Were concrete, reinforcing steel, and a metal pool liner used to construct a gamma irradiator exempt as manufacturing-machine materials?

Plain-English summary

South Carolina Private Letter Ruling 90-3 treated an entire gamma-irradiation facility as a manufacturing machine rather than a building.

XYZ manufactured optical products, including contact-lens solutions. Federal standards required both the solution and its bottle to meet sterilization requirements before sale. The company used gamma radiation to sterilize bottles as a manufacturing step.

The irradiator's radiation source, storage pool, concrete biological shield, and specialized maze design worked together as one integrated unit. Because the concrete, reinforcing steel bars, and metallic pool liner were materials used to build that manufacturing machine, the contractor's purchases were exempt under the historical statute.

How the irradiator worked

The facility had three main parts:

1. a rack containing cobalt-60 radiation sources;
2. a deionized-water storage pool that shielded the source when inactive; and
3. a concrete biological shield enclosing the irradiation area.

During operation, the source rack rose from the pool and bottles passed by it for sterilization. The ruling said the process exposed bottles to as much as 2.5 million rads and completed the sterilization phase required before the product could be sold.

Why the concrete was part of the machine

The concrete vault was not an ordinary building enclosure. The ruling emphasized that:

• the walls were nearly six feet thick solely to contain gamma radiation;
• the maze-like entries used multiple right angles to reduce escaping radiation;
• the radiological license required the source and shield as one licensed unit;
• the vault was designed for extraordinary safety conditions, including a direct airplane hit and catastrophic earthquake; and
• the irradiator walls were independent of the building housing the facility.

Without the shield, the facility could not lawfully operate. The shield therefore performed an integral machine function rather than merely improving the land or sheltering equipment.

Machine versus real property

The ruling relied on Hercules Contractors and Engineers, Inc. v. South Carolina Tax Commission, which treated an integrated wastewater-treatment facility as one machine.

That analysis did not turn on whether components were large, fixed, static, or attached to land. Instead, the relevant questions were whether the improvements:

• were used directly in manufacturing;
• were necessary and integral to the manufacturing process; and
• were used solely for that purpose.

A structure with no meaningful use apart from the industrial process could be machinery. An ordinary building benefiting the land generally was different.

Materials covered

The holding exempted the contractor's purchases of:

• concrete;
• reinforced steel bars; and
• the metallic pool liner.

Those materials became components of the integrated irradiator machine.

The PLR did not announce that all construction materials at a manufacturing plant were exempt. Its result depended on the specialized function and exclusive use of these components in the irradiation process.

What this means for you

Manufacturers

An industrial structure can qualify as machinery when its static and structural components directly perform the manufacturing process and have no general building use.

Contractors

Document how each material functions inside the integrated machine. Size, immobility, and attachment to land were not decisive under the ruling, but direct, necessary, integral, and exclusive manufacturing use was.

Current projects

Do not rely on this 1990 PLR for another facility. Verify current exemption statutes, contractor-purchase rules, and Department guidance for your equipment and facts.

Common questions

Q: Why was a six-foot concrete vault considered machinery?

A: It directly contained lethal radiation, was required by the operating license, and had no ordinary building function apart from the irradiator.

Q: Did machinery have to move?

A: No. The cases discussed in the PLR rejected a distinction between moving and static machine components.

Q: Were all materials used in the building exempt?

A: No. The holding covered the concrete, reinforcing bars, and pool liner used to construct the integrated irradiator.

Q: Can another manufacturer rely on this PLR?

A: No. Its scope says it applies only to the requesting taxpayer's specific facts and has no precedential value.

