Were ethylene concentrate and generators used to ripen produce at warehouses exempt from South Carolina sales and use tax?

Plain-English summary

The South Carolina Department of Revenue concluded that ABC, Inc.'s ethylene-ripening concentrate and generators did not qualify for the state's processing exclusions when used at produce warehouses. The concentrate sales were taxable, and ABC's purchases of generators for warehouse use were also taxable.

The key issue was the character of the facility, not whether ripening changes the produce. The Department viewed the warehouses as wholesaling, storage, distribution, or retail facilities rather than processing facilities. Therefore, property used there did not qualify as an input used directly in processing or as machinery used by a processor.

How the ripening system worked

ABC sold “Ripener 1 Concentrate,” which contained 92.46% ethanol, and loaned ethylene generators to produce warehouses without charge. The generator converted the concentrate into ethylene gas inside controlled ripening rooms. That gas triggered bananas—and other produce such as tomatoes, kiwi, and avocados—to begin their own ripening process before sale to consumers.

The warehouses could be operated by independent produce distributors or large grocery chains supplying their stores. Their purpose on the stated facts was selling or distributing produce and sometimes other merchandise.

Why the exemptions failed

Section 12-36-120 excluded from tax tangible personal property used directly in manufacturing, compounding, or processing property into products for sale. Section 12-36-2120(17) exempted machines used in processing tangible personal property for sale.

The Department said those provisions required use by a processor in a processing facility. It did not consider a produce warehouse to be a processor merely because some ripening occurred there. It looked to factors such as the facility's purpose, how the public perceived the operation, whether sales were mainly wholesale or retail, and the operation's property-tax treatment.

Important facility-purpose caveat

The ruling did not say ripening equipment could never qualify. It said the result might be different if a facility's purpose was the ripening of produce, because that facility might be a processing facility. The same possibility existed if the facts showed two distinct facilities—one for warehousing and one for processing.

That determination would depend on the particular facts.

Common questions

Q: Was the ethylene concentrate a tax-free processing input?

A: No, not when sold for use at the produce warehouses described in the ruling. Those warehouses were not processing facilities.

Q: Was ABC's purchase of the ethylene generators exempt machinery?

A: No. The generators were bought for use at warehouses that the Department classified as storage, distribution, wholesaling, or retail facilities.

Q: Could a dedicated produce-ripening plant qualify?

A: Possibly. The ruling expressly left open the exclusion and exemption for a facility whose purpose was produce ripening, or for a separate processing facility, depending on the facts.

Q: Can another produce distributor rely on PLR 99-3?

A: No. The ruling states that it has no precedential value and may be relied on only by its recipient for the covered transactions.

Citations and references

• S.C. Code Ann. § 12-36-120(3) (property used directly in manufacturing, compounding, or processing property for sale)
• S.C. Code Ann. § 12-36-2120(17) (machines used in processing tangible personal property for sale)
• S.C. Regulation 117-174.30 (cited processing guidance)
• Commission Decision #87-107 (machine exemption denied to a retail ice-cream operation)
• HED, Inc. v. Powers, 84 N.C. App. 292, 352 S.E.2d 265 (1987)

Subject

Ethylene Concentrate and Generator Used to Ripen Produce at Warehouse

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR99-3.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 #99-3

TO:

ABC, Inc.

SUBJECT:

Ethylene Concentrate and Generator Used to Ripen Produce at Warehouse
(Sales and Use Tax)

DATE:

August 30, 1999

REFERENCE:

S. C. Code Ann. Section 12-36-120 (Supp. 1998)
S. C. Code Ann. Section 12-36-2120(17) (Supp. 1998)
SC Regulation 117-174.30

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (Supp. 1997)
SC Revenue Procedure #97-8

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.

Questions:

