When did SC Revenue Ruling 91-13 let a machine shop buy production inputs, machinery, and electricity without sales or use tax?

Plain-English summary

South Carolina Revenue Ruling 91-13 treated a machine shop as a manufacturer for specified sales-and-use-tax exclusions and exemptions only when it regularly and continuously manufactured tangible personal property for sale and that work was a substantial part of its total business.

For a qualifying shop:

• property becoming an ingredient or component of a product made for sale was a wholesale purchase;
• property used directly in manufacturing a product for sale was a wholesale purchase;
• machines substantially used in manufacturing property for sale were exempt;
• electricity used in that manufacturing was exempt; and
• property used to fabricate parts for exempt manufacturing machines was exempt.

The ruling rejected the portion of Regulation 117-174.130 that purported to exempt machines used only to make tools and supplies for the shop's own use. Beginning December 1, 1991, a shop not substantially engaged in manufacturing for sale could not purchase those machines tax-free.

The qualification standard

The ruling did not treat every repair or fabrication shop as automatically eligible. Manufacturing property for sale had to be:

• regular;
• continuous; and
• a substantial part of the shop's total business activities.

The ruling relied on Hercules Contractors and Engineers, Inc. v. South Carolina Tax Commission for the principle that exempt manufacturing use need not be exclusive or primary, but more than a minimal use was required. It contrasted that substantial-use rule with Southern Equipment Sales Company, Inc. v. South Carolina Tax Commission, where incidental asphalt sales did not qualify a contractor's machine for the exemption.

Inputs and repair materials

Sections 12-36-120(2) and (3) excluded qualifying wholesale sales from the retail sales-tax base. The ruling applied those provisions to property that became part of a product manufactured for sale or was used directly in manufacturing it.

Regulation 117-174.110 distinguished fabrication from repair consumption. A machine shop performing repairs was the consumer of materials that lost their identity in the repair process and owed tax when buying them. When it fabricated a recognizable part or attachment, however, the fabricated item could be sold separately from installation labor if the agreements, books, and invoices clearly separated the two charges.

The ruling also addressed a manufacturer-owned shop that fabricated property only for its owner's use. Even though that fabricated item was not itself sold, property used directly to make an item that would itself be used directly in manufacturing property for sale was not subject to tax under Section 12-36-120(3).

Machines and electricity

Sections 12-36-2120(17) and (19) exempted qualifying manufacturing machines and electricity. RR 91-13 said the shop's for-sale manufacturing activity had to satisfy the same regular, continuous, and substantial-business standard.

The machine exemption included necessary and customarily used parts, attachments, and replacements. Property used by the shop to fabricate parts for an exempt manufacturing machine also qualified.

Own-use tools and supplies

Regulation 117-174.130 said machines used to produce tools and supplies for a manufacturer's own use came within the machine exemption. The ruling concluded that sentence conflicted with Section 12-36-2120(17), which limited the exemption to machines used to manufacture tangible personal property for sale.

Citing Society of Professional Journalists v. Sexton, the Commission said a regulation must fall when it alters or adds to a statute. It therefore declared that sentence invalid while leaving the rest of the regulation in place.

What this means for you

Independent machine shops

Document whether fabrication for sale is regular, continuous, and substantial. Occasional or inconsequential manufacturing sales did not satisfy the ruling's standard.

Manufacturer-owned shops

A shop making only the owner's tools, supplies, or machine parts could not exempt the machines used for that own-use production after December 1, 1991. The ruling separately allowed the direct-use input treatment described above when the fabricated item would be used directly in manufacturing property for sale.

Repair operations

Separate recognizable fabricated parts from installation labor in agreements, books, and invoices if claiming the treatment described in Regulation 117-174.110. Materials consumed in ordinary repair work remained taxable to the machinist.

Common questions

Q: Did every machine shop qualify as a manufacturer?

A: No. Manufacturing tangible personal property for sale had to be regular, continuous, and a substantial part of the shop's total business.

Q: Were component materials and directly used inputs taxable?

A: Not when they met the ruling's wholesale-sale conditions for qualifying manufacturing for sale.