Citations and references

• S.C. Code Ann. § 12-35-550(17) — historical manufacturing-machine exemption
• S.C. Regulation 117-174.123 — historical exemption for materials used to build manufacturing machines
• S.C. Regulation 117-174.45 — historical building-material rule discussed
• Hercules Contractors and Engineers, Inc. v. South Carolina Tax Commission, 280 S.C. 426, 313 S.E.2d 300 (Ct. App. 1984) — integrated-facility machine analysis

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR90-3.pdf

Original ruling text

SC PRIVATE LETTER RULING #90-3

TO:

XYZ

SUBJECT:

Gamma Irradiator
(Sales and Use Tax)

REFERENCE:

S.C. Code Ann. Section 12-35-550(17) (1976)

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:
Are purchases by a contractor of concrete, reinforced steel bars and a metallic pool liner, when
used to construct a gamma irradiator for XYZ, exempt from the sales and use tax, pursuant to
Code Section 12-35-550(17)?
Facts:
XYZ is engaged in the manufacture and sale of optical products, including contact lense
solutions. XYZ's main solutions manufacturing plant is located in South Carolina. The
manufacture and sale of solutions is subject to Food & Drug Administration (FDA) regulations,
which require that the product be free of organisms which would be harmful to the user. The
bottle, in which the solution is packaged, as well as the solution itself, must meet certain
sterilization standards. Products which do not meet these criteria may not be sold in the
marketplace. XYZ has chosen to employ a gamma irradiation process to meet the sterilization
requirements for bottles.
Gamma rays are high frequency electromagnetic waves which kill living organisms. Because the
rays are harmful to humans as well as undesired organisms, steps must be taken to protect
humans from lethal dosages of radiation. The usual method of protection employs a biological
shield composed of lead or concrete. Low level dosages are generally shielded with lead, while
concrete is employed in larger applications requiring higher intensities.

1

The facility, which is being built for XYZ by ABC Construction Company, consists of 3 main
parts:

1. Radiation Source
2. Storage Pool
3. Biological Shield
   Exhibit A shows a typical irradiator of the type being built for XYZ. The source rack contains
   pencils of cobalt 60. The cobalt emits a continuous stream of gamma radiation. The storage
   pool of deionized water provides shielding of the source when the process is not in operation.
   The pool allows the operator to enter the irradiation room for inspection, adjustment and start up
   purposes.
   The irradiation process is initiated by turning a key switch in the extreme rear of the irradiation
   area. The operator then makes his way out of the winding inner tunnel to the control console,
   checking to insure that no one is inside the area. Turning a second key switch within 90 seconds
   causes the source rack to be raised from the pool and the irradiation process begins. Bottles pass
   by the source rack and are exposed to as much as 2.5 million rads of gamma radiation. After
   passing by the source, the bottle sterilization phase of the manufacturing process will be
   complete, and the bottles will meet FDA requirements.
   Five hundred rads is a lethal dose to humans. To protect the operator and others from a dose that
   can be up to 5,000 times the lethal level, a concrete shield has been erected to enclose the
   irradiation area. The cumulative thickness of various concrete barriers is nearly 6 feet in any
   direction from the source. This extraordinary thickness provides the needed shielding. The
   gamma irradiator, as a whole, is licensed by the South Carolina Department of Radiological
   Health. This license specifies the shielding requirements which the concrete shield must meet.
   Without this shield, the facility could not lawfully operate.
   Entry and exit openings are required to supply bottles and utilities to the irradiator. Taking
   advantage of the essentially straight lines in which gamma rays travel, these entries and exits
   follow a maze like path. Since the rays cannot navigate corners, each right angle diminishes the
   rays by 95%. Multiple angles bring the levels even lower. In combination, the concrete and right
   angles bring the level of radiation outside the vault to acceptable levels.
   Code Section 12-35-550(17) exempts from the sales and use tax:
   The gross proceeds of the sale of ....machines used in mining, quarrying, compounding,
   processing and manufacturing of tangible personal property;...
   Discussion:
   The issue is whether the contractor has constructed a machine (personal property) or a building
   (real property).

