Did South Carolina PLR 93-6 apply the historical $300 maximum tax to each item in a university supercomputer system used for research and development?

Plain-English summary

South Carolina PLR 93-6 applied the historical $300 maximum tax to each item of a university's large parallel supercomputer system. The system would support software development for groundwater-contamination research and other chemistry, mathematics, engineering, geology, software, and product R&D.

The statute required direct and exclusive experimental or laboratory R&D use and location in a separate facility devoted exclusively to R&D. The university barred efficiency surveys, management and economic studies, humanities work, consumer surveys, advertising, promotion, and similar excluded uses. The computer sat in restricted space already devoted to research computing and had a dedicated staff member separate from the general computer-services staff.

Those use and facility facts satisfied both statutory requirements, so each item in the system qualified for the maximum.

Common questions

Q: Did all university computer use qualify? No. The ruling depended on exclusive qualifying R&D use and expressly excluded listed non-R&D activities.

Q: Why did the location matter? The historical statute required a separate facility devoted exclusively to R&D.

Q: Was the $300 cap for the whole system? No. The conclusion applied the maximum to each item of the system.

Citations and references

• S.C. Code Ann. § 12-36-2110(D) (1992 Supp.) — historical maximum tax and R&D machinery requirements
• S.C. Code Ann. §§ 12-36-910(A) and 12-36-1310(A) (1992 Supp.) — sales and use tax
• South Carolina Commission Decision 92-61 — separate-facility factors discussed in the ruling

Subject

Research and Development Machinery

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR93-6.pdf

Original ruling text

SC PRIVATE LETTER RULING #93-6

TO:

The University

TAX ANALYST:

Deana West

SUBJECT:

Research and Development Machinery
(Sales and Use Taxes)

DATE:

September 8, 1993

REFERENCES:

S.C. Code Ann. Section 12-36-2110 (Supp. 1992)

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (Supp. 1992)
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 prescedential value and are not intended for
general distribution.

Question:
Does the purchase of each item of a large computer system by the University qualify as research
and development machinery subject to the $300 maximum sales tax?
Facts:
The University (University) along with four national research laboratories and five other
universities are members of the Partnership in Computational Sciences (PICS). The PICS project
involves USC scientists and engineers working in collaboration with the other member
institutions to develop basic engineering tools needed to clean up hazardous waste which
threatens water supplies in the United States.
Research grants have been awarded over a five year period by the U.S. Department of Energy to
support this work. The award includes funds to purchase a large computer system that will be
located at on e of the national research laboratories and smaller computers to be located at the
member universities. The University has received a $500,000 grant to aid in the purchase of an
Intel Paragon XP/S Model A4 parallel supercomputer.
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The University will use the computer, in part, for basic research conducted under the PICS
program for the duration of the project. The computer will be used to develop highly
sophisticated computer software that will aid scientists and engineers in determining how to
clean up groundwater contamination. Computer time not committed to the PICS effort will be
devoted to research and development in the field of chemistry, mathematics, engineering and
geology that will aid in the development of software and other research and development
products. The University researchers will access the computer via the campus network. Access to
the machine by other researchers will be via a contributed statewide network owned by the
SCANA Corporation.
The University High Performance Computing Advisory Committee will determine other research
projects which will be allowed access to the computer. The University will ensure that all users
will comply with the research and development restrictions set forth in Code Section 12-362110.
The computer will not be used for efficiency surveys, management studies, humanities research,
economic studies, management science/operations research, consumer surveys, advertising and
promotion activities, or research in connection with literary, historical, or similar projects.
The physical location of the computer will be in a portion of the second floor of the University
Computer Services Division building. This location currently houses a large scale parallel
processor that is devoted to research and development of computer software by the computer
science and mathematics departments. Entrances to the facility are limited by keyless entry
system which restricts access only to approved researchers.
The computer will have its own dedicated staff person who will not be integrated with the other
staff of the University Computer Services Division. This person will be responsible for
maintenance, operation and upkeep of the computer.
Discussion:
Code Section 12-36-910(A) imposes a sales tax and reads, in part:
A sales tax, equal to five percent of the gross proceeds of sales, is imposed upon every
person engaged or continuing within this State in the business of selling tangible personal
property at retail.
Code Section 12-36-1310(A) imposes a use tax and reads, in part:
A use tax is imposed on the storage, use, or other consumption in this State of tangible
personal property purchased at retail for storage, use, or other consumption in this State,
at the rate of five percent of the sales price of the property, regardless of whether the
retailer is or is not engaged in business in this state.