Q: Were machine-shop machines automatically exempt?

A: No. The machines had to support qualifying manufacturing for sale, and the shop's manufacturing activity had to meet the ruling's substantial-business standard.

Q: Could a shop exempt a machine used only to make its own tools or supplies?

A: No, beginning December 1, 1991. The ruling held that the contrary sentence in Regulation 117-174.130 exceeded the statute.

Q: Did manufacturing use have to be exclusive?

A: No. The ruling said substantial manufacturing use was required, but cited Hercules for the conclusion that exclusive or primary use was not required.

Citations and references

• S.C. Code Ann. § 12-36-110 — retail sale definition
• S.C. Code Ann. § 12-36-120(2) and (3) — manufacturing wholesale-sale exclusions
• S.C. Code Ann. § 12-36-910(A) — sales tax
• S.C. Code Ann. § 12-36-1310(A) — use tax
• S.C. Code Ann. § 12-36-2120(17) and (19) — manufacturing machines and electricity exemptions
• S.C. Code Ann. § 12-4-320 — ruling authority
• S.C. Regs. 117-174.110, 117-174.123, and 117-174.130 — machine-shop and manufacturing rules
• Southern Equipment Sales Company, Inc. v. South Carolina Tax Commission, unpublished order dated July 27, 1962
• Hercules Contractors and Engineers, Inc. v. South Carolina Tax Commission, 280 S.C. 426, 313 S.E.2d 300 (1984)
• Society of Professional Journalists v. Sexton, 283 S.C. 563, 324 S.E.2d 313 (1984)

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR91-13.pdf

Original ruling text

SC REVENUE RULING #91-13

SUBJECT:

Machine Shop Activities
(Sales and Use Tax)

TAX ANALYST:

Steve C. Hallman

EFFECTIVE DATE:

With respect to machines used by machine shops to produce tools and
supplies for the machine shops' own use, the effective date is December
1, 1991.
With respect to all other issues, this ruling applies to all open periods
under the statute.

REFERENCE:

S.C. Code Ann. Section 12-36-110 (Supp. 1990)
S.C. Code Ann. Section 12-36-120(2) and (3) (Supp. 1990)
S.C. Code Ann. Section 12-36-910(A) (Supp. 1990)
S.C. Code Ann. Section 12-36-1310(A) (Supp. 1990)
S.C. Code Ann. Section 12-36-2120(17) and (19) (Supp. 1990)
Regulation 117-174.110
Regulation 117-174.123
Regulation 117-174.130

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (Enacted June, 1991)
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.

Questions:
1.

Are sales to, or purchases by, machine shops of tangible personal property which becomes
an ingredient or a component part of the product being manufactured, or is "used directly"
in manufacturing the product, excluded from the sales and use tax pursuant to Code
Section 12-36-120(2) and (3)?

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2.

Are sales to, or purchases by, machine shops of machines and electricity exempt from the
sales and use tax pursuant to Code Section 12-36-2120(17) and (19)?

Facts:
Machine shops are facilities where power-driven tools are used for making, finishing, or
repairing machines or machine parts. Some manufacturers own and operate machine shops,
while other machine shops are independently owned and operated. In many instances, machine
shops custom make or fabricate parts or attachments for a manufacturer's machinery. Where
machine shops engage in such activities, it has not been clear whether the machine shops are
considered as manufacturers for sales and use tax purposes. More specifically, there has been
uncertainty as to whether machine shops qualify for the exclusions from the sales and use tax
found at Code Sections 12-36-120(2) and (3) when purchasing ingredients or component parts of
a product being manufactured, or tangible personal property "used directly" in manufacturing a
product. Further, there has been uncertainty as to whether machine shops qualify for the
exemptions from the sales and use tax found at Code Section 12-36-2120(17) and (19) for
machines and electricity used in manufacturing tangible personal property.
Discussion:
Code Section 12-36-910(A) states:
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) reads:
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.
The terms "sale at retail" and "retail sale" are defined at Code Section 12-36-110, in part, as "all
sales of tangible personal property except those defined as wholesale sales."
Code Section 12-36-120 provides, in part:
"Wholesale sale" and "sale at wholesale" mean a sale of:

(2)

tangible personal property to a manufacturer or compounder as an ingredient or
component part of the tangible personal property or products manufactured or
compounded for sale;

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(3)

tangible personal property used directly in manufacturing, compounding, or
processing tangible personal property into products for sale;...