1. Is the Ripener 1 Concentrate sold by ABC, Inc. to produce warehouses and used in triggering
   the ripening process of produce excluded from the sales and use tax as a “wholesale sale” under
   Code Section 12-36-120(3)?
2. Is the ethylene generator purchased by ABC, Inc. and used by produce warehouses in
   triggering the ripening process of produce exempt from the sales and use tax as a machine used
   in processing tangible personal property for sale under Code Section 12-36-2120(17)?
   Conclusions:
   Based on the facts set forth below, it is the department’s opinion that:
3. The Ripener 1 Concentrate sold by ABC, Inc. to produce warehouses is not a “wholesale
   sale” under Code Section 12-36-120(3) since the concentrate is not used in a processing facility
   (see note below). As such, the sale of the Ripener 1 Concentrate by ABC, Inc. to produce
   warehouses is not excluded from the sales and use tax under Code Section 12-36-120 and is,
   therefore, subject to the sales and use tax.
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2. The ethylene generator purchased by ABC, Inc., when used by a produce warehouse, is not
used in a processing facility (see note below). Therefore, the purchase of an ethylene generator
by ABC, Inc. for use by a produce warehouse is not exempt from the sales and use tax as a
machine used in processing tangible personal property for sale under Code Section 12-362120(17) and is subject to the sales and use tax.
Note: The above opinions are based on the concentrate and the ethylene generators being used
by a warehouse whose purpose is the sale or distribution of produce and, in some cases, other
merchandise. If a facility’s purpose is the ripening of produce, then the exemption and exclusion
may be applicable since such a facility’s purpose may be the processing of tangible personal
property for sale. Such a determination will depend on the facts. In addition, there are no facts
indicating that there are two facilities, a warehouse facility and a processing facility. If such
were the case, the exemptions and exclusions from the sales and use tax may be applicable.
Facts:
ABC, Inc. (“ABC”) is in the business of selling Ripener 1 Concentrate to produce warehouses.
ABC also loans ethylene generators to these warehouses. These products are used by the
warehouses to ripen their produce so that it is ready to sell to the consumer. Such produce
warehouses may be operated by an independent distributor of produce or by a large retailer
(grocery store chains) for the purpose of supplying produce to its stores.
For example, when a produce warehouse purchases bananas from its supplier, the bananas are in
an unripened state and are stone green in color. In this state, the bananas are not salable. As
such, these bananas are placed in atmospherically controlled rooms called ripening rooms. Small
produce warehouse may have only one such room while large grocery store distribution centers
may have twenty such rooms. An ABC ethylene generator (which is loaned to the warehouse at
no charge) is placed in the room and filled with the Ripener 1 Concentrate. The Ripener 1
Concentrate contains 92.46% ethanol. When put through the ABC ethylene generator, ethylene
gas is produced. This triggers the ripening process and the bananas produce their own ethylene
gas. The rooms are then vented and cooled. At this point the bananas are ready for sale to the
consumer since the ripening has been triggered. This process is used with respect to other fruits
and vegetables such as tomatoes, kiwi, and avocados.
Discussion:
In determining the taxability of the concentrate and the ethylene generator, we must review Code
Sections 12-36-120 and 12-36-2120(17) and determine if the produce warehouses using the
concentrate and the ethylene generators are processing facilities.
Code Section 12-36-120 defines the term “wholesale sale” and excludes from the tax “tangible
personal property used directly in manufacturing, compounding, or processing tangible personal
property into products for sale.”

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Code Section 12-36-2120(17) exempts from sales and use tax:
...the gross proceeds of sales of...machines used in ... processing ... tangible personal
property for sale. “Machines” include the parts of machines, attachments, and
replacements used...in the operation of the machines and which are necessary to the
operation of the machines...
It has been the longstanding position of the department that in order to qualify for the above
exemption machines must be used by a processor in processing tangible personal property for
sale in a processing facility. Based on this position, the department does not consider a produce
warehouse to be a processor. A warehouse is a wholesaling, storage or distribution facility.
The statute provides an exemption under Code Section 12-36-2120(17) for machines “used in
manufacturing ... tangible personal property for sale.” This exemption only applies to a facility
whose purpose is that of a manufacturer. Therefore, machines used by a large bakery
manufacturer in manufacturing breads, cakes, and pies may be purchased tax free; however,
similar machines used by a “Ma & Pa” bakery on Main Street (retail bakery) may not be
purchased tax free. In making this determination, the department looks at several factors,
including but not limited to: the purpose of the facility and how the operation is perceived by the
general public - manufacturer, processor, retailer, wholesalers, distributor; whether sales are
mostly at wholesale or at retail; and, how the operation is taxed for property tax purposes.
When confronted with this question in Commission Decision #87-107, the commissioners denied
the machine exemption to a business which made and sold ice cream at retail since the
taxpayer’s “operation [was] commonly understood to be that of a merchant.” This decision did
not elaborate on what was meant by the phrase “commonly understood to be that of a merchant;”
however, an examination of case law from other jurisdictions provides insight. These cases,
while concerning what is manufacturing, are relevant since South Carolina’s machine exemption
applies to “processing” as well as to “manufacturing.”
In HED, Inc. v. Helen A. Powers, Secretary of Revenue, 84 N.C. App. 292, 352 S.E. 2d. 265
(1987), the Court of Appeals of North Carolina did not agree that a Hardee’s restaurant was a
“manufacturing industry or plant” within the meaning of N.C. Section 105-164.4(1)(h).
Therefore, HED was not entitled to North Carolina’s lower sales tax rate for manufacturing
machinery.
In arriving at its decision, the North Carolina court referred to a North Carolina Supreme Court
case, Master Hatcheries, Inc. v. Coble, 286 N.C. 518, 212 S.E. 2d. 150 (1950) in stating:
The Court [in Master Hatcheries] recognized as we do here ‘that the term manufacturing
as used in tax statutes is not susceptible of an exact and all-embracing definition, for it
has many applications and meanings. Where, as here, the statute does not define the
term, courts have resorted to the dictionaries to ascertain its generally accepted meaning
and have then undertaken to determine its application to the circumstances of the
particular case. The court used a comprehensive approach, considering such factors as the
general rules regarding statutory interpretation, the commonly accepted meaning of

