Which machines used to develop and mass-produce genetically enhanced tree seedlings qualified for South Carolina exemptions under this PLR?

Plain-English summary

The taxpayer used tissue culture, genetic engineering, field testing, nurseries, and orchards to develop and mass-produce genetically enhanced tree seedlings for sale. The Department classified the overall operation as farming, not processing tangible personal property for sale.

That classification denied the processing-machine exemption but allowed the farm-machinery exemption for machines used in mass seedling production. The favorable examples included machines that placed growth media on plates, placed tissue on media trays to produce embryos, placed embryos into plugs and trays, and placed soil and seedlings into containers. Cryogenic tanks used only to store tissue were not treated as farm machinery used in planting, cultivating, or harvesting.

Separate machines used directly and primarily in experimental or laboratory work to develop new or improved seedlings qualified for the research-and-development machine exemption. That exemption covered qualifying machines and their defined parts, attachments, and replacements, but not ordinary laboratory supplies such as Petri dishes and solutions.

What this means for you

Seedling and nursery operations

Advanced biotechnology did not automatically turn the farm operation into a processor. The Department looked at the integrated purpose of the operation and treated mass seedling production as planting and cultivation of a farm crop.

Equipment purchasers

The same business could qualify under different exemptions for different machines. Mass-production machinery was analyzed as farm machinery, while experimental development machinery was analyzed under the R&D exemption.

Laboratory and storage equipment

Not everything used by the operation qualified. Tissue-storage tanks fell outside the farm-machinery exemption, and laboratory consumables fell outside the statutory R&D machine definition.

Common questions

Q: Was the taxpayer a processor for machine-exemption purposes?
A: No. The Department classified the integrated operation as farming rather than processing tangible personal property for sale.

Q: Which production machines qualified as farm machinery?
A: The ruling approved the listed media-placement, embryo-production, plug-and-tray, and soil-and-seedling machines used in mass production.

Q: Did cryogenic tissue tanks qualify?
A: No. They were not used in planting, cultivating, or harvesting farm crops under the ruling.

Q: Could experimental development machines qualify?
A: Yes, if used directly and primarily in experimental or laboratory R&D for new or improved seedlings.

Q: Did Petri dishes and solutions qualify as R&D machines?
A: No. The ruling treated them as laboratory supplies outside the machine exemption.

Citations and references

• S.C. Code § 12-36-2120(16) (farm machinery used in planting, cultivating, or harvesting crops for sale)
• S.C. Code § 12-36-2120(17) (processing machinery exemption denied on these facts)
• S.C. Code § 12-36-2120(56) (research-and-development machines)
• S.C. Regulations 117-301.5 and 117-302.5 (farm and processing machinery guidance)
• SC Revenue Ruling #08-3 (more-than-50% direct qualifying R&D use guidance cited by the PLR)

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR08-3.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P.O. Box 125, Columbia, South Carolina 29214
Website Address: http://www.sctax.org

SC PRIVATE LETTER RULING #08-3

SUBJECT:

Production of Genetically Enhanced Tree Seedlings for Sale
(Sales and Use Tax)

REFERENCES: S. C. Code Ann. Section 12-36-2120(17) (Supp. 2007)
S. C. Code Ann. Section 12-36-2120(16) (2000)
S. C. Code Ann. Section 12-36-2120(56) (Supp. 2007)
SC Regulation 117-302.5 (Supp. 2007)
SC Regulation 117-301.5 (Supp. 2007)
AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (2005)
SC Revenue Procedure #05-2

SCOPE:

A Private Letter Ruling is an advisory opinion issued to a specific
taxpayer by the Department to apply principles of law to a specific set
of facts or a particular tax situation. It is the Department’s opinion
limited to the specific facts set forth, and is binding on agency
personnel only with respect to the person to whom it was issued and
only until superseded or modified by a change in statute, regulation,
court decision, or another Departmental advisory opinion, providing
the representations made in the request reflect an accurate statement of
the material facts and the transaction was carried out as proposed.

