Which components of ABC's high-purity water treatment system did SC PLR 91-1 treat as exempt manufacturing machines?

Plain-English summary

South Carolina Private Letter Ruling 91-1 divided a custom high-purity water treatment system between exempt manufacturing machinery and taxable storage or waste-handling equipment.

ABC was building the system for a new South Carolina manufacturing plant. The system purified city water into ultra-pure water used to manufacture the plant's product. The Commission exempted the components that purified, conditioned, circulated, regenerated, and controlled process water. It denied exemption for the process-water storage tank, process-water pumps, and waste-water surge tank.

The exempt components

The ruling exempted these items under the manufacturing-machine provision:

• activated carbon filters;
• sodium bisulfite feed system;
• primary mixed-bed ion exchangers;
• primary demineralized-water storage tanks and transfer pumps;
• polishing mixed beds and micron cartridge filters;
• hot-subloop tank, pumps, and accessories;
• cold-subloop tank, pump, and accessories;
• acid and caustic regeneration systems;
• instruments and local solenoid panels;
• control panel;
• interconnecting piping; and
• motor control center.

Although some exempt items were called tanks, the ruling treated them as parts of the chain of processing operations rather than mere storage.

The nonexempt components

The ruling did not exempt:

• the 22,000-gallon process-water storage tank;
• the process-water pumps; or
• the waste-water surge tank.

Its conclusion classified those items as storage equipment rather than machines used directly in the manufacturing process. The waste-water tank held and neutralized unused acid and sodium hydroxide before discharge to the plant's waste-treatment facility.

How the system worked

The plant first stored city water, then pumped it through activated-carbon filters to remove chlorine. A sodium-bisulfite feed neutralized remaining chlorine. Mixed-bed ion exchangers removed impurities, and acid and caustic systems regenerated the resin.

After initial purification, water entered demineralized-water tanks, passed through additional polishing exchangers and cartridge filters, and moved into hot and cold subloops. Those loops heated or cooled the ultra-pure water and delivered it to factory processes, with unused water circulating back.

Why the processing equipment qualified

Section 12-36-2120(17) exempted machines used to manufacture tangible personal property for sale, including necessary and customarily used parts and attachments.

Regulation 117-174.123 allowed a manufacturer of a machine to buy materials used to build it tax-free, while excluding ordinary building materials used to erect a structure. The ruling relied on Hercules Contractors and Engineers, Inc. v. South Carolina Tax Commission, which said a structure's machine status depended on its use rather than its form and allowed a contractor building a manufacturing machine to purchase the construction materials tax-free.

The tank regulations supplied the dividing line: tanks within the processing chain could qualify, while storage tanks did not. Waste-removal machinery was not independently a manufacturing process unless it was an attachment of an exempt machine.

What this means for you

Manufacturers and system designers

Map each component to its operating function. A “tank” label did not control; the question was whether the item participated in processing or merely stored material.

Contractors building custom machinery

The ruling applied the exemption to ABC's materials even though ABC built the system for another manufacturer. The Hercules analysis focused on construction of a machine that the customer would use to manufacture tangible personal property for sale.

Other taxpayers

Do not rely on the component list without matching the facts. This PLR applied only to ABC's described design and has no precedential value.

Common questions

Q: Were all water tanks taxable storage tanks?

A: No. The DI-water tanks and hot and cold subloop tanks were exempt as processing components; the process-water storage tank and waste-water surge tank were not.

Q: Were the system controls and piping exempt?

A: Yes. The conclusion included instruments, solenoid panels, the control panel, interconnecting piping, and the motor control center.

Q: Why was the waste-water surge tank not exempt?

A: It held and neutralized regeneration waste before discharge and was not treated as a machine used directly in manufacturing.

Q: Could the contractor buy machine-building materials tax-free?

A: Under the ruling's facts, yes, for materials used to build the qualifying manufacturing machine rather than a structure.

Q: Can another manufacturer rely on this PLR?

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

Citations and references

• S.C. Code Ann. § 12-36-2120(17) — manufacturing-machine exemption
• S.C. Code Ann. §§ 12-36-910 and 12-36-1310 — sales and use taxes
• S.C. Regs. 117-174.120 and 117-174.123 — machine parts and machine-building materials
• S.C. Regs. 117-174.140 through 117-174.142 — processing tanks, storage tanks, and waste removal
• Hercules Contractors and Engineers, Inc. v. South Carolina Tax Commission, 280 S.C. 426, 313 S.E.2d 300 (1984)

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR91-1.pdf

Original ruling text

SC PRIVATE LETTER RULING #91-1

TO:

ABC, Inc.

