Could a planned two-building expansion of a South Carolina regional corporate headquarters qualify for a five-year property-tax exemption and an income-tax credit, including after a sale-leaseback?

Plain-English summary

South Carolina Private Letter Ruling 89-19 concluded that XYZ's planned two-building expansion could qualify for two corporate-headquarters incentives then in effect:

• a five-year exemption from nonschool county ad valorem property taxes for the new facilities; and
• an income-tax credit for qualifying headquarters-expansion costs, including qualifying personal property if the enhanced job and wage requirements were satisfied.

The approval was conditional. The property-tax exemption required the new construction to cost at least $50,000 and the headquarters expansion to create at least 75 new full-time South Carolina jobs. The broader income-tax-credit treatment described in the ruling required at least 150 new full-time jobs in the headquarters complex, at least 40 of them classified as staff employees, satisfaction of the stated compensation thresholds, and use of the personal property in the headquarters complex.

The Commission also treated the two buildings as one expansion because persuasive evidence showed they were planned and constructed as one project. XYZ therefore had to satisfy the employment thresholds once for the combined expansion, not separately for each building.

Why the regional headquarters qualified

XYZ's corporate headquarters was in California, but it maintained a South Carolina regional headquarters serving a region of at least five states. The South Carolina operation was the location where regional corporate staff were domiciled and employed and where the majority of regional financial, personnel, legal, planning, and other business functions were handled.

On those facts, the ruling found that the South Carolina facility, including the new buildings, met the statutory definition of a corporate headquarters.

Five-year property-tax exemption

Section 12-37-220(B)(32), as quoted in the ruling, exempted qualifying new corporate headquarters, corporate office facilities, distribution facilities, and additions from nonschool county ad valorem taxes for five years.

The ruling concluded that XYZ's construction was an addition to an existing corporate headquarters and was placed in service after the statute's effective date. The facilities were therefore eligible for the five-year exemption from the date they were placed in service, provided XYZ complied with the requirement to create 75 qualifying positions.

Headquarters income-tax credit

Section 12-7-1245 allowed a credit equal to 20% of qualifying headquarters design, preparation, development, direct-construction, or direct-lease costs described in the statute. The ruling also addressed the additional credit treatment for personal property used in headquarters-related functions when the higher employment and compensation conditions were met.

For XYZ, the Commission concluded that the new-building and personal-property costs would qualify if:

• at least 150 new full-time jobs were added in the South Carolina headquarters complex;
• at least 40 of those jobs were staff-employee positions;
• the new employees and XYZ's overall South Carolina employees met the stated per-capita-income compensation tests; and
• the personal property was used in the headquarters complex.

The ruling defined staff employees as qualifying executive, administrative, or professional workers and described the duties required for each classification.

Two buildings counted as one expansion

Neither cited statute defined an "addition" as necessarily one building. The Commission looked to the expansion plan and the statutes' employment-incentive purpose.

Because XYZ presented persuasive evidence that both buildings were planned and concurrently constructed as one expansion plan, the Commission treated them as one addition. XYZ therefore had to meet the relevant employment requirements once for the project rather than doubling them for two buildings.

Where and when the new employees could work

The qualifying jobs did not have to be physically located in the newly constructed buildings. They did have to be in the expanded South Carolina headquarters complex.

The Commission also allowed early hiring for training. Employees could work temporarily elsewhere while construction was completed if they would be placed in the corporate headquarters during construction or immediately after completion.

Sale-leaseback treatment

XYZ asked whether it could retain the income-tax credit if it sold a new building and leased it back.

The Commission answered yes only if the sale-leaseback was merely a financing arrangement for income-tax purposes and XYZ, as seller-lessee, retained the beneficial interest in the building. The legal form of transferring title was therefore not enough by itself; the transaction's substantive ownership treatment controlled the ruling's answer.

What this means for you

Companies planning a headquarters expansion

The ruling shows that eligibility depended on the facility's actual headquarters functions, construction timing and cost, new full-time jobs, staff classifications, wage levels, and the use of the property. A regional office did not qualify merely because the company called it a headquarters.

