Were ABC's purchases of parts and materials for temporary dual-vacuum extraction systems exempt when the systems cleaned soil and groundwater pollution caused by manufacturing machines?

Plain-English summary

South Carolina PLR 95-8 treated ABC's purchases of parts and materials for dual-vacuum extraction systems as exempt manufacturing-machine purchases, provided all requirements of Regulation 117-173 were met.

ABC was an environmental consulting firm hired by manufacturers to remediate soil and groundwater contaminated by chemical releases from machines used to manufacture tangible personal property for sale.

Its systems used pumps, tanks, piping, underground pipes, and vacuum-extraction devices to remove water and vapor from the ground. Removing the water and vapor also removed contaminants for proper disposal. After a site reached acceptable state and federal remediation levels, ABC disassembled the system; working equipment could be reused at another facility.

Why the exemption applied

Cleanup of existing pollution qualified

Code Section 12-36-2120(17) exempted qualifying machines used in manufacturing, including necessary parts and attachments.

Regulation 117-173 treated a pollution-control machine as a manufacturing machine when it was installed and operated to comply with a qualifying federal or state agency order addressing air or water pollution caused or threatened by other machines used to manufacture tangible personal property for sale.

The Department said the regulation was not limited to preventing pollution or reducing future releases. Its language also covered machines used to reduce pollution already in the environment. ABC's temporary systems therefore could qualify even though they cleaned up past contamination.

The regulation imposed three conditions

The PLR identified three requirements:

1. The machine had to prevent or abate air or water pollution caused or threatened by other qualifying production machines.
2. It had to be installed and operated to comply with an order from the federal or state agency primarily responsible for pollution prevention or abatement.
3. The manufacturer had to furnish the Department a certified statement from that ordering agency confirming that the machine was necessary.

The conclusion was expressly conditional on satisfying all of those requirements.

Construction materials received the same treatment

ABC purchased the component parts used to build each system. Citing Hercules Contractors and Engineers, Inc. v. South Carolina Tax Commission and Regulation 117-174.123, the Department said materials used to build a machine that qualifies for the exemption may also be purchased free of sales and use tax.

What this means for you

Manufacturers and remediation contractors

A machine used to clean existing manufacturing pollution could qualify; the equipment did not have to remain permanently installed or solely prevent new pollution.

Purchasers documenting the exemption

The ruling required more than a system's environmental function. Preserve the qualifying agency order and the agency's certified necessity statement described by the regulation.

Contractors buying components

The exemption extended to materials used to construct a qualifying machine, but only when the finished system itself met the statutory and regulatory requirements.

Other taxpayers

This PLR applied only to ABC and its stated transactions. It had no precedential value for another purchaser or remediation design.

Common questions

Q: Did the system need to prevent future pollution?
A: No. The Department said Regulation 117-173 also covered machines cleaning pollution already in the environment.

Q: What did the system remove?
A: Water and vapor from contaminated soil and groundwater, thereby removing contaminants for disposal.

Q: Did temporary or reusable equipment automatically fail?
A: No. The facts said the systems were removed after remediation and working equipment could be reused, yet the Department still found the purchases conditionally exempt.

Q: Was a government order required?
A: Yes, along with a certified statement from the ordering agency that the machine was necessary.

Q: Could ABC buy the construction materials tax-free?
A: Yes, if the completed pollution-control system qualified under the cited requirements.

Citations and references

• S.C. Code Ann. § 12-36-2120(17) — manufacturing-machine exemption
• S.C. Code Ann. § 12-4-320 — Department advisory-opinion authority
• S.C. Regulation 117-173 — pollution-control machines, agency orders, and certification
• S.C. Regulation 117-174.123 — materials used to build qualifying manufacturing machines
• Hercules Contractors and Engineers, Inc. v. South Carolina Tax Commission, 313 S.E.2d 300 (S.C. Ct. App. 1984)

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR95-8.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214

SC PRIVATE LETTER RULING #95-8 (TAX)

TO:

ABC

SUBJECT:

Pollution Control Machine
(Sales and Use Tax)

DATE:

August 14, 1995

REFERENCE:

S. C. Code Ann. Section 12-36-2120(17) (Supp. 1994)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (Supp. 1994)
SC Revenue Procedure #94-1

SCOPE:

A Private Letter Ruling is an official advisory opinion issued by the
Department of Revenue to a specific person.

NOTE:

A Private Letter Ruling may only be relied upon by the person to whom it is
issued and only for the transaction or transactions to which it relates. A
Private Letter Ruling has no precedential value.

Question:
Are the purchases by ABC of parts and material used to construct a dual vacuum extraction
system, as described in the facts, exempt from the sales and use tax under Code Section 12-362120(17)?
Conclusion:
The purchases by ABC of parts and material used to construct a dual vacuum extraction system
to abate pollution caused by machines used in manufacturing tangible personal property for sale,
as described in the facts, are exempt from the sales and use tax under Code Section 12-362120(17) provided all the requirements of SC Regulation 117-173 are met.
Facts:
ABC ("ABC") is an environmental consulting firm that contracts with manufacturing companies
to remediate contaminated soil and water beneath and surrounding the manufacturer's facilities.
The contaminated areas are a direct result of chemical releases from machines used in
manufacturing tangible personal property for sale.

