Which leased-facility, design, job, and property-tax costs did SC PLR 91-2 allow for ABC's historical headquarters incentives?

Plain-English summary

South Carolina Private Letter Ruling 91-2 answered eight questions about ABC's historical corporate-headquarters income-tax credit and five-year county property-tax exemption.

The core results were:

• Use actual lease payments made during the first five years, not the straight-line book expense.
• Leased personal property could qualify if the enhanced job-and-compensation conditions were met and the property served headquarters or research-and-development functions.
• Payments to outside companies, including affiliated subsidiaries, for qualifying design, preparation, and development services could count up to fair market value; ABC's own employee costs did not.
• Capitalizing or expensing a qualifying cost did not change credit eligibility.
• Moving costs did not qualify.
• New permanent jobs were measured when the certification form was filed; transferred South Carolina employees did not count.
• Engineers meeting the described professional requirements counted as staff employees when placed in the headquarters complex.
• The property-tax exemption belonged to the property owner, though the lessor could apply based on headquarters use.

Direct lease costs

The historical statute allowed a 20% credit for specified design, preparation, development, construction, and first-five-year direct lease costs.

ABC's accounting books spread the full lease expense evenly over 15 years. The ruling rejected book expense as the measure because “direct lease cost” had its ordinary meaning: the actual lease payments made during the headquarters' first five years.

Leased personal property

The historical enhanced credit covered headquarters or research-and-development personal property when at least 150 new full-time jobs met both compensation tests stated in the statute.

If those conditions were satisfied, the actual first-five-year lease cost of qualifying personal property could count. Listing ABC's parent, XYZ, as an additional lessee did not disqualify the payments because ABC was primarily liable, made the payments, used the equipment, and installed it at the South Carolina headquarters.

Design and development services

The credit reached out-of-pocket costs of establishing the headquarters, not ordinary operating costs ABC would pay regardless of the project.

Payments for qualifying services performed by other corporations—including other XYZ subsidiaries—could count if they did not exceed fair market value. Compensation paid to ABC's own employees did not count because temporarily assigning existing management personnel did not create an additional out-of-pocket headquarters cost.

The statute did not distinguish between capitalized and expensed costs. The ruling therefore said eligible costs could qualify either way, while expressly declining to decide whether expensing them was proper accounting or tax treatment.

Moving costs

Actual moving costs did not qualify. The ruling interpreted design, preparation, and development as relating to real property and said moving did not improve that property. The personal-property portion contemplated buying or leasing new property, not moving existing furniture or equipment.

Counting new jobs

The Commission looked to full-time permanent jobs existing when Form PT-423 was filed. The form documented the 150 new jobs and identified at least 40 staff positions.

Employees transferred from another South Carolina location did not count. Replacement hiring could preserve a permanent position, but planned, expected, or reasonably foreseeable employment declines reduced the new-job count. ABC had to retain supporting employment records.

Engineers as staff employees

The facts required engineers to hold an engineering bachelor's degree and initial certification, exercise judgment and initiative, make decisions affecting project results, and use advanced skills.

The ruling found that those engineers met the statutory professional-employee definition because their work required advanced knowledge and discretion. To count for the headquarters credit, they also had to be placed in the headquarters complex.

Property-tax exemption for leased facilities

The historical five-year exemption applied to qualifying new headquarters and related facilities meeting the construction-cost and job thresholds.

The ruling strictly construed the exemption and assigned it to the person legally responsible for property tax—the owner—not to a lessee merely because the lease shifted payment responsibility. ABC therefore could not claim the exemption as lessee. The lessor could apply based on the property's use as a headquarters.

Common questions

Q: Did GAAP straight-line rent determine the credit?

A: No. The ruling used actual lease payments during the first five years.

Q: Did having the parent company on an equipment lease disqualify it?

A: No, under these facts. ABC was primarily liable, paid the lease, and used the equipment at its headquarters.

Q: Could affiliated-company design services count?

A: Yes, when they otherwise qualified and the payments did not exceed fair market value.

Q: Did ABC employee time count as a project cost?

A: No. The ruling treated those wages as ordinary operating costs rather than additional out-of-pocket headquarters costs.

Q: Could transferred employees count as new jobs?

A: No. Employees moved from another South Carolina location did not count.

Q: Could ABC claim the property-tax exemption as tenant?

A: No. The exemption belonged to the owner responsible for the tax, although the lessor could apply based on headquarters use.

Citations and references

• S.C. Code Ann. § 12-7-1245 — historical corporate-headquarters income-tax credit
• S.C. Code Ann. § 12-37-220(B)(32) — historical headquarters property-tax exemption and employee definitions
• S.C. Code Ann. §§ 12-7-230 and 12-19-70 — taxes against which the historical credit applied
• Owner Industrial Products, Inc. v. Sharpe, 274 S.C. 193, 262 S.E.2d 33 (1980)
• Hollingsworth on Wheels, Inc. v. Greenville County Treasurer, 276 S.C. 314, 278 S.E.2d 340 (1981)
• York County Fair Association v. South Carolina Tax Commission, 249 S.C. 337, 154 S.E.2d 361 (1967)

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR91-2.pdf

Original ruling text

SC PRIVATE LETTER RULING #91-2

TO:

ABC, Inc.

TAX ANALYST:

Malane S. Pike

SUBJECT:

Headquarters Credit/Property Tax Abatement
(Income Tax and Property Tax)

REFERENCE:

S.C. Code Ann. Section 12-7-1245 (Law. Coop. Supp. 1990)
S.C. Code Ann. Section 12-37-220(B)(32) (Law Coop. Supp. 1990)

AUTHORITY:

S.C. Code Ann. Section 12-3-170 (Law. Coop. 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.

FACTS:
"ABC," a wholly owned subsidiary of "XYZ," is located in South Carolina and provides services
on a worldwide basis. ABC will build a regional headquarters at a location in South Carolina.
ABC signed a 15-year lease on a 229,000 square-foot building to be constructed on a 22-acre site
that will be named the XYZ Corporate Park. Under the terms of the lease, the direct lease cost
for the first five years is expected to be:
Year 1
Year 2
Year 3-7.5
Year 7.5-15

$
$
$
$

($/year)
($/year)

The book expense (determined pursuant to Generally Accepted Accounting Principles) is
expected to be $ each year ($ total lease expense divided by 15 years).
In addition to the lease costs, ABC has incurred approximately $ in design and construction
management costs. Approximately $ of these costs have been performed by other subsidiaries of
XYZ, with the balance performed by other firms. These costs represent 6% of the total cost of
the new facility.
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Approximately $ of leased personal property is being or will be used in the new facility. The
lease indicates that the lessee is ABC and XYZ. It provides that the place of installation is the
ABC facility in South Carolina. The personal property is to be used by ABC and it is their
responsibility to make all of these lease payments. Estimated moving and planning for the new
facility will run between $ and $.
The new facility was occupied in the spring of 1990, and at least 150 jobs have been created.
They expect to hire a total of over 500 employees in the next fiscal year; however the customary
turnover in the business may result in a net increase which is less than 500. Not less than 40 of
these jobs are filled by "staff employees" who occupy executive, administrative or professional
positions for ABC and work in the new facility. Among these employees are engineers who are
required to have a B.S. degree in engineering and at least an initial certification. The engineers
make decisions for internal purposes involving moderate monetary amounts. They exercise
judgment and initiative in the tasks assigned to them. Their work is diversified and requires skills
of an advanced nature.
DISCUSSION:
The following questions and answers concern the income tax credit for corporate headquarters
found in Section 12-7-1245 and the property tax abatement found in 12-37-220(B)(32). Section
12-7-1245 reads as follows:
A corporation establishing a corporate headquarters in this State, or adding to an existing
corporate headquarters, is allowed a credit against any tax due pursuant to Section 12-7-230 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 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 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).

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The amount of any credit allowed under this section must be reduced by the amount of any pastdue debt owed to the State of South Carolina by the taxpayer.
Q1:

Is the 20% income tax credit based on the actual lease payments or the actual book
expense over the first five years?
A: Code Section 12-7-1245 states that a 20% income tax credit is available to
corporations who establish a corporate headquarters in this state or add to an existing
corporate headquarters. This credit is available for "direct lease costs" during the first
five years of operations for the corporate headquarters. One of the primary rules of
statutory construction is that words used in a statute should be taken in their ordinary
and popular meaning, unless there is something in the statute which requires a
different interpretation. Hughes v. Edwards, 265 S.C. 529, 220 S.E.2d 231 (1975);
Investors Premium Corp. v. South Carolina Tax Commission, 260 S.C. 13, 193
S.E.2d 642 (1973). The term "direct lease costs" is not an accounting or tax term
therefore, it should be given its ordinary meaning. As such, "direct lease cost"
indicates the actual lease payments made by the corporation.

Q2:

If personal property is leased for the facility, do these costs qualify for the income tax
credit? If the parent's name (required by lessor) and ABC's name are listed on the lease,
does this disqualify the lease payments for the credit?
A: Pursuant to Section 12-7-1245, personal property is entitled to the headquarters credit
provided that the per capita income criteria are met and the personal property is used
for corporate headquarters related functions or research and development related
functions. The per capita income requirements state that 150 new full time jobs must
be 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". If these criteria are met, the actual lease cost of the personal property for the
first five years qualifies for the credit provided that the personal property is used for
headquarters related functions or research and development related functions and
services.
This credit is not disallowed by virtue of the fact XYZ is listed as a lessee on the
lease. The lease states that the lessees are ABC and XYZ. However, ABC is primarily
liable on the lease and will make all lease payments. XYZ will only make payments if
ABC is unable to make them. The equipment will be used by ABC at its headquarters
in South Carolina.

Q3:

Do design, construction, and planning management services performed by ABC or other
subsidiaries of XYZ qualify for the income tax credit for corporate headquarters?
A: Section 12-7-1245 establishes a credit in the amount of twenty percent of the costs
incurred in the design, preparation, and development of establishing a corporate

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headquarters. The credit is for the costs of establishing a headquarters, not for the
normal operating costs of the company. Management costs are a normal expenditure
for ABC, irrespective of the establishment of a corporate headquarters. Although
management personnel may be temporarily dedicated to the design, preparation, and
development of the corporate headquarters, this does not represent additional cost to
the corporation outside of what it would normally pay these individuals. Section 127-1245 provides a credit for the out of pocket cost of establishing a corporate
headquarters in the State of South Carolina. Therefore, payments made for services
performed by other corporations, including other subsidiaries of XYZ, qualify
provided that such payments do not exceed the fair market value of the services.
Payments for services provided by employees of ABC do not qualify.
Q4.

Do the costs mentioned in Question 3 qualify if they were expensed instead of
capitalized?
A: Code Section 12-7-1245 does not differentiate between capitalized or expensed costs.
The costs indicated above may be expensed or capitalized for purposes of 12-7-1245.
It should be noted that this ruling expresses no opinion with respect to whether it is
proper to expense any of these costs.

Q5:

Do actual moving costs qualify for the income tax credit?
A: Pursuant to Section 12-7-1245, costs incurred in the design, preparation, and
development of either establishing or expanding a corporate headquarters are eligible
for the credit. The phrase "design, preparation, and development" relates to real
property. In this regard, moving costs are not an expenditure to improve the real
property for which a credit is allowed. Moving costs would also not qualify under the
credit for personal property contained in Section 12-7-1245. The provision for
personal property contemplates the purchase or lease of new personal property. This
provision does not encompass the moving of furniture or other personal property to a
new location.

Q6:

How is the number of new jobs required by Section 12-7-1245 determined?
A: The Tax Commission will look to the number of full time, permanent jobs created at
the time of the filing of Form PT-423, Certification of Eligibility New Jobs Credit
and/or Five Year Property Tax Abatement for Corporate Headquarters, Corporate
Office Facilities or Distribution Facilities. This form documents the 150 new jobs
created, including the 40 staff positions. It requires the name, social security number,
and the date hired for each full time employee hired pursuant to Section 12-37220(B)(32). The company should identify the 40 staff employees in this list.
Employees moved from an existing South Carolina location to work in the new or
expanded facility do not count. Although employees may leave and be replaced, jobs
must be full time, permanent positions. Jobs which are lost within the period of the
credit may have the appearance of having been temporary positions. A decrease in

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employment which was planned, expected or could reasonably be foreseen when the
Form PT-423 is completed will reduce the number of new jobs created for the
purposes of obtaining this credit. The company should be prepared to make
employment records or other pertinent information available to the Tax Commission
should any questions arise.
Q7:

Are engineers, as determined in the facts, generally considered staff employees?
A: The term "staff employee" is defined in 12-37-220(B)(32) as follows:
... 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
judgment. 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.
Information provided by the company indicates that engineers are required to have
a Bachelor of Science degree in engineering and at least an initial certification.
They make decisions involving moderate monetary amounts. They are accountable
for functions that exercise direct influence on project results. Engineers exercise
judgment and initiative within certain guidelines. In addition, they are instrumental
in determining the sequence of jobs where a choice of methods is available. Only
questionable cases are referred to a supervisor. Thus, engineers meet the statutory
requirements for a professional position in that they in that they are required to have
knowledge of an advanced type and must exercise discretion in their job. Engineers
qualifying for the headquarters credit must be placed in the headquarters complex.

Q8:

Is the property tax exemption from county ad valorem taxes available to ABC since they
lease the facility?
A: A five year property tax exemption is provided in Section 12-37-220(B)(32) and
reads as follows:
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 June 27, 1988, are exempt from nonschool county ad valorem taxes

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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.
In general, owners of property are responsible for property taxes. Although the owner may
contract with another party to pay the property taxes, for example by lease, the owner is liable
for the property taxes. In applying this principle to the exemption in Section 12-37-220(B)(32),
it has been the long standing administrative practice of the Tax Commission to strictly construe
tax exemption statutes. "As a general rule, tax exemption statutes are strictly construed against
the taxpayer." Owner Industrial Products, Inc. v. Sharpe, 274 S.C. 193, 262 S.E. 2d 33 (1980);
Hollingsworth on Wheels, Inc. v. Greenville County Treasurer et. al., 276 S.C. 314, 278 S.E. 2d
340 (1981). "This rule of strict construction simply means that constitutional and statutory
language will not be strained or liberally construed in the taxpayer's favor." York County Fair
Association v. S. C. Tax Commission, 249 S.C. 337, 154 S.E. 2d 361 (1967).
Thus, the exemption is only granted to the persons responsible for the property taxes even though
they may have contractual arrangements to have another pay them. However, it should be noted
that the lessor of the property may apply for the exemption based on the use of the property as a
headquarters.

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
April 26
, 1991

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