Economic-development and tax teams

Multiple buildings could be one expansion when the evidence showed one coordinated project. Contemporaneous planning documents mattered because the Commission reviewed them before accepting single-project treatment.

Employers hiring before a building opens

The ruling allowed advance hiring for training, but the employees ultimately had to be placed in the South Carolina headquarters complex. Jobs shifted from another existing South Carolina location did not meet the quoted definition of a new job.

Businesses considering a sale-leaseback

The ruling's favorable answer depended on XYZ retaining beneficial ownership and the sale-leaseback being financing in substance. The ruling did not decide the treatment of a transaction that failed those conditions.

Readers applying the ruling today

PLR 89-19 applied statutes and incentive requirements in effect in 1989. Current qualification thresholds, credit percentages, eligible costs, job definitions, wage tests, carryforwards, and property-tax rules must be checked under current law.

Common questions

Q: Did the ruling approve the property-tax exemption outright?

A: It found the facilities eligible for a five-year exemption from nonschool county ad valorem taxes from the date they were placed in service, provided XYZ complied with the requirement to create 75 qualifying positions.

Q: What did XYZ need for the personal-property portion of the income-tax credit?

A: The ruling required at least 150 new full-time jobs in the South Carolina headquarters complex, at least 40 staff employees, satisfaction of the stated compensation tests, and use of the personal property in the headquarters complex.

Q: Did XYZ need to meet the job thresholds separately for each building?

A: No. The Commission treated the two buildings as one expansion because they were planned and constructed as part of the same project.

Q: Did every new employee have to work in a new building?

A: No. The employees had to work in the South Carolina headquarters complex, but not necessarily in the newly constructed portion.

Q: Could employees be hired before construction finished?

A: Yes, for training, if they would be placed in the corporate headquarters during construction or immediately after completion.

Q: Did any sale-leaseback preserve the credit?

A: No. The ruling's favorable answer depended on the transaction being merely a financing arrangement for income-tax purposes and XYZ retaining the beneficial interest in the building.

Q: Can another company rely on PLR 89-19?

A: No. The ruling states that 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 12-37-220(B)(32) (Law. Co-op. Supp. 1988) — corporate-headquarters property-tax exemption; definitions of corporate headquarters, region, new job, and staff employee
• S.C. Code section 12-7-1245 (Law. Co-op. Supp. 1988) — corporate-headquarters income-tax credit, qualifying costs, job and compensation requirements, personal property, and carryforwards
• S.C. Code section 12-3-170 (Law. Co-op. Supp. 1976) — authority for the private letter ruling
• Federal Tax Coordinator 2d, Deductible Taxes, section K-4025 (1988) — sale-leaseback financing discussion quoted by the ruling

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR89-19.pdf

Original ruling text

SC PRIVATE LETTER RULING #89-19

TO:

XYZ, Inc.

SUBJECT:

Exemption from Property Taxes & Income Tax Credit
(Property Tax & Income Tax)

REFERENCE:

S.C. Code Ann. Section 12-37-220 (B)(32) (Law. Co-op.
Supp. 1988).
S.C. Code Ann. Section 12-7-1245 (Law. Co-op. Supp. 1988).

AUTHORITY:

S.C. Code Section 12-3-170 (Law. Co-op. Supp. 1976)

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 the construction of XYZ's new building qualify for the property tax exemption
provided by S. C. Code Section 12-37-220(B)(32)?

2.

Will the costs of XYZ's new building and personal property qualify for the income tax
credit provided by S. C. Code Section 12-7-1245?

3.

May buildings planned and constructed as part of the same project be considered as one
expansion?

4.

Must the positions created to satisfy 12-37-220(B)(32) and 12-7-1245 be placed in the
new buildings in order to qualify for the income tax credit?

5.

If the building is sold and leased back, will the lessee (XYZ) be eligible for the income
tax credit?

