Were materials bought by contractors and subcontractors for a federal construction project exempt from South Carolina sales tax?

Plain-English summary

South Carolina Revenue Ruling #04-9 explained when property bought for a federal construction project qualified for the state's federal-contract sales and use tax exemption.

A prime contractor with a written contract with the federal government could buy qualifying property exempt when the contract required title and possession to transfer to the government, or the property became part of government-owned real or personal property. Items the contractor itself used or consumed did not qualify.

A subcontractor did not qualify merely because its work was part of the federal project; it had no direct written contract with the government. The Department nevertheless recognized an exemption where the subcontractor was a properly documented agent of the prime contractor. A lower-tier subcontractor could qualify as a subagent only when the prime contractor specifically authorized the appointment and could be bound by it.

The ruling provided a written-agency safe harbor involving written appointments, purchase-order disclosure, the prime contractor's exemption certificate, supplier copies, and books and records supporting the relationship.

What this means for you

Prime federal contractors

The federal contract had to connect the purchased property to transfer into federal ownership. The prime also accepted payment and tax liability under the ruling's agency safe harbor if its agent failed to pay.

Subcontractors and lower-tier subcontractors

Working on a federal site was not enough. The ruling required a written agency chain and supporting purchasing documents for the Department's safe harbor.

Suppliers and tax professionals

Check the contract, purchase order, exemption certificate, and actual disposition of the property. Property consumed by the contractor or subcontractor remained taxable.

Common questions

Q: Were all prime-contractor purchases for a federal project exempt?
A: No. The written contract and actual transaction had to satisfy the transfer-to-government requirements, and contractor-consumed property was excluded.

Q: Did a subcontract with the prime contractor qualify by itself?
A: No. The ruling treated the subcontractor's purchases as taxable unless a qualifying agency relationship existed.

Q: Could a second-tier subcontractor qualify?
A: Yes, under the ruling's analysis, when it was a written subagent and the prime had specifically authorized its agent to appoint a subagent capable of binding the prime.

Q: Could the agency arrangement be oral?
A: No for this exemption analysis. The ruling required the agency or subagency agreement to be in writing and supported by the records.

Citations and references

• S.C. Code Ann. §§ 12-36-910(A) and 12-36-1310(A) — sales and use tax
• S.C. Code Ann. § 12-36-110 — construction-contractor purchases as retail sales
• S.C. Code Ann. § 12-36-2120(29) — federal construction contract exemption
• S.C. Code Ann. § 12-36-2540 — recordkeeping requirements

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: RR04-9.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 #04-9

SUBJECT:

Federal Government Construction Contracts
(Sales and Use 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 12-36-910(A) (2000)
S. C. Code Ann. Section 12-36-1310(A) (2000)
S. C. Code Ann. Section 12-36-60 (2000)
S. C. Code Ann. Section 12-36-110 (2000)
S. C. Code Ann. Section 12-36-2120 (29) (2000)
S. C. Code Ann. Section 12-36-2450 (2000)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (Supp. 2002)
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.

Questions:

1. Are sales to, or purchases by, Contractor A of tangible personal property for use in a federal
   government construction project in South Carolina as described in the facts subject to the
   sales and use tax?
2. Are sales to, or purchases by, Subcontractor B of tangible personal property for use in a
   federal government construction project in South Carolina as described in the facts subject to
   the sales and use tax?
3. Are sales to, or purchases by, Subcontractor C of tangible personal property for use in a
   federal government construction project in South Carolina as described in the facts subject to
   the sales and use tax?
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Conclusions:

1. Sales to, or purchases by, Contractor A of tangible personal property for use in a federal
   government construction project in South Carolina as described in the facts are exempt from
   the sales and use tax under Code Section 12-36-2120(29) if the written contract necessitating
   the purchase provides that title and possession of the property is to transfer from Contractor
   A to the federal government at the time of purchase or after the time of purchase and such
   property actually transfers to the federal government in accordance with the contract or the
   property becomes part of real or personal property owned by the federal government, or is to
   transfer to the federal government.
2. Sales to, or purchases by, Subcontractor B of tangible personal property for use in a federal
   government construction project in South Carolina as described in the facts are subject to the
   sales and use tax since Subcontractor B does not have a written contract with the federal
   government.
   However, if Subcontractor B is an agent for the Contractor A, then sales to, or purchases by,
   Subcontractor B of tangible personal property for use in a federal government construction
   project in South Carolina as described in the facts are not subject to the sales and use tax if all
   other provisions of the exemption found in Code Section 12-36-2120(29) are met and all books
   and records support the existence of an agency relationship. (See information below concerning
   an agency relationship.)
3. Sales to, or purchases by, Subcontractor C of tangible personal property for use in a federal
   government construction project in South Carolina as described in the facts are subject to the
   sales and use tax since Subcontractor C does not have a written contract with the federal
   government.
   However, if Subcontractor C is a subagent for Subcontractor B and Contractor A has specifically
   granted Subcontractor B the authority to appoint a subagent that can bind Contractor A, then
   sales to, or purchases by, Subcontractor C of tangible personal property for use in a federal
   government construction project in South Carolina as described in the facts are not subject to the
   sales and use tax if all other provision of the exemption found in Code Section 12-36-2120(29)
   are met and all books and records support the existence of an agency relationship. (See
   information below concerning an agency relationship.)
   While there may be other circumstances in which the Department will recognize the existence of
   an agency relationship with respect to the exemption in Code Section 12-36-2120(29), such a
   determination must be made a case-by-case basis and that if it is determined an agency
   relationship does not exist the Department will assess the applicable party (depending on the
   facts) under the sales and use tax law (supplier or contractor or subcontractor) for the tax due.
   (Note: Regardless of the facts and circumstances, the agency must be in writing.) However, the
   Department has established the following “safe harbor” for which it will recognize an agency
   relationship with respect to the above facts and the exemption in Code Section 12-36-2120(29):

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1. Purchases by Subcontractor B: Contractor A has appointed, in writing, Subcontractor B
as its agent when purchasing tangible personal property for the federal government
contract and that as a result of this agency relationship Contractor A is liable for payment
of such purchases if Subcontractor B fails to pay the supplier and is also liable for the
payment of any sales and use tax for any property that was purchased by Subcontractor B
in its capacity as agent and that does not qualify for the exemption in Code Section 1236-2120(29) if Subcontractor B fails to pay the tax.
Purchases by Subcontractor C: Subcontractor B has appointed, in writing, Subcontractor
C as its subagent when purchasing tangible personal property for the federal government
contract and Contractor A has specifically granted Subcontractor B the authority to
appoint a subagent that can bind Contractor A and that as a result of this subagency
relationship Contractor A is liable for payment of such purchases if Subcontractor C fails
to pay the supplier and is also liable for the payment of any sales and use tax for any
property that was purchased by Subcontractor C in its capacity as subagent and that does
not qualify for the exemption in Code Section 12-36-2120(29) ) if Subcontractors B or C
fail to pay the tax.

2. The purchase order of Subcontractor B or Subcontractor C submitted to the supplier must
   clearly state that Subcontractor B or Subcontractor C is the agent of Contractor A in
   purchasing the property.
3. Contractor A has applied for and received an exemption certificate from the Department
   for purposes of the exemption in Code Section 12-36-2120(29). Copies of the application
   for the exemption, Form ST-10G, can be found on the Department’s website at
   www.sctax.org. Attached to this advisory opinion as Exhibit “A” is a sample of the
   federal contractor’s exemption certificate that will be issued by the Department - Form
   ST-404.
4. Contractor A must provide a copy of the exemption certificate to Subcontractor B and
   must have completed Section C of the copy indicating that Subcontractor B and
   Subcontractor C are its agents in purchasing tangible personal property for the federal
   construction project. Subcontractor B will in turn provide a copy to its subagent,
   Subcontractor C.
   Note: Only Contractor A can complete Section C of the exemption certificate. Therefore,
   when Contractor A has specifically granted Subcontractor B the authority to appoint a
   subagent that can bind Contractor A, Subcontractor B will be required to inform
   Contractor A, who then must list Subcontractor C as its agent on a copy of the certificate.
5. Subcontractor B or Subcontractor C must provide a copy of the certificate to the supplier
   when purchasing tangible personal property exempt under Code Section 12-36-2120(29).
6. All books and records support the existence of an agency relationship.