Questions:

1. Is XYZ LLC engaged in processing tangible personal property for sale and entitled to
   the exemption in Code Section 12-36-2120(17) for “machines used in … processing …
   tangible personal property for sale?”
2. Is XYZ LLC engaged in the production of farms crops for sale and entitled to the
   exemption in Code Section 12-36-2120(16) for “farm machinery … used in planting,
   cultivating or harvesting farm crops” for sale?
3. Are sales of machines to XYZ for use by XYZ LLC to develop new or improved
   seedlings exempt from the sales and use tax as “machines used in research and
   development” under Code Section 12-36-2120(56)?

Conclusion:

1. XYZ LLC is not engaged in processing tangible personal property for sale and
   therefore is not entitled to the exemption in Code Section 12-36-2120(17) for “machines
   used in … processing … tangible personal property for sale.”
2. XYZ LLC is engaged in the production of farms crops for sale and therefore is entitled
   to the exemption in Code Section 12-36-2120(16) for “farm machinery … used in
   planting, cultivating or harvesting farm crops” for sale.
   Note: This would include the sale to, or purchase by, XYZ of the following machines (or
   parts used to fabricate such machines) used in the mass production of seedlings: (1)
   machines used to uniformly place media on plates; (2) machines used to place bulked up
   tissue on media trays to stimulate the production of embryos; (3) machines used to place
   embryos in plugs and place plugs in trays 1 ; and (4) machines used to place soil and
   seedlings in containers. However, the cryogenic tanks used to store tissue are not
   machines used in “planting, cultivating or harvesting of farm crops” and not exempt
   under Code Section 12-36-2120(16).
3. Sales of machines (or parts used to fabricate such machines) to XYZ for use by XYZ
   LLC to develop new or improved seedlings are exempt as machines “machines used in
   research and development” under Code Section 12-36-2120(56), provided such machines
   are used by XYZ directly and primarily in research and development, in the experimental
   or laboratory sense, of new seedlings or improvement of existing seedlings. (See SC
   Revenue Ruling #08-3.)
   Note: The exemption for “machines used in research and development” under Code
   Section 12-36-2120(56) only applies to machines and parts, attachments, and
   replacements as defined in Code Section 12-36-2120(56). It does not apply to laboratory
   supplies, such as Petri dishes and solutions, that are not a part of a machine used in
   research and development as defined in Code Section 12-36-2120(56).
   Facts:
   XYZ LLC (“XYZ”), with its principal place of business located in Someplace, USA, is
   engaged in tree improvement and production and produces more than 300,000,000
   seedling and cuttings in four countries. It is the world’s largest producer of tree planting
   stock for landowners and the forest product industry. In August 2007, XYZ acquired tree
   improvement and nursery and orchard businesses from International Paper,
   MeadWestvaco and Rubicon. To this base, XYZ adds research, development and
   commercialization of biotechnology products that will improve the productivity and
   wood quality of elite, purpose-grown trees. These trees will grow faster, producing more
   wood on less land and have improved processing characteristics to increase efficiencies
   and reduce chemical use in the manufacture of paper and other precuts made from wood.
   1

This machine is in the developmental stage. At the time of the drafting of the private letter ruling, the
placing of embryos in plugs and the placing of these plugs in a tray was a manual operation.

