How much qualifying research-and-development use did a machine need for South Carolina's sales-tax exemption under the 2008 ruling?

Plain-English summary

The South Carolina Department of Revenue concluded that a machine qualified for the research-and-development sales and use tax exemption only when more than 50% of its total use was direct qualifying research and development.

The statutory definition covered machines used directly and primarily in experimental or laboratory work involving new products, new uses for existing products, or improvements to existing products. Machine parts, attachments, and replacements could also fall within the definition when necessary to operation and customarily used that way.

All other use counted against the threshold. The ruling specifically identified teaching and administrative use as nonqualifying, along with indirect research support and work that was not experimental or laboratory development of the listed product types.

What this means for you

Universities and research organizations

A machine shared between laboratory research and teaching or administration did not qualify merely because it supported research. Direct qualifying R&D use had to exceed all nonqualifying use combined.

Manufacturers and product developers

The test focused on the machine's actual use. Direct experimental or laboratory work on new or improved products qualified; indirect, administrative, or unrelated use did not.

Purchasers claiming the exemption

The ruling did not prescribe a particular recordkeeping method, but its more-than-50% test makes support for the machine's total qualifying and nonqualifying use important.

Common questions

Q: Was exactly 50% qualifying use enough?
A: No. The ruling required more than 50% of total use to be direct qualifying research and development.

Q: Did teaching use count as research use at a university?
A: No. The ruling treated teaching as a nonqualifying use when applying the percentage test.

Q: Did administrative support for research count?
A: No. Indirect research-related use, including administrative use, was nonqualifying.

Q: What kind of research counted?
A: Direct experimental or laboratory research and development concerning new products, new uses for existing products, or improvements to existing products.

Q: Could parts and attachments qualify?
A: Yes, the quoted statute included necessary, customarily used machine parts, attachments, and replacements within the machine definition.

Citations and references

• S.C. Code § 12-36-2120(56) (sales and use tax exemption and definitions for research-and-development machines)
• Hay v. South Carolina Tax Commission, 255 S.E.2d 837 (S.C. 1979) (dictionary-use authority cited by the ruling)
• Fennell v. South Carolina Tax Commission, 103 S.E.2d 424 (S.C. 1958) (same)
• Etiwan Fertilizer Co. v. South Carolina Tax Commission, 60 S.E.2d 682 (S.C. 1950) (same)

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR08-3.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 REVENUE RULING #08-3

SUBJECT:

Research and Development Machines
(Sales and Use Tax)

EFFECTIVE DATE:

Applies to all periods open under the statute.

SUPERSEDES:

All previous advisory opinions and any oral directives in
conflict herewith.

REFERENCES:

S. C. Code Ann. Section 12-36-2120(56) (Supp. 2007)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (Supp. 2007)
SC Revenue Procedure #05-2

SCOPE:

The purpose of a Revenue Ruling is to provide guidance to the
public and to Department personnel. It is an advisory opinion
issued to apply principles of tax law to a set of facts or general
category of taxpayers. It is the Department’s position until
superseded or modified by a change in statute, regulation, court
decision, or another Departmental advisory opinion.

Question:
In order for a machine to qualify for the exemption from the sales and use tax in Code
Section 12-36-2120(56) for research and development machines, what percentage of the
machine’s use must be devoted to research and development?
Conclusion:
In order for a machine to qualify for the exemption from the sales and use tax in Code
Section 12-36-2120(56) for research and development machines, more than 50% of its
total use must be for direct use in research and development as defined in the exemption.

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Note: Based on the definition of research and development found in the exemption, the
use of a machine indirectly in research and development (e.g., administrative uses), or not
in the experimental or laboratory sense of research and development, or not with respect
to new products, new uses for existing products, or improvement of existing products
must be considered as non-qualifying uses when determining if the machine qualifies for
the exemption in Code Section 12-36-2120(56).
Facts:
Machines used in research and development at universities and other places may also be
used for other purposes. For example, at a university, a machine used in research and
development may also be used for teaching or administrative purposes.
The issue at hand is what percentage of the machine’s use must be devoted to research
and development in order for the exemption in Code Section 12-36-2120(56) to apply.
Discussion:
Code Section 12-36-2120(56) exempts from the sales and use tax the gross proceeds of
sales, or sales price, of
Machines used in research and development. "Machines" includes
machines and parts of machines, attachments, and replacements which are
used or manufactured for use on or in the operation of the machines,
which are necessary to the operation of the machines, and which are
customarily used in that way. "Machines used in research and
development" means machines used directly and primarily in research and
development, in the experimental or laboratory sense, of new products,
new uses for existing products, or improvement of existing products.
It is an accepted practice in South Carolina to resort to the dictionary to determine the
literal meaning of words used in statutes. For cases where this has been done, see Hay v.
South Carolina Tax Commission, 273 S.C. 269, 255 S.E.2d 837 (1979); Fennell v. South
Carolina Tax Commission, 233 S.C. 43, 103 S.E.2d 424 (1958); Etiwan Fertilizer Co. v.
South Carolina Tax Commission, 217 S.C. 484, 60 S.E.2d 682 (1950).
The Second College Edition of the American Heritage Dictionary provides the following
definitions:
primarily

1. At first; originally. 2. Chiefly; principally.

primary

… 4. Being first or best in degree, quality, or
importance. …

chiefly

1. Above all; especially. 2. Mostly; mainly. …

2

Based on the above, when comparing all of a machine’s direct use in research and
development as defined in the exemption to the total of all its non-qualifying uses
(teaching, administrative, etc.), the machine must be used mostly for qualifying research
and development. In other words, more than 50% of its total use must be for direct use in
research and development as defined in the exemption.
Note: The use of a machine indirectly in research and development (e.g., administrative
uses), or not in the experimental or laboratory sense of research and development, or not
with respect to new products, new uses for existing products, or improvement of existing
products must be considered as non-qualifying uses when determining if the machine
qualifies for the exemption in Code Section 12-36-2120(56).
SOUTH CAROLINA DEPARTMENT OF REVENUE

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

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