Could a buyer of an exempt South Carolina facility continue the seller's property-tax exemption or receive a new five-year exemption?

Plain-English summary

South Carolina Revenue Ruling #04-14 explained how certain five-year county property-tax exemptions could carry over when a manufacturing, research-and-development, corporate-office, distribution, or headquarters facility was sold.

An unrelated buyer could claim the seller's remaining exemption period when the county governing body approved, the transaction was at arm's length, and the buyer preserved the existing facility and existing number of jobs.

To receive a new full five-year exemption, the buyer also had to satisfy the requirements for the applicable facility category. Under the ruling, that generally meant at least $50,000 of additional qualifying investment. A headquarters, corporate-office, or distribution facility also had to create 75 additional full-time jobs or 150 substantially equivalent jobs while maintaining the existing jobs.

The ruling said county approval had to come before the Department application and described supporting evidence for the relationship, fair-market-value transaction, retained jobs, preserved facility, and new investment.

What this means for you

Buyers of operating facilities

The exemption did not automatically follow the property. The buyer had to be unrelated to the seller, complete an arm's-length acquisition, retain the facility and jobs, obtain county approval, and apply to the Department.

Economic-development and site-selection teams

Continuing the seller's remaining term and qualifying for a fresh five-year term were different paths. The fresh term required new investment and any additional job creation tied to the facility type.

Buyers of closed facilities

The ruling said § 12-37-220(C) was unavailable where the facility had closed and no jobs existed when acquired, though the property might separately qualify as a new facility if it met the relevant exemption requirements.

Common questions

Q: Could a related buyer receive the transferred exemption?
A: No. The ruling required an unrelated purchaser and used IRC § 267 principles to identify related parties.

Q: Was county approval required?
A: Yes. The county governing body had to approve extending the exemption before the Department application.

Q: Could the buyer simply use all five years again?
A: Not without meeting the additional requirements for a new facility exemption. Otherwise, the buyer could claim only the seller's remaining time.

Q: Did a new headquarters exemption require new jobs?
A: Yes. The ruling required 75 additional full-time jobs or 150 substantially equivalent jobs, plus the stated investment and retention conditions.

Citations and references

• S.C. Code Ann. § 12-37-220(C) — purchaser extension of the partial exemption
• S.C. Code Ann. § 12-37-220(A)(7) — manufacturing facilities
• S.C. Code Ann. § 12-37-220(B)(32) — headquarters, corporate offices, and distribution facilities
• S.C. Code Ann. § 12-37-220(B)(34) — research and development facilities
• S.C. Code Ann. §§ 12-4-710 and 12-4-720 — exemption determination and application
• IRC § 267 — related-party principles used by the ruling

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: RR04-14.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214
Website Address: http://www.sctax.org

SC REVENUE RULING #04-14

SUBJECT:

Property Exemption Under Code Section 12-37-220(C)
(Property Tax)

EFFECTIVE DATE:

Applies to all periods open under the statute.

SUPERSEDES:

All previous advisory opinions and any oral directives in conflict
herewith.

REFERENCES:

S.C. Code Ann. Section 12-37-220(C)
S.C. Code Ann. Section 12-37-220(A)(7)
S.C. Code Ann. Section 12-37-220(B)(32)
S.C. Code Ann. Section 12-37-220(B)(34)

AUTHORITY:

S. C. Code Ann. Section 12-4-320
S. C. Code Ann. Section 1-23-10(4)
SC Revenue Procedure #03-1

SCOPE:

The purpose of a Revenue Ruling is to provide guidance to the
public and to Department personnel. It is a written statement
issued to apply principles of tax law to a specific set of facts or a
general category of taxpayers. A Revenue Ruling is an advisory
opinion; it does not have the force or effect of law and is not
binding on the public. It is, however, the Department’s position
and is binding on agency personnel until superseded or modified
by a change in statute, regulation, court decision, or advisory
opinion.

Question:

1. Under Code Section 12-37-220(C), what requirements must a purchaser of a
   manufacturing facility, a research and development facility, or a corporate office facility,
   distribution facility, or corporate headquarters meet in order to be able to continue the time
   left on any exemption under Code Sections 12-37-220(A)(7), (B)(34), or (B)(32),
   respectively, for which the property qualified for originally?

