Were equipment rentals made at a South Carolina military post exchange taxable when exchange employees operated the facility for a private contractor?

Plain-English summary

South Carolina Private Letter Ruling 89-12 held that equipment rentals made at a military post exchange were subject to sales tax because the private contractor, XYZ, was the retailer.

A post exchange is a federal instrumentality, and sales made by the exchange itself could be immune and exempt from state tax. But the Commission concluded that the exchange was only acting as XYZ's agent. XYZ supplied the rental equipment and forms, controlled prices and procedures, contracted directly with customers, received all rental proceeds, and paid the exchange a commission.

Because an agent's sales are treated as sales by the principal, the post exchange's federal status did not convert XYZ's private rental transactions into government sales.

The rental arrangement

XYZ agreed to establish a rental facility at a military post exchange in South Carolina. The exchange supplied space and personnel to operate the facility. Patrons were limited to military personnel, retirees, and their family members; the general public could not rent there.

The contract allocated the core business terms to XYZ:

• XYZ supplied the rental equipment, forms, price list, and employee training.
• XYZ bore responsibility for theft or break-in losses at the facility.
• Exchange employees followed XYZ's procedures for customer contracts, transaction records, and inventory accountability.
• The exchange collected the money and sent all proceeds and supporting paperwork to XYZ each week.
• XYZ paid the exchange a commission for operating the facility.

The customer rental contracts named only XYZ and the customer. They allowed XYZ to terminate the contract and recover equipment, and any written change required an XYZ official's signature.

Why the federal exemption did not control

The ruling recognized post exchanges as instrumentalities of the United States and described the constitutional immunity for federal properties, functions, and instrumentalities. Section 12-35-550(1) also exempted receipts the state was prohibited from taxing under federal or state law.

That immunity would have mattered if the post exchange were the retailer. The decisive question, however, was who actually made the rental sales.

Why XYZ was the retailer

The Commission applied the agency principle that when an owner sells property through an agent, the owner is the seller and bears the sales-tax liability. The agent does not become the retailer merely by interacting with customers or collecting money.

The operating agreement and customer contracts showed that the exchange performed services for XYZ. XYZ retained the equipment, business controls, customer contracts, proceeds, and enforcement rights. The ruling therefore treated XYZ as principal and retailer and the exchange as its commissioned agent.

What this means for you

Vendors operating through military exchanges

Selling or renting at a federal facility does not by itself make the transaction a federal-government sale. Contract terms and actual control determine whether the exchange is the retailer or only an agent for a private seller.

Equipment-rental companies

Factors that mattered here included ownership of the equipment, control of prices and paperwork, responsibility for losses, direct customer contracts, receipt of all proceeds, and the operator's commission structure.

Accountants and tax professionals

Analyze the principal-agent relationship before applying federal-instrumentality immunity. PLR 89-12 separated the exchange's protected status from the tax identity of the private retailer using it as an operating agent.

Common questions

Q: Are all sales or rentals at a military post exchange exempt from South Carolina sales tax?

A: No. The ruling said exemption depended on the post exchange itself being the retailer. These rentals were made by XYZ through the exchange as its agent.

Q: Why did exchange employees and money collection not make the exchange the retailer?

A: They performed those functions under XYZ's procedures, forwarded all money to XYZ, and received a commission. The customer contracts were with XYZ.

Q: Who was liable for the tax in this ruling?

A: XYZ, because the Commission concluded that XYZ was the retailer making the taxable rentals.

Q: Can another post-exchange vendor rely on PLR 89-12?

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

Citations and references

• S.C. Code section 12-35-550(1) (1976) — exemption for receipts the state is constitutionally or federally prohibited from taxing
• S.C. Code section 12-35-510 (1976) — sales-tax liability analyzed
• S.C. Code section 12-35-30 (1976 & Supp. 1988) — reference cited in the ruling
• Bowen v. Culotta, 294 F. Supp. 183 (D.C. Va. 1968); Standard Oil Co. of California v. Johnson, 316 U.S. 481; and United States v. State Tax Commission of Mississippi, 421 U.S. 599 (1975) — post-exchange federal-instrumentality status discussed
• South Carolina Attorney General Opinion S-OAG-78 (Sept. 6, 1984) — authority quoted concerning post exchanges
• 68 Am. Jur. 2d, Sales and Use Taxes section 95 — principal-agent retailer rule quoted
• 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/PLR89-12.pdf

Original ruling text

SC PRIVATE LETTER RULING #89-12

TO:

XYZ

SUBJECT:

Sales at Military Post Exchange/Liability for the Tax
(Sales Tax)

REFERENCE:

S.C. Code Ann. Section 12-35-550(1) (1976)
S.C. Code Ann. Section 12-35-510 (1976)
S.C. Code Ann. Section 12-35-30 (1976 & 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.

