Did a parent company become taxable in South Carolina by owning a manufacturing subsidiary and performing sales, billing, purchasing, and invoicing services outside the state?

Plain-English summary

South Carolina Private Letter Ruling 87-5 answered seven questions about XYZ Company and its wholly owned South Carolina manufacturing subsidiary, ABC, Inc.

The central parent-company result was favorable: XYZ did not become subject to South Carolina income tax merely because it owned ABC, shared officers with ABC, sold ABC's output through its aviation representatives, or performed billing, collection, purchasing, disbursing, and intercompany invoicing outside South Carolina.

The ruling also concluded that:

• ABC was entirely intrastate if it was not subject to a qualifying net-income or net-income-measured franchise tax in another state;
• warehousing goods in another jurisdiction could make ABC taxable there under the stated test;
• manufacturer inventory was exempt from personal property tax except manufactured articles offered for retail sale; and
• XYZ and ABC could elect consolidated filing only if both were taxable and both apportioned income.

The parent-subsidiary structure

XYZ formed ABC as a 100%-owned subsidiary to operate a South Carolina plant manufacturing aviation sparkplugs.

The sparkplugs remained ABC's property at all times. XYZ's sales and administrative personnel handled sales solicitation, billing, and collection for a fee, but those activities were performed outside South Carolina.

The ruling understood that services actually performed in South Carolina would be performed by ABC employees.

ABC's intrastate-business status

The Commission concluded that ABC conducted business entirely within South Carolina if it was not subject to a net income tax or a franchise tax measured by net income in another state under section 12-7-240.

It explained that warehousing goods in South Carolina would subject a corporation to South Carolina tax. Applying the same rule to another jurisdiction, ABC's warehousing of goods there could make it taxable in that jurisdiction and change the entirely-intrastate conclusion.

Ownership and common personnel did not tax XYZ

XYZ's 100% ownership of ABC, several common officers, and sale of all ABC production by XYZ aviation representatives did not cause the Commission to treat XYZ as doing business in South Carolina.

The ruling kept the corporations' activities separate on those facts.

Out-of-state support services did not create nexus

XYZ could act as ABC's invoicing and collection agent without becoming taxable in South Carolina, provided those services were not performed in the state.

During startup, XYZ also could act as ABC's purchasing and disbursing agent without South Carolina income tax if:

• XYZ charged ABC appropriately for the services; and
• the services were performed outside South Carolina.

The same result applied to reasonable, arm's-length intercompany invoicing for materials or services performed outside South Carolina.

Manufacturer inventory exemption

The ruling stated that manufacturer inventories were exempt from personal property tax under section 12-37-220(6), except for manufactured articles offered for sale at retail.

The conclusion therefore distinguished manufacturing inventory from finished items placed into retail sale.

Consolidated-return election

XYZ and ABC could elect to file consolidated returns if both corporations were subject to tax and both apportioned their income.

Regulation 117-77 supplied the consolidated-return rules. The ruling did not allow an election where the stated taxable-and-apportioning conditions were absent.

What this means for you

Parent companies with South Carolina subsidiaries

PLR 87-5 did not attribute the subsidiary's South Carolina plant to the parent solely through stock ownership, common officers, or sales of the subsidiary's products.

Intercompany service teams

Location mattered. Billing, collection, purchasing, disbursing, and invoicing performed outside South Carolina received the favorable answer, with appropriate or arm's-length charges where specified.

Manufacturing subsidiaries

Other-state warehousing could affect whether the subsidiary operated entirely within South Carolina under the ruling's tax-subjection test.

Property-tax teams

The ruling recognized the manufacturer-inventory exemption but excluded manufactured articles offered for retail sale.

Consolidated-filing groups

Common ownership alone was not enough for the election described. Both corporations also had to be taxable and apportion income.

Readers applying the ruling today

PLR 87-5 applied 1987 rules to one aviation-manufacturing structure. Current economic and physical nexus, agency, unitary-business, intercompany pricing, inventory, combined or consolidated reporting, and qualification rules must be checked independently.

Common questions

Q: Did owning 100% of ABC make XYZ taxable in South Carolina?

A: No. The Commission did not find nexus from ownership, common officers, and XYZ representatives selling ABC's production.

Q: Could XYZ bill and collect for ABC without South Carolina income tax?

A: Yes, provided the services were not performed in South Carolina.

Q: Could XYZ perform startup purchasing and disbursing?

A: Yes, if it charged ABC appropriately and performed the services outside South Carolina.

Q: Were intercompany materials and service invoices taxable to XYZ?

A: Not when the underlying materials or services were performed outside South Carolina and prices were reasonable and arm's length.

Q: Was all manufacturer inventory exempt from personal property tax?

A: The ruling exempted manufacturer inventories except manufactured articles offered for retail sale.

Q: Could XYZ and ABC file consolidated returns?

A: Yes, if both were subject to tax and both apportioned income under the rules in Regulation 117-77.

Q: Can another parent-subsidiary group rely on PLR 87-5?

A: No. The ruling states that it applied only to XYZ's specific facts, had no precedential value, and was not intended for distribution.

Citations and references

• S.C. Code sections 12-7-230, 12-7-240, and 12-7-250 — corporate income-tax and intrastate-business provisions cited in the ruling
• S.C. Code section 12-7-1570 and S.C. Regulation 117-77 — consolidated returns
• S.C. Code section 12-37-220(6) — manufacturer inventory exemption stated in the conclusion
• S.C. Code section 12-3-170 — private-letter-ruling authority

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR87-5.pdf

Original ruling text

SC PRIVATE LETTER RULING #87-5

TO:

XYZ Company

SUBJECT:

Corporate Income Taxation of XYZ Company and Subsidiary,
ABC, Inc.

REFERENCE:

S.C. Code Section 12-7-230, 12-7-240, 12-7-250, 12-7-1570, Regulation
117-77, 12-37-220(b)

AUTHORITY:

S.C. Code Section 12-3-170

SCOPE:

A Private Letter Ruling is a temporary document issued to a taxpayer,
upon request, and it applies only to the specific facts or circumstances
related in the request. Private Letter Rulings have no precedential value
and are not intended for distribution.

Questions:

1. Will ABC, Inc. be considered as being an exclusively intrastate business if it does not qualify
   as doing business in another state? If products are manufactured in South Carolina, but
   warehoused in another state and subject to taxation in that state does the answer change?
2. Will XYZ Company be considered as doing business in South Carolina because of its 100%
   ownership of ABC, Inc. several common officers and 100% of ABC's production being sold
   by XYZ Company's aviation representaties?
3. Will XYZ Company, acting as an invoicing and collection agent for ABC, be considered as
   doing business within the state for the purpose of financial gain or profit and, therefore,
   subject XYZ Company to South Carolina's income tax?
4. Will XYZ Company, acting as a purchasing and disbursing agent for ABC during the start-up
   period, be subject to South Carolina's income tax if appropriate charge is made to ABC for
   these services?
5. To what extent can inventories be exempt from personal property taxes?
6. Can XYZ Company elect to file consolidated returns at any time after the initial start-up
   period, if considered necessary by the corporation?

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7. Will XYZ's intercompany invoicing for materials or services performed outside of South
Carolina, at reasonable intercompany prices, be considered as doing business within the state
for the purpose of financial gain or profit and, therefore, subject XYZ to South Carolina's
income tax?
Facts:
XYZ Company has requested an answer to the above questions pursuant to Code Section 12-3170. XYZ has established ABC, Inc., a 100% owned subsidiary to operate a manufacturing plant
in South Carolina. The plant will manufacture aviation sparkplugs. The sparkplugs will at all
times be the property of ABC. XYZ sales and administrative personnel will handle sales
solicitation, billing and collection for a fee, these activities will be conducted outside of South
Carolina.
Conclusion:

1. ABC will be considered to be conducting its business entirely within this State if it is not
   subject to a net income tax or franchise tax measured by net income in another State pursuant
   to S.C. Code Section 12-7-240. The warehousing of goods in South Carolina would subject a
   corporation to tax in South Carolina. Therefore, if the income tax laws of South Carolina
   were applied to another jurisdiction pursuant to Code Section 12-7-240, a corporation that
   warehouses goods in another jurisdiction would be taxable in that jurisdiction.
2. XYZ Company will not be considered as doing business in South Carolina because of its
   100% ownership of ABC, several common officers and 100% of ABC's production being
   sold by XYZ Company aviation representatives.
3. XYZ Company, acting as invoicing and collection agent for ABC, will not be considered as
   doing business within South Carolina provided such services are not performed within South
   Carolina.
4. XYZ Company, acting as a purchasing and disbursing agent for ABC during the start-up
   period, will not be subject to South Carolina income tax if appropriate charges are made to
   ABC provided these services are not performed within South Carolina. It is the
   Commission's understanding that services actually performed within South Carolina will be
   performed by ABC employees.
5. Inventories of manufacturers are exempt from personal property tax, except manufactured
   articles which have been offered for sale at retail pursuant to S.C. Code Section 12-37220(6).
6. XYZ Company can elect to file consolidated returns with ABC provided both corporations
   are subject to tax and both apportion their income. Rules for filing a consolidated return are
   found at Regulation 117-77.

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7. XYZ Company's intercompany invoicing for materials or services performed outside of
South Carolina, at reasonable and arm's length intercompany prices, will not subject XYZ to
South Carolina income tax.

SOUTH CAROLINA TAX COMMISSION

s/S. Hunter Howard, Jr.
S. Hunter Howard, Jr., Chairman

s/John M. Rucker
John M. Rucker, Commissioner

s/Howard E. Duvall, Jr.
Howard E. Duvall, Jr., Commissioner

Columbia, South Carolina
June 4
, 1987

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