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2. Under Code Section 12-37-220(C), what requirements must a purchaser of a
manufacturing facility, a research and development facility, or a corporate office facility,
distribution facility, or corporate headquarters meet in order to receive a new five year
exemption on all of the seller’s property that originally qualified for an exemption under
Code Sections 12-37-220(A)(7), (B)(34), or (B)(32), respectively?
Conclusion:

1. If a purchaser purchases a manufacturing facility, a research and development facility, or
   a corporate office facility, distribution facility, or corporate headquarters, the purchaser may
   claim the remaining time the seller had on its original exemption if:
   a) the purchaser is unrelated to the seller;
   b) the sale occurs in an arm’s length transaction;
   c) the purchaser preserves the existing facility and the existing number of jobs at the
   facility; and,
   d) the purchaser obtains the approval of the governing body of the county for the
   exemption.
2. If a purchaser purchases a manufacturing facility, a research and development facility, or
   a corporate office facility, distribution facility, or corporate headquarters, the purchaser may
   qualify for a new five year exemption under Code Section 12-37-220(C) if the purchaser:
   a. meets the requirements of (a) through (d) above;
   b. invests an additional $50,000 in a new facility or an addition to an existing facility; and,
   c. in the case of a corporate headquarters, corporate office facility, or distribution facility,
   also creates an additional 75 jobs at the facility.

