Were direct-cost computer, software, and manufacturing-equipment purchases for ABC Authority's Navy RAMP program subject to South Carolina sales or use tax?

Plain-English summary

South Carolina Private Letter Ruling 89-11 concluded that direct-cost property bought for ABC Authority's Navy RAMP program was not subject to South Carolina sales or use tax.

The contract incorporated Federal Acquisition Regulation 52.245-5. Under that clause, title to property reimbursable as a direct contract cost passed to the federal government when the vendor delivered it. The ruling therefore treated the vendor's transaction with ABC as a sale for resale and ABC's transfer to the Navy as an exempt federal-government sale.

The same structure defeated use tax. Because title vested in the federal government and the property was held for transfer in the regular course of business, ABC's possession and work on the property did not amount to taxable ownership use or storage under the provisions analyzed.

The RAMP arrangement

ABC Authority was a public corporation created by the General Assembly to support university research, high-technology industry, and research facilities in South Carolina. Its Technology Management Division organized a consortium of independent companies for RAMP—the $90 million Rapid Acquisition of Manufactured Parts program for the Navy.

ABC bought computer hardware, software, and manufacturing equipment. Consortium members configured those items into manufacturing “cells,” which were turned over as units to the Navy after approval for use in making replacement parts for Navy ships and aircraft.

The ruling covered only “direct items of cost”: property directly attributable to RAMP, reimbursable under the contract, and later transferred to the Navy. It expressly did not address property ABC retained or items not directly attributable to the program.

Why sales tax did not apply

The Commission reasoned that a taxable retail sale excluded a wholesale sale for resale. Because the contract vested title in the federal government upon vendor delivery, the supplier's transfer was part of a resale chain rather than ABC's retail consumption.

The subsequent transfer to the Navy was an exempt sale to the federal government under section 12-35-550(42). The ruling supported this analysis with Lockheed Aircraft, Day & Zimmermann, and South Carolina's Industrial Vendors decision.

Why use tax did not apply

Use tax applied to property purchased at retail for storage, use, or consumption in South Carolina. The statutory definitions excluded property held for sale in the regular course of business, and “use” concerned rights or powers incident to ownership.

The ruling concluded that ABC did not own the direct-cost property after delivery because title had already vested in the federal government. Its possession while the consortium configured the items into cells therefore did not create the taxable use or storage described by the statutes.

What this means for you

Federal and government contractors

The result depended on the contract's title-passage clause and the direct connection between each reimbursable item and its later transfer to the Navy. The ruling did not announce a blanket exemption for everything a federal contractor buys.

Technology and manufacturing businesses

Computer hardware, software, and manufacturing equipment received the same treatment here because all were direct-cost inputs covered by the title clause and incorporated into cells transferred to the Navy.

Accountants and tax professionals

Separate direct from indirect costs and retained property. PLR 89-11 expressly excluded items ABC kept or that were not directly attributable to RAMP, so its holding cannot be extended to those purchases from this document.

Common questions

Q: Were vendors' sales of the direct-cost RAMP property taxable retail sales?

A: No. The ruling treated them as sales for resale because the property was transferred onward to the federal government under the contract.

Q: Why was the transfer to the Navy exempt?

A: Section 12-35-550(42) exempted sales of tangible personal property to the federal government, and the contract vested title in the government upon vendor delivery.

Q: Did ABC owe use tax while it and the consortium configured the property?

A: No. The ruling concluded that ABC did not own the property and that it was held for transfer in the regular course of business.

Q: Did the ruling cover equipment or other property ABC retained?

A: No. It expressly excluded retained property and items not directly attributable to the RAMP program.

Q: Can another contractor rely on PLR 89-11?

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

Citations and references

• S.C. Code sections 13-17-20 and 13-17-90 (Supp. 1988) — provisions cited concerning ABC Authority
• S.C. Code sections 12-35-510, 12-35-100, 12-35-110, and 12-35-70 — sales tax and sale, retail-sale, and purchase provisions analyzed
• S.C. Code section 12-35-550(42) (Supp. 1988) — federal-government sales exemption
• S.C. Code sections 12-35-810, 12-35-130, and 12-35-160 — use tax and storage/use definitions
• Federal Acquisition Regulation 52.245-5 — title-passage clause quoted from the RAMP contract
• Edisto Fleets, Inc. v. South Carolina Tax Commission, 256 S.C. 350, 182 S.E.2d 713 (1971) — relationship between sale and purchase
• Lockheed Aircraft v. State Board of Equalization, 146 Cal. Rptr. 283 (1987); Day & Zimmermann, Inc. v. Calvert, 519 S.W.2d 106; and Industrial Vendors, Inc. v. Burts, 151 S.E.2d 867 — government-contract sales and use-tax authorities discussed
• S.C. Code section 12-3-170 (1976) and SC Revenue Procedure 87-3 — PLR authority cited

