Were concrete, steel, and other materials used by a manufacturer to build a wastewater settling basin exempt under South Carolina's manufacturing-machine exemption?

Plain-English summary

South Carolina Revenue Ruling 89-7 exempted concrete, steel, and other materials a manufacturer used to construct a settling basin for its wastewater treatment facility.

The facility included the basin, pipes, pumps, tanks, and other mechanical devices and had been built under a South Carolina Department of Health and Environmental Control order to prevent or abate water pollution.

The ruling treated the entire wastewater facility as one machine. The basin's fixed, immovable construction did not disqualify it because its function—not its physical form—made it an integral part of the machine.

Why the pollution-control facility qualified

Former section 12-35-550(17) exempted machines used in manufacturing tangible personal property, including necessary parts and attachments.

Regulation 117-173 extended that treatment to machines installed and operated exclusively to prevent or abate air or water pollution caused or threatened by manufacturing machinery when needed to comply with an order from the responsible federal or state agency.

The regulation also required a certified statement from the ordering agency showing that the claimed machine was necessary for pollution prevention or abatement. On the ruling's facts, DHEC had ordered construction of the treatment facility to prevent or abate water pollution.

Why a concrete settling basin was part of a machine

The ruling relied on Hercules Contractors and Engineers, Inc. v. South Carolina Tax Commission, which addressed a textile plant wastewater facility made up of vats, basins, tanks, pumps, pipes, and other devices.

That court treated the facility as a single machine. It rejected physical attachment, movement, or immovability as decisive tests and instead asked whether the property was directly used in manufacturing, necessary and integral to the process, and used solely for that purpose.

The ruling emphasized that a structure's tax treatment depended on its use. Concrete vats and basins had no use apart from the machine of which they were integral parts, unlike a general-purpose building.

Why the construction materials were exempt

Regulation 117-174.123 allowed manufacturers and compounders to purchase materials tax-free when they used those materials to build machines for manufacturing tangible personal property for sale.

The regulation distinguished machine construction from ordinary building materials used to erect a structure. Because the settling basin was part of the wastewater-treatment machine, the ruling treated its concrete and steel as machine-building materials rather than taxable real-property improvements.

What this means for you

Manufacturers building pollution-control systems

Under this historical ruling, a required wastewater facility could qualify as manufacturing machinery when its components operated together as a single pollution-control system.

Plant and environmental compliance managers

The agency order and proof of necessity mattered. Regulation 117-173 required certification from the agency responsible for pollution prevention or abatement.

Industrial construction and procurement teams

Large, fixed items were not automatically treated as taxable building improvements. Their actual function and integration with the manufacturing machine controlled the analysis.

Accountants and tax professionals

The ruling distinguished materials used to build a machine from materials used to improve real property. Documentation should connect each claimed component to the qualifying machine and pollution-control purpose.

Common questions

Q: Did only the pumps and moving equipment qualify?

A: No. The concrete settling basin also qualified because it was an integral part of the single wastewater-treatment machine.

Q: Did the basin lose the exemption because it was fixed and immovable?

A: No. The ruling said form was not controlling; the basin's use as part of the machine was.

Q: Why did the DHEC order matter?

A: Regulation 117-173 addressed pollution-control machines necessary to comply with an order from the responsible federal or state agency.

Q: Were all building materials at the plant exempt?

A: No. The ruling distinguished materials used to construct the qualifying machine from materials used for general buildings or real-property improvements.

Q: Is this exemption necessarily current?

A: No. RR 89-7 applied former statutes and regulations in 1989. Current law, documentation rules, and later guidance must be checked.

Citations and references

• Former S.C. Code section 12-35-550(17) — manufacturing-machine exemption
• Regulation 117-173 — pollution-control machines required by a federal or state agency order
• Regulation 117-174.123 — materials used by manufacturers to build machines
• Regulation 117-174.45 — real-property improvement materials, discussed as inapplicable
• S.C. Code section 12-3-170 and SC Revenue Procedure 87-3 — authority cited for the Revenue Ruling
• Hercules Contractors and Engineers, Inc. v. South Carolina Tax Commission, 280 S.C. 426, 313 S.E.2d 300 (Ct. App. 1984) — wastewater facility operated as one machine
• Commonwealth v. Philadelphia Electric Co., 472 Pa. 530, 372 A.2d 815 (1977) — fixed and immovable property may be machinery based on its manufacturing use
• Gulf Oil Corp. v. City of Philadelphia, 357 Pa. 101, 53 A.2d 250 (1947) — no logical distinction between moving and static machine components

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR89-7.pdf

Original ruling text

SC REVENUE RULING #89-7

SUBJECT:

Settling Basins - Machine Exemption
(Sales and Use Tax)

EFFECTIVE DATE:

Applies to all periods open under statute.

