Was electricity used to turn customers' grease wool into customer-specific wool top exempt as electricity used to manufacture tangible personal property for sale?

Plain-English summary

South Carolina Private Letter Ruling 90-14 concluded that ABC Company was a manufacturer of tangible personal property for sale when it converted customers' grease wool into customer-specific wool top. Electricity used in that manufacturing process qualified for the exemption in section 12-36-2120(19).

The fact that ABC did not own the wool did not defeat the exemption. The ruling treated contract manufacturing performed for the seller of the finished wool product as manufacturing tangible personal property for sale.

The exemption was limited to production electricity. Power used in offices, the reception area, warehouses, and other nonmanufacturing areas remained taxable.

From grease wool to wool top

ABC received customers' grease wool and performed several operations:

1. It graded, cored, and blended wool to each customer's specifications, including blending Australian and U.S. wool to control the later fabric's quality.
2. It washed the wool with mild detergent, rinsed it, steam-dried it, and continued removing vegetation.
3. It carded the wool into web form, aligned fibers, and removed short fibers.
4. It combed the wool to parallel the fibers and control the final wool top's weight, producing thick thread resembling heavy yarn stored on spools.

ABC then shipped the wool top to customers on demand.

Manufacturing rather than processing

The ruling distinguished processing from manufacturing. Processing changes raw material's form, content, or condition into a finished product; manufacturing requires a new and substantially different article with a distinctive name and substantially different character or use.

ABC did more than clean wool. Its blending, carding, fiber alignment, short-fiber removal, combing, and formation of thick thread changed sheep's wool substantially in appearance and use and created a product known as wool top.

The ruling compared ABC's operations to the first stages of a textile mill, not to cotton ginning. A cotton gin cleaned cotton, separated fiber from seed, and rebaled it for a textile mill. ABC performed textile-mill-like steps that created heavy wool yarn.

Why customer ownership did not matter

ABC manufactured on a contract basis using wool supplied by customers. The ruling said it was common in the textile industry for an independent manufacturer to perform one part of production on customer-owned material and return the manufactured goods.

The Commission's long-standing policy treated those third-party manufacturing operations as manufacturing tangible personal property for sale when performed for the seller of the product.

What this means for you

Textile and contract manufacturers

Under this historical ruling, contract work on customer-owned materials could qualify as manufacturing for sale. The decisive question was whether the operation created a substantially different article, not whether the contractor owned the raw material.

Facilities claiming a utility exemption

Only electricity used in the manufacturing process qualified. The ruling expressly excluded office, reception, and warehouse electricity.

Accountants and tax professionals

The manufacturing-versus-processing distinction depended on the physical transformation, the resulting product's name, character, and use, and the contractor's role in the production chain.

Common questions

Q: Was ABC merely processing wool?

A: No. The ruling found that ABC substantially changed sheep's wool in appearance and use and created a distinct product called wool top.

Q: Did ABC have to own the wool?

A: No. Manufacturing under contract for the seller of the product qualified under the Commission's stated long-standing policy.

Q: Was all electricity at the plant exempt?

A: No. Only electricity used in manufacturing qualified. Office, reception-area, warehouse, and other nonproduction electricity did not.

Q: Can another textile business rely on PLR 90-14?

A: No. The ruling states that it applied only to the requesting taxpayer's specific facts and had no precedential value.

Citations and references

• S.C. Code section 12-36-910(B)(2) — 1990 sales tax on electricity
• S.C. Code section 12-36-2120(19) — 1990 electricity exemption for manufacturers, miners, and quarriers
• Regulation 117-174.84 and Attorney General opinion S-OAG-13 — cotton-ginning treatment discussed by the ruling
• Anheuser-Busch Brewing Association v. United States, 207 U.S. 556 (1908); Prentice v. City of Richmond, 90 S.E.2d 839 (1956); and Linwood Stone Products Co. v. State Department of Revenue, 175 N.W.2d 393 — manufacturing and processing standards quoted or cited
• Merchant v. Hamilton, 309 S.E.2d 781 (S.C. 1983); Ryder Truck Lines, Inc. v. South Carolina Tax Commission, 248 S.C. 148, 149 S.E.2d 435 (1966); and Etiwan Fertilizer Co. v. South Carolina Tax Commission, 217 S.C. 354, 60 S.E.2d 682 (1950) — weight given to long-standing agency interpretations
• 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/PLR90-14.pdf

Original ruling text

SC PRIVATE LETTER RULING #90-14

TO:

ABC Company, Inc.

