What property counted as inventory under SC Revenue Ruling 91-7's historical business-inventory property-tax exemption?

Plain-English summary

South Carolina Revenue Ruling 91-7 defined inventory as merchandise purchased for resale for the historical business-inventory property-tax exemption and South Carolina income-tax treatment.

The controlling fact was why the property was bought and held. A later sale did not turn property acquired for another business use into inventory.

The ruling specifically excluded:

• equipment primarily rented out by a rental business; and
• materials and supplies used or consumed in operating a business.

Those items therefore did not qualify for the historical inventory property-tax exemption.

Why purchase purpose controlled

South Carolina's property-tax statutes did not define inventory. The ruling looked to income-tax concepts because other property-valuation rules also relied on income-tax records.

Under the federal authorities it cited, merchandise purchased for resale was inventory. But a business asset held for rental remained a depreciable business asset even if the owner later sold it. Similarly, materials and supplies were deducted as consumed rather than included in inventory.

The ruling used gain treatment as supporting evidence: sales of inventory generally produced ordinary income, while sales of qualifying business assets held more than one year could produce Section 1231 gain after depreciation recapture.

Rental equipment was not inventory

The ruling discussed typewriters and other personal property primarily held for rental. Later sales did not change their original business purpose.

It also cited IRS Revenue Ruling 75-544 concerning vehicle-leasing businesses that sold used vehicles wholesale without retail-sales facilities. Under the stated conditions, the vehicles were business assets rather than inventory.

Materials and supplies were not inventory

Treasury Regulation 1.162-3 treated materials and supplies as deductible when consumed. The ruling therefore excluded business-use materials and supplies from inventory and from the historical inventory exemption.

Manufacturer inventory was left unchanged

The ruling expressly stated that it was not intended to change the items treated as manufacturers' inventories under Section 12-37-220(A)(6).

What this means for you

Retailers and wholesalers

Merchandise acquired and held for resale fit the ruling's inventory definition.

Rental businesses

Equipment acquired primarily to generate rental income did not become inventory merely because it was eventually sold.

Businesses holding supplies

Consumable materials and operating supplies were business-use items, not resale inventory under the ruling.

Tax professionals

Document purpose at acquisition and during the holding period. That purpose drove both the inventory classification and the exemption result.

Common questions

Q: What was inventory under RR 91-7?

A: Merchandise purchased and held for resale.

Q: Did a later sale automatically make an asset inventory?

A: No. The purpose for which the property was bought and held controlled.

Q: Was rental equipment inventory?

A: No. Equipment primarily rented by a rental business was excluded.

Q: Were materials and supplies inventory?

A: No. Items used or consumed in the business were excluded.

Q: Did the ruling change manufacturer-inventory treatment?

A: No. It expressly preserved the treatment under Section 12-37-220(A)(6).

Citations and references

• S.C. Code Ann. § 12-37-450 — historical business-inventory property-tax exemption
• S.C. Code Ann. § 12-37-220(B)(30) — historical inventory-exemption provision
• S.C. Code Ann. § 12-37-220(A)(6) — manufacturer-inventory provision preserved by the ruling
• S.C. Code Ann. § 12-37-930 and SCTC Regulation 117-110 — valuation references discussed by the ruling
• Internal Revenue Code §§ 1221, 1231, and 1245 — inventory, business-asset gain, and recapture concepts
• Treasury Regulation § 1.162-3 — materials and supplies
• IRS Revenue Ruling 75-544, 1975-2 C.B. 343 — leased-vehicle example
• Pierce-Arrow Motor Car Co. v. United States, 9 F. Supp. 577 (Ct. Cl. 1935)
• McWilliams v. Godwin, 54-2 USTC ¶ 9514 (E.D. Ark. 1954)
• A. Bennetti Novelty Co., Inc., 13 T.C. 1072

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR91-7.pdf

Original ruling text

SC REVENUE RULING #91-7

SUBJECT:

Definition of Inventory for Property Tax Purposes

TAX ANALYST:

Malane Pike

EFFECTIVE DATE:

Applies to all periods open under statute.

SUPERCEDES:

All previous documents and any oral directives in conflict herewith.

REFERENCE:

S. C. Code Ann. Section 12-37-450 (Law. Coop. Supp. 1990)
S. C. Code Ann. Section 12-37-220(B)(30) (Law. Coop. Supp. 1990)

AUTHORITY:

S. C. Code Ann. Section 12-3-170 (Law. Coop. 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
superceded by a Regulation or is rescinded by a subsequent Revenue
Ruling.

Question:
What is the definition of "inventory" for property tax purposes?
Discussion:
South Carolina Code Section 12-37-450 provides a phase out of the property tax on inventory of
business establishments and reads, in part:
(A) The inventory of business establishments shall be exempt from property
taxation as follows: for the 1985 tax year, seventeen percent; for the 1986 tax
years, fifty percent; for the 1987 and subsequent tax years, one hundred percent.
The exemption herein provided is conditional upon the appropriation by the State
to the municipalities and counties for each year an amount equal to tax revenue
not collected by reason of the exemption. If the appropriation for any year is less
than the amount equal to the tax revenue not collected, the exemption shall be
proportionately reduced in the manner provided in (C) below. The exemption
provided in this section is not allowed if the return is received by the Commission
after the date due or the tax due is received by the county or municipality after the
date due.
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Because inventory is no longer taxed, it has become necessary to define what is to be
encompassed within this term for purposes of the exemption. South Carolina property tax
statutes do not define the term "inventory". However, there are several situations in which the
income tax treatment of an item is dispositive of the property tax treatment. For example, the fair
market value of merchants' furniture, fixtures and equipment is the depreciated value as shown
by the merchants for income tax purposes. (SCTC Regulation 117-110.) Likewise, the value of
manufacturers' machinery and equipment is determined by the gross capitalized cost as shown on
the taxpayer's income tax records. (S. C. Code Ann. Section 12-37-930 (Law. Coop. Supp.
1989)). Therefore, it makes sense to use South Carolina income tax definitions which, in turn,
conform to federal income tax law. Administrative interpretation of the term "inventory", as
discussed below, is consistent with this approach.
For federal income tax purposes, inventory is defined as merchandise purchased for resale. The
purpose for which merchandise was bought governs in determining whether it is inventory, not
the fact that it may subsequently be resold (Pierce-Arrow Motor Car Co. v. U. S. (9 F. Supp. 577
(Court of Claims 1935)).
Another federal income tax concept which is helpful in defining whether an item is considered
inventory is its treatment on sale. When inventory is sold, the resulting income is treated as
ordinary income. In contrast, when trade or business assets held for more than one year are sold,
capital gain may result after recapture for depreciation. (Internal Revenue Code Sections 1221
and 1231 ). This issue was examined in the case of McWilliams v. Godwin, 54-2 USTC §9514
(E.D. Ark. 1954) where sales of used typewriters by a partnership engaged primarily in the rental
of typewriters and sales of new machines resulted in capital gain. The typewriters were
specifically found to be depreciable assets used in the dealer's business, and not property held for
sale in the ordinary course of business. Similarly, rented personal property was held primarily for
rental rather than for sale, and hence gains from its sale were treated as capital gains (A. Bennetti
Novelty Co., Inc., 13 TC 1072). Thus, the rental property was deemed to be a business asset
rather than inventory.
Another situation in which this principle has been utilized is leased automobiles. Internal
Revenue Service Revenue Ruling 75-544, 1975-2 CB 343, states that the capital gains provisions
of Section 1231 are applicable (subject to the recapture provisions of Section 1245) to taxpayers
who:
1.
2.
3.

are primarily engaged in the business of leasing motor vehicles, and
sell their used motor vehicles at wholesale prices that do not contemplate a
dealer's profit to dealers, wholesalers, or jobbers, and
do not maintain facilities for the retail sale of motor vehicles, such as showrooms,
used car lots, or sales forces.

Materials and supplies are also not deemed to be "inventory" for purposes of federal income tax
law. Pursuant to Treasury Regulation 1.162-3 (1958), the cost of materials and supplies are to be
deducted as they are consumed. Thus, these items are not includable in inventory, but rather, are
expensed as consumed.

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Based upon this analysis, the South Carolina Tax Commission has consistently treated materials
and supplies used in a business and equipment which is rented out in a rental business to be
excluded from the definition of inventory. Therefore, no exemption is provided for those items
under Section 12-37-450.
In addition, administrative interpretations of the statutes by the agency charged with their
administration and not expressly changed by the legislative body are entitled to great weight.
Marchant v. Hamilton, 297 S.C. 497, 309 S.E. 2d 781 (1983). When as in this case, the
construction or administrative interpretation of a statute has been applied for a number of years
and has not been changed by the legislature, there is created a strong presumption that such
interpretation or construction is correct. Ryder Truck Lines, Inc. v. South Carolina Tax
Commission, 248 S.C. 148, 149 S.E.2d 435 (1966); Etiwan Fertilizer Company v. South
Carolina Tax Commission, 217 S.C. 354, 60 S.E. 2d 682 (1950).
Conclusion:
Merchandise purchased for resale is "inventory" for purposes of the business inventory tax
exemption (Section 12-37-450) and South Carolina income taxation. The purpose for which
merchandise was bought and held governs in determining whether it is inventory, not the fact
that it may subsequently be resold. Equipment which is rented out by rental businesses and
materials and supplies used in a business are examples of property which are not inventory and
therefore, not exempt from property taxation under Code Section 12-37-450 and 12-37220(B)(30).

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
April 18
NOTE: This ruling is not intended to change the items deemed to be inventories of
manufacturers in S. C. Code Ann. Section 12-37-220(A)(6).

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