XYZ believes its biotech products represent the greatest value and will displace
conventional seedlings currently available in the market as customers integrate higher
value biotech planting stock into their forestry practices and develop a better
understanding of, and increased confidence in, the benefit of high value trees.
The XYZ production process can be broken into three interlinked segments:
varietal tree production;
biotech tree production; and
nurseries and orchards.
Varietal Tree Production: The varietal tree production process begins when cones are
delivered to XYZ from customers or XYZ’s own orchards. These cones are the result of
extensive tree improvement programs designed to produce increasingly genetically
superior seed with characteristics desired by the customer. Each seed within the cone will
result in an individual variety with a unique genetic make-up that can be mass produced.
After the cones are received, the seed is extracted and tissue from the seed is bulked up
on growth media. Multiple vials of this tissue are preserved in cryogenic storage where it
can be retrieved at a later date. A portion of the tissue is then pulled from cryogenic
storage and bulked up. The bulked up tissue is then placed on media that stimulates the
production of embryos that will later form individual trees. These embryos are then
allowed to germinate and grow into trees that will enter XYZ’s field testing program. All
of the trees produced from a single seed will have an identical genetic make-up. In
XYZ’s field testing program, each variety is planted at various locations and observed for
characteristics that would be desirable to a customer such as fast growth and straightness.
XYZ selects the top performing varieties based on these characteristics.
Tissue from the top performing varieties is then pulled from cryogenic storage and mass
production of trees begins through a scaled-up version of this same process that
incorporates various mass production and automation technologies. This allows the
production of trees that are genetically uniform providing additional value to the
landowner relative to conventional seedlings. Some of these trees will be delivered to
customers, some will be delivered to XYZ’s orchards where they will be used to produce
seed that will be cycled back through the process, and others will be enhanced through
genetic engineering for the production of biotech trees with improved traits.
Some of the machines used, or that may be used, by XYZ in the varietal tree production
are:
(1) machines used to uniformly place media on plates;
(2) machines used to place bulked up tissue on media trays to stimulate the
production of embryos;

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(3) machines used to place embryos in plugs and place plugs in trays 2 ; and,
(4) machines used to place soil and seedlings in containers
Biotech Tree Production: The varietal tree production process described above is the
basis for XYZ’s value-enhanced, biotechnology portfolio through the provision of top
performing, genetically uniform trees that can be further enhanced through genetic
engineering. XYZ has a large portfolio of revolutionary biotech products in various
stages of commercialization and product development.
The production of biotech trees begins with the identification of a gene that is believed to
confer a desirable characteristic such as improved growth. XYZ acquires these genes
through licenses and through its internal gene discovery program.
Candidate genes must be isolated and the transformation plasmid (the vehicle through
which the gene is introduced into genetic material of a tree) must be constructed. The
gene is then transferred (transformed) into genetic material of a tree through a process
that utilizes a bacterium that will naturally insert the foreign DNA into the tree’s genome.
These initial transformations are done on a small scale for proof-of-concept testing to
ensure that the inserted gene confers the desired trait. If the gene of interest confers the
desired trait in proof-of-concept testing, large scale transformations are preformed. Each
time a transformation is performed, the gene will be inserted differently into the genome
of the tree resulting in varying levels of performance.
Each transformation results in what is termed a genetic “event.” Multiple copies of these
events are produced through the varietal tree production process to achieve quantities
sufficient for field testing. Field testing of biotech trees or “events” is very similar to
field testing of varietal trees. The trees are observed for the characteristic of interest and
top performing trees are selected for larger scale field tests.
Selections continue until a small number of top performing events remain for mass
production and delivery to the customer. If XYZ develops a new gene during this
process, a patent will be filed that will allow XYZ to license the technology to other
companies providing an additional revenue stream for XYZ.
Nursery and Orchard Business: XYZ’s nursery and orchard business is the path through
which XYZ delivers its commercially viable trees to the customer. The nursery and
orchard business is also the path through which XYZ produces conventional seedlings.
XYZ’s orchards receive top quality trees from traditional tree improvement programs and
XYZ’s varietal program. These trees are used to produce seed for the production of trees
to be delivered to customers. A portion of this seed will also be funneled back into
XYZ’s varietal program.

2

This machine is in the developmental stage. At the time of the drafting of the private letter ruling, the
placing of embryos in plugs and the placing of these plugs in a tray was a manual operation.

