When does South Carolina's sales-tax exemption cover material-handling systems and equipment?

Plain-English summary

South Carolina Revenue Ruling 13-3 explains a sales-and-use-tax exemption for material-handling systems and equipment used in a manufacturing facility or distribution facility. To qualify, the taxpayer must notify the Department before first using the exemption and must invest at least $35 million in real or personal property in South Carolina during a stated five-year period.

Qualifying equipment can include automated storage and retrieval systems, carts, conveyors, cranes, dollies, forklifts and their designed battery chargers, hand trucks, hoppers, piping, pumps, racks, shelving, stackers, tanks, and replacement or repair parts. The equipment must actually be used in operating a qualifying manufacturing or distribution facility. Office shelving, computers, copiers, and similar office equipment do not qualify merely because they are located at the facility.

The exemption does not cover material-handling equipment used in processing, recycling, compounding, mining, or quarrying facilities. Some of that equipment may instead qualify under the separate manufacturing-machine exemption.

Notice and timing

The taxpayer must give written notice before the first month it will use the exemption. Purchases become eligible on the first day of the calendar month after the notice.

The five-year investment period begins on the date stated in the notice. It may begin before or after the notice date, but an investment made before notice must be documented as part of a five-year plan to invest at least $35 million.

The Department issues an exemption certificate for presentation to suppliers. If the purchaser uses it for nonqualifying purchases, the purchaser is liable for the tax.

What counts toward $35 million

The ruling counts South Carolina real or personal property expenditures such as land, buildings, machinery, equipment, fixtures, furniture, office equipment, site preparation, and infrastructure development.

Employee wages and benefits, taxes, raw materials, and inventory do not count. The investment may be made anywhere in South Carolina; it does not have to occur at the same site where the exempt equipment will be used.

Related entities' investments generally cannot be combined because § 12-36-2120(51) applies the requirement to the taxpayer as a separate legal entity. The ruling treats a federally disregarded single-member LLC differently: its investment can be treated as the same taxpayer's investment under the stated South Carolina conformity rule.

Facility ownership and duration

Once the same taxpayer meets the exemption's requirements, it can use the exemption at all of its South Carolina manufacturing and distribution facilities, including future qualifying facilities. The exemption is not limited to the five-year investment period; it remains available while that taxpayer operates qualifying facilities and the statute remains in effect.

A buyer of a qualifying facility cannot inherit the seller's exemption. Each separate taxpayer must give notice and satisfy the investment requirement independently, subject to the ruling's treatment of a disregarded single-member LLC.

Fuel, electricity, and records

Fuel and electricity are not exempt under the material-handling provision itself. If the equipment separately qualifies as a manufacturing machine, related fuel or electricity may qualify under the separate exemptions discussed in the ruling.

The taxpayer must keep records proving the investment, such as closing documents, building contracts, invoices, and payment evidence. Those records must be retained while the exemption is used and for three additional years unless the Department says otherwise.

Common questions

Q: Do replacement and repair parts qualify?

A: Yes, when they are for material-handling systems or equipment that qualify for the exemption.

Q: Can the taxpayer count payroll or inventory toward $35 million?

A: No. The ruling limits the investment calculation to real or personal property in South Carolina.

Q: Must all $35 million be invested at the facility using the equipment?

A: No. The qualifying taxpayer may make the investment anywhere in South Carolina.

Q: Can a new owner keep using the seller's exemption certificate?

A: No. A new legal entity must separately notify the Department and satisfy the exemption's requirements.

Citations and references

• S.C. Code Ann. § 12-36-2120(51) — material-handling systems and equipment exemption
• S.C. Code Ann. § 12-36-2120(17) — separate manufacturing-machine exemption
• S.C. Code Ann. § 12-36-2120(9) and (19) — fuel and electricity exemptions discussed by the ruling
• S.C. Code Ann. § 12-54-85 — limitations period suspended as stated in § 12-36-2120(51)
• S.C. Code Ann. § 12-2-25 — state treatment of federally disregarded single-member LLCs
• S.C. Regulation 117-336 — facility definition cited by the ruling
• S.C. Regulation 117-302 and 117-302.5 — manufacturing-machine, fuel, and electricity guidance cited by the ruling

Subject

Material Handling Systems and Material Handling Equipment

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR13-3.pdf

Original ruling text

State of South Carolina
Department of Revenue
300A Outlet Pointe Blvd., Columbia, South Carolina 29210
P.O. Box 125, Columbia, South Carolina 29214

SC REVENUE RULING #13-3

SUBJECT:

Material Handling Systems and Material Handling Equipment
(Sales and Use Taxes)

EFFECTIVE DATE:

Applies to all periods open under the statute.