1

ABC designs and installs dual vacuum extraction systems to contain and recover contaminants
from soil and ground water. The systems are constructed from pumps, tanks, piping, and
vacuum extraction devices as required by each design. The machine, through its underground
pipes and vacuum system, removes water and vapor from the ground. By removing the water
and vapor, contaminants are removed from the ground so they can be disposed of properly. In
addition, the now clean water may, if needed, be used as a coolant in the manufacturing plant.
ABC makes all purchases of the component parts that are used to construct these systems.
A system is constructed, installed and operated for a period of time sufficient to remediate the
contaminated area to levels acceptable under state and federal regulations. After the remediation
is complete, the system is disassembled and removed from the manufacturing facility.
Equipment in working order may be used at another manufacturing facility.
Discussion:
Code Section 12-36-2120(17) exempts from the sales and use tax the gross proceeds of sales, or
sales price, of:
machines used in manufacturing, processing, compounding, mining or quarrying tangible
personal property for sale. "Machines" include the parts of machines, attachments, and
replacements used, or manufactured for use, on or in the operation of machines and
which are necessary to the operation of the machines and are customarily so used. This
exemption does not include automobiles or trucks:
SC Regulation 117-173 concerns pollution control machines and reads, in part:
Section 1. ... Frequently, [manufacturing, processing, compounding, mining or
quarrying] machines cannot be operated when the same pollute the air or water beyond
regulated levels and in compliance with orders of agencies of the United States or of this
state to abate or prevent the pollution of the air or water caused or threatened by the
operation of such machines it is necessary to install other machines that are designed and
operated exclusively for the purpose of abating or preventing this pollution. The purpose
of this regulation is to classify the machines, their parts or attachments, as machines used
in mining, quarrying, compounding, processing, or manufacturing of tangible personal
property when the same are installed and operated for compliance with an order of an
agency of the United States or of this state to prevent or abate pollution of the air or water
caused or threatened by the operation of other machines used in the mining, quarrying,
compounding, processing, or manufacturing of tangible personal property.
Section 2. The term "machines" as defined in [Section 12-36-2120(17)] shall include
machines, their parts and attachments, when the same are necessary to comply with the
order of an agency of the United States or of this state for the prevention or abatement of
pollution of the air or water caused or threatened by any machines used in the mining,
quarrying, compounding, processing, or manufacturing of tangible personal property.

2

Section 3. Proof of the necessity of such machines. Any person engaged in the business
of mining, quarrying, compounding, processing, or manufacturing of tangible personal
property shall furnish the [Department of Revenue] a certified statement from the
ordering agency that any machine for which the exemption is claimed is necessary to
prevent or abate water or air pollution caused or threatened by the operation of other
machines that are used in the mining, quarrying, compounding, processing, or
manufacturing of tangible personal property.
Section 4. The order referred to herein must be issued by the agency of the United States
or of this state that is primarily charged with the duty of preventing or abating the
pollution. (April 5, 1973)
Based on the above, pollution control machines are exempt from the sales and use tax if:

1. the machine is installed to prevent or abate water or air pollution caused or threatened
   by the operation of other machines that are used in the mining, quarrying,
   compounding, processing, or manufacturing of tangible personal property for sale;
2. the machine is installed and operated in order to comply with an order of an agency
   of the United States or of this state to prevent or abate pollution of the air or water;
   and,
3. the person engaged in the business of mining, quarrying, compounding, processing,
   or manufacturing of tangible personal property furnishes the [Department of
   Revenue] a certified statement from the ordering agency that any machine for which
   the exemption is claimed is necessary to prevent or abate water or air pollution.
   The above regulation does not restrict the exemption to machines that prevent pollution or that
   reduce the amount of pollution released into the environment. The clear language of the
   regulation also allows the exemption for machines used to reduce the amount of pollution
   already in the environment. In other words, machines used to "clean up" pollution "caused ... by
   the operation of other machines that are used in the mining, quarrying, compounding, processing,
   or manufacturing of tangible personal property" for sale qualify for the exemption under Code
   Section 12-36-2120(17).
   Finally, in Hercules Contractors and Engineers, Inc. v. South Carolina Tax Commission, S.C.,
   313 S.E. 2d. 300 (1984), the State Court of Appeals held that material used to build a machine
   that qualifies for the exemption may be purchased free of the sales and use tax. The court cited
   SC Regulation 117-174.123 which states in part:
   Manufacturers and 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.
   Therefore, the purchases by ABC of parts and material used to construct a dual vacuum
   extraction system, as described in the facts, are exempt from the sales and use tax under Code
   Section 12-36-2120(17).
   3