REFERENCE:

S.C. Code Ann. Section 12-35-550(17) (1976)

AUTHORITY:

S.C. Code Ann. Section 12-3-170(1976)
SC Revenue Procedure #87-3

SCOPE:

A Revenue Ruling is the Commission's official interpretation of how tax
law is to be applied to a specific set of facts. A Revenue Ruling is
public information and remains a permanent document until superseded
by a Regulation or is rescinded by a subsequent Revenue Ruling.

Question:
Are sales/purchases of materials used to construct a settling basin for a waste water treatment
facility, by a manufacturer, exempt from the sales and use tax, pursuant to Code Section 12-35550(17)?
Facts:
A taxpayer is a manufacturer of tangible personal property, whose plant includes a waste water
treatment facility. Such facility includes a settling basin, constructed of concrete and steel, as
well as, pipes, pumps, tanks and other mechanical devices used to treat the waste water. The
treatment facility has been constructed to comply with an order, by the South Carolina
Department of Health and Environmental Control ("DHEC"), to prevent or abate the pollution of
water.
Code Section 12-35-550(17) exempts from the sales and use tax:
The gross proceeds of the sale of...machines used in...manufacturing of tangible personal
property ...provided, that the term "machines", as used in this article, shall include the
parts of such machines [and] attachments...which are necessary to the operation of such
machines...

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Furthermore, Regulation 117-173 reads:
Section 1. Purpose, Section 12-35-550(17) of the 1976 Code exempts from the sales or
use tax the gross proceeds of the sale of "machines used in mining, quarrying,
compounding, processing and manufacturing of tangible personal property and the term
'machine' includes parts of such machines, attachments and replacements therefor which
are used or manufactured for use on or in the operation of such machines and which are
necessary to the operation of such machines and which are customarily so used***."
Frequently, these machines cannot be operated when the same pollute the air or water
beyond regulated levels and in compliance with orders of agencies of the United States or
of this State to abate or prevent the pollution of the air or water caused or threatened by
the operation of such machines it is necessary to install other machines that are designed
and operated exclusively for the purpose of abating or preventing this pollution. The
purpose of this regulation is to classify the machines, their parts or attachments, as
machines used in mining, quarrying, compounding, processing or manufacturing of
tangible personal property when the same are installed and operated for compliance with
an order of an agency of the United States or of this State to prevent or abate pollution of
the air or water caused or threatened by the operation of other machines used in the
mining, quarrying, compounding, processing or manufacturing of tangible personal
property.
Section 2. The term "machine" as defined in Section 12-35-550(17) shall include
machines, their parts and attachments, when the same are necessary to comply with the
order of an agency of the United States or of this State for the prevention or abatement of
pollution of the air or water that is caused or threatened by any machines used in the
mining, quarrying, compounding, processing and manufacturing of tangible personal
property.
Section 3. Proof of the necessity of such machines. Any person engaged in the business
of mining, quarrying, compounding, processing and manufacturing of tangible personal
property shall furnish the Commission a certified statement from the ordering agency that
any machine for which the exemption is claimed is necessary to prevent or abate water or
air pollution caused or threatened by the operation of other machines that are used in the
mining, quarrying, compounding, processing or manufacturing or tangible personal
property.
Section 4. The order referred to herein must be issued by the agency of the United States
or of this State that is primarily charged with the duty of preventing or abating the
pollution.
Section 5. This regulation shall be effective upon filing in the office of the Secretary of
State.
Filed and recorded with the Secretary of State this 5th day of April, 1973.