Question:
Is XYZ liable for the sales tax, on sales made at a military post exchange located in South
Carolina?
Facts:
XYZ has entered into an agreement with a post exchange, located on a military base, in South
Carolina. The contract stipulates that XYZ will provide the equipment for a rental facility, which
will be operated by exchange personnel. The exchange will forward all monies to XYZ and
receive a commission.
Ultimate customers will be military personnel, retirees, and their family members. The general
public may not rent items from the facility.
Discussion:
The question is whether the retailer is XYZ or the post exchange.
A military post exchange is a non-appropriated fund activity. In Bowen v. Culotta, D.C. Va.
1968, 294 F. Supp. 183, the court stated: A non-appropriated fund activity is one to which the
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government has initially provided funds to permit it to begin operations. The governmental loan
is repaid out of the profits earned by the activity. Thus, the activity is created by the government
with government funds for government personnel, and is administered by government employees
for the use and benefit of the United States.
The court further held:
Plaintiff was employed in a non-appropriated fund activity. These activities are
instrumentalities of the United States and are integral parts of the government's military
services. Standard Oil Company of California v. Johnson, 316 U.S. 481, 62 S.Ct 1168, 86
L.Fd. 1611; United States v. Holcombe, 176 F. Supp. 297, 303 (E.D. Va. 1959) affirmed
277 F.2d 143 (4th Cir. 1960); United States v. Forfari, supra; Nimco v. Davis, 92 U.S.
App. D.C. 293, 204 F.2d 734 (1953); Edelstein v. South Post Officers Club, 118 F. Supp.
40 (E.D. Va. 1951). Non-appropriated fund activities of the government "share in
fulfilling the duties entrusted to it and partake of whatever immunities it may have under
the constitution and federal statutes." Standard Oil Co. of California v. Johnson, 316
U.S. 481, 485, 62 S.Ct. 1168, 1170 (emphasis added).
In Opinion of Attorney General S-OAG-78 (September 6, 1984), the case of United States v.
State Tax Commission of Mississippi, 421 U.S. 599, 44 L. Ed 2d 404, 95 S.Ct 1872 (1975) was
cited, and reads, in part:
...post exchanges and similar facilities are instrumentalities of the United States: 'it is
clear that the ship's stores, officers' clubs and post exchanges "as operated are arms of the
government deemed by it essential for the performance of governmental function..."'
(Citations omitted)
Furthermore, "without congressional action there is immunity from state and local taxation,
implied from the Constitution itself, of all properties, functions, and instrumentalities of the
Federal Government. It necessarily follows that a state and the subordinate taxing units thereof
are without power to subject to taxation the property of the Federal Government or the means,
instrumentalities, and agencies thereof which it employs to carry out its proper functions, unless
Congress expressly confers a right upon the states to tax such agencies, instrumentalities, or
property." 71 AM Jur 2d State and Local Taxation, Section 221 (Kern Limerick, Inc. v.
Scurlock, 347 US 110, 98 L.Ed 546, 74 S.Ct 403; Mayo v. United States, 319 US 441, 87 L.Ed
1504, 63 S.Ct 1137, 147 ALR 761).
In addition, Code Section 12-35-550(1) exempts from the sales tax:
The gross proceeds of the sale of tangible personal property or the gross receipts of any
business which the State is prohibited from taxing under the Constitution or laws of the
United States of America or under the Constitution of this State.
In summary, if the person making the sales (the retailer) is the post exchange, then such sales are
by the United States Government and are, therefore, immune and exempt from taxation.

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To determine which party is the retailer, an examination of the contract, as well as case law, is
required.
Section 1 of the "..... Rental Contract" is entitled "ITEMS AND SERVICES TO BE
PERFORMED BY THE CONTRACTOR [XYZ]" and reads, in part:
A. The Contractor shall offer goods and services which are customarily offered in the .....
rental industry.
B. The Contractor shall provide all forms necessary to perform all services.....
C. The Contractor shall provide a current price list. Prices charged to Exchange patrons
shall be (10) ten percent less than those indicated on the price list and shall be free of
all taxes.
D. The Contractor shall provide training for Exchange employees as necessary to
efficiently execute rental contracts on behalf of the Contractor.....
*

*

*

*

I. The Contractor shall assume full responsibility for all losses occurring within the .....
rental facility due to theft or break-in (emphasis added).
Section 2 is entitled "ITEMS AND SERVICES PROVIDED BY THE EXCHANGE", and reads,
in part:
A. The Exchange shall provide adequate space for a rental operation.
B. The Exchange shall operate the rental operation utilizing Contractor supplied
equipment and Exchange supplied personnel.
*

*

*

*

D. The Exchange agrees to comply with Contractor's procedures regarding completion
of user contracts, issuance of User's Code, and collection of fees.
E. The Exchange agrees to perform Contractor required documentation in support of all
rental transactions and accountability of equipment inventory.
F. The Exchange shall collect and account for all monies due for goods and services
provided hereunder. On a weekly basis the Exchange will forward all monies
collected from ..... rentals and related transactions along with supporting paperwork to
an address provided by the Contractor (emphasis added).
Attachment "C" of the contract, entitled "DECLARATION OF COMMISSION" reads, in part:
The Contractor agrees to pay the Exchange a commission as set forth below for the
operation of a rental facility...
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Furthermore, 68 Am.Jur. 2d Sales and Use Taxes, Section 95 reads, in part:
Where commodities are sold by the producer or manufacturer thereof through the
services of another party employed by the former under a definite contract, the questions
may arise (1) whether the contract creates a principal and agent relationship between the
parties, and (2) if so, what bearing this circumstance has upon the question of which of
the parties is liable for a tax imposed upon the making of the sale. One whose property is
sold through an agent is, in contemplation of law, the seller, and he is liable for the sales
tax to the same extent he would be if he sold the property himself, and the agent is not
liable for the tax on such sales,....(emphasis added)
In summary, in an agency relationship, the principle, not the agent, is considered to be the
retailer.
In addition, the "Local Equipment Rental Contract" and the "One-Way Equipment Rental
Contract" refer only to XYZ and the customer. The Exchange is not referred to in these
contracts. Items 11 and 13 of these contracts read, respectively:
XYZ may terminate this contract and enter customer's property to recover equipment at
anytime.
*

*

*

*

This contract may not be changed except in writing, signed by a XYZ official (emphasis
added).
Therefore, the contract, signed by the ultimate customer, is with XYZ.
In summary, the sales (rentals) in question are sales by XYZ, as the retailer.
Conclusion:
The subject sales, at the post exchange, are sales by XYZ and are, therefore, subject to taxation.

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
June 7
, 1989
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