TAX ANALYST:

Sally Major

SUBJECT:

Electricity Used at a Wool Combing Plant
(Sales Tax)

REFERENCE:

S.C. Code Ann. Section 12-36-910(B)(2) (Enacted June, 1990)
S.C. Code Ann. Section 12-36-2120 (19) (Enacted June, 1990)

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 the electricity used by ABC Company, Inc. in creating wool top exempt from sales tax under
Code Section 12-36-2120 (19)?
Facts:
ABC converts grease wool into wool top using the following steps:

1. ABC receives a customer's grease wool which it grades, cores and blends according to
   that customer's specifications. Higher quality Australian grease wool is blended with
   lower quality United States grease wool according to the customer's specifications. The
   blending process determines the ultimate quality of the fabric produced by a subsequent
   manufacturer.
2. The wool is washed with a mild detergent to remove grease and vegetation. The washed
   wool is then rinsed, steamed dry, and additional processes are performed to continue to
   remove vegetation.

1

3. The wool is run through a machine which begins to put fibers in one direction and
remove short fibers from the wool. This product is carded in web form.

4. Finally, the web wool is run through a combing machine which parallels the wool fibers
   and controls the weight of the final wool top. This product is spun or combed into thick
   thread, resembling a very heavy yarn which is stored on spools. This product is known as
   wool top. The wool top is shipped to customers on demand.
   Discussion:
   Code Section 12-36-910(B)(2) imposes a sales tax on the gross proceeds accruing or proceeding
   from the sale of electricity.
   Code Section 12-36-2120 provides, in part:
   Exempted from the taxes imposed by this chapter are the gross proceeds of sales, or sales
   price of:
   ...(19) electricity used by manufacturers, miners, or quarriers to manufacture, mine,
   or quarry tangible personal property for sale....
   The first question presented is whether the taxpayer is a manufacturer. In a decision dated
   August 22, 1986, the Commission recognized a distinction between processing and
   manufacturing. In that decision the Commission held:
   Processing for sales tax purposes is best defined as the operation by which raw material is
   changed in form, context[sic] or condition so as to result in a finished product. Linwood
   Stone Products Co. v. State Dept. of Revenue, 175 N.W.2d 393, 394. However,
   manufacturing requires more. There must be the creation of a new and substantially
   different article having a distinctive name and substantially different character or use.
   Anheuser-Bush Brewing Association v. United States, 207 U.S. 556, 562 (1908) and
   Prentice v. City of Richmond, 90 S.E.2d 839, 843 (1956). For example, the processing of
   poultry is not manufacturing (there is no change or transformation of live poultry into an
   article or product of substantially different characters. See Commonwealth v. Meyer, 23
   S.E.2d 353 (1942); a commodity such as poultry that retains a continuing substantial
   identity through the processing stage is not manufacturing. See East Texas Motor Freight
   Lines, Inc. v. Frozen Food Express, 351 U.S. 49, 54 (1956)) The processing of fruit is not
   manufacturing (the chemical treatment of fruit to preserve and enhance its value is not
   manufacturing. American Fruit Growers, Inc. v. Brogdex Co., 283 U.S. 1, 11-13 (1931).)
   Likewise, the processing of cork for use in bottling beer is not manufacturing (a cork put
   through the claimant's process is still a cork, Anheuser-Busch, supra at 562.)
   Additionally, Attorney General's opinion S-OAG-13 provides that a ginning company is in the
   business of processing and is, therefore, not exempt from the sales tax on fuel which it uses for
   processing since the exemption only applies to manufacturers. This opinion has been confirmed
   by Regulation 117-174.84 which provides:

2

The sale or sales of fuel, not otherwise exempted, to cotton ginners for use in drying
cotton is subject to the tax.
We must decide whether the taxpayer is a manufacturer or merely a processor.
The taxpayer is involved in one stage of converting wool directly from a sheep into wool fabric
or yarn. This type of conversion is substantially different from the processing cases cited by the
Commission. In each of the processing cases, although a product may have been enhanced by the
process performed, the product and its use remained virtually unchanged.
Likewise, a cotton gin performs a different operation from a wool combing plant. A cotton gin
first takes raw cotton and removes the dirt and trash, such as dried leaves and sticks from the
cotton. The gin then separates the long cotton fibers from the seeds and rebales the cleaned and
seedless cotton which is sent to the textile mill where cotton threads and cloth are made.
At the textile mill the cotton is blended to produce the right mixture of fibers. Theses fibers are
again cleaned to remove dirt and debris from the cotton. The cotton is then carded in web form.
The carded cotton is used to form a loose rope of cotton called sliver. The sliver is stretched and
the cotton fibers are straightened, producing a loose cotton rope. Finally, the loose cotton rope is
twisted into yarn to be used for weaving.
The ABC Company's operations are like the first stages of the textile mill rather than the cotton
gin. ABC first blends wool to customers' specifications to produce the desired quality of wool
fabric which the customer will subsequently manufacture. This procedure results in wool top
specifically designed for a particular customer. After a cleaning process, the company begins
making wool top for the customer by removing short fibers and putting fibers in one direction to
strengthen the wool. This wool is run through a combing machine which parallels the wool
fibers and controls the weight of the final wool top. Finally, the wool is spun or combed into
thick thread, resembling a very heavy yarn which is stored on spools. This product is known as
wool top. The wool top is shipped to customers on demand. This procedure is virtually identical
to the stages of the textile mill described above.
ABC is not merely cleaning the wool for another manufacturer, but is rather creating a heavy
wool yarn much like the loose cotton rope produced at a textile mill. Although the completed
product is still wool, it has changed substantially from the original sheep's wool both in
appearance and use. Performing this type of change is manufacturing.
Even though we have established that ABC is involved in the manufacturing of tangible personal
property, we still must decide whether it is involved in manufacturing personal property for sale.
ABC does not purchase its own wool. Rather, it takes a customer's wool and produces wool top
from that customer's wool to the customer's specifications.
In the textile industry it is common practice for part of the manufacturing process to be
performed by an independent manufacturer. In these situations, it is also common practice for
the independent manufacturer to receive the textile product from a customer, perform its
manufacturing operations, and return the goods to the original customer.

3

ABC is performing part of the manufacturing process on a contract basis for the seller of the
wool product. It has been the Commission's long-standing policy that "manufacturing tangible
personal property for sale" includes manufacturing processes performed by a third party on a
contract basis for the seller of the product.
Administrative interpretations of statutes by the agency charged with their administration and not
expressly changed by the legislative body are entitled to great weight. Merchant v. Hamilton,
309 S.E. 2d 781 (1983). When as in this case, the construction or administrative interpretation of
a statute has been applied for a number of years and has not been changed by the legislature,
there is created a strong presumption that such interpretation or construction is correct. Ryder
Truck Lines, Inc. v. South Carolina Tax Commission, 248 S.C. 148, 149 S.E. 2d 435 (1966);
Etiwan Fertilizer Company v. South Carolina Tax Commission, 217 S.C. 354 60 S.E. 2d 682
(1950).
Conclusion:
The taxpayer is a manufacturer of tangible personal property for sale; therefore, it is entitled to
the exemption for electricity provided in Code Section 12-36-2120 (19).
NOTE: The exemption only applies to electricity used in the manufacturing process. Electricity
used in the offices, reception area, warehouse, etc. is not entitled to the exemption.

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 27
, 1990

4