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Discussion:
The issue is whether a settling basins are part of a machine used in manufacturing tangible
personal property.
In resolving this issue, we may look to the South Carolina courts. In Hercules Contractors and
Engineers, Inc. v. South Carolina Tax Commission, 280 S.C. 426, 313 S.E.2d 300, (1984 App.)
(writ of certiorari was denied on May 17, 1984), the court reviewed the tax exempt status of a
waste water facility at a textile plant near Society Hill, South Carolina. The facility was
"situated in an uncovered area on plant property and [consisted] of various vats, basins, tanks,
pumps and other mechanical devices, as well as troughs and pipes which carry the waste from
one part of the facility to another".
The court concluded, with respect to the waste water treatment facility, that "this facility operates
as one single entity, and that entity is a 'machine'." The court cited Commonwealth v.
Philadelphia Electric, 472 PA. 530, 372 A.2d 815 (1977), (a Pennslyvania Supreme Court
decision which concerned the "problem of the connection of a manufacturing machine with the
land upon which it sits") which held:
Under our case law, the large, fixed, and immovable nature of the property in question is
not dispositive. We have long rejected tests such as "physical attachment" or "applies
force or involves the quality of motion" as doctrines not adapted "to the business and
improvements of the age." .Thus, this Court has held that such fixed and immovable
items as ore yards, blast furnace stock bins, and slag pits...and oil refinery tanks...are
machinery and equipment and not taxable as realty. (Citations omitted.)
The test for determining what is machinery and equipment, first formulated in [In re
Borougn of Aliquippa] Jones & Laughlin, 405 Pa. [421] at 431, 175 A.2d [856] at 861,
provides:
"[I]mprovements, whether fast or loose, which (1) are used directly in manufacturing the
products that the establishment is intended to produce; (2) are necessary and integral
parts of the manufacturing process; and (3) are used solely for effectuating that purpose
are excluded from real estate assessment and taxation. On the other hand...improvements
which benefit the land generally and may serve various users of the land are subject to
taxation."
Our court, therefore, concluded that "a particular 'structure' may or may not constitute a machine
for tax purposes, depending not upon its form but upon its use." The court in Hercules
Contractors and Engineers, Inc. v. South Carolina Tax Commission, supra, further cited Gulf Oil
Corporation v. City of Philadelphia 357 Pa. 101, 53 A.2d 250 (1947) "to show that no logical
distinction exists between the moving parts of a machine and those which are static". The court,
in Gulf Oil, using the example of a butter churn, held:
If for purposes of taxation static machinery must be separated from machinery that
moves, it would be necessary, for example, in assessing butter manufactories to separate
the blades which beat the cream, from the barrel which contains it.
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Our court also held that the above rationale would not apply to buildings in that "[t]he concrete
vats and basins..., unlike buildings, have utterly no use apart from the machine of which they are
an integral part."
In reviewing the Commission Regulations, the court held that Regulation 117-174.123 "clearly
provides Hercules was entitled to purchase the materials used to construct the facility free of
sales or use tax". That regulation reads:
Manufacturers or compounders are entitled to purchase at wholesale free of the sales or
use tax, materials used by them in the building of machines for the purpose of
manufacturing or compounding tangible personal property for sale.
It should be noted that only those materials are exempt to manufacturers or compounders
which are used by them in building machines for the purpose of manufacturing or
compounding tangible personal property for sale. This ruling would not be for
application in the case of the use of property in the nature of building materials from
which there is erected a "structure," which upon completion might be used for producing
tangible personal property for sale.
It is well to note that the court further held Regulation 117-174.45 applies to "materials used to
improve real property" and was, therefore, not applicable to materials used to construct a
machine.
Conclusion:
A settling basin for a waste water treatment facility is one part of a single entity, a machine (the
waste water treatment facility). Therefore, sales/purchases of materials, such as concrete and
steel, by a manufacturer to construct a settling basin for a waste water treatment facility, are
exempt from the sales and use tax, pursuant to Code Section 12-35-550(17).

SOUTH CAROLINA TAX COMMISSION
s/S. Hunter Howard Jr.
S. Hunter Howard, Jr., Chairman
s/A. Crawford Clarkson Jr.
A. Crawford Clarkson, Jr., Commissioner
s/T. R. McConnell
T. R. McConnell, Commissioner
Columbia, South Carolina
, 1989
April 7

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