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Note: Sale or purchases of tangible personal property used or consumed by the purchaser
(contractor or subcontractor) are subject to the tax. The exemption in Code Section 12-362120(29) only applies property where title and possession of the property transfers from the
contractor or subcontractor to the federal government at the time of purchase or after the time of
purchase or the property purchased becomes part of real or personal property owned by the
federal government.
Facts:
The federal government will from time to time enter into written contracts with construction
contractors for the purposes of making improvements to real property owned by the federal
government (e.g., construction of military barracks, airfields, federal office buildings, etc.). As
with many construction projects, the general or prime contractor who has signed a contract with
the federal government will then hire subcontractors to build or construct specific aspects of the
project (e.g., electrical subcontractors, plumbing subcontractors, etc.)
The sales and use tax law only provides an exemption for purchases by a construction contractor
who has a written contract with the federal government. Questions have been raised about the
application of the exemption to purchases by subcontractors who have contracts with the general
or prime contractor, but not with the federal government.
For purposes of this document, the following example and information will be used in addressing
these questions.
The federal government is constructing a building on a military base located in South
Carolina. After following its contracting procedures, the federal government has entered
into a written contract with a general construction contractor (“Contractor A”) to
construct the building.
Contractor A has hired and entered into a written contract with a construction
subcontractor (“Subcontractor B”) to construct a certain portion of the building.
Subcontractor B in turn hires and enters into a written contract with a construction
subcontractor (“Subcontractor C”) to construct a certain portion of the building under its
contract.
Contractor A, Subcontractor B, and Subcontractor C each purchase the material
necessary to complete the project from various suppliers.
Discussion:
Code Section 12-36-910(A) imposes the sales tax and states:
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.
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Code Section 12-36-1310(A) imposes the use tax and states:
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.
Code Section 12-36-60 defines the term “tangible personal property” and states:
“Tangible personal property” means personal property which may be seen,
weighed, measured, felt, touched, or which is in any other manner perceptible to
the senses. It also includes services and intangibles, including communications,
laundry and related services, furnishing of accommodations and sales of
electricity, the sale or use of which is subject to tax under this chapter and does
not include stocks, notes, bonds, mortgages, or other evidences of debt. Tangible
personal property does not include the transmission of computer database
information by a cooperative service when the database information has been
assembled by and for the exclusive use of the members of the cooperative service.
Code Section 12-36-110 defines the terms “sale at retail” and “retail sale” in part as:
Sale at retail and retail sale mean all sales of tangible personal property except
those defined as wholesale sales. The quantity or sales price of goods sold is
immaterial in determining if a sale is at retail.
(1) The terms include:
(a) sales of building materials to construction contractors, builders, or
landowners for resale or use in the form of real estate;

(e) sales to contractors for use in the performance of construction contracts;
Based on the above, in order for the sales or use tax to apply, there must be a retail sale of
tangible personal property. A retail sale includes sales to construction contractors.
However, Code Section 12-36-2120(29) exempts from the sales and use tax:
tangible personal property purchased by persons under a written contract with the federal
government when the contract necessitating the purchase provides that title and
possession of the property is to transfer from the contractor to the federal government at
the time of purchase or after the time of purchase. This exemption also applies to
purchases of tangible personal property which becomes part of real or personal property
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owned by the federal government or, as provided in the written contract, is to transfer to
the federal government. This exemption does not apply to purchases of tangible personal
property used or consumed by the purchaser;
While sales to construction contractor are subject to the tax 1 , sales to construction contractors
under a written contract with the federal government are exempt from the tax if the contract
necessitating the purchase provides that title and possession of the property is to transfer from
the contractor to the federal government at the time of purchase or after the time of purchase or
the property becomes part of real or personal property owned by the federal government or is to
transfer to the federal government.
Therefore, it is the opinion of the Department that sales to, or purchases by, a construction
contractor of tangible personal property for use in a federal government construction project in
South Carolina for which the contractor has a written contract with the federal government are
not subject to the sales and use tax if the contract necessitating the purchase provides that title
and possession of the property is to transfer from the contractor to the federal government at the
time of purchase or after the time of purchase and such property actually transfer to the federal
government in accordance with the contract or the property becomes part of real or personal
property owned by the federal government or is to transfer to the federal government.
Now the question arises as to the taxability of sales to, or purchases by, a construction
subcontractor of tangible personal property for use in a federal government construction project
in South Carolina for which the subcontractor has a written contract with a general contractor
who has a written contract for the project with the federal government.
Based on the above, it is the opinion of the Department that these sales and purchases are subject
to the tax since the subcontractor does not have a written contract with the federal government.
However, for completeness, it must be determined if the subcontractor is the agent for the
general contractor.
The following quotes from 3 Am. Jurs. 2nd, Agency provide guidance:
Section 1: Generally, definitions
The term “agency” means a fiduciary relationship by which a party confides to
another the management of some business to be transacted in the former’s name
or on his or her account, and by which such other assumes to do the business and
render an account of it.