Facts:
XYZ (the "corporation") is a subsidiary of ABC Corporation. ABC Corporation is not required
to and does not file a South Carolina income tax return. XYZ is a member, and common parent,
of an affiliated group which files a South Carolina consolidated income tax return together with
other members of its affiliated group.
1

The corporate headquarters of XYZ is in California. XYZ maintains a regional headquarters in
South Carolina. There are two other principle offices located in two other states. XYZ operates
in more than five states and its South Carolina facility (including the new building) is the
headquarters for a region of at least five states, including South Carolina. As such, a majority of
their financial, personnel, legal, planning and other business functions for the region are handled
here.
The regional headquarters in South Carolina consists of a building located downtown and a
complex located outside of the downtown area known as the XYZ Centre. The XYZ Centre
presently consists of two buildings. In addition, there is a building under construction which will
not adjoin the existing buildings. It is the costs of these buildings which are the subject of this
ruling request.
Regional corporate managerial, professional, technical, and administrative personnel are located
in every building in South Carolina and will be located in the new buildings as well. These
employees are permanently domiciled in the South Carolina area.
Included with the employees to be assigned to the new buildings are employees from
administrative departments performing financial, personnel, legal and planning functions. In
addition, technical personnel, such as professional engineers, will be located in the new
buildings.
XYZ's expansion of its regional headquarters will result in the construction of two buildings and
the hiring of over 750 employees. The average new employee wage will be 1 1/2 times the state
per capita average. XYZ 's overall per employee South Carolina cash compensation is twice the
state per capita average. As part of the expansion, they will create over 150 jobs in the corporate
headquarters. Of the new hires, at least 40 will be staff employees as defined in Section 12-37220B(32); they will be executive, administrative or professional workers. Some of the new hires
who will be stationed in the new buildings may be hired in advance of the date the new buildings
are placed in service in order to properly train them. These employees may be assigned to
temporary locations until the new building is ready to be occupied. All 750 employees hired will
be in the corporate headquarters but may not be located in the new buildings.
The costs of the first building are projected to be as follows:
Land
Direct construction costs - steel, concrete, HVAC, windows
Indirect overhead costs directly related to project
Design costs such as engineering and architecture
Set up costs - real property such as carpet, electrical

• personal property such as partitions
• indirect overhead costs
• design

$ 1,000,000
5,800,000
1,000,000
400,000
1,200,000
400,000
150,000
270,000

Furniture, fixtures, and equipment
Indirect overhead and interest expense capitalized under IRC

2,400,000
300,000
$13,000,000

2

All of these costs have been incurred and paid after the June 27, 1988 effective date of the Act.
One building has been partially in use since June and has recently been completed. The other
building is awaiting interior completion and will be placed in service during XYZ's next fiscal
year. The taxpayer presented persuasive evidence showing that the decision to plan and
concurrently construct both of these buildings was made as part of a single expansion plan.
Discussion:

1. S.C. Code Section 12-37-220(B)(32) provides:
   All new corporate headquarters, corporate office facilities, distribution facilities, and all
   additions to existing corporate headquarters, corporate office facilities, or distribution
   facilities located in South Carolina, established or constructed, or placed in service after the
   effective date of this item, are exempt from nonschool county ad valorem taxes for a period
   of five years from the time of establishment, construction, or being placed in service if the
   cost of the new construction or additions is fifty thousand dollars or more and seventy-five
   or more new jobs which are full-time are created in South Carolina.
   Subsection (3) defines "corporate headquarters" as:
   the location where corporate staff members or employees are domiciled and employed, and
   where the majority of the company's financial, personnel, legal, planning, or other business
   functions are handled either on a regional or national basis and must be the sole such
   corporate headquarters within the region or nation;
   Subsection (5) defines "region" or "regional" as:
   a geographic area comprised of either:
   (a) at least five states, including South Carolina, or
   (b) two or more states, including South Carolina, if the entire business operations of the
   corporation are performed within fewer than five states;
   XYZ's South Carolina facility (including the new building) constitutes:
   a.

the location where corporate staff members or employees are domiciled and
employed;

b.

the location where the majority of their financial, personnel, legal, planning or other
business functions are handled (on a regional basis); and

c.

the sole headquarters within the region.