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Discussion:
The primary issue in question is whether XYZ is engaged in processing, farming, or both.
To address this issue, we must review the exemption for machines used in processing and
the exemption for farm machinery.
Code Section 12-36-2120(17) exempts from sales and use tax the gross proceeds of sales,
or sales price of:
machines used in … processing, … 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 (a) are necessary to the operation of the machines and are
customarily so used, or (b) 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 air, water, or noise that is caused or threatened by any
machine used as provided in this section. This exemption does not include
automobiles or trucks. …
SC Regulation 117-302.5 concerns the above exemption, which applies to machines used
in manufacturing tangible personal property for sale as well as machines used in
processing tangible personal property for sale. For purposes of this exemption, the
guidelines for determining whether the exemption is applicable are the same regardless of
whether the machine is used in manufacturing or processing (See SC Regulation 117302.5(B)(1).). As such, the principles discussed in the regulation concerning
manufacturing are applicable for purposes of this advisory opinion in determining
whether XYZ is engaged in processing.
SC Regulation 117.302.5 states in part:
(A) Introduction:
Machines used in manufacturing, processing, compounding, mining, or
quarrying tangible personal property for sale, and the replacement parts
and attachments to such machines, are exempt from the sales and use tax
under Code Section 12-36-2120(17). Materials or equipment which might
constitute a machine or machinery when not used for manufacturing,
processing, compounding, mining, or quarrying tangible personal property
for sale are not exempted.
(B) General Guidance:
(1) A "machine used in manufacturing ... tangible personal property for
sale" is exempt from the sales and use tax. For purposes of this regulation
subsection (117-302.5), manufacturing includes processing, compounding,
mining and quarrying.

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A machine qualifies for the exemption under Code Section 12-362120(17) if the machine is integral and necessary to the manufacturing
process and the product being manufactured is being manufactured "for
sale." A machine, which includes every mechanical device or combination
of mechanical powers, parts, attachments and devices to perform some
function and produce a certain effect or result, is integral and necessary to
the manufacturing process if it meets all of the following:
(a) The machine is used at a manufacturing facility. This exemption
only applies to machines used at a facility whose purpose is that of
manufacturing a product "for sale." It does not apply to machines used
at a facility whose purpose is retailing, wholesaling, distributing, or
some other non-manufacturing purposes. For example, machines used
by a large industrial baker in manufacturing breads, cakes, and pies for
sale may be purchased tax free; however, similar machines used by a
"Ma & Pa" bakery on Main Street may not be purchased tax free since
they are used at a facility whose purpose is retailing.
(b) The machine is used in, and serves as an essential and indispensable
component part of the manufacturing process, and is used on an
ongoing and continuous basis during the manufacturing process. A
machine is not a part of the manufacturing process merely because it is
integral and necessary to the manufacturer. For example, machines
used for warehouse, distribution, or administrative purposes are integral
and necessary to the manufacturer, but not part of the manufacturing
process.
(c) The machine must be substantially "used in manufacturing ...
tangible personal property for sale." The statute does not require that
the machine be used exclusively in manufacturing; however, incidental
manufacturing use will not qualify for the exemption. For purposes of
the exemption, more than one-third of a machine's use in
manufacturing is substantial.

Based on the above and the longstanding position of the department, in order to qualify
for the above exemption machines must be used by a processor in processing tangible
personal property for sale in a processing facility.
In making this determination, the department looks at several factors, including but not
limited to: the purpose of the facility and how the operation is perceived by the general
public - manufacturer, processor, retailer, wholesalers, distributor; whether sales are
mostly at wholesale or at retail; and, how the operation is taxed for property tax purposes.

