How did South Carolina Revenue Ruling 15-2 apply the construction-material exemption for major manufacturing and distribution facilities?

Plain-English summary

South Carolina Revenue Ruling 15-2 explained the sales and use tax exemption for construction materials used in a qualifying new or expanded manufacturing or distribution facility.

Under the ruling's 2015 version of Section 12-36-2120(67), the project required at least $100 million of capital investment in real and personal property at a single South Carolina site over an 18-month period.

The taxpayer had to notify the Department in writing before the first month it used the exemption. Tax-free purchasing could start on the first day of the calendar month after notice. The Department then issued an exemption certificate for presentation to suppliers.

What materials qualified

Construction material meant tangible personal property that became part of the real property. The ruling listed examples including brick, cement, structural steel, lumber, roofing, flooring, electrical and plumbing systems, HVAC systems, elevators, fencing, roads, railroad track, tanks, meters, well pumps, windows, wire, and related components.

The exemption covered qualifying manufacturing and distribution facilities, including a facility serving both purposes. It did not cover a processing, recycling, compounding, mining, or quarrying facility merely because it was being built, although material incorporated into qualifying manufacturing or similar machinery could require a separate machine-exemption analysis.

A contractor hired to build the qualifying facility could purchase covered materials exempt when all statutory requirements were met.

Notice, timing, and certificate rules

• Written notice had to precede the first month of exemption use.
• The investment-period start date was stated in the notice and did not have to equal the first tax-free purchase date.
• The investment period could begin before or after notice, but purchases made before the first day of the month following notice were not exempt.
• Earlier expenditures within the chosen 18-month period could still count toward the investment threshold even when the related material purchase was not tax-free.
• The exemption lasted through the entire construction period, not only the 18-month investment period, if the taxpayer satisfied all requirements. It ended when construction was completed.
• The taxpayer had to notify the Department whether it met or failed the investment requirement.

The purchaser—not the supplier—was liable if the certificate was used for a nonqualifying purchase.

What counted toward the $100 million investment

The ruling included buildings, equipment, fixtures, furniture, infrastructure, land, machinery, office equipment, site preparation, and other real or personal property at the qualifying site.

Employee wages and benefits, taxes, raw materials, and inventory did not count.

For contractor work, an investment occurred when the taxpayer had a binding obligation to pay for completed work or for acquired materials or equipment located at the site. For the taxpayer's own property purchases, the ruling required payment or a binding payment obligation, possession by the taxpayer, eventual use at the site, and operation of the completed facility.

Investments by related persons described in IRC Section 267(b) could count toward the threshold. The ruling also treated a disregarded single-member LLC and its owner as the same taxpayer for the transfer example it discussed.

Phases, sales, and records

A later, distinct project phase could require its own $100 million investment, 18-month period, and notice. Whether work was one project or separate projects depended on contracts, reasons for phasing, conditions for starting later phases, and timing between phases.

If the facility was sold before completion, a separate new owner generally could not continue the seller's exemption and had to independently notify the Department and meet the requirements.

Taxpayers had to keep evidence such as closing documents, construction contracts, invoices, and proof of payment for as long as the exemption continued plus three years, unless the Department allowed earlier disposal.

Common questions

Q: Can tax-free purchases start on the notice date?

A: No. RR 15-2 allowed use beginning on the first day of the next calendar month.

Q: Does the facility have to be finished within 18 months?

A: No. The investment test used 18 months, but the material exemption could continue for the full construction period if all requirements were met.

Q: Can a contractor use the exemption?

A: Yes, when building the qualifying facility for the investing taxpayer and complying with the exemption requirements.

Q: What happens if the investment threshold is missed?

A: The Department could assess tax on construction materials purchased tax-free, and the assessment limitation period was suspended during the notice-to-final-notice interval described in the statute.

Q: Does every later phase share the first phase's exemption?

A: Not necessarily. A distinct later project could need a separate qualifying investment and notice.