3

XYZ operates in more than five states and its South Carolina facility (including the new
building) is the headquarters for a region of at least five states, including South Carolina.
Therefore, the definition of "corporate headquarters" in Section 12-37-220(B)(32) has been met.
XYZ has stated that in excess of seventy-five new full-time jobs will be created, thus the new
jobs requirement is met.
All costs relating to the new buildings have been incurred after the June 27, 1988 effective date
in Section 12-37-220. The statute states that the headquarters must be "established or
constructed, or placed in service after the effective date of this item". The first building was
initially placed in service in June 1989. XYZ will be eligible for exemption from nonschool
county ad valorem taxes for a period of five years from the date of establishment or date placed
in service pursuant to Section 12-37-220(B)(32).

2. S.C. Code Section 12-7-1245 provides:
   A corporation establishing a corporate headquarters in the State, or adding to an existing
   corporate head- quarters, is allowed a credit against any tax due pursuant to Section 12-7230 or Section 12-19-70 of the 1976 Code in an amount equal to twenty percent of the (1)
   costs incurred in the design, preparation, and development of either establishing or
   expanding a corporate headquarters, and (2) direct construction or the direct lease costs
   during the first five years of operations for the corporate headquarters. This credit applies
   to all qualifying costs incurred to establish or expand a corporate headquarters which add at
   least seventy-five new jobs which are full-time in South Carolina with at least forty of the
   new jobs classified as staff employees, and the cost of the new construction or additions is
   fifty thousand dollars or more. This credit only applies to facilities established for the direct
   use of the headquarters staff employees. This credit is nonrefundable but an unused credit
   may be carried forward for ten taxable years for all qualifying corporate headquarters costs
   or headquarters cost or fifteen years for all qualifying corporate headquarters costs in
   connection with which at least one hundred fifty new full-time jobs are created which (1)
   have an average cash compensation level more than one and one-half times the per capita
   income of the State at the time the jobs are filled, and (2) result in a total employee cash
   compensation per South Carolina employee of more than twice the per capita income of the
   State at the time the newly created jobs are filled. In addition to the credits set forth above,
   qualifying headquarters meeting these per capita income criteria are further entitled to the
   credit in this section for personal property used for corporate headquarters related functions
   and services or research and development related functions and services.
   For purposes of this section, the terms "corporate headquarters", "new jobs", and "full-time" are
   defined as provided in Section 12-37-220(B).
   XYZ is expanding its corporate headquarters with the construction of two new office buildings.
   The statute cited above provides a credit for corporate expansion to include the cost of the
   buildings if 75 new jobs are created, 40 of which are staff employees. One hundred fifty
   employees meeting per capita income criteria must be hired before the credit for personal
   property is allowed. The employees hired and the personal property purchased must be used in
   the South Carolina headquarters complex.
   4

The costs listed in the facts (supra) have been incurred for facilities established for the direct use
of headquarters staff pursuant to 12-7-1245, as amended. The definition of corporate
headquarters is discussed in Question Number 1 above. The definition of "staff employee" or
"staff member" is as follows:
"staff employee" or "staff member", [as used in the definition of corporate
headquarters] means executive, administrative, or professional worker. At least
eighty percent of an executive employee's business functions must involve the
management of the enterprise and directing the work of at least two employees. An
executive employee has the authority to hire and fire or has the authority to make
recommendations related to hiring, firing, advancement, and promotion decisions,
and an executive employee must customarily exercise discretionary powers. An
administrative employee is an employee who is not involved in manual work and
whose work is directly related to management policies or general business operations.
An administrative employee must customarily exercise discretion and independent
judgement A professional employee is an employee whose primary duty is work
requiring knowledge of an advanced type in a field of science or learning. This
knowledge is characterized by a prolonged course of specialized study. The work
must be original and creative in nature, and the work cannot be standardized over a
specific period of time. The work must require consistent exercise of discretion.
Therefore, all costs as shown above will be eligible for the credit since the per capita income
criteria are met. More than 150 new employees will be hired to work in the headquarters
complex and forty new positions will be staff employees.
3

XYZ has constructed two buildings at their South Carolina location and seeks guidance as to
whether these two buildings will be viewed as one expansion or two expansions. This
determination becomes necessary in determining whether XYZ must meet the employment
requirements once for both buildings or for each building separately.

