How did South Carolina tax meals a nursing facility prepared for affiliated facilities and for its own patients?

Plain-English summary

South Carolina Private Letter Ruling 90-10 addressed one central kitchen serving three affiliated health care facilities.

Meals that the nursing facility prepared for an affiliated acute-care hospital and another affiliated nursing facility were taxable retail sales. The tax base was the entire amount those facilities reimbursed—including food, staff, overhead, and other costs—not merely the ingredient cost.

For meals served to the preparing facility's own patients, tax arose when unprepared food was withdrawn from inventory. The ruling measured that withdrawal by the food's fair market value, described in its conclusion as the purchase price.

How the shared kitchen operated

XYZ operated a skilled-care nursing facility. Its affiliates operated an acute-care hospital and an intermediate-care nursing facility. All three were wholly owned subsidiaries of the same parent.

XYZ employees prepared every facility's patient meals in XYZ's kitchen. The affiliates coordinated meal counts and dietary needs, transported the meals, and served their own patients. They reimbursed XYZ for all food, labor, overhead, and other costs.

The kitchen served only the three affiliated facilities. The group chose one centralized kitchen for efficiency and lower patient cost, but the ruling treated the corporations as separate parties for sales-tax purposes.

Meals supplied to the affiliates

Former S.C. Code section 12-35-110 treated hospitals, nursing homes, and similar institutions as consumers of meals furnished without a separate patient charge. The ruling therefore treated XYZ's transfers of prepared meals for consideration as retail sales to the two affiliated facilities.

Because “gross proceeds of sales” allowed no deduction for property cost, materials, labor, or other expenses, the taxable measure included the affiliates' total reimbursements for food, staff, overhead, and all other meal costs.

Meals supplied to XYZ's own patients

For its own patients, XYZ did not make a separate intercompany sale. Instead, it withdrew unprepared food from inventory and used it to prepare patient meals.

The ruling said tax was due at withdrawal. Under the cited valuation rule, withdrawn goods were valued at the price for which the business offered them for sale, after customary discounts, but never below what the business paid. The conclusion used the unprepared food's purchase price as the measure on these facts.

What this means for you

Health care groups with a shared kitchen

Common ownership and cost-only reimbursement did not prevent a taxable retail sale between the separate corporations in this ruling.

Institutional food-service operators

The historical ruling distinguished meals transferred to another facility from ingredients withdrawn for the operator's own patients. The tax point and measure differed for those two flows.

Accountants and tax professionals

The full intercompany charge—not just food cost—was the historical sales-tax base. For internal patient meals, the ruling applied withdrawal-from-inventory rules instead.

Common questions

Q: Were meals sent to the affiliated facilities taxable?

A: Yes. The ruling classified them as retail sales to the hospital and nursing facility.

Q: What amount was taxed on those affiliate sales?

A: The complete reimbursement, including food, staff, overhead, and other costs.

Q: When was tax due on meals for XYZ's own patients?

A: When XYZ withdrew the unprepared food from inventory for use.

Q: How was the internal withdrawal valued?

A: The ruling's conclusion used the unprepared food's fair market value, identified parenthetically as its purchase price.

Q: Can a current health care group rely on PLR 90-10?

A: No. The document says it applied only to the requesting taxpayer's facts and had no precedential value, and it applied former law from 1990.

Citations and references

• Former S.C. Code section 12-35-510 — sales tax on retail sellers
• Former S.C. Code section 12-35-110 — retail sales, withdrawals, and institutional meals
• Former S.C. Code section 12-35-30 — gross proceeds and withdrawn-property value
• Former S.C. Code sections 12-35-20, -60, -100, and -170 — business, person, sale, and wholesale sale
• Former Regulations 117-166, 117-174.82, and 117-174.225 — institutional consumption, mixed retail/withdrawal inventory, and valuation
• S.C. Code section 12-3-170 and SC Revenue Procedure 87-3 — PLR authority cited in the ruling

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR90-10.pdf

Original ruling text

SC PRIVATE LETTER RULING #90-10

TO:

XYZ, Inc.

SUBJECT:

Meals - Nursing Care/Hospital Facilities
(Sales & Use Tax)

REFERENCE:

S.C. Code Ann. Section 12-35-510 (1976)
S.C. Code Ann. Section 12-35-110 (Supp. 1988)
S.C. Code Ann. Section 12-35-30 (1976; Supp. 1988)
Regulation 117-166

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 the transactions between XYZ and the other facilities (ABC Clinic and X
   Convalescent Center) retail sales, subject to the sales tax, pursuant to Code Section 1235-510?
2. If the transactions between XYZ and the other facilities are subject to the sales tax, what
   is the measure of the tax?
3. At what point is the sales tax due on meals provided to XYZ's patients?
4. What is the measure of the tax for meals provided to XYZ's patients?
   Facts:
   XYZ, Inc., ABC Clinic and Hospital, Inc. and X Convalescent Center are wholly owned
   subsidiary corporations of W, a closely held corporation. XYZ, operates a skilled care nursing
   facility. ABC Clinic operates an acute care hospital. X Convalescent Center operates an
   intermediate care nursing facility.

