on an exempt machine. Labor alone was nontaxable; when taxable parts and installation were sold together, separately stating labor generally kept the labor out of the taxable amount, while an unseparated charge was fully taxable.

Common questions

Q: Was temporary storage before export automatically exempt? No. ZIP had to satisfy a specific manufacturing, prior-use, or storage exclusion.

Q: Were all repair materials for exempt machines exempt? No. Consumable supplies that lost their identity remained taxable.

Q: Was repair labor taxable? Labor-only work was not; bundled taxable parts and labor depended on whether the bill separated them.

Citations and references

• S.C. Code Ann. § 12-36-2120(17) (1992 Supp.) — historical manufacturing-machine exemption
• S.C. Code Ann. § 12-36-120 (1992 Supp.) — direct-use exclusion
• S.C. Code Ann. §§ 12-36-1310 and 12-36-1370(B) (1992 Supp.) — use tax and receipt presumption
• S.C. Code Ann. § 12-36-140 (1992 Supp.) — historical storage exclusions
• Regulations 117-174.191 and 117-174.220 — repair and prior out-of-state-use rules discussed

Subject

Machines and Equipment Stored and Repaired in South Carolina

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR93-7.pdf

Original ruling text

SC PRIVATE LETTER RULING #93-7

TO:

ZIP Company

TAX MANAGER:

John P. McCormack

SUBJECT:

Machines and Equipment Stored and Repaired in South Carolina
(Sales and Use Tax)

DATE:

November 3, 2993

REFERENCES:

S.C. Code Ann. Section 12-36-2120(17) (Supp. 1992)
S.C. Code Ann. Section 12-36-120 (Supp. 1992)
S.C. Code Ann. Section 12-36-1310 (Supp. 1992)
S.C. Code Ann. Section 12-36-1370(B) (Supp. 1992)
S.C. Code Ann. Section 12-36-140 (Supp. 1992)

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (Supp. 1992)

SCOPE:

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

Question:
Is ZIP Company liable for sales and use taxes with respect to the purchase or transfer of
machines, equipment or repair parts for repair, reconditioning and testing in South Carolina, as
described in the facts, prior to subsequent shipment of these items to a new manufacturing
facility in Mexico?
Facts:
ZIP Company (“ZIP”), with headquarters in ZIP, USA, is a manufacturer of automotive ride
products for the commercial market. The primary products manufactured are shocks and struts
for original equipment and aftermarket sales. In the United States, ZIP has manufacturing plants
in South Carolina, Arkansas, Georgia, and Nebraska. They also have an assembly facility in
Delaware. Outside of the United States, ZIP has manufacturing plants in Canada, Belgium,
Australia, the United Kingdom, and Brazil.
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ZIP will begin manufacturing operations in Mexico in October of 1994. the machines and
equipment to operate this facility will be assembled from transfers of available machines from
current manufacturing plants in the United States and from foreign countries and from the
purchase of new machines and equipment from various suppliers.
The machines and equipment will be temporarily stored in Anderson, South Carolina, either in
ZIP’s facility or a rented warehouse for the purpose of:

1. Utilizing engineering and technical services of ZIP and its U.S. suppliers to repair,
   recondition, and prepare the necessary machines, equipment, and tooling to initiate
   manufacturing operations in Mexico.
2. Testing the machines and equipment to insure operational standards.
3. Coordinate the bulk transfer of the machines and equipment to Mexico.
   The machines and equipment will be stored in Anderson, South Carolina for the above purposes
   for six to nine months.
   Discussion:
   The issue is whether the machines and equipment, as described in the facts, will be subject to
   sales or use taxes in South Carolina.
   Code Section 12-36-910(A) imposes the South Carolina sales tax and reads, in part:
   A sales tax, equal to five percent of the gross proceeds of sales is imposed upon every
   person engaged or continuing within this State in the business of selling tangible personal
   property at retail.
   Code Section 12-36-1310(A) imposes the South Carolina use tax and reads in part:
   A use tax is imposed on the storage, use, or other consumption in this State of tangible
   personal property purchased at retail for storage, use, or other consumption in this State,
   at the rate of five percent of the sales price of the property, regardless of whether the
   retailer is or is not engaged in business in this State.
   Therefore, for the 5% sales or use taxes to apply, there must be a retail sale or purchase of
   tangible personal property.
   The statute provides several exemptions and exclusions that may be applicable and are described
   below.
   MACHINES USED IN MANUFACTURING
   Code Section 12-36-2120(17) exempts from sales and use tax the gross proceeds of sales, or
   sales price of:
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Machines used in manufacturing, processing, compounding, mining, or quarrying
tangible personal property for sale. “Machines” include the parts of machines,
attachments, and replacements used, or manufactured for use, on or in the operation of
machines and which are necessary to the operation of the machines and are customarily
so used.
In order to determine whether machines and attachments are used in manufacturing automotive
ride products for sale, it is essential to ascertain at which point the manufacturing will begin and
end at the manufacturing site in Mexico. American Law Reports Annotated 2d suggests the
following in making this determination and reads:
While the determination of whether the use is a taxable one or not appears to depend
largely upon the peculiarities of the taxpayer’s operations, so as to be essentially a
question of fact in each case, it seems that tax will be imposed where the transportation
or storage is clearly of raw materials prior to the start of manufacturing or processing, or
of the completed product after such operations have clearly terminated, but that handling
and storage intermediate to the various manufacturing or processing operations may be
regarded as a part of those operations, and so free from the tax. Annot., 30 A.L.R. 2d
1449 (1955).
Furthermore, in Bird & Son, Inc. v. Limbach, 45 Ohio St. 3d 76, 543 N.E. 2d 1161(1989), the
Ohio Supreme Court concluded that “tangible personal property which is employed in operations
preliminary or preparatory to the production of the marketable product, …, or employed
subsequent to the completion of the manufacturing process, … , is not exempt” (Emphasis
added).
SC Regulation 117-174-134, entitled “Conveyors”, reads in part:
The general rule with reference to material handling machinery and/or mechanical
conveyors is that such machinery is subject to the tax up to the point where the materials
go into the process. The machine feeding the first processing machine(s) is exempt. The
last machine to come within the exemption is that machine which discharges the finished
product from the last machine used in the process. Material handling machinery used for
transporting (in process) material from one process stage to another comes within the
exemption. Warehouse machinery used only for warehouse purposes, loading and
unloading, storing, transporting raw materials and finished products, etc., is held to be
subject to the tax.
If material handling machinery is customarily used for a dual purpose, that is partly for
an exempt purpose and partly for a taxable purpose, the machinery may be purchased
free of the tax under the machine exemption …
The South Carolina Supreme Court held in Hercules Contractors and Engineers, Inc. v. South
Carolina Tax Commission, 280 SC 426, 313 S.E. 2d 300 (1984) that machinery used for both
taxable and exempt purposes must be used substantially for an exempt purpose in order to come
within the provisions of the machine exemption under Code Section 12-36-2120(17).

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Based on the above, machines that will be used in manufacturing (as described above) ZIP’s
automotive ride products for sale may be stored in South Carolina free of the sales and use tax
before they are transported to ZIP’s new facility in Mexico. “’Machines’ include the parts of
machines, attachments, and replacements used, or manufactured for use, on or in the operation of
machines and which are necessary to the operation of the machines and are customarily so used.”
EQUIPMENT “USED DIRECTLY” IN MANUFACTURING
Code Section 12-36-120 defines the terms “wholesale sale” and “sale at wholesale”. This section
provides several exclusions from the tax, including one in which tangible personal property may
be purchased free of the tax if it is “used directly” in manufacturing tangible personal property
for sale. Under SC Regulation 117-174.30, tangible personal property is “used directly” if it
comes in direct contact with the product being manufactured for sale and it contributes to bring
about a chemical or physical change to the product.
Based on the above, equipment and other items that will be used directly in manufacturing (as
described above) ZIP’s automotive ride products for sale may be stored in South Carolina free of
the sales and use tax before they are transported to ZIP’s new facility in Mexico.
TANGIBLE PERSONAL PROPERTY SUBSTANTIALLY USED OUTSIDE OF SOUTH
CAROLINA
Code Section 12-36-1310 imposes the use tax and reads, in part:
A use tax is imposed on the storage, use, or other consumption in this State of tangible
personal property purchased at retail for storage, use, or other consumption in this State,
at the rate of five percent of the sales price of the property, regardless of whether the
retailer is or is not engaged in business in this State.
Code Section 12-36-1370(B) states that “[i]t is presumed that tangible personal property received
in [South Carolina] by its purchaser was purchased for storage, use or other consumption in
[South Carolina].”
Therefore, in order for the use tax to apply, the property: (1) must be used, stored or consumed in
South Carolina; (2) must have been purchased at retail; and (3) must have been purchased for
use, storage or consumption in South Carolina. In addition, the statute specifically presumes that
the property was purchased for use, storage or consumption in South Carolina.
SC Regulation 117-174.220 reads, in part:
Where property purchased in another state and used outside the State of South Carolina,
is brought into [South Carolina] for use, storage or consumption in South Carolina, the
use tax will apply unless the following conditions are conclusively established: (1) That
the property when purchased was intended for a bona fide use outside the state of South
Carolina; (2) That the first actual use of the property was outside the state of South
Carolina; and (3) That the first actual use of the property was substantial and constituted
the primary use for which the property was purchased.
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The responsibility for proof rests upon the purchaser and until the above facts are
established to the satisfaction of the [Department of Revenue], it will be presumed that
the use of such property in South Carolina is subject to a use tax.
Based on the above, machines and equipment of ZIP that were purchased and used outside of
South Carolina, and then brought into South Carolina for the purposes set forth in the facts, are
not subject to the use tax if the facts required by SC Regulation 117-174.220 can be established.
TANGIBLE PERSONAL PROPERTY PURCHASED OUTSIDE SOUTH CAROLINA
FOR TEMPORARY STORAGE IN SOUTH CAROLINA
As stated above, the “use tax is imposed on the storage, use, or other consumption in this State of
tangible personal property purchased at retail for storage, use, or other consumption in this State,
…” (Emphasis added.)
Code Section 12-36-140 defines the term “storage” and reads in part:
(A) “Storage” includes any keeping or retaining in this State, for any purpose except sale
in the regular course of business or subsequent use solely outside this State, of tangible
personal property purchased at retail.

(C) “Storage” and “use” do not include the keeping, retaining, or exercising of any right
or power over tangible personal property:
(1)

for the exclusive purpose of subsequently transporting it outside the State for
first use, or

(2)

for the purpose of first being manufactured, processed, or compounded into
other tangible personal property to be transported and used solely outside the
State.

Based on the above, machines and equipment of ZIP that were purchased at retail outside of
South Carolina, and transported to South Carolina for the purposes set forth in the facts, are not
subject to the use tax if any one of the exclusions provided for in subsections (A) or (C) of Code
Section 12-36-140 is applicable.
REPAIR PARTS, SUPPLIES, AND LABOR
SC Regulation 117-174.191 reads:
(a) When repairs require only service or services with the use of an inconsequential
amount of materials, the amount received is not subject to tax.
(b) When material and service are used in making repairs to machines exempted under
the machine exemption and when the materials used consist of standard replacement
parts customarily used on such machines, neither service nor materials are subject to tax.
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(c) When material and service are used in repairing machines not exempted and when
there is no separation in the billing, both materials and services are to be included in
gross proceeds of sales.
(d) When material and service are used in repairing taxable machines with service and
materials shown separately, the material only is subject to tax.
(e) Materials are taxable in any event when sold to repairmen for use in making repairs
when such materials lose their identity as a result of such use. For instance, paint, solder,
lumber, and sheet metal.
Conclusion:
MACHINES AND EQUIPMENT
ZIP Company is liable for the sales and use tax with respect to the purchase or transfer of
machines and equipment for repair, reconditioning and testing in South Carolina, as described in
the facts, prior to subsequent shipment of these items to a new manufacturing facility in Mexico,
unless any one of the following are applicable:
1.

The property is a machine that will be used in manufacturing ZIP’s automotive ride
products for sale. See the discussion above for information concerning whether a
machine is used in manufacturing products for sale.

2.

The property is equipment or other items, other than a manufacturing machine, that
will be “used directly” in manufacturing ZIP’s automotive ride products for sale.
See the discussion above for information concerning whether certain equipment is
“used directly” in manufacturing products for sale.

3.

The property was purchased at retail outside of South Carolina by ZIP and was
intended for a bona fide use by ZIP in a plant outside of South Carolina; was first
actually used at that plant outside of South Carolina; and, the first actual use at the
plant outside of South Carolina was substantial and constituted the primary use for
which the property was purchased.

4.

The property was purchased at retail outside of South Carolina by ZIP, transported
to South Carolina, and stored in South Carolina for subsequent use solely outside
South Carolina or for the purpose of first being manufactured, processed, or
compounded into other tangible personal property to be transported and used solely
outside South Carolina.
Repair parts purchased to repair, in South Carolina, machines that will not be used
in manufacturing tangible personal property for sale will be subject to the sales and
use tax. These items are used, and not merely stored, in South Carolina and are not
“manufactured, processed, or compounded into other tangible personal property”.

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REPAIR PARTS
ZIP Company is liable for the sales and use tax with respect to the purchase or transfer of repair
parts used to repair machines and equipment in South Carolina, as described in the facts, unless
the property is a repair part for, or attachment to, a machine that will be used in manufacturing
ZIP’s automotive ride products for sale. See the discussion above for information concerning
whether a machine is used in manufacturing products for sale.
SUPPLIES
Supplies used in repairing ZP’s machines and equipment in South Carolina as described in the
facts, and which lose their identity as a result of such use, are subject to the sales and use tax. For
instance, paint and solder used in repairing or reconditioning a machine are taxable. Such
supplies are subject to the sales and use tax whether or not the machine being repaired is an
exempt machine.
LABOR
The sales and use tax is applicable to the charges for labor performed with respect to ZIP’s repair
or reconditioning of machines and equipment in South Carolina, as described in the facts, as
follows:
1.

If repairs of ZIP’s machines and equipment in South Carolina, as described in the facts,
require only labor, the charge for the labor is not subject to the sales and use tax.

2.

If ZIP has purchased the repair part from one person and later hires another person to
install the part, the charge for labor is not subject to the sales and use tax. Only the
purchase of the part is subject to the sale and use tax; however, the purchase of the part
is not subject to the tax if it is installed in an exempt machine.

3.

If a supplier of ZIP is making a sale and installation of the repair part, both the part and
labor are included in gross proceeds of sales and subject to the sales and use tax if there
is no separation of parts and labor on the billing to ZIP. If there is a separation of parts
and labor on the billing to ZIP, only the parts are subject to tax.

However, as stated above, if the property is a repair part for, or attachment to, a machine that
will be used in manufacturing ZIP’s automotive ride products for sale, the sale and
installation is not subject to the sales and use tax.

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