Which components of a municipal water-treatment-plant expansion qualified for the manufacturing-machine sales-tax exemption under SC RR 91-8?

Plain-English summary

South Carolina Revenue Ruling 91-8 mapped the manufacturing-machine exemption across a municipal water-treatment expansion.

The key boundary was the actual processing window. The ruling said water processing began at the existing rapid-mix tank and ended with final filtration in the filter-building tanks.

Equipment and integral components inside that window generally were exempt. Preliminary intake equipment before processing, finished-water conveyance after processing, storage tanks, and the general building shell were not.

Exempt components

The ruling exempted the described:

• ductile iron pipe within the processing system;
• chemical-basin mixer;
• flocculators and sludge-collection machinery;
• chemical machinery used within processing;
• concrete, piping, electrical controls, and mechanical instrumentation integral to the process from the rapid-mix tank through the filter tanks;
• granular-media filters and fiberglass troughs;
• steel pipes and related piping; and
• steel and concrete forming the filter-tank portion of the filter building.

The flocculators and filter tanks could qualify as machines even though they were fixed structures. Under the cited Hercules test, use and integration mattered more than physical form.

Nonexempt components

The ruling denied the exemption for the described:

• raw-water pump;
• traveling water screen, subject to the transition rule below;
• concrete valve vault;
• caustic, hydrofluosilicic, polyphosphate, and polyphosphate-day tanks;
• pumps conveying finished water;
• related concrete, piping, electrical controls, and instrumentation for those nonqualifying items; and
• concrete, brick, glass, and other materials making up the filter-building shell.

Why the line fell there

Section 12-36-2120(17) exempted machines used to process tangible personal property for sale and necessary machine parts and attachments. Regulation 117-174.145 specifically treated municipal water-processing machines as exempt.

But operations preliminary to producing the marketable water and operations after processing ended were outside the exemption. The raw-water screen protected intake pumps by removing large debris before the rapid-mix tank, so the ruling treated it as preparatory. Finished-water pumps moved the completed product after final filtration.

The chemical tanks were storage tanks because no processing occurred inside them. Under the cited regulations, a tank in the processing chain could qualify, but a storage tank and piping to or from storage did not.

The filter-tank portion was an integrated machine. The surrounding shell was a building that protected the water from contamination and did not become machinery merely by housing the process.

Traveling-water-screen transition rule

Effective July 1, 1991, the tax treatment of traveling water screens used in manufacturing or processing became a case-by-case factual question.

Although the screen described in the ruling was preliminary and preparatory, the ruling exempted it if purchased under:

• a construction contract executed before July 1, 1991; or
• a written bid submitted before July 1, 1991 that later resulted in a construction contract.

The same transition exception applied to similarly situated taxpayers.

What this means for you

Municipal water systems

Classify each component by where it functions in the water process, not merely by whether it sits at the treatment plant.

Contractors and procurement teams

Separate process machinery from intake, storage, post-processing conveyance, and general building materials in project records and invoices.

Engineers

Functional diagrams can establish when processing begins and ends and which concrete, piping, controls, and structures are integral to qualifying machinery.

Current projects

Verify current law. RR 91-8's component classifications and pre-July 1991 contract exception are historical.

Common questions

Q: Where did the ruling say water processing began and ended?

A: It began at the rapid-mix tank and ended with final filtration in the filter tanks.

Q: Were chemical storage tanks exempt?

A: No. No processing occurred inside them, so the ruling treated them as taxable storage tanks.

Q: Was the entire filter building exempt?

A: No. The filter-tank machinery and integral materials qualified, but the building shell did not.

Q: Were finished-water pumps exempt?

A: No. They conveyed water after the processing operation had ended.

Q: How were traveling water screens treated?

A: Case by case beginning July 1, 1991, with an exemption for the described screen and similarly situated purchases under qualifying pre-July contracts or bids.

Citations and references

• S.C. Code Ann. § 12-36-2120(17) — manufacturing and processing machine exemption
• S.C. Regulation 117-174.145 — municipal water-processing machines
• S.C. Regulation 117-174.120 — machine parts and attachments
• S.C. Regulations 117-174.139, 117-174.140, and 117-174.141 — storage piping, processing tanks, and storage tanks
• Annot., 30 A.L.R.2d 1449 (1953) — processing-boundary principle cited by the ruling
• Bird & Son, Inc. v. Limbach, 45 Ohio St. 3d 76, 543 N.E.2d 1161 (1989)
• Hercules Contractors and Engineers, Inc. v. South Carolina Tax Commission, 280 S.C. 426, 313 S.E.2d 300 (Ct. App. 1984)
• Commission Decision S-D-74 (August 13, 1971) — building-shell comparison cited by the ruling

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR91-8.pdf

Original ruling text

SC REVENUE RULING #91-8

SUBJECT:

Water Treatment Plants
(Sales and Use Tax)

TAX ANALYST:

Deana West

EFFECTIVE DATE: With respect to traveling water screens, the effective date is July 1, 1991.
With respect to all other issues, this ruling applies to all periods open
under statute.
SUPERCEDES:

All previous documents and any oral directives in conflict herewith.

REFERENCE:

S.C. Code Ann. Section 12-36-2120(17) (Supp. 1990)

AUTHORITY:

S.C. Code Ann. Section 12-3-170 (Supp. 1989)
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 the raw water pump, traveling water screen, valve vault, iron pipe, chemical basin
mixer, flocculators, sludge collection machinery, chemical machinery, various chemical
tanks, various pumps which convey finished water, and the related concrete, piping,
electrical and mechanical instrumentation used in expanding a municipal water treatment
plant, as described in the facts, exempt from sales and use tax pursuant to Code Section
12-36-2120(17)?

2.

Are the granular media filters, fiberglass troughs, electrical and mechanical
instrumentation, steel pipes and related piping, steel and concrete used in constructing a
filter building addition at a municipal water treatment plant, as described in the facts,
exempt from sales and use tax pursuant to Code Section 12-36-2120(17)?

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Facts:
A contract has been awarded for the construction and installation of the surface water treatment
plant expansion and water treatment facilities for a South Carolina municipality. The facility
produces water for use by residents and businesses in the area.
The water treatment plant expansion includes the construction and/or installation of the
following items which are numbered to correspond to the water process described below:
1.
2.
3.
4.
5.

Raw water pump and traveling water screen
Concrete valve vault and mechanical instrumentation
Ductile iron pipe
Chemical basin mixer, flocculators, rectangular sludge collection machinery
Granular media filters, fiberglass troughs, electrical and mechanical instrumentation,
stainless steel pipe

6. Chemical machinery and various chemical tanks
7. Various pumps which convey finished water
8. Pipe, electrical and instrumentation work, miscellaneous steel items and concrete
   used in constructing or installing items 1 - 7 above.
   The addition to the water treatment process can be described as follows:
9. Raw water enters an intake structure containing a traveling water screen and a raw water
   vertical pump from the Intra- coastal Waterway and is piped immediately to the plant for
   processing. The traveling water screen removes large debris from the raw water so the
   pumps will not be damaged.
10. A concrete enclosed, underground valve vault containing valves, motors, and mechanical
    instrumentation is used to divert the flow of water. The instrumentation is very sensitive
    to weather and is enclosed within a concrete structure for protection.
11. The water is then piped through an existing meter vault. A new pipe from the valve vault
    is being installed to meter the flow of influent water.
12. Moving through an existing preozone contact chamber and rapid mix tank, the water is to
    be dispersed into a flocculation and settling basin once constructed. The settling basin, a
    rectangular concrete structure, is equipped with flocculation and sludge collection
    machinery whereby solid particles settle out of the water and the waste is piped to a
    sludge pond (See Exhibit A).
13. The final filtration process occurs in the filter building which has granular media filters,
    troughs, pipe and electrical and mechanical instrumentation. The filter building is
    composed of concrete, brick, glass, and other materials and is covered to protect water
    from contamination before use by customers (See Exhibit B).
14. Chemicals are injected at various points in the filtration process, both before and after the
    water passes through the filter building. The chemicals are conveyed through small
    diameter pipelines and are pumped from a number of chemical pumps which are fed from
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various chemical tanks. A caustic storage tank, a hydrofluosilicic tank, a polyphosphate
tank and a polyphosphate day tank are being built.

7. Once the process is complete in the filter building, the water treatment plant will use
   various pumps to provide the final means of water conveyance. The pumps under
   construction will pump finished water from the filters to the existing clearwells for
   storage, pump water back from the clearwells to the municipality for distribution to the
   public and pump water from the finished water line back to the ozone building for use in
   the manufacture of ozone.
   Discussion:
   Code Section 12-36-2120(17) exempts from sales and use tax:
   ...the gross proceeds of sales of...machines used in ... processing...tangible personal
   property for sale. 'Machines' include the parts of machines, attachments, and
   replacements used...in the operation of the machines and which are necessary to the
   operation of the machines...
   Regulation 117-174.145 provides that "sales of machines to municipalities for use in processing
   water are not subject to the [sales and use] tax."
   Furthermore, Regulation 117-174.120 provides an interpretation of the term "machines" and
   reads, in part:
   The terms "...parts of such machines" are restricted to the following: (a) they must be
   used or manufactured for use, on or in the operation of such machines; (b) necessary to
   the operation of such machines and (c) customarily so used. These restrictions are
   interpreted to mean that the part or attachment must be purchased in the form in which it
   will be used by the manufacturer without any fabrication or alteration by him, except the
   usual and customary minor adjustment (except as stated at 117-174.123) and that it is a
   standard part or attachment customarily used and, further, that the machine or machinery
   on which it is used would not do the work for which it was designed if it were not used.
   This, of course, exempts all parts and attachments without which the machine would do
   no work, and, in addition, it exempts parts and attachments designed to increase the
   efficiency of the machine.
   The law, therefore, provides that machines, their parts and attachments, subject to certain
   restrictions, that are used by a municipality in processing water for sale qualify for the exemption
   found in Code Section 12-36-2120(17). However, as a general rule, tax exemption statutes are
   strictly construed against the taxpayer. Owen Industrial Products, Inc. v. Sharpe, 274 SC 193,
   262 SE 2d 33 (1980), Hollingsworth on Wheels, Inc. v. Greenville County Treasurer et al, 276
   SC 314, 278 SE 2d 340 (1981). This rule of strict construction simply means that constitutional
   and statutory language will not be strained or liberally construed in the taxpayer's favor. York
   County Fair Association v. SC Tax Commission, 249 SC 337, 154 SE 2d 361 (1967).

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In order to determine whether machines and attachments are used in processing water for sale, it
is essential to ascertain the points at which processing at the municipal water treatment plant
begins and ends. American Law Reports Annotated 2d suggests the following in making this
determination and reads:
While the determination of whether the use is a taxable one or not appears to depend
largely upon the peculiarities of the taxpayer's operations, so as to be essentially a question
of fact in each case, it seems that the tax will be imposed where the transportation or
storage is clearly of raw materials prior to the start of manufacturing or processing, or of
the completed product after such operations have clearly terminated, but that the handling
and storage intermediate to the various manufacturing or processing operations may be
regarded as a part of those operations, and so free from the tax. Annot., 30 A. L. R. 2d
1449 (1953).
Also, in Bird & Son, Inc. v. Limbach, 45 Ohio St. 3d 76, 543 N.E.2d 1161 (1989), the Ohio
Supreme Court concluded that "tangible personal property which is employed in operations
preliminary or preparatory to the production of the marketable product,..., or employed
subsequent to the completion of the manufacturing process,..., is not exempt" (emphasis added).
Based upon this reasoning and the above facts, the processing of water begins at the existing
rapid mix tank and ends with the final filtration in the filter tanks located in the filter building.
Machines and their parts and attachments, including the chemical machinery, contained within
the water process are exempt from sales and use tax.
It must now be determined whether the chemical tanks are "machines" allowed the exemption
from sales and use tax provided in Code Section 12-36-2120(17). The following regulations
provide guidance in making this determination and read as follows:
Regulation 117-174.140 - Tanks which are part of the chain of processing operations are
exempted by the machine exemption.
Regulation 117-174.141 - Storage tanks are not exempted from the tax by the machine
exemption.
Regulation 117-174.139 - Piping leading to and from storage tanks...does not come within
the machine exemption.
Based upon the above regulations, the chemical tanks described in the facts are not "machines"
for tax purposes since there is no processing taking place in the chemical tanks. Instead, the
chemical tanks are storage tanks.
Finally, it must be determined whether the flocculators and the filter building are machines. In
other words, can a structure affixed to the land be a machine. The Court of Appeals in South
Carolina reviewed this issue in Hercules Contractors and Engineers, Inc. v. South Carolina Tax
Commission, 280 SC 426, 313 SE2d 300 (1984). The court concluded the Klopman facility,
which treated waste in connection with the manufacture of textile products for sale, was a
machine used in the manufacture of tangible personal property and was exempt from sales taxes.

4

Our court cited Commonwealth v. Philadelphia Electric Company, 472 Pa. 530, 372 A.2d 815
(1977), a property tax decision dealing with the "problem of the connection of a manufacturing
machine with the land upon which it sits", which summarized the test for determining what is
machinery and equipment, first formulated in [In re Borough of Aliquippa] Jones & Laughlin,
405 Pa. [421] at 431, 175 A.2d [856] at 861. The court held:
[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 further concluded that a "particular 'structure' may or may not constitute a machine for
tax purposes, depending not upon its form but upon its use" and "that the difference between
buildings and the vats and basins at issue here is readily apparent. The concrete vats and basins
of Klopman, unlike buildings, have utterly no use apart from the machine of which they are an
integral part".
The flocculators under construction appear to be improvements to realty; however, the
flocculators are machines for tax purposes under the tests established in Hercules v. South
Carolina Tax Commission, supra.
In determining whether the "filter building" is a machine or building, Commission Decision S-D74 provides guidance. This August 13, 1971 decision involved the construction of a large domeshaped structure housing the nuclear reactor at a nuclear plant in South Carolina. The structure,
required to contain radioactive particles, prevented the same from escaping into the atmosphere
and possibly injuring persons or property. The Commission Decision concluded "the purpose
that the structure serves is not unlike the building that houses or contains a textile manufacturing
plant in that humidity and temperatures must be regulated in order to produce a quality product"
and was therefore subject to the sales and use tax.
Based upon the court's determination in Hercules v. South Carolina Tax Commission, supra and
Commission Decision S-D-74, the filter tank portion of the filter building under construction is a
machine. The filter building shell, however, is not a machine for tax purposes.
Conclusion:

1. The iron pipe, chemical basin mixer, flocculators, sludge collection machinery, piping,
   and the related chemical machinery, concrete, piping and electrical and mechanical
   instrumentation contained within the water process from the rapid mix tank to the filter
   building tanks used in expanding a municipal water treatment plant, as described in the
   facts, are exempt from sales and use tax as provided under Section 12-36-2120(17).
   The raw water pump, traveling water screen, valve vault, various chemical tanks (caustic
   storage tank, hydrofluosilicic tank, polyphosphate tank and polyphosphate day tank),
   various pumps which convey finished water and the related concrete, piping and

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electrical and mechanical instrumentation used in expanding a municipal water treatment
plant, as described in the facts, are not exempt from sales and use tax. (See note below to
exempt the traveling water screen from sales and use tax.)

2. The granular media filters, fiberglass troughs, electrical and mechanical instrumentation,
   steel pipes and related piping, steel and concrete used in constructing the filter tank
   portion of a municipal water treatment plant's filter building, as described in the facts, are
   exempt from sales and use tax under Code Section 12-36-2120(17).
   However, the concrete, brick, glass, and other materials used to construct the shell of the
   filter building are not exempt from sales and use tax.

NOTE: Effective July 1, 1991, the imposition of sales and use tax upon traveling water
screens used in manufacturing and processing will be a question of fact and
determined on a case by case basis.
Although the traveling water screen discussed in the facts above is preliminary
and preparatory to the processing of water, this traveling water screen would be
exempt from sales and use tax if it was purchased under the terms of a pre-July
1991 contract.
Such an exception will be made for similar taxpayers who purchased traveling
water screens under the terms of a construction contract executed prior to July 1,
1991 or a written bid submitted prior to July 1, 1991 that culminates in a
construction contract.
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
May 22

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