SUPERSEDES:

SC Revenue Ruling #97-6 and all previous documents and any oral
directives in conflict herewith.

REFERENCE:

S.C. Code Ann. Section 12-36-2120(51) (Supp. 2012)

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (Supp. 2012)
SC Revenue Procedure #09-3

SCOPE:

The purpose of a Revenue Ruling is to provide guidance to the public. 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.

INTRODUCTION:
Since 1996 South Carolina has exempted from the sales and use tax certain material handling
systems and equipment used in the operation of a manufacturing facility or a distribution facility.
The exemption requires the taxpayer to meet specific investment requirements.
The purpose of this advisory opinion is to revise SC Revenue Ruling #97-6 and to address and
clarify additional questions that have arisen since the exemption was first enacted.

LAW:
Code Section 12-36-2120(51) exempts from the sales and use tax:
material handling systems and material handling equipment used in the operation
of a distribution facility or a manufacturing facility1 including, but not limited to,
racks used in the operation of a distribution facility or a manufacturing facility and
1

See SC Regulation 117-336 for a definition of the term “facility.”

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either used or not used to support a facility structure or part of it. To qualify for
this exemption, the taxpayer shall notify the department before the first month it
uses the exemption and shall invest at least thirty-five million dollars in real or
personal property in this State over the five-year period beginning on the date
provided by the taxpayer to the department in its notices. The taxpayer shall notify
the department in writing that it has met the thirty-five million dollar investment
requirement or, after the expiration of the five years, that it has not met the thirtyfive million dollar investment requirement. The department may assess any tax
due on material handling systems and material handling equipment purchased taxfree pursuant to this item but due the State as a result of the taxpayer's failure to
meet the thirty-five million dollar investment requirement. The running of the
periods of limitations for assessment of taxes provided in Section 12-54-85 is
suspended for the time period beginning with notice to the department before the
taxpayer uses the exemption and ending with notice to the department that the
taxpayer either has met or has not met the thirty-five million dollar investment
requirement.

QUESTIONS AND ANSWERS:
Property Eligible for the Exemption

1. Q. Are material handling systems and material handling equipment used in the operation of
   processing, recycling, compounding, mining or quarrying facilities covered by the
   exemption in Code Section 12-36-2120(51)?
   A. No. Only material handling systems and material handling equipment used in distribution
   or manufacturing facilities qualify for the exemption in Code Section 12-36-2120(51).
   However, certain purchases of material handling equipment may qualify for the machine
   exemption provided for in Code Section 12-36-2120(17). For information on the
   machine exemption in Code Section 12-36-2120(17), see SC Regulation 117-302.5.
2. Q. Are replacement parts and repair parts for material handling systems and material
   handling equipment covered by the exemption?
   A. Yes. Purchases of replacement parts and repair parts for material handling systems and
   material handling equipment that qualify for the exemption also qualify for the
   exemption.
3. Q. What are examples of material handling systems and material handling equipment that
   qualify for the exemption when used in the operation of a manufacturing facility or a
   distribution facility?

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A. The following are examples of material handling systems and material handling
equipment that qualify for the exemption when used in the operation of a
manufacturing facility or a distribution facility:
Automated storage and retrieval systems
Carts
Conveyors
Cranes
Dollies
Forklifts (including battery chargers designed for the forklift) 2
Hand trucks
Hoppers
Piping
Pumps
Racks
Shelving
Stackers
Tanks
Note: The exemption in Code Section 12-36-2120(51) does not apply to any material
handling systems or material handling equipment that is not used in the operation of a
manufacturing facility or a distribution facility (e.g., mail carts, shelving used in the
office for books and records, office computers, copiers, and similar office equipment) and
does not apply to any material handling systems or material handling equipment used in a
manufacturing facility or distribution facility that does not meet all the requirements of
the exemption.

4. Q. Are purchases of fuel or electricity exempt from the sales and use tax when used in
   operating material handling equipment and systems exempt under Code Section 12-362120(51)?
   A. No. The exemption in Code Section 12-36-2120(51) for material handling equipment and
   material handling systems does not include fuel or electricity.
   However, certain purchases of material handling equipment may qualify for the machine
   exemption provided in Code Section 12-36-2120(17). Therefore, purchases of fuel and
   electricity used in operating material handling machines exempt as manufacturing
   machines under Code Section 12-36-2120(17) are exempt from the tax under Code
   Section 12-36-2120(9) (fuel) and Code Section 12-36-2120(19) (electricity). For
   information on the machine exemption in Code Section 12-36-2120(17), the fuel
   exemption in Code Section 12-36-2120(9), and the electricity exemption in Code Section
   12-36-2120(19), see SC Regulation 117-302.
   2

The battery charger qualifies for the exemption since the forklift, and the battery charger designed for it, are two
parts of a material handling “system.”