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manufacture as found in Duke Power Co. v. Clayton, 274 N.C. 505, 164 S.E. 2d. 289
(1968), the complexity of the process involved, and cases from other jurisdictions.

In Duke Power the court stated that the connotative meaning of manufacturing is “the
making of a new product from raw or partly wrought materials.” Although HED relies
heavily on this definition, we heed the Court’s suggestion in Master Hatcheries that we
consider the definition in light of the circumstances of the particular case. A literal
application of this definition which HED urges, could result in the inclusion of any
business that produces a product. For example, word processing companies take in
rough drafts of written materials and produce highly literate well-printed documents but
word processing operators are hardly referred to as manufacturers.
HED strenuously argues that such processes as the assemblage of hamburgers and mixing
of dough to form biscuits fit the technical perimeters of the above definition. However,
manufacturing as that term is commonly understood does not include the mere
preparation of food items at a restaurant exclusively for sale on the premises. The
essence of Hardee’s operation is the selling or merchandising of its products, not
production. Moreover, Hardee’s food preparation is significantly different from the
intricate and elaborate industrial operations that have been classified as manufacturing in
the past.
In McDonald’s Corporation v. Oklahoma Tax Commission, 563 P.2d 635, the Supreme Court of
Oklahoma concluded that “preparation of food for immediate retail sale is not manufacturing or
processing ..., in that such preparation or cooking of food is not ‘generally recognized’ as
manufacturing or processing.” In arriving at its decision, the Court cited Kansas City v. Manor
Baking Company, 377 S.W. 2d 545 (Mo. App. 1964), which addressed whether a business was a
manufacturer or a merchant baker.
The Court, in McDonald’s, also cited Roberts v. Bowers, 170 Ohio St. 99, 182 N.E. 2d 858, a
property tax case concerning a restaurant. In ruling against the taxpayer, the Ohio Supreme
Court reasoned:
The primary purpose of the appellant here is to serve prepared food to the general
public. Preparation and mixing of the food from raw materials (as, for example,
Salisbury steak and salads) certainly partake of a manufacturing process, but not
heretofore during the many years of existence of the statutory definition has one
thought of a restaurant proprietor as a manufacturer.
Based on the above, the concentrate and the ethylene generator, when used by a produce
warehouse, are not entitled to the sales and use tax exclusions and exemptions for processing
tangible personal property for sale. Produce warehouses are not processors, but wholesaling,
distributing, or retailing facilities. Therefore, sales of the concentrates to produce warehouses
and purchases of ethylene generators by ABC for use by a produce warehouse are subject to the
sales and use tax.

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Note: The above conclusions are based on the facts set forth above. In the facts presented, the
concentrate and the ethylene generators are being used by a warehouse whose purpose is the sale
or distribution of produce and, in some cases, other merchandise. If a facility’s purpose is the
ripening of produce, then the exemption and exclusion may be applicable since such a facility’s
purpose may be the processing of tangible personal property for sale. Such a determination will
depend on the facts. In addition, there are no facts indicating that there are two facilities, a
warehouse facility and a processing facility. If such were the case, the exemptions and
exclusions from the sales and use tax may be applicable.

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