Citations and references

• S.C. Code Ann. Section 12-36-2120(67) (construction materials for qualifying facilities)
• S.C. Code Ann. Section 12-54-85 (assessment limitation period referenced in the ruling)
• IRC Section 267(b) (related-person investments)
• S.C. Code Ann. Section 12-2-25 (single-member LLC treatment)
• S.C. Code Ann. Section 12-36-2120(17) and SC Regulation 117-302.5 (separate machine exemption)
• SC Revenue Ruling #13-3 (material-handling exemption notice discussed by RR 15-2)

Subject

Construction Material Exemption for Manufacturing and Distribution Facilities

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR15-2.pdf

Original ruling text

State of South Carolina
Department of Revenue
300A Outlet Pointe Blvd., Columbia, South Carolina 29210
P.O. Box 125, Columbia, South Carolina 29214

SC REVENUE RULING #15-2

SUBJECT:

Construction Material Exemption for Manufacturing and Distribution
Facilities
(Sales and Use Taxes)

EFFECTIVE DATE:

Applies to all periods open under the statute.

SUPERSEDES:

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

REFERENCE:

S.C. Code Ann. Section 12-36-2120(67) (2014)

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (2014)
S.C. Code Ann. Section 1-23-10(4) (Supp. 2014)
SC Revenue Procedure #09-3

SCOPE:

The purpose of a Revenue Ruling is to provide guidance to the public. It
is an advisory opinion issued to apply principles of tax law to a set of
facts or general category of taxpayers. It is the Department’s position
until superseded or modified by a change in statute, regulation, court
decision, or another Departmental advisory opinion.

INTRODUCTION:
South Carolina provides an exemption from the sales and use tax for construction material used
in the construction or expansion of certain manufacturing facilities or distribution facilities. The
exemption requires the taxpayer to meet specific investment requirements.
The purpose of this advisory opinion is to address questions concerning this exemption and its
investment and notification requirements.
Note: The exemption for taxpayers investing $100 million over eighteen months that is discussed
in this advisory opinion was phased in and qualifying purchases became fully exempt effective
July 1, 2011. The exemption for taxpayers investing $750 million, and creating 3,800 full-time
new jobs, became effective November 1, 2009 and applies only to taxpayers who notify the
Department prior to October 31, 2015 of their intent to utilize the exemption. Since the
exemption for investing $100 million over an eighteen-month period is fully implemented, the
exemption for investing $750 million and creating 3,800 full-time new jobs will not be discussed
in this advisory opinion.

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LAW:
Code Section 12-36-2120(67) exempts from the sales and use tax:
(67) Effective July 1, 2011, construction materials used in the construction of a
new or expanded single manufacturing or distribution facility, or one that serves
both purposes, with a capital investment of at least one hundred million dollars in
real and personal property at a single site in the State over an eighteen-month
period, …

To qualify for this exemption, the taxpayer shall notify the department before the
first month it uses the exemption and shall make the required investment over the
applicable time period beginning on the date provided by the taxpayer to the
department in its notices. The taxpayer shall notify the department in writing that
it has met the investment requirement or, after the expiration of the applicable
time period, that it has not met the investment requirement. The department may
assess any tax due on construction materials purchased tax free pursuant to this
subitem but due the State as a result of the taxpayer's failure to meet the
investment requirement. The running of the periods of limitations for assessment
of taxes provided in Section 12-54-85 is suspended for the time period beginning
with notice to the department before the taxpayer uses the exemption and ending
with notice to the department that the taxpayer either has met or has not met the
investment requirement.
As used in this subitem, "taxpayer" includes a person who bears a relationship to
the taxpayer as described in Section 267(b) of the Internal Revenue Code[.]

QUESTIONS AND ANSWERS:
Property Eligible for the Exemption

1. Q. Is construction material used in the construction of a new or expanded single processing,
   recycling, compounding, mining or quarrying facility covered by the exemption in Code
   Section 12-36-2120(67)?
   A. No. Only construction material used in the construction of a new or expanded distribution
   or manufacturing facility qualifies for the exemption in Code Section 12-36-2120(67).
   However, certain purchases of construction material used in constructing a machine used
   in manufacturing, processing, mining, compounding, mining or quarrying tangible
   personal property for sale may qualify for the machine exemption provided for in Code
   Section 12-36-2120(17). For information on the machine exemption in Code Section 1236-2120(17), see SC Regulation 117-302.5.