Discussion:
The statutes
In 1995, a new subsection was added to the Code to address the sale of a facility that was
the subject of certain exemptions. This code section, 12-37-220(C), provides that:
Upon approval by the governing body of the county, the five-year partial
exemption allowed pursuant to subsection (A)(7), (B)(32), and (B)(34) is
extended to an unrelated purchaser who acquires the facilities in an arms-length
transaction and who preserves the existing facilities and existing number of jobs.
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The partial exemption applies for the purchaser for five years if the purchaser
otherwise meets the exemption requirements.
Code Section 12-37-220(A)(7) provides a 5 year exemption from county ad valorem
property taxes for all new manufacturing establishments and additions to existing
manufacturing establishments if the cost is $50,000 or more. The exemption is available for
five years if investments totaling $50,000 or more are made at the facility.1
Code Section 12-37-220(B)(32) provides a 5 year exemption from county ad valorem
property taxes for all new corporate headquarters, corporate office facilities, distribution
facilities and all additions to these facilities if the cost of the new construction or the
addition is $50,000 or more and 75 new full-time jobs (or 150 or more substantially
equivalent jobs) are created.
Code Section 12-37-220(B)(34) provides a 5 year exemption from county ad valorem
property taxes for all new enterprises engaged in research and development and all
additions valued at $50,000 or more. The exemption is available for five years if
investments valued at $50,000 or more are made at the facility. The facility or the addition
must be devoted directly and primarily to research and development, in the experimental or
laboratory sense, of new products, new uses for existing products, or improvement of
existing products.
These exemptions apply for five years for the property placed in service at the new facility
or addition if $50,000 is invested and, if applicable, the 75 jobs are created. Note, if a
taxpayer invests money in an addition to real property, the exemption is allowed to the
extent the additional real property improvements increase the value of the property. See SC
Revenue Ruling #89-3.
Applying for the Exemption
Code Section 12-4-710 provides in relevant part that “Except for the exemption provided by
Section 12-37-220(A)(9), the department shall determine if any property qualifies for
exemption from local property taxes under Section 12-37-220 in accordance with the
Constitution and general laws of this State….”
Code Section 12-4-720 provides in relevant part,
(A) Applications for property exemptions, other than the exemption provided by Section
12-37-220(A)(9), must be filed as follows:
(1) Except as otherwise provided any property owner whose property may
qualify for property exemption shall file an application for exemption with the
department within the period provided in Section 12-54-85(F) for claims for
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Section 3(g) of Article X of the South Carolina Constitution also contains this exemption.
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refund. This item does not relieve the taxpayer of any responsibility to file timely
and accurate property tax returns.
In order to qualify for the exemption under Code Section 12-37-220(C), the purchaser of the
facility must apply to the South Carolina Department of Revenue (“Department”) in a
timely manner. The taxpayer should use Form PT-444 to apply.
Requirements for the Purchaser to Continue the Seller’s Exemption
There are four requirements in order for the purchaser to be able to continue to use the
remaining time that the seller had on its exemption. In order to continue the exemption, the
purchaser must: a) get the approval of the governing body of the county to the extension of
the exemption to the purchaser; b) be unrelated to the seller; c) purchase the facility that is
the subject of the exemption in an arm’s length transaction; and, d) maintain the existing
facility and the existing number of jobs at the facility. If the purchaser meets these four
requirements, it is entitled to any remaining time that is left on any exemption under Code
Section 12-37-220(A)(7), (B)(32), or (B)(34) that the seller had for property at the facility.
For example, if the seller had obtained a five year exemption from county ad valorem taxes
under Code Section 12-37-220(A)(7), and sold the facility in year two, the purchaser would
be able to use the exemption for all of the property located at the facility that had the
original exemption for the remaining three years if it meets the four requirements discussed
herein.
Approval of the governing body of the county
The first requirement a purchaser must meet in order to obtain the exemption described in
Code Section 12-37-220(C) is that the governing body of the county approve of extending
the exemption to the purchaser of the facility. The purchaser is required to obtain the
approval of the governing body of the county prior to applying for the exemption. When
the purchaser has obtained the approval, the purchaser should attach a copy of the county
approval to the PT-444.
Purchase Must be Made by an Unrelated Party
The second requirement of the statute is that the purchase must be made by a purchaser that
is unrelated to the seller. The term “unrelated” is not defined in the statute and the
dictionary also does not define the term. In other tax statutes that address related party
issues, the statutes make reference to Internal Revenue Code provisions that address related
parties and issues concerning related parties. While there are several different Internal
Revenue Code (“IRC”) sections that address related parties or controlled parties (for
example, Sections 318, 267, 482, 1563), the one that is used most often in the South
Carolina tax statutes is IRC Section 267. IRC Section 267 addresses the disallowance of
losses, and the matching of deductions with income in the case of expenses and interest,
between related parties. The South Carolina tax statutes that cite IRC section 267 use it
primarily to identify relationships that create related party status, usually limiting the use of
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a credit or benefit in some way. (See, Code Sections 12-6-3360, 12-6-3515, and 12-44110(3)). Under IRC Section 267, related parties include brothers and sisters, spouses, an
individual and a corporation in which the individual owns 50% or more of the stock,
corporations that are part of a controlled group, and a partnership and corporation if the
same person owns more than 50% of the stock of the corporation and 50% of the capital or
profits interest of the partnership. For a complete list of disqualifying relationships, IRC
Section 267 should be reviewed. The Department will consider any person who is unrelated
to the seller under the principles of IRC section 267 to be an unrelated purchaser for
purposes of Code Section 12-37-220(C). The purchaser should include information about
any relationship between the purchaser and seller with the PT-444 that it files with the
Department.
Purchase of the Facility Must Occur in an Arm’s Length Transaction
The purchase must also occur through an arm’s length transaction. The term “arm’s length
transaction” is also not defined in the statute. However, “arm’s length transaction” is a
common phrase and is defined by Blacks’ Law Dictionary at p.109 (6th ed. 1990) as “A
transaction in good faith in the ordinary course of business by parties with independent
interests” or as “the standard under which unrelated parties, each acting in his or her own
best interest, would carry out a particular transaction.” A transaction is generally considered
to be arm’s length if the purchaser pays fair market value for the assets. The purchaser
should provide evidence that the facility was purchased in an arm’s length sale, such as
proof that the transaction occurred at fair market value, with the PT-444 that it files with the
Department.
Preservation of the Existing Number of Jobs and the Existing Facility
The statute requires that the purchaser preserve the existing number of jobs and the existing
facility. In order to meet this requirement of the exemption, the purchaser must retain the
same number of jobs that the seller had at the facility prior to the date of the sale.2 In
meeting this requirement, all circumstances will be examined to make sure that jobs were

2

To the extent that the facility had been closed and there are no jobs at the facility at the time
the facility is acquired by the purchaser, the exemption under Code Section 12-37-220(C) is not
available although the facility may be able to qualify for the exemptions under Code Sections 1237-220(A)(7), 12-37-220(A)(32), and 12-37-220(A)(34) as a new facility if it otherwise meets
the requirements of the statute. In certain instances, a facility that has been closed for a certain
period of time will be considered a new facility. Things that will be considered in determining
whether a new facility exists include: 1) a change in ownership; 2) a change in product; 3)
substantial investment of new capital; 4) whether there is a cessation of the former business; and,
5) a change in the product market. See, SC PLR #87-11 citing Cummins Engine Company, Inc.
v. Thomas, 267 S.C. 521, 230 S.E. 2d 217 (1976); Arkwright Mills v. Murphy, 219 S.C. 438, 65
S.E. 2d 665 (1951); Chronicle Publishers, Inc. v. South Carolina Tax Commission, 244 S.C. 192,
136 S.E. 2d 261 (1964).
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not eliminated prior to the sale of the facility in order to enable the purchaser to meet this
requirement. In addition to preserving the existing number of jobs, the purchaser must also
preserve the existing facility.3
In submitting the request for the exemption, the purchaser should provide substantiation that
it has retained the jobs that the purchaser had prior to the sale and that it has preserved the
existing facility.
Qualifying for a New Five Year Exemption
In order to obtain a full new five year exemption, the purchaser must meet all the
requirements discussed above (approval of the governing body of the county, unrelated
purchaser, an arm’s length transaction, and retain the existing facility and jobs) and in
addition, must meet an additional requirement. The further requirement is that the
purchaser must otherwise meet the exemption requirements.
The exemption requirements that must otherwise be met are the requirements of Code
Sections 12-37-220(A)(7), 12-37-220(B)(32) or 12-37-220(B)(34), respectively. The
purchaser must meet the requirements for the type of facility that it is purchasing. In the
case of the exemption allowed under Code Section 12-37-220(A)(7), the purchaser must
operate a manufacturing facility and must invest an additional $50,000 in an addition to the
facility. For the exemption allowed under Code Section 12-37-220(B)(32), the purchaser
must operate a corporate office facility, a distribution facility, or a corporate headquarters,
must invest $50,000 in an addition to the facility, and must create an additional 75 new fulltime jobs (or 150 or more substantially equivalent jobs) at the facility in addition to the
existing jobs at the facility. For the exemption allowed under Code Section 12-37220(B)(34), the purchaser must operate a research and development facility and must invest
an additional $50,000 in an addition to the facility.
If the purchaser can meet the additional requirements for the exemption that it would
otherwise qualify for, then the purchaser will receive a new full five year exemption from
the county portion of ad valorem taxes for all the property located at the facility that is
purchased in the sale that was the subject of the original exemption4.
.
If the purchaser is seeking a new full five year exemption, the purchaser should provide
information as to how much it has invested in property to substantiate that it has invested an
additional $50,000 in property at the applicable facility in an addition to the facility. In the
case of a corporate headquarters, corporate office facility, or distribution facility, the
purchaser must also provide substantiation that it has created an additional 75 jobs at the
facility in addition to maintaining any pre-existing jobs that the seller had at the facility.

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SC Property Tax Regulation 117-124.22 provides a definition of “facility.”
Any part of the property sold to the purchaser that was not subject to the original exemption is
not eligible for a new five year exemption.
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With regard to any exemption request under Code Section 12-37-220(C), the Department
may make further inquiries and audit the purchasers, books, records and returns, to
determine if the purchaser’s representations are accurate.
For questions concerning this revenue ruling, contact Jerilynn VanStory at (803)898-5151.
For questions concerning the exemptions allowed under Code Sections 12-37-220(A)(7),
(B)(32), and (B)(34), please contact Ralph Coleman at (803)898-5472. For general
questions about other property tax exemptions please call Adriane Shealy at (803)898-5480.

SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Burnet R. Maybank III
Burnet R. Maybank III, Director

September 28
, 2004
Columbia, South Carolina

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