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Code Section 12-36-2110 imposes a maximum tax on the sale of certain items and reads, in part:
(D) The maximum tax levied pursuant to this chapter on the sale or use of each item of
machinery for research and development is three hundred dollars. As used in this
subsection, “machinery for research and development” means machinery used directly
and exclusively in research and development in the experimental or laboratory sense for
new products, new uses for existing products, or for improving existing products. To be
eligible for the limitation imposed by this subsection, the machinery must be located in a
separate facility devoted exclusively to research and development as defined in this
subsection. The limitation does not extend to machinery used in connection with
efficiency surveys, management studies, consumer surveys, economic surveys,
advertising, promotion, or research in connection with literary, historical, or similar
projects.
Therefore, for the 5% state sales or use tax to apply there must be a retail sale or retail purchase
of tangible personal property. As provided in code Section 12-36-2110, certain items including
each item of research and development machinery are subject to the $300 maximum tax.
In order to qualify for the maximum tax on research and development machinery, two
requirements must be met:

1. The property must be used directly and exclusively in research and development, and
2. The property must be located in a separate facility devoted exclusively to research and
   development.
   The first requirement concerns the use of the computer. Machinery for research and development
   is defined in the statute as “machinery used directly and exclusively in research and development
   in the experimental or laboratory sense for new products, new uses for existing products, or for
   improving existing products”.
   The last sentence in the statute specifies what research and development equipment is not.
   Specifically, the $300 sales tax limitation does not apply to machinery used in connection with
   efficiency surveys, management studies, consumer surveys, economic surveys, advertising,
   promotion, or research in connection with literary, historical, or similar projects.
   As discussed in the facts, the computer will be used half of the time to develop highly
   sophisticated computer software that will aid scientists and engineers in determining how to
   clean up groundwater contamination. Computer time not committed to the PICS effort will be
   devoted to research and development in the field of chemistry, mathematics, engineering and
   geology that will aid in the development of software and other research and development
   products. The computer will not be used for efficiency surveys, management studies, humanities
   research, economic studies, management science/operations research, consumer surveys,
   advertising and promotion activities, or research in connection with literary, historical, or similar
   projects. The University will ensure that all users will comply with the research and development
   restrictions set forth in Code Section 12-36-2110.
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Based upon the facts presented, the computer is being used as research and development
machinery as defined in the statute.
The second requirement to be addressed concerns the location of the machinery. Commission
Decision #92-61 addressed this issue. In this decision, the Commission determined that the
research and development function constituted a separate facility devoted exclusively to research
and development. This conclusion was reached based on the following facts: (1) the research and
development function was secluded, set apart and kept apart from other functions, (2) it is
installed to serve a particular distinct purpose, (3) it is autonomous with its own director and
separate management and specific employees, (4) its space is separated from other functions, and
(5) it is accounted for separately and is treated as a separate operating entity by management.
With respect to the physical location of the machinery, The University has indicated: (1) the
computer will be located in a separate facility of the University Computer Services Division
building, (2) this facility already contains a large scale parallel processor that is devoted to
research and development of computer software by the computer science and mathematics
departments and meets the requirements in Code Section 12-36-2110, (3) the computer is being
purchased to develop software for the PICS project and software and other products for the
research and development projects not dedicated to the PICS project, (4) entrances to the facility
are limited by a keyless entry system by approved researchers, and (5) the computer will have its
own dedicated staff person who will not be integrated with the other staff of the University
Computer Services Division.
Based upon the facts presented, the new large computer system is located in a separate facility
devoted exclusively to research and development.
Conclusion:
Based upon the facts presented by the University, the large computer system purchased will be
used exclusively to develop computer software and other research and development products. It
meets all of the requirements in Code Section 12-36-2110 to qualify as research and
development machinery. Accordingly, each item of the computer system qualifies for the
$300.00 maximum tax.

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