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2. Q. What are examples of construction materials that qualify for the exemption when used in
the construction of a manufacturing facility or a distribution facility that meet the
requirements of Code Section 12-36-2120(67)?
A. Construction material includes any and all tangible personal property which becomes a
part of real property. The following are examples of construction materials that qualify
for the exemption when used in the construction of a new or expanded
manufacturing facility or a distribution facility meeting the requirements of Code
Section 12-36-2120(67):
Air conditioning systems
Bolts
Brick
Cement
Doors and door frames
Electric cable
Electrical fixtures
Elevators
Fencing
Floorings
Gas meters
Glass
Gravel
Heating systems
Lime
Lumber
Nails
Paint
Pipe
Pipe fittings
Plumbing fixtures
Plumbing supplies
Railroad rails
Railroad track accessories
Reinforcing steel
Road building materials
Roofing materials
Sand
Screws
Sheet metal
Slag
Sprinkler systems
Stone
Structural steel
Tanks

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Telephone poles
Tile
Timber
Water meters
Well pumps
Window frames
Wire

3. Q. May a contractor purchase the construction material exempt from the sales and use tax if
   hired by the taxpayer who will make the investment and operate the manufacturing or
   distribution facility?
   A. Yes. The contractor building the manufacturing facility or distribution facility for the
   taxpayer who will make the investment and operate the manufacturing or distribution
   facility may purchase the construction material exempt from the sales and use tax,
   provided all the requirements of the exemption are met.
   Notification Requirements
4. Q. When and how must a taxpayer notify the Department of the taxpayer’s intent to start
   using the exemption?
   A. The taxpayer must notify the Department before the first month the taxpayer will use the
   exemption. The notification must be in writing and mailed to:
   SCDOR
   ATTN: Registration Section
   PO Box 125
   Columbia, S.C. 29214l
   The written notice should include the taxpayer’s name, address, and retail license number
   or use tax registration number; location of records; beginning date of the investment
   period; a brief description of the qualifying investment; a brief description of the facility
   to be constructed; and the name of a person to contact with respect to the exemption and
   that person’s telephone number.
   Note 1: The taxpayer shall also notify the Department in writing that it has met the
   investment requirement or, after the expiration of the applicable time period, that it has
   not met the investment requirement. The Department may assess any tax due on
   construction material purchased tax free but due the State as a result of the taxpayer's
   failure to meet the investment requirement. The running of the periods of limitations for
   assessment of taxes provided in Code Section 12-54-85 is suspended for the time period
   beginning with notice to the Department before the taxpayer uses the exemption and
   ending with notice to the Department that the taxpayer either has met or has not met the
   investment requirement.

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Note 2: A taxpayer that qualifies for both the construction material exemption ($100
million investment over an eighteen-month period) and the material handling systems and
equipment exemption ($35 million over a five-year period) may submit one notification
for both exemptions to the above address. See SC Revenue Ruling #13-3 for information
on the material handling exemption, including information to be included in the notice to
the Department. 1
Exemption - Effective Dates, Usage, and Exemption Certificate

5. Q. When may the taxpayer first use the exemption?
   A. The exemption is available to the taxpayer for purchases of construction material made
   on or after the first day of the calendar month following the date the taxpayer notified the
   Department of its intent to invest $100 million and to use the exemption.
   For example, if the taxpayer notifies the Department on October 15th of its intent to invest
   $100 million and to use the exemption in Code Section 12-36-2120(67), the taxpayer may
   use the exemption for purchases made on or after November 1st. Any purchases made
   prior to November 1st are not eligible for the exemption.
6. Q. Is the exemption limited to the specific manufacturing facility or distribution facility
   under construction?
   A. Yes.
7. