Did PLR 94-11 apply South Carolina's historical $300 maximum tax to a research electron microscope?

Plain-English summary

South Carolina Private Letter Ruling 94-11 applied the historical $300 maximum tax to each item of ABC's electron-microscope system.

The microscope was used exclusively to develop new uses for membrane filters and improve existing systems. It was not used for production, efficiency studies, management research, consumer or economic surveys, advertising, promotion, or the other excluded activities listed in the ruling.

It was also housed in a separate facility devoted exclusively to research and development. Those two facts—exclusive qualifying use and a separate R&D-only facility—satisfied the historical statute.

Common questions

Q: Was the microscope fully exempt? No. The ruling applied a maximum tax of $300 to each qualifying item.

Q: Could it be used for production? The facts said no production occurred at the facility.

Q: Did contract use by other firms defeat qualification? No, because ABC required every user to comply with the R&D restrictions.

Q: Can another laboratory rely on this PLR? No. It was limited to ABC's system and facility.

Citations and references

• S.C. Code Ann. § 12-36-2110(D) (historical R&D machinery maximum tax)
• S.C. Code Ann. §§ 12-36-910 and 12-36-1310 (historical sales and use taxes)
• South Carolina Commission Decision 92-61 (separate-facility interpretation referenced in the PLR)

Subject

Research and Development Machinery

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR94-11.pdf

Original ruling text

SC PRIVATE LETTER RULING #94-11

TO:

ABC Inc.

SUBJECT:

Research and Development Machinery
(Sales and Use Taxes)

DATE:

October 19, 1994

REFERENCE:

S.C. Code Ann. Section 12-36-2110 (Supp. 1993)

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (Supp. 1993)
SC Revenue Procedure #94-1

SCOPE:

A Private Letter Ruling is an official advisory opinion issued by the
Department of Revenue to a specific person.

NOTE:

A Private Letter Rulings may only be relied upon by the person to whom it is
issued and only for the transaction or transactions to which it relates. A
Private Letter Ruling has no precedential value.

Question:
Does the purchase of an Electron Microscope by ABC Inc., which will be used exclusively to
develop new uses for membrane filters and to improve existing systems, qualify as research and
development machinery subject to the $300 maximum sales tax?
Conclusion:
Based upon the facts presented, the Electron Microscope purchased by ABC, Inc., will be used
exclusively to develop new uses for membrane filters and to improve existing systems. It meets all
of the requirements in Code Section 12-36-2110 to qualify as research and development
machinery. Accordingly, each item of the Electron Microscope qualifies for the $300.00
maximum tax.
Facts:
ABC Inc., is a research and development facility located in South Carolina. Its primary business
function is to develop new uses for membrane filters, and to improve existing applications.
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In order to perform its research and development function, ABC, Inc., has purchased a research
grade Electron Microscope for $307,125.
The Electron Microscope is used for imaging (i.e. examining and recording on a photograph)
surface features of material in high magnification. These photographs are used to examine such
things as contaminants on membrane filter surfaces, locate and evaluate defects and damage to the
surfaces, such as cracks.
The equipment has no application in efficiency surveys, management studies, humanities research,
economic studies, management science/operations research, consumer surveys, advertising and
promotion activities, or research in connection with literary, historical, or similar projects.
The system will also be made available to other firms for aiding in their research and development
efforts on a contract basis. ABC, Inc. will ensure that all users will comply with the research and
development restrictions set forth in Code Section 12-36-2110.
ABC, Inc., specifically leased and equipped a building in South Carolina exclusively for research
and development. In addition to the Electron Microscope and its associated equipment, the
building contains: a "wet" lab for the actual membrane application tests, a "dry" lab for testing
electrical/electronic systems and microscope sample preparation, a storage and mechanical room, a
library, two offices and a reception area. There is no production performed in the entire facility.
Discussion:
Code Section 12-36-910(A) imposes a 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 a 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 12-36-2110 imposes a maximum tax on the sale of certain items and reads, in part:
(D) The maximum tax levied pursuant to this chapter on the sale or use of each item of
machinery for research and development is three hundred dollars. As used in this
subsection, "machinery for research and development" means machinery used directly
and exclusively in research and development in the experimental or laboratory sense for
new products, new uses for existing products, or for improving existing products. To be
eligible for the limitation imposed by this subsection, the machinery must be located in a
separate facility devoted exclusively to research and development as defined in this
subsection. The limitation does not extend to machinery used in connection with
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efficiency surveys, management studies, consumer surveys, economic surveys,
advertising, promotion, or research in connection with literary, historical, or similar
projects.
Therefore, for the 5% state sales or use tax to apply there must be a retail sale or retail purchase of
tangible personal property. As provided in Code Section 12-36-2110, certain items including each
item of research and development machinery are subject to the $300 maximum tax.
In order to qualify for the maximum tax on research and development machinery, two
requirements must be met:

1. The property must be used directly and exclusively in research and development, and
2. The property must be located in a separate facility devoted exclusively to research and
   development.
   The first requirement concerns the use of the Electron Microscope. Machinery for research and
   development is defined in the statute as "machinery used directly and exclusively in research and
   development in the experimental or laboratory sense for new products, new uses for existing
   products, or for improving existing products".
   The last sentence in the statute specifies what research and development equipment is not.
   Specifically, the $300 sales tax limitation does not apply to machinery used in connection with
   efficiency surveys, management studies, consumer surveys, economic surveys, advertising,
   promotion, or research in connection with literary, historical, or similar projects.
   As discussed in the facts, the Electron Microscope will be used to develop new uses for membrane
   filters and to improve existing products. The Electron Microscope will not be used for efficiency
   surveys, management studies, humanities research, economic studies, management
   science/operations research, consumer surveys, advertising and promotion activities, or research in
   connection with literary, historical, or similar projects. ABC, Inc., will ensure that all users will
   comply with the research and development restrictions set forth in Code Section 12-36-2110.
   The second requirement concerns the location of the machinery. In order to qualify for the
   exemption, the machinery must be located in a separate facility devoted exclusively to research and
   development. As discussed in the facts, ABC, Inc.'s facility is used exclusively for research and
   development. Therefore, the second requirement is met. (See Commission Decision #92-61 for an
   interpretation of the phrase "separate facility".)
   Based upon the facts presented, the Electron Microscope is being used as research and
   development machinery, and is located in a separate facility devoted exclusively to research and
   development as required by Code Section 12-36-2110.

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