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Notification Requirements

5. Q. When and how must a taxpayer notify the Department of the taxpayer’s intent to start
   using the exemption?
   A. The taxpayer must notify the Department before the first month the taxpayer will use the
   exemption. The notification must be in writing and mailed to:
   S.C. Department of Revenue
   Office Operations Division
   License and Registration Unit
   P.O. Box 125
   Columbia, S.C. 29214-0140
   The written notice should include the taxpayer’s name, address, retail license number or
   use tax registration number, the location of records, the beginning date of the investment
   period, a brief description of the qualifying investment, a brief description of property
   claimed to be exempt from tax and where it will be used, and the name of a person to
   contact with respect to the exemption and that person’s telephone number.

Exemption - Effective Dates, Usage, and Exemption Certificate

6. Q. When may the taxpayer first use the exemption?
   A. The exemption is available to the taxpayer for purchases of material handling systems and
   equipment made on or after the first day of the calendar month following the date the
   taxpayer notified the Department of its intent to invest $35 million and to use the
   exemption.
   For example, if the taxpayer notifies the Department on October 15th of its intent to invest
   $35 million and to use the exemption in Code Section 12-36-2120(51), the taxpayer may
   use the exemption for purchases made on or after November 1st. Any purchases made
   prior to November 1st are not eligible for the exemption.
7. Q. Is the exemption limited to one specific manufacturing facility or distribution facility?
   A. No. If the taxpayer meets all the requirements of the exemption, then the exemption is
   available for any and all manufacturing facilities and distribution facilities of the taxpayer
   located in the state.
   For example, if a manufacturer with three manufacturing facilities that have been in
   operation in South Carolina for decades decides to build a fourth manufacturing facility in
   which it will invest over $35 million 3, the taxpayer (i.e., a single, legal entity) may use the
   3

For purposes of simplicity, the taxpayer in this example will invest $35 million at the new facility. However, as
noted in the answer to Question #14, the $35 million investment may be made anywhere in South Carolina.

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material handling exemption at all four manufacturing facilities, but only for purchases
of material handling systems and equipment made on or after the first day of the calendar
month following the date the taxpayer notified the Department of its intent to invest $35
million and to use the exemption. The taxpayer must meet all the requirements of the
exemption and all four manufacturing facilities must be owned by the same taxpayer. In
addition, if the taxpayer meets all the requirements of the exemption in constructing its
fourth manufacturing facility, the exemption would also apply to all future manufacturing
or distribution facilities owned by the taxpayer in South Carolina regardless of the
amount of any future investment in South Carolina.

8. Q. Is the exemption for material handling systems and equipment only for the five-year
   investment period?
   A. No. The exemption is available to the taxpayer as long as the taxpayer is operating
   manufacturing facilities, distribution facilities or both in South Carolina, provided Code
   Section 12-36-2120(51) remains in effect.
9. Q. What must the taxpayer present to suppliers to make tax-exempt purchases under the
   exemption?
   A. The Department will issue an exemption certificate to the taxpayer. This certificate is to
   be presented to suppliers to make tax-exempt purchases of material handling systems and
   material handling equipment.
10. Q. Who will be held liable for any taxes due if the certificate is used to make purchases that
    do not come within the exemption - the supplier or the purchaser?
    A. If the certificate is used to make purchases tax-free that are not exempt, then the
    purchaser will be held liable for any taxes due.
11. Q. If a taxpayer who has met the requirements of the exemption and has been using the
    exemption at its manufacturing or distribution facility sells that facility, may the new
    owner continue to use the exemption of the seller?
    A. No. Each taxpayer (i.e, each separate legal entity) must meet the requirements of the
    exemption on its own. The new owner would need to notify the Department of its intent
    to use the exemption and would need to meet the investment requirements of the
    exemption on its own.
    Note: South Carolina follows the federal tax treatment of limited liability companies.
    Based upon the federal rules and Code Section 12-2-25, if a single member LLC does not
    make a federal election to be taxed as a corporation, it will be disregarded. Therefore, in
    the case of a sale or transfer of a qualifying facility by a taxpayer to a single member LLC
    of which the taxpayer is the single member, the exemption of the taxpayer will still be
    applicable since the facility is considered to be owned by the same taxpayer for South
    Carolina tax purposes.
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Investment Requirements