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When confronted with this question in Commission Decision #87-107, the
commissioners denied the machine exemption to a business which made and sold ice
cream at retail since the taxpayer’s “operation [was] commonly understood to be that of a
merchant.” This decision did not elaborate on what was meant by the phrase “commonly
understood to be that of a merchant;” however, an examination of case law from other
jurisdictions provides insight. These cases, while concerning what is manufacturing, are
relevant since (as stated above) South Carolina’s machine exemption applies to
“processing” as well as to “manufacturing.”
In HED, Inc. v. Helen A. Powers, Secretary of Revenue, 84 N.C. App. 292, 352 S.E. 2d.
265 (1987), the Court of Appeals of North Carolina did not agree that a Hardee’s
restaurant was a “manufacturing industry or plant” within the meaning of N.C. Section
105-164.4(1)(h). Therefore, HED was not entitled to North Carolina’s lower sales tax
rate for manufacturing machinery.
In arriving at its decision, the North Carolina court referred to a North Carolina Supreme
Court case, Master Hatcheries, Inc. v. Coble, 286 N.C. 518, 212 S.E. 2d. 150 (1950) in
stating:
The Court [in Master Hatcheries] recognized as we do here ‘that the term
manufacturing as used in tax statutes is not susceptible of an exact and allembracing definition, for it has many applications and meanings. Where, as here,
the statute does not define the term, courts have resorted to the dictionaries to
ascertain its generally accepted meaning and have then undertaken to determine
its application to the circumstances of the particular case. The court used a
comprehensive approach, considering such factors as the general rules regarding
statutory interpretation, the commonly accepted meaning of manufacture as found
in Duke Power Co. v. Clayton, 274 N.C. 505, 164 S.E. 2d. 289 (1968), the
complexity of the process involved, and cases from other jurisdictions.

In Duke Power the court stated that the connotative meaning of manufacturing is
“the making of a new product from raw or partly wrought materials.” Although
HED relies heavily on this definition, we heed the Court’s suggestion in Master
Hatcheries that we consider the definition in light of the circumstances of the
particular case. A literal application of this definition which HED urges, could
result in the inclusion of any business that produces a product. For example, word
processing companies take in rough drafts of written materials and produce highly
literate well-printed documents but word processing operators are hardly referred
to as manufacturers.
HED strenuously argues that such processes as the assemblage of hamburgers and
mixing of dough to form biscuits fit the technical perimeters of the above
definition. However, manufacturing as that term is commonly understood does
not include the mere preparation of food items at a restaurant exclusively for sale

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on the premises. The essence of Hardee’s operation is the selling or
merchandising of its products, not production. Moreover, Hardee’s food
preparation is significantly different from the intricate and elaborate industrial
operations that have been classified as manufacturing in the past.
In McDonald’s Corporation v. Oklahoma Tax Commission, 563 P.2d 635, the Supreme
Court of Oklahoma concluded that “preparation of food for immediate retail sale is not
manufacturing or processing ..., in that such preparation or cooking of food is not
‘generally recognized’ as manufacturing or processing.” In arriving at its decision, the
Court cited Kansas City v. Manor Baking Company, 377 S.W. 2d 545 (Mo. App. 1964),
which addressed whether a business was a manufacturer or a merchant baker.
The Court, in McDonald’s, also cited Roberts v. Bowers, 170 Ohio St. 99, 182 N.E. 2d
858, a property tax case concerning a restaurant. In ruling against the taxpayer, the Ohio
Supreme Court reasoned:
The primary purpose of the appellant here is to serve prepared food to the general
public. Preparation and mixing of the food from raw materials (as, for example,
Salisbury steak and salads) certainly partake of a manufacturing process, but not
heretofore during the many years of existence of the statutory definition has one
thought of a restaurant proprietor as a manufacturer.
Based on the above, the machines used by XYZ are not entitled to the sales and use tax
exclusions and exemptions for processing tangible personal property for sale 3 .
However, the General Assembly has authorized a separate and distinct exemption for
certain machines used in farm operations.
Code Section 12-36-2120(16) exempts from sales and use tax the gross proceeds of sales,
or sales price of:
farm machinery and their replacement parts and attachments, used in
planting, cultivating or harvesting farm crops, including bulk coolers
(farm dairy tanks) used in the production and preservation of milk on dairy
farms, and machines used in the production of poultry and poultry
products on poultry farms, when such products are sold in the original
state of production or preparation for sale. This exemption does not
include automobiles or trucks;