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR89-11.pdf

Original ruling text

SC PRIVATE LETTER RULING #89-11

TO:

ABC Authority

SUBJECT:

Exemption
(Sales and Use Tax)

REFERENCE:

S.C. Code Ann. Section 13-17-20 (Supp. 1988)
S.C. Code Ann. Section 13-17-90 (Supp. 1988)
S.C. Code Ann. Section 12-35-110 (Supp. 1988)
S.C. Code Ann. Section 12-35-170 (1976)
S.C. Code Ann. Section 12-35-550 (42) (Supp. 1988)

AUTHORITY:

S.C. Code Ann. Section 12-3-170 (1976)
SC Revenue Procedure #87-3

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 general distribution.

Questions:

1. Are sales of tangible personal property ("direct items of cost") to the ABC Authority
   ("ABC"), for the so-called "RAMP" program, subject to the sales tax, pursuant to Code
   Section 12-35-510?
2. Are purchases of tangible personal property ("direct items of cost") by ABC, for the
   "RAMP" Program, subject to the use tax, pursuant to Code Section 12-35-810?
   Facts:
   The ABC Authority ("Authority") was created by the General Assembly per Act No. 50,
   effective April 29, 1983, as a public corporation.
   The Authority's primary purpose is stated in Code Section 13-17-20, which reads, in part:
   The authority is organized to enhance the research capabilities of the State's public and
   private universities, to establish a continuing forum to foster greater dialogue throughout
   the research community within the State, and to promote the development of high
   technology industries and research facilities in South Carolina.

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To accomplish its objectives, the Authority operates through two divisions.
The Research Parks Division, using land donated by the State and acquired by the Authority,
initiates and oversees development of parks to be used by private industry for research and
development purposes. The 1983 Act required the Authority to establish three parks, initially;
one each near Clemson University, the Medical University of South Carolina and the University
of South Carolina. The Authority may establish and operate additional research parks as
determined by the board of trustees. The Authority is responsible for all decisions and
operations of these parks.
The Technology Management Division's purpose is to attract research companies to South
Carolina to conduct research via subcontract agreements with the Authority. The first such
project is the RAMP (Rapid Acquisition of Manufactured Parts) program, a $90 million
program, for the Navy. The RAMP program is for the purpose of developing and implementing
technology for manufacture of replacement parts for Navy ships and aircraft; and is the focus of
this document.
To accomplish the objectives of the RAMP program, ABC has created a consortium, consisting
of several independent corporations. The consortium members utilize office/working space
provided by ABC, at its facilities near Charleston, South Carolina.
Tangible personal property, which is purchased by ABC for the RAMP program, consists of
computer hardware, software and manufacturing equipment. The consortium, under the
umbrella of ABC, configures the aforementioned items into so-called "cells". Upon approval by
the Navy, these "cells" are turned over, as a unit, to the Navy for use in manufacturing repair
parts.
The RAMP contract, by reference, includes Federal Acquisition Regulation ("FAR") 52.245-5.
The portion of FAR 52.245-5, germane to the questions at hand, reads:
(2)

Title to all property purchased by the Contractor [SCRA] for which the Contractor
is entitled to be reimbursed as a direct item of cost under this contract shall pass to
and vest in the Government upon the vendor's delivery of such property (emphasis
added).

"Direct items of cost", as opposed to "indirect items of cost", are those items directly attributable
to the RAMP program and subsequently turned over to the Navy (computer hardware, software
and manufacturing equipment, or "cells"). This document does not address those items retained
by ABC and/or not directly attributable to the RAMP program.
Discussion:
To answer the questions at hand, it is necessary to examine the sales and use tax statutes, case
law, and the contract between ABC and the Navy.

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1. SALES TAX
S.C. Code Section 12-35-510 imposes upon every person selling at retail a sales tax in an
amount equal to five percent of "gross proceeds of sales".
The term "sale at retail" or "retail sale" is defined at Code Section 12-35-110, in part, as
"all sales of tangible personal property except those defined in this article as wholesale
sales" (emphasis added).
"Sale" is defined at Code Section 12-35-100, in part, as "[a]ny transfer exchange or
barter, ..., of tangible personal property for a consideration" (emphasis added). Further,
per Edisto Fleets, Inc. v. South Carolina Tax Commission, 256 SC 350, 182 SE2d 713
(1971), "[t]he terms 'sale' and 'purchase' are inextricably related and bound together and
must be so construed". Code Section 12-35-70 defines "purchase", in part, as "acquired
for a consideration, whether...effected by a transfer of title or of possession, or of both,
..." (emphasis added).
Code Section 12-35-550 contains certain exemptions from the sales tax. Paragraph (42)
of that section exempts "[t]he gross proceeds of the sale of tangible personal property to
the Federal Government...".
A California Second District Court of Appeals case, Lockheed Aircraft v. State Board of
Equalization, 146 Cal. Rptr. 283 (1987), dealt with an analogous situation.
In Lockheed, Lockheed Aircraft Corporation and Aerojet-General Corporation acquired
or manufactured special test equipment used for conducting functional tests of certain
aircraft, torpedoes, related components and subsystems. The items being tested were
manufactured by Lockheed and Aerojet for the federal government; and, the State of
California sought to impose the sales or use tax on the purchase/use of the test equipment.
As with the contract between ABC and the Navy, the contracts in Lockheed provided title
to the test equipment vested with the federal government, upon being acquired or
produced by Lockheed and Aerojet.
The California sales tax statutes are very similar to South Carolina's. More specifically,
the sales tax is imposed upon retailers selling tangible personal property at retail; "sale" is
defined as "[a]ny transfer of title or possession...for a consideration"; "retail sale" does
not include sales for resale (wholesale); and, sales to the federal government are exempt.
The Court, in Lockheed, concluded that the transactions between Lockheed and Aerojet
and their suppliers were sales for resale, thereby excluded from being taxed.
Furthermore, subsequent transfers of the test equipment to the federal government
constituted exempt retail sales.

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In Day & Zimmermann, Inc. v. Calvert 519 SW2d 106, cert den 423 US 832, 46 L ED 2d
50, 96 S CT 54, the Texas Supreme Court dealt with a similar situation. In that case, it
was ruled:
...it is clear that the initial purchases by Day & Zimmermann were not taxable under
the "Sale for Resale" exemption. Art. 20-04(0). Additionally, the second sale
between Day & Zimmermann and the Federal Government is also exempt under
both articles 20.04(C) and (H) since they are sales the State is "prohibited from
taxing under the Constitution or laws of the United States or under the Constitution
of this State"; and constitute "the receipts from the sale, ... of any taxable items to,
... [t]he United States, its unincorporated agencies and instrumentalities."
Also, in Industrial Vendors, Inc. v. Burts, 151 SE2d 867, a sales tax case involving a
contract between the Charleston Naval Station and a vending machine company, the
Supreme Court of South Carolina ruled:
This type contract appears to be in general use at military installations. The theory
is that when the merchandise is placed in the machines, a sale to the governmental
agency for resale is effected, and that the retail sales from the machines are made by
the governmental agency. Hence, no South Carolina sales tax is incurred. The Tax
Commission concedes that sales under this type contract are tax exempt.

2. USE TAX
   The use tax is imposed at Code Section 12-35-810 upon "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...".
   "Storage" is defined at Code Section 12-35-130, in part, as "any keeping or retention in
   this State, for any purpose except sale in the regular course of business..., of tangible
   personal property purchased at retail".
   The term "use" is defined at Code Section 12-35-160 as:
   ...the exercise of any right or power over tangible personal property incident to the
   ownership of that property or by any transaction in which possession is given,
   except that it shall not include the sale of that property in the regular course of
   business.
   Lockheed, also dealt with the imposition of the use tax. The State of California sought to
   impose the use tax based on the argument that the federal government took a mere legal
   title and Lockheed and
   Aerojet retained the essential indicia of ownership, such as possession, use, and risk of
   loss".

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However, the court rejected this argument as "sale" is defined as any transfer of title or
possession. The Court reasoned "that a sale is contemplated even when something less
than all indicia of ownership are transferred".
Also, the definition of "use" precluded imposition of the use tax. The California Statute
defines the term, in part, as "the exercise of any right or power over tangible personal
property incident to the ownership of that property...except...sale of that property in the
regular course of business: (emphasis added).
It was ruled, since title vested in the federal government, Lockheed and Aerojet did not
own the test equipment; and, also, the equipment was for sale "in the regular course of
business".
Likewise, the Court ruled "storage", as contemplated in the statute, had not occurred.
The key phrase being, as in the definition of "use", "except sale in the regular course of
business".
Conclusions:

1. Sales of tangible personal property ("direct items of cost") to the ABC Authority
   ("ABC"), for the so-called "RAMP" program, are not subject to the sales tax, pursuant to
   Code Section 12-35-510.
2. Purchases of tangible personal property ("direct items of cost") by ABC, for the "RAMP"
   program, are not subject to the use tax, pursuant to Code Section 12-35-810.

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
, 1989
May 31

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