1

Meals for the patients/residents of each of these three facilities are prepared by the XYZ staff at
the XYZ facility. The ingredients for the meals are purchased from various vendors and paid for
by checks issued by XYZ. Sales tax is collected by these vendors from XYZ.
The XYZ staff coordinates meal preparation with the staffs of the other two facilities (as to
number of meals required, special dietary needs, etc.). Following preparation of the meals at
XYZ, ABC Clinic transports the meals to the other two facilities. Staff at each facility are
responsible for serving of the meals to patients/residents. ABC Clinic and X Convalescent Center
reimburse XYZ for all costs involved in providing the meals (i.e., cost of food, staff, overhead,
etc.).
XYZ's kitchen facilities are utilized only for preparation of meals for the three facilities. XYZ
does not prepare meals for other institutional users or the general public. ABC Clinic and X
Convalescent Center do not have kitchens in their respective facilities. The managements of the
three corporations have made the decision that one kitchen can service the three facilities more
efficiently, more profitably, and at lower cost to the patients/residents than could separate
kitchens at each facility.
Discussion:
To determine whether the transactions between XYZ and ABC Clinic and X Convalescent
Center are subject to the sales tax, and; to determine the measure thereof, we must look to the
statutes.__1. & 2.
Code Section 12-35-510, which imposes the sales tax, reads, in part:
In addition to all other licenses, taxes and charges imposed, there is levied...., upon every
person engaged or continuing within this State in the business of selling at retail any
tangible personal property whatsoever....an amount equal to [five] percent of the gross
proceeds of sales of the business.
The term "person" is defined at Code Section 12-35-60, in part, as ...any individual, firm,
copartnership, association, corporation, receiver, trustee or any other group or combination
acting as a unit" (emphasis added).
"Business" is defined at Code Section 12-35-20, in part, as:
....all activities engaged in, or caused to be engaged in, with the object of gain, profit,
benefit or advantage, either direct or indirect, and not excepting subactivities producing
marketable commodities used or consumed in the main business activities each of which
subactivities shall be considered business engaged in, taxable in the class in which it falls.
The term "gross proceeds of sales" (measure of the sales tax) is defined at Code Section 12-3530, in part, as:
...the value proceeding or accruing from the sale of tangible personal property...without
any deduction on account of the cost of the property sold, the cost of the materials used,
labor or any other expenses whatsoever...
2

The terms "sale at retail" and "retail sale" are defined, in part, at Code Section 12-35-110, as:
....all sales of tangible personal property except those defined in this article as wholesale
sales. The quantities of goods sold or prices at which they are sold are immaterial in
determining whether or not a sale is at retail.
The term "sale" is defined at Code Section 12-35-100, in part, as:
Any transfer, exchange or barter, conditional or otherwise, in any manner or by any
means whatsoever, of tangible personal property for a consideration; (emphasis added).
The term "wholesale sale" is defined at Code Section 12-35-170 as "not [to] include a sale..to
users or consumers, not for resale".
Quoting further from Code Section 12-35-110:
Where meals and beverages are furnished by hospitals, infirmaries, sanitariums, nursing
homes and like institutions, educational institutions, boarding houses and transportation
companies without a separate charge being made, the hospitals, infirmaries, sanitariums,
nursing homes and like institutions, educational institutions, boarding houses and
transportation companies are deemed to be the users or consumers of the prepared
meal....(emphasis added).
In other words, sales of prepared meals to hospitals, nursing homes and like institutions are retail
sales.
This is further supported by Regulation 117-166, which reads, in part:
Hospitals, infirmaries, sanitariums, nursing homes and like institutions are deemed to be
the users of consumers of such tangible personal property [meal,
bandages, dressings, drugs, etc.] and the instate sellers of these items are required to
report and remit the tax due on the sale of such property to the hospitals, infirmaries,
sanitariums, nursing homes, and like institutions....,
As for meals provided to XYZ's patients, we must, again, look to Code Section 12-35-110, which
defines "sale at retail" as including:
...the withdrawal, use or consumption of any tangible personal property by anyone who
purchases it at wholesale...
Also, Code Section 12-35-110 provides:
Where meals and beverages are furnished by hospitals, infirmaries, sanitariums, nursing
homes and like institutions...[such institutions] are deemed to be the users or
consumers....of the unprepared food products if [such institutions] purchase such products
and prepare the meal.
Regulation 117-166 restates the above-quoted language in Code Section 12-35-110.
3

In addition, Regulation 117-174.82, reads:
Operators or businesses who are both making retail sales and withdrawing for use from
the same stock of goods are to purchase at wholesale all of the goods so sold or used and
report both retail sales and withdrawals for use under the Sales Tax Law.
As for the measure of the tax, upon withdrawal and use by XYZ of foodstuffs for its patients,
Code Section 12-35-30 provides:
The term ["gross proceeds of sales"] shall also include the reasonable and fair market
value of any tangible personal property previously purchased at wholesale which is
withdrawn or used from the business or stock...(emphasis added).
Further, Regulation 117-174.225 provides, in part:
The value to be placed upon such goods [withdrawn for use] is the price at which these
goods are offered for sale by the person withdrawing them. All cash or other customary
discounts which he would allow to his customers may be deducted; however, in no event
can the amount used as gross proceeds of sales be less than the amount paid for the goods
by the person making the withdrawal.
Conclusions:

1. The providing of prepared meals by XYZ to ABC Clinic and X Convales- cent Center are
   retail sales, subject to the sales tax, pursuant to Code Section 12-35-510.
2. The measure of the sales tax ("gross proceeds of sales") on the sales by XYZ to the other
   facilities includes the total amount charged the facilities (i.e., cost of food, staff,
   overhead, etc.).
3. The sales tax on meals provided to XYZ's patients is due upon withdrawal of the
   unprepared foodstuff.
4. The measure of the sales tax ("gross proceeds of sales") upon withdrawals for use by
   XYZ is the fair market value (purchase price) of the unprepared foodstuff.
   SOUTH CAROLINA TAX COMMISSION

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

s/A. Crawford Clarkson Jr.
A. Crawford Clarkson, Jr., Commissioner
Columbia, South Carolina
, 1990
March 28
4