1

To simplify the issues raised in this document, the questions addressed in this document only concern federal
construction projects located in South Carolina. While the exemption in Code Section 12-36-2120(29) also applies
to sales and purchases within South Carolina for federal construction projects in other states, sellers and construction
contractors should also be aware of the exclusion found in Code Section 12-36-110(2) and the exemption found in
Code Section 12-36-2120(36) with respect to an out-of-state construction projects.

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In an agency relationship, the party for whom another acts and from whom such
other derives authority to act is a “principal.” The one who acts for and represents
the principal and acquires his or her authority from the principal is an “agent.”
Pursuant to the grant of authority by the principal, the agent is the representative
of the principal and acts for, in the place of, and instead of, the principal.
Section 7: Subagency
A subagent is a person employed by the agent to assist him or her in conducting
the principal’s affairs.
Once a third party is validly appointed a subagent, the principal is liable for the
subagent’s actions. …
Section 15: Generally; consent of parties
The relationship between an agent and a principal is a contractual one, and the
extent of the rights and duties of each is to be found in the express or implied
terms of the agency contract. …
Finally, with respect to the subcontractor as agent for the general contractor in purchasing
tangible personal property for a federal government contract, the following must be considered.
Code Section 12-36-2540 states:
(A) Every person engaging in any business, for which a privilege or excise tax is
imposed by this chapter, shall keep and preserve suitable records of the business,
as considered necessary by the department, to determine the amount of tax due
under this chapter. The taxpayer shall keep and preserve records, such as
purchase invoices, for three years. Invoices must bear the name and address of
the vendor.
B) Any person selling both at wholesale and at retail shall keep books which
separately show the gross proceeds of wholesale sales and the gross proceeds of
retail sales. If the records are not separately kept, all sales must be considered
retail sales.
(C) Every seller and every person storing, using, or otherwise consuming, in this
State, tangible personal property purchased from a retailer shall keep records,
receipts, invoices, and other pertinent papers in the form the department requires.
The South Carolina Supreme Court has adopted the generally prevailing rule that exemptions in
taxing statutes exist through legislative grace and one asserting an exemption must bring himself
squarely within the statute authorizing the exemption. 85 C.J.S., Taxation 1099; Southern
Weaving Co. v. Query, 34 S.E.2d 51, 206 S.C. 307 (1945). See Taxation Key No. 1031.
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Based on the above, it is the opinion of the Department that if a construction subcontractor
purchases tangible personal property for use in a federal government construction project in
South Carolina for which the subcontractor has a written contract with the general construction
contractor who has a written contract for the project with the federal government, then such
purchases are not subject to the sales and use tax only if the subcontractor is an agent for the
general contractor. In addition, purchases by a subcontractor of the subcontractor for use in a
federal government construction project in South Carolina are not subject to the sales and use tax
only if the general contractor who has the written contract with the federal government has
specifically granted his agent the authority to appoint a subagent that can bind the general
contractor.
While an agency relationship may be implied, the sales and use tax law specifically requires
taxpayers to keep and maintain proper records and the exemption requires that the contract with
the federal government be in writing. Therefore, in order to comply with both of these
provisions, the agency agreements with the subcontractors (as agents or subagents) must be in
writing to maintain a continuity of written agreements (contracts and agency agreements) so that
the “written contract” requirement of the exemption is met. As such, the Department will
consider a subcontractor to be an agent for a general contractor who has a written contract with
the federal government with respect to the exemption under Code Section 12-36-2120(29) when
the following conditions are met:

1. The general contractor has appointed, in writing, the subcontractor as its agent when
   purchasing tangible personal property for the federal government contract and that as a
   result of this agency relationship the general contractor is liable for payment of such
   purchases if the subcontractor fails to pay the supplier and is also liable for the payment
   of any sales and use tax for any property that was purchased by the agent in his capacity
   as agent and that does not qualify for the exemption in Code Section 12-36-2120(29) if
   Subcontractor B or C fail to pay the tax.
2. The subcontractor’s purchase order to the supplier must clearly state the subcontractor is
   the agent of the general contractor in purchasing the property.
3. Contractor A has applied for and received an exemption certificate from the Department
   for purposes of the exemption in Code Section 12-36-2120(29). Copies of the application
   for the exemption, Form ST-10G, can be found on the Department’s website at
   www.sctax.org. Attached to this advisory opinion as Exhibit “A” is a sample of the
   federal contractor’s exemption certificate that will be issued by the Department - Form
   ST-404.
4. Contractor A must provide a copy of the exemption certificate to Subcontractor B and
   must have completed Section C of the copy indicating that Subcontractor B and
   Subcontractor C are its agents in purchasing tangible personal property for the federal
   construction project. Subcontractor B will in turn provide a copy to its subagent,
   Subcontractor C.

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Note: Only Contractor A can complete Section C of the exemption certificate. Therefore,
when Contractor A has specifically granted Subcontractor B the authority to appoint a
subagent that can bind Contractor A, Subcontractor B will be required to inform
Contractor A who then must list Subcontractor C as its agent on a copy of the certificate.

5. Subcontractor B or Subcontractor C must provide a copy of the certificate to the supplier
   when purchasing tangible personal property exempt under Code Section 12-36-2120(29).
6. All books and records support the existence of an agency relationship.

SOUTH CAROLINA DEPARTMENT OF REVENUE

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

May 13
, 2004
Columbia, South Carolina

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EXHIBIT “A”
Sample Exemption Certificate
This exhibit is a sample federal contractor’s exemption certificate. It is not an official
Department of Revenue exemption certificate. It is included in this advisory opinion to better
explain how a federal contractor’s exemption certificate can be used when a subcontractor is an
agent, as described in the advisory opinion, of a contractor who has a written contract with the
federal government. The official certificates issued under this exemption (Code Section 12-362120(29)) may differ slightly and may change from time to time. To apply for a federal
contractor’s exemption certificate, use Form ST-10G.

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SAMPLE ST-404
EXEMPTION CERTIFICATE
FEDERAL GOVERNMENT CONTRACT
A. Contractor under Written Contract with the Federal Government
Name of Contractor:________
Office Location: ________
Mailing Address: _________
Telephone Number:___________

B. Project Information
Project Name: _________
Project Number: __Building Permit or Other Identifying Number: ____
Project Location: ________
Expected Project Completion Date: _______
(Note: This certificate expires on this date and must be returned to the Department unless an extension is granted by
the Department)
C. Agents of the Contractor
The following section will be completed by the Contractor listed in Section A above. The Contractor has
appointed, in writing, the following subcontractors as its agents when purchasing tangible personal property
for the federal government contract and agrees it is liable for payment of such purchases if such
subcontractors fail to pay the supplier and is also jointly and severally liable for the payment of any sales and
use tax for purchases by these subcontractors under this certificate that do not qualify for the exemption in
Code Section 12-36-2120(29). The agency will be considered to end on the “Expected Project Completion
Date” listed above.
Name and Address of Agents:

Contractor Must Sign and Date Here
As Recognition of Agency/Subagency

------------------------------------------------------------------------------------------------------------------------Each purchase order submitted to the supplier must state that these subcontractors are purchasing the
property as agent for the Contractor listed in Section A. The Contractor listed in Section A or the Agent
listed in Section C certify that the purchases of tangible personal property made under this certificate are
made in accordance with the exemption in Code Section 12-36-2120(29) and that in the event the property so
purchased is used for purposes that do not qualify for the exemption, the purchaser assumes liability and
must file a return and pay the tax due and the Contractor in Section A agrees to pay the tax if its agent fails
to do so.

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