Sections 12-7-1245 and 12-37-220 allow tax benefits for the addition to an existing corporate
headquarters however no definition of "addition" is provided. It is therefore incumbent upon the
South Carolina Tax Commission to construe this section in light of its legislative intent. The
legislature intended to promote employment opportunities in this state by providing an incentive
for corporations to establish regional or national headquarters in this state.
Since the phrase "addition to an existing corporate headquarters" may mean the building of one
building or many buildings, a reasonable interpretation is to look to the plan of expansion. Since
the plan of expansion included the current construction of both buildings, then the buildings
should be construed as one addition therefore requiring XYZ to fulfill the employment
provisions once (i.e. hire a total of 150 employees to obtain all the benefits of this legislation
rather than 300).

5

4. Pursuant to Sections 12-37-220(B)(32) and 12-7-1245, seventy-five or more new full-time
jobs must be created in South Carolina. Section 12-7-1245 adds the additional requirement
that 150 full time employees meeting certain income requirements must be hired in order to
obtain the benefit of a credit for personal property related to the corporate headquarters and
the carry forward for any unused credit. Although the new employees are not required to
work in the newly constructed portion of the corporate headquarters, they are required to
work in the South Carolina headquarters complex.
Section 12-7-1245 reads, in part: "This credit applies to all qualifying costs incurred to establish
or expand a corporate headquarters which add at least seventy-five new jobs ...". The context of
this provision indicates that the headquarters must add seventy-five new jobs however it does not
address where they must be placed within the headquarters. The definition of "new job" in
Section 12-37-220(B)(32) also supports this interpretation. This provision reads: "new job"
means any job created by an employer in South Carolina at the time a new facility or an
expansion is initially staffed, but does not include a job created when an employee is shifted
from an existing South Carolina location to work in a new or expanded facility". Therefore the
new employees must be located in the expanded headquarters complex but not necessarily in the
expanded portion of the complex.
Initial staffing may occur prior to the completion of the building if the purpose for such early
staffing is to train the new employees and these employees will be placed in the corporate
headquarters during the construction of the expansion or immediately after its completion.

5. Assuming the sale and leaseback transaction is merely a financing arrangement, the sellerlessee would remain the owner of the property for income tax purposes and would, therefore,
   qualify for the income tax credit provided by S.C. Code Section 12-7-1245.
   "... a sale-leaseback transaction may be treated for [income] tax purpose as a
   financing arrangement where the seller-lessee retains the beneficial interest in the
   property and the buyer-lessor is given the legal title only as security for the lenders."
   Federal Tax Coordinator 2d, Deductible Taxes, Section K-4025 (1988).
   Conclusions:
   1.

The construction described will be considered an addition to an existing corporate
headquarters pursuant to S. C. Code Ann. Section 12-37-220(B)(32) and will be deemed to
have been placed in service after the effective date of this section. Therefore, the facilities
will be eligible for exemption from non school county ad valorem taxes for a period of five
years from the date they are placed in service provided that they comply with the
provisions relating to creating the seventy-five positions.

2.

The costs of XYZ's new buildings and personal property will be considered qualifying
costs incurred to establish or expand a corporate headquarters if at least one hundred fifty
new full-time jobs are added in the South Carolina headquarters complex, with at least
forty of the new jobs classified as staff employees. The salaries of these employees and all
of XYZ's South Carolina employees must meet the stated per capita income requirements.
In addition, the personal property must be used in the headquarters complex.
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3.

Buildings planned and constructed as part of the same project may be considered as one
expansion thereby requiring XYZ to meet the employment requirement of Sections 12-37220 and 12-7-1245 only once. Upon review of the documents, it appears that this project
was one expansion.

4.

The positions created to satisfy 12-37-220(B)(32) and 12-7-1245 need not be placed in the
new buildings however they must be employed in the South Carolina headquarters
complex. Early staffing for the purpose of training is acceptable if the employee will be
placed in the corporate headquarters during the construction of the expansion or
immediately after its completion.

5.

XYZ is entitled to the income tax credit contained in Section 12-7-1245 if the saleleaseback transaction is merely a financing arrangement for income tax purposes and XYZ
(seller-lessee) retains the beneficial interest in the new building.

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
November 30
, 1989

7