2

In resolving this issue, we may look to the South Carolina courts. In Hercules Contractors and
Engineers, Inc. v. South Carolina Tax Commission, 280 S.C. 426, 313 S.E. 2d 300, (1984 App.)
(writ of certiorari was denied on May 17, 1984), the court reviewed the tax exempt status of a
waste water facility at a textile plant in South Carolina. The facility was "situated in an
uncovered area on plant property and [consisted] of various vats, basins, tanks, pumps and other
mechanical devices, as well as troughs and pipes which carry the waste from one part of the
facility to another".
The court concluded, with respect to the waste water treatment facility, that "this facility operates
as one single entity, and that entity is a 'machine'." The court cited Commonwealth v.
Philadelphia Electric, 472 PA. 530, 372 A.2d 815 (1977), (a Pennsylvania Supreme Court
decision which concerned the "problem of the connection of a manufacturing machine with the
land upon which it sits") which held:
Under our case law, the large, fixed, and immovable nature of the property in question is
not dispositive. We have long rejected tests such as "physical attachment" or "applies
force or involves the quality of motion" as doctrines not adapted "to the business and
improvements of the age." ...Thus, this Court has held that such fixed and immovable
items as ore yards, blast furnace stock bins, and slag pits...and oil refinery tanks...are
machinery and equipment and not taxable as realty. (Citations omitted.)
The test for determining what is machinery and equipment, first formulated in [In re
Borougn of Aloquippa] Jones & Laughlin, 405 Pa. [421] at 431, 175 A.2d [856] at 861,
provides:
"[I]mprovements, whether fast or loose, which (1) are used directly in manufacturing the
products that the establishment is intended to produce; (2) are necessary and integral
parts of the manufacturing process; and (3) are used solely for effectuating that purpose
are excluded from real estate assessment and taxation. On the other hand...improvements
which benefit the land generally and may serve various users of the land are subject to
taxation."
Our court, therefore, concluded that "a particular 'structure' may or may not constitute a machine
for tax purposes, depending not upon its form but upon its use." The court in Hercules
Contractors and Engineers, Inc. v. South Carolina Tax Commission, supra, further cited Gulf Oil
Corporation v. City of Philadelphia 357 Pa. 101, 53 A.2d 250 (1947) "to show that no logical
distinction exists between the moving parts of a machine and those which are static". The court,
in Gulf Oil, using the example of a butter churn, held:
If for purposes of taxation static machinery must be separated from machinery that moves, it
would be necessary, for example, in assessing butter manufactories to separate the blades which
beat the cream, from the barrel which contains it.
Our court also held that the above rationale would not apply to buildings in that "[t]he concrete
vats and basins..., unlike buildings, have utterly no use apart from the barrel which contains it".

3

In reviewing the Commission Regulations, the court held that Regulation 117-174.123 "clearly
provides Hercules was entitled to purchase the materials used to construct the facility free of
sales or use tax". That regulation reads:
Manufacturers or compounders are entitled to purchase at wholesale free of the sales or
use tax, materials used by them in the building of machines for the purpose of
manufacturing or compounding tangible personal property for sale.
It should be noted that only those materials are exempt to manufacturers or compounders
which are used by them in building machines for the purpose of manufacturing or
compounding tangible personal property for sale. This ruling would not be for
application in the case of the use of property in the nature of building materials from
which there is erected a "structure", which upon completion might be used for producing
tangible personal property for sale.
It is well to note that the court further held Regulation 117-174.45, entitled "Building Materials",
applies to "materials used to improve real property" and was, therefore, not applicable to
materials used to construct a machine.
In reviewing the purpose and use of the gamma irradiator, several factors must be noted.

1. The vault is designed and licensed for the purpose of containing gamma radiation
   during the sterilization process. The sterilization process is an essential activity in the
   manufacturing of contact lense solution. Concrete is used because of its shielding
   qualities on large scale irradiators. Smaller, less powerful irradiators have shields
   consisting of steel and lead. The overall shape and size of these smaller irradiator
   approximate a home refrigerator.
2. The license granted by the South Carolina Department of Radiological Health grants
   to the holder the right to operate a unit containing a specific radiation source with a
   specific radiation shield.
3. The vault is nearly 6 feet thick. The extraordinary thickness is solely to contain
   gamma radiation. It is unlikely that an ordinary structure or building would require
   walls this thick.
4. The specialized design incorporates a maze arrangement to trap gamma radiation.
5. For safety reasons the vault is designed to withstand a direct airplane hit and
   catastraphic earthquake. These dual features are not usually designed into the
   ordinary building or structure.
6. The facility's walls are independent of the building which houses the facility.

4

Conclusion:
The gamma irradiator, in question, constitutes a machine; therefore, purchases by the contractor
of concrete, reinforced steel bars and the metallic pool liner, used in constructing the gamma
irradiator for XYZ, are exempt from the sales and use tax, pursuant to Code Section 12-35550(17).

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
February 21
, 1990

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