TAX ANALYST:

Deana West

SUBJECT:

High Purity Water Treatment System
(Sales and Use Tax)

REFERENCE:

S.C. Code Ann. Section 12-36-2120(17) (Supp. 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:
Are the materials, as described in the facts, to be used by "ABC" in constructing a high purity
water system for "XYZ" exempt from sales and use tax pursuant to Code Section 12-362120(17)?
Facts:
ABC, a New York registered company, is a wholly owned subsidiary of "DEF." ABC has been
awarded a contract to design, build and supply the components of a high purity water treatment
system for a new XYZ manufacturing plant being built in South Carolina. The water treatment
system will purify city water and produce ultra pure water to be used in the manufacture of
XYZ's product.
The system, consisting of numerous components including tanks, pumps, filters, chemical
handling machinery, instrumentation and controls, is to be partially piped and electrically wired
in the ABC shop outside of South Carolina and shipped to South Carolina where it will be
physically installed and connected by local mechanical and electrical contractors under ABC's
supervision.
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The system under construction by ABC includes the construction of the following items which
are numbered to correspond to the plant process described below:
1.
2.
3.
4.
5.
6.
7.
8.
9.

Process water storage tank
Process water pumps, activated carbon filters
Sodium bisulfite feed system
Primary mixed bed exchangers
Primary DI water storage tanks, DI water transfer pumps, polished mixed beds,
micron cartridge filters
Hot subloop tank, pumps and accessories and cold subloop tank, pump and
accessories
Acid regeneration system, caustic regeneration system
Waste water surge tank
Set instruments, lot local solenoid panels, control panel, lot interconnecting piping
and motor control center to be used in the system.

The high purity water treatment plant process can be described as follows:

1. City or process water is put into a 22,000 gallon process water storage tank. The tank acts
   as a buffer to even out flows and to act as a storage tank for the process during city
   maintenance, interruption and the like.
2. Three process water pumps then pump city water into three activated carbon filters. The
   filters are steel tanks filled with fine activated carbon granules. The purpose of the carbon
   is to remove chlorine in the water which is detrimental to subsequent process steps.
3. As water leaves the carbon filters, chemical feed tanks and feed pumps add sodium
   bisulfite in order to neutralize any residual chlorine not removed by the activated carbon.
4. The water then passes through two high primary mixed bed ion exchangers. These are
   steel, rubber lined vessels filled with ion exchange resins. The impurities in the water
   eventually overload the chemically active sites on the ion exchange resin beads and the
   resin is said to be exhausted. This occurs about once per day by design. At this point, the
   resin sites are made active again by adding hydrochloric acid and sodium hydroxide
   during a process called regeneration. The dilution water heat exchanger, hydrochloric
   acid tank and pumps, naoht caustic tank and pumps are required to control the chemical
   addition during regeneration.
5. The purified water is stored in two 42,000 gallon demineralized water tanks which act as
   a buffer during maintenance, etc. The purified water is pumped from these two tanks by
   three water transfer pumps to a set of polishing mixed bed ion exchangers. The purified
   water is brought in contact with ion exchange resin beads again in order to purify it to an
   even higher extent.
6. The highly purified water is directed to the hot subloop tank (HSLT) and the cold
   subloop tank (CSLT). The water in the HSLT is pumped to various processes in the
   factory by the hot subloop pumps and is heated to 128 degrees Fahrenheit by steam in the
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heat exchanger. The water not used in the factory is returned to the hot subloop tank
(HSLT). The CSLT operates as the HSLT except it is set up to be at 61 degrees
Fahrenheit and has a cooling heat/exchanger. This CSLT also has some small portable
mixed bed ion exchangers and some cold subloop cartilage filters in the water circuit.

7. The ion exhangers are regenerated with hydrochloric acid and sodium hydroxide.
   Hydrochloric acid in the hydrochloric acid tank (HCLT) is pumped with metering pumps
   to a mixing tee where it is mixed with dilution water to a controlled concentration and
   then directed to whichever mixed bed ion exchanger is being regenerated. The same thing
   is done with sodium hydroxide as above, but in addition the dilution water is heated to
   120 degrees Fahrenheit with steam using the dilution water heat exchanger.
8. The waste water surge tank is used to hold and neutralize the acid and sodium hydroxide
   which are not totally consumed in the ion exchange regeneration process, prior to being
   discharged to the XYZ Waste Treatment Plant.
   Discussion:
   Code Sections 12-36-910 and 12-36-1310 impose the sales tax and use tax, respectively. The
   sales tax is imposed upon the retail sale of tangible personal property and the use tax is imposed
   upon the storage, use, or consumption of tangible personal property purchased at retail for
   storage, use or consumption in this State.
   Code Section 12-36-2120(17) exempts from sales and use tax:
   ...the gross proceeds of sales of...machines used in manufacturing...tangible personal
   property for sale. 'Machines' include the parts of machines, attachments, and replacements
   used...on or in the operation of the machines and which are necessary to the operation of
   the machines...
   Regulation 117-174.120 provides an interpretation of the term "machines" and reads, in part:
   ...The terms "...parts of such machines" are restricted to the following: (a) they must be
   used or manufactured for use, on or in the operation of such machines; (b) necessary to the
   operation of such machines and (c) customarily so used. These restrictions are interpreted
   to mean that the part or attachment must be purchased in the form in which it will be used
   by the manufacturer without any fabrication or alteration by him, except the usual and
   customary minor adjustment, (except as stated at 117-174.123) and that it is a standard part
   or attachment customarily used and, further, that the machine or machinery on which it is
   used would not do the work for which it was designed if it were not used.
   This, of course, exempts all parts and attachments without which the machine would do no
   work, and, in addition, it exempts parts and attachments designed to increase the efficiency
   of the machine.

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Additionally, Regulation 117-174.123 provides that the materials used to build machines which
manufacture tangible personal property for sale may be purchased by their manufacturers free
from sales or use tax and 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.
The law, therefore, provides that machines, their parts and attachments, that are used in
manufacturing tangible personal property for sale qualify for the exemption found in Code
Section 12-36-2120(17).
The South Carolina Court of Appeals reviewed the application of the exemption found in Code
Section 12-36-2120(17), formally Code Section 12-35-550(17), and Regulation 117-174.123 in
Hercules Contractors and Engineers, Inc. v. South Carolina Tax Commission, 280 SC 426, 313
SE 2d 300 (1984). The court reviewed the tax exempt status of materials purchased by Hercules
Contractors that were used to construct a waste water facility at the Klopman textile plant. The
court 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 reaching its' conclusion
stated:
Hercules was the manufacturer of this machine for the Klopman plant, which in turn used
it to manufacture tangible personal property for sale. We therefore hold that this
regulation [117-174.123] clearly provides Hercules was entitled to purchase the materials
used to construct this facility free of sales or use tax.
Finally, it must be determined whether the tanks are "machines" for tax purposes. The following
regulations provide guidance in making this determination:
Regulation 117-174.140 - Tanks which are a part of the chain of processing operations are
exempted by the machine exemption.
Regulation 117-174.141 - Storage tanks are not exempted from the tax by the machine
exemption.
Regulation 117-174.142 - ...the removal or disposal of waste materials is not of itself a
manufacturing process on which a claim for exemption could be based. The waste
removal machinery must be an attachment of an exempt machine to come within the
exemption.

4

The above regulations, therefore, provide that storage tanks are not exempt from sales and use
tax, however, tanks which are part of the processing operations are exempt from sales and use
tax.
Conclusion:
The activated carbon filters, sodium bisulfite feed system, primary mixed bed exchangers,
primary DI water storage tanks, DI water transfer pumps, polished mixed beds, micron cartridge
filters, hot subloop tank, pumps and accessories, cold subloop tank, pump and accessories, acid
regeneration system, caustic regeneration system, set instruments, lot local solenoid panels,
control panel, lot interconnecting piping and motor control center used by ABC in constructing a
high purity water treatment system for XYZ are exempt from the sales and use tax, pursuant to
Code Section 12-36-2120(17) and Regulation 117-174.140.
However, the process water storage tank, process water pumps and waste water surge tank are
storage tanks and not "machines" used directly in the manufacturing process and, therefore, are
not exempt from sales and use tax.

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