12. Q. Must the five-year investment period begin on the same date the taxpayer begins to use
    the exemption?
    A. No. The five year investment period begins on the date provided by the taxpayer in its
    notification to the Department and does not need to be the same date the taxpayer may
    first use the exemption.
    Investment Prior to Notification: The investment period may begin on a date prior to
    the date the taxpayer notifies the Department of its intent to invest $35 million over a five
    year period, provided the taxpayer can document that any investment made prior to the
    notification is a part of a five year plan in which the taxpayer “shall invest” at least $35
    million in the State of South Carolina.
    For example, a taxpayer with plans to build a large distribution facility in South
    Carolina, purchases $1 million in realty for the distribution facility over a six month
    period beginning in January 2013 prior to notifying the Department of its intent to
    invest at least $35 million. When this taxpayer notifies the Department in June 2013
    of its intent to invest $35 million and to use the exemption, the taxpayer may claim a
    five year investment period that begins on January 1, 2013 and ends on December
    31, 2017. The taxpayer may begin using the exemption for purchases made on or
    after July 1, 2013 since the taxpayer cannot start using the exemption until the first
    day of the month following the month in which the taxpayer notifies the Department
    that he will use the exemption.
    Investment After Notification: The investment period may also begin on a date after the
    date the taxpayer notifies the Department of its intent to invest $35 million over a five
    year period.
    For example, a taxpayer who has been operating within South Carolina for decades
    decides to build a distribution facility on land it has also owned for decades. If the
    taxpayer plans to begin construction in October, 2013, but wants to begin purchasing
    and storing material handling systems and equipment in April 2013, the taxpayer can
    submit the notice to the Department in March 2013 4 with an investment period
    beginning date of October 1, 2013. This will allow the taxpayer to use the exemption
    beginning April 1, 2013 and to claim a five year investment period of October 1,
    2013 through September 30, 2018.

4

The taxpayer may submit the notice to the Department prior to March 2013 and still use the exemption beginning
April 1, 2013 (or sooner depending on when the notice is submitted to the Department). See Question No. 6 for
information on when a taxpayer may begin using the exemption.

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13 Q. What expenditures meet the $35 million investment requirement?
A. The $35 million investment is limited to real or personal property in South Carolina. This
includes expenditures for:
buildings
equipment
fixtures
furniture
infrastructure development (roads, water, sewer, etc)
land
machinery
office equipment (computers, copiers, and similar office equipment)
site preparation
Expenditures by the taxpayer for employee wages, employee benefits, taxes, raw material
and inventory are examples of expenditures that do not meet the investment requirement.

14. Q. Is it required that the investment in real and personal property be made at the same
    location where the material handling systems and material handling equipment will be
    used?
    A. No. The investment may be made anywhere in South Carolina.
15. Q. If the taxpayer that will be operating the manufacturing facility or distribution facility has
    related entities (e.g., subsidiary corporations), are investments by these related entities of
    the taxpayer in South Carolina included in determining if the taxpayer has met the $35
    million investment requirement under the exemption for material handling systems and
    equipment in Code Section 12-36-2120(51)?
    A. No. While other sales and use tax exemptions that require a certain amount of investment
    define the term “taxpayer” to include “a person who bears a relationship to the taxpayer
    as described in Section 267(b) of the Internal Revenue Code” (e.g., Code Section 12-362120(9)(e) &(f) and Code Section 12-36-2120(67)), the exemption for material handling
    systems and equipment in Code Section 12-36-2120(51) does not include such a
    definition. Therefore, the investments by related entities of the taxpayer may not be
    included in determining if the taxpayer has met the $35 million requirement under the
    exemption for material handling systems and equipment in Code Section 12-36-2120(51).
    Note: South Carolina follows the federal tax treatment of limited liability companies.
    Based upon the federal rules and Code Section 12-2-25, if a single member LLC does not
    make a federal election to be taxed as a corporation, it will be disregarded. Therefore, in
    the case of investments made by a disregarded single member LLC of which the taxpayer
    is the single member, the investments of both the taxpayer and the single member LLC
    will be included in determining if the taxpayer has met the $35 million investment
    requirement under the exemption since the both investments are considered to have been
    made by the same taxpayer for South Carolina tax purposes.
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Records

16. Q. What records must taxpayers keep with respect to this exemption?
    A. Taxpayers must be able to substantiate that they have met the $35 million investment
    requirement. Like other records maintained for tax purposes, the records must be readily
    available for inspection by the Department. Examples of records that must be maintained
    are real estate closing documents, building contracts, and purchase invoices with evidence
    of payment.
17. Q. How long must taxpayers maintain records supporting their investment in South
    Carolina?
    A. Records substantiating that a taxpayer has met the investment requirement must be
    maintained for as long as the taxpayer continues to take the exemption, plus three years,
    unless the Department otherwise advises the taxpayer that they can discontinue
    maintaining the records.

SOUTH CAROLINA DEPARTMENT OF REVENUE

s/William M. Blume, Jr.
William M. Blume, Jr., Director
May 21
, 2013
Columbia, South Carolina

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