In summary, for the sales or use tax to be imposed, there must be a retail sale of tangible
personal property. Wholesale sales of tangible personal property are excluded from taxation.
Wholesale sales include sales of tangible personal property to a manufacturer which become an
ingredient or component part of products manufactured for sale or which are "used directly" in
manufacturing tangible personal property for sale. The term "used directly" as found in the
statute is defined in Regulation 117-174.30(b) to mean:
... that the materials or products so used come in direct contact with and contribute to bring
about some chemical or physical change in the ingredient or component properties during
the period in which the fabricating, converting or processing takes place. It is not
necessary that such materials or products be used up or entirely consumed, provided there
is a compliance with the requirements set forth herein.
In addition to the aforementioned exclusions, Code Section 12-36-2120 exempts from the sales
and use tax purchases of:
(17) 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 the machines and which are necessary to the operation of the machines and are
customarily so used. This exemption does not include automobiles or trucks;

(19) electricity used by manufacturers, miners, or quarries to manufacture, mine, or
quarry tangible personal property for sale.
Therefore, purchases of machines and electricity used to manufacture tangible personal property
for sale are exempt from the sales and use taxes.
Regulation 117-174.123 states, in pertinent part:
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....
In Southern Equipment Sales Company, Inc. v. South Carolina Tax Commission, Court of
Common Pleas of Richland County, unpublished order dated July 27, 1962, the court considered
whether a secondary and casual use of a machine by a construction contractor who occasionally
sold asphalt produced by the machine would come within the exemption for machines used in
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manufacturing tangible personal property. The court concluded the exemption was applicable
when a machine is used in the manufacture, processing or compounding of tangible personal
property for sale and that incidental sales of asphalt by the contractor to others would not bring
its machine within the exemption.
More recently, the Court of Appeals of South Carolina, in Hercules Contractors and Engineers,
Inc. v. South Carolina Tax Commission, 280 S.C. 426, 313 S.E.2d 300, 308, 309 (1984),
deliberated whether building materials were exempt from sales and use taxes when used to
construct a machine to abate pollution caused by the operation of manufacturing machines even
though the pollution abatement machine was not used exclusively for that purpose. In reaching
its conclusion the court reviewed an exemption found at Code Section 12-35-550(17) that has
been repealed and recodified at Code Section 12-36-2120(17). Their finding states, in part:
...The exemption of section [12-36-2120(17)] extends to the sale of machines used in the
manufacture of tangible personal property. It does not provide that the manufacturing use
has to be exclusive. Neither does it require that the manufacturing use must be the primary
use to which the facility [pollution abatement machine] is devoted....At the same time, it
would not be reasonable to hold that the legislature intended only a minimum use by a
manufacturer be sufficient to make a machine tax exempt.... The Burlington facility
[pollution abatement facility], ...is substantially used in the manufacture of tangible
personal property for sale, and this was the purpose for which it was built. We therefore
hold that the materials used in its construction are exempt from sales or use
taxes....(emphasis added)
In summary, a machine must be substantially used in manufacturing tangible personal property
for sale in order to qualify for the exemption at Code Section 12-36-2120(17). In addition,
materials used to construct a machine which qualifies for the exemption are not subject to the
tax.
Regulation 117-174.110, entitled "Machine Shops", states:
Property manufactured or fabricated by machine shops and custom foundries is subject to
the sales tax, except when sold for resale purposes or when exempted by one of the
exemptions found in the sales tax law.
In doing repair work the machine shop operator consumes the materials which lose their
identity in the repairing process, such as paint, solder, babbitt and lumber. He is also
considered to be the consumer of such items as cotter keys, nails, washers, stove bolts and
nuts, bits of metal, and sheets of metal used in patching or reinforcing. The receipts from
the use of these materials are not subject to the sales tax. The sales or use tax is due by the
machinist at the time of purchase from his suppliers.
Where the machinist in making repairs, fabricates or manufactures a recognizable part or
attachment for the article being repaired (as contrasted to patching, mending, or
reinforcing weakened parts) no deduction is permissible for labor or any other expenses
which are a part of fabricating or manufacturing the part or attachment. He may, however,

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if making separate agreements to sell the manufactured or fabricated part and to install the
same, remit tax only on the sales price of the fabricated part or attachment, provided his
books and invoices show clearly a separation between the sales price of the fabricated part
or attachment and the labor and service of installation.
Pursuant to the language contained in the above regulation, a machine shop may function as a
manufacturer of tangible personal property.
Regulation 117-174.130, entitled "Machine Shop Machinery", reads:
Machines used for maintenance purposes do not come within the machine exemption.
Machines used to produce tools and supplies for the use or consumption of the
manufacturer do come within the machine exemption. Machines customarily used for both
maintenance and manufacturing of tangible personal property will normally be considered
to come within the machine exemption, except where manufacturing is an occasional,
incidental or inconsequential part of the use of the machine.
Note: Nothing contained herein shall be construed to exempt from the tax materials from
which a manufacturer fabricates tools for his own use, or machinery which will be placed
to a taxable use. (emphasis added)
The foregoing regulation conflicts with the statute in that the regulation would allow a machine
shop to purchase tax-free machines used to produce tools and supplies for its own use, while
Code Section 12-36-2120(17) limits the exemption from sales and use tax to machines used in
manufacturing tangible personal property for sale.
To quote from 68 Am.Jur.2d, Sales and Use Taxes, §143:
... An administrative rule or regulation is invalid to the extent that it is in conflict with or at
variance with the taxing statute as construed by the court; and it is null and void if it
purports to extend coverage of the statute being administered, or to enlarge an exemption
or confer an exemption not conferred by the statute....
The above rule was followed by the South Carolina Supreme Court, in Society of Professional
Journalists v. Sexton, 283 S.C. 563, 324 S.E.2d 313, 315 (1984), when the Court ruled,
"Although a regulation has the force of law, it must fall when it alters or adds to a statute."
Therefore, the above emphasized sentence in Regulation 117-174.130 is invalid as it is in
conflict with Code Section 12-36-2120(17). However, the remainder of the regulation is valid.
Conclusions:
1.

Sales to, or purchases by, machine shops of tangible personal property which becomes an
ingredient or component part of the product being manufactured for sale, or "used directly"
in manufacturing the product for sale, are excluded from the sales and use tax pursuant to
Code Section 12-36-120(2) and (3). To qualify for the exclusions, the machine shops must
manufacture tangible personal property for sale on a regular and continuous basis, and
these activities must be a substantial part of the machine shops' total business activities.
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Further, if a machine shop owned by a manufacturer only fabricates tangible personal
property for use by the manufacturer (and not for resale), then tangible personal property
purchased by the machine shop to fabricate an item that will be "used directly" in
manufacturing tangible personal property for sale is not subject to the sales and use tax
pursuant to Code Section 12-36-120(3).
2.

Sales to, or purchases by, machines shops of machines and electricity are exempt from the
sales and use tax pursuant to Code Section 12-36-2120(17) and (19) provided the machine
shops manufacture tangible personal property for sale on a regular and continuous basis,
and these activities are a substantial part of the machine shops' total business activities.
Also, tangible personal property purchased by machine shops and used to fabricate parts
for exempt manufacturing machines are not subject to the sales and use tax pursuant to
Code Section 12-36-2120(17).
Effective December 1, 1991, machine shops not substantially engaged in manufacturing
tangible personal property for sale may not purchase machines free of the tax. For
example, if a machine shop's activities consist solely of producing tools, supplies, or
machine parts for its own use, machines may not be purchased for, or by, the machine
shop free of the tax.
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
, 1991
September 4

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