3

While its is only applicable to the taxpayer to whom it was issued, SC Private Letter Ruling #99-3
provides guidance with respect to an analogous situation in which the Department determined that a
produce warehouse was not entitled to the exemption for “machines … used in … processing … tangible
personal property for sale” in Code Section 12-36-2120(17).

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SC Regulation 117-301.5 states in part:
The sale of farm machinery that is used in planting, cultivating or
harvesting farms crops for sale is exempt under Code Section 12-362120(16). This exemption also applies to replacement parts and
attachments. For purposes of this exemption, the terms "planting,"
"cultivating," and "harvesting" are defined as follows:
"Planting" includes all necessary steps in the preparation of the soil prior
to, and including, the planting and sowing of the seed.
"Cultivating" includes the loosening of the soil around growing plants,
control of moisture content in the soil, and weed and pest control.
"Harvesting" begins with the gathering of the crop and ends when the crop
is placed in a temporary or permanent storage area. It also includes the
additional preparation for storage or sale of certain crops such as the
curing of tobacco, grains, and peanuts and the grading and packaging of
peaches, cucumbers, tomatoes, etc.
The sale of bulk coolers (farm dairy tanks) used in the production and
preservation of milk on dairy farms and machines used in the production
of poultry and poultry products on poultry farms when such products are
sold in the original state of production or preparation for sale are also
exempt under Code Section 12-36-2120(16).
The following machines qualify for this exemption:

(g) machinery used in planting, cultivating, and harvesting timber
products.

This separate and distinct exemption for farm machinery further supports the position that
XYZ is not a processor. XYZ is a farm operation. In addition, various other exemptions
in Code Section 12-36-2120 for electricity and fuel demonstrate the distinction the
General Assembly has drawn between processing operations (12-36-2120(9) and (19))
and farming operations (12-36-2120(18), (32) and (44)).
While a person may be engaged in two businesses at the same time as was the case in
Monroe v. Livingston, 251 SC214, 161 se 2D, 243 (1968), that is not the case with XYZ.
XYZ’s production operation is not that of a processor processing tangible personal
property for sale, but is that of a farm operation. Each phase of its operation is not a

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separate and distinct business (i.e, one phase is processing, another phase is farming,
etc.). Each phase is an integral and necessary part of a single farming operation.
Now the question arises as to whether machines used in certain phases of this farm
operation are used in “planting, cultivating or harvesting of farm crops.”
As cited above, SC Regulation 117-301.5 defines “planting,” “cultivating” and
“harvesting” as follows:
"Planting" includes all necessary steps in the preparation of the soil prior
to, and including, the planting and sowing of the seed.
"Cultivating" includes the loosening of the soil around growing plants,
control of moisture content in the soil, and weed and pest control.
"Harvesting" begins with the gathering of the crop and ends when the crop
is placed in a temporary or permanent storage area. It also includes the
additional preparation for storage or sale of certain crops such as the
curing of tobacco, grains, and peanuts and the grading and packaging of
peaches, cucumbers, tomatoes, etc.
It is important to note that the definitions of “planting” and “cultivating” use the word
“includes.” As such, the term ‘planting” is not limited to “all necessary steps in the
preparation of the soil prior to, and including, the planting and sowing of the seed” and
the term “cultivating” is not limited to “the loosening of the soil around growing plants,
control of moisture content in the soil, and weed and pest control.” As such, we must
look to the general definitions for these terms.
It is an accepted practice in South Carolina to resort to the dictionary to determine the
literal meaning of words used in statutes. For cases where this has been done, see Hay v.
South Carolina Tax Commission, 273 SC 269, 255 S.E.2d 837 (1979); Fennell v. South
Carolina Tax Commission, 233 S.C. 43, 103 S.E.2d 424 (1958); Etiwan Fertilizer Co. v.
South Carolina Tax Commission, 217 SC 484, 60 S.E.2d 682 (1950).
The Second Edition of the American Heritage Dictionary defines these terms, in part, as
follows:
Planting

1. To place or set (seeds, for example) in the ground
   to grow. 2.a. To furnish or supply (a plot of land)
   with plants or seeds. …

Cultivating

1.a. To improve or prepare (land) as by plowing or
fertilizing, for raising crops. B. To loosen or dig
(soil) around growing plants. 2. To grow or tend (a
plant or crop). 3. To promote the growth of (a
biological culture, for example). …

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Based on the above, “planting” involves more than preparation of the soil for seeds. It
also involves the preparation of soil for seedlings and plants. In addition, “cultivating”
involves more than “the loosening of the soil around growing plants, control of moisture
content in the soil, and weed and pest control.” It also involves the promoting the growth
of a biological culture by a farm operation in the raising of farm crops when such is
integral and necessary to the farm operation.
Therefore, machines used by XYZ in the mass production of its farm crop (seedling) for
sale are “farm machinery … used in planting, cultivating or harvesting of farm crops” for
sale and exempt under Code Section 12-36-2120(16). This would include the sale to, or
purchase by, XYZ of the following machines (or parts used to fabricate such machines)
used in the mass production of seedlings: (1) machines used to uniformly place media on
plates; (2) machines used to place bulked up tissue on media trays to stimulate the
production of embryos; (3) machines used to place embryos in plugs and place plugs in
trays 4 ; and (4) machines used to place soil and seedlings in containers.
However, the cryogenic tanks used to store tissue are not machines used in “planting,
cultivating or harvesting of farm crops” and not exempt under Code Section 12-362120(16).
The final issue concerns machines that are not used in the mass production of XYZ’s
seedlings but are used to develop better seedlings and therefore better trees for use by
XYZ’s customers. These machines are not used in “planting, cultivating or harvesting of
farm crops” and not exempt under Code Section 12-36-2120(16).
However, Code Section 12-36-2120(56) exempts from the sales and use tax:
[m]achines used in research and development. "Machines" includes
machines and parts of machines, attachments, and replacements which are
used or manufactured for use on or in the operation of the machines,
which are necessary to the operation of the machines, and which are
customarily used in that way. "Machines used in research and
development" means machines used directly and primarily in research and
development, in the experimental or laboratory sense, of new products,
new uses for existing products, or improvement of existing products.
Based on the above, any machine used by XYZ directly and primarily in research and
development, in the experimental or laboratory sense, of new seedlings or improvement
of existing seedlings are exempt from the tax under Code Section 12-36-2120(56). (See
also SC Revenue Ruling #08-3.)

4

This machine is in the developmental stage. At the time of the drafting of the private letter ruling, the
placing of embryos in plugs and the placing of these plugs in a tray was a manual operation.

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In addition, the exemption for “machines used in research and development” under Code
Section 12-36-2120(56) only applies to machines and parts, attachments, and
replacements as defined in Code Section 12-36-2120(56). It does not apply to laboratory
supplies, such as Petri dishes and solutions, that are not a part of a machine used in
research and development as defined in Code Section 12-36-2120(56).
Note: As an agricultural operation, XYZ may be entitled to other exemptions related to
agriculture if the specific requirements of each such exemption are met. For a list of
agricultural exemptions, see the Department’s “2008 Sales and Use Tax Workshop
Manual” at http://www.sctax.org/Publications/default.htm.
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Ray N. Stevens
Ray N. Stevens, Director
October 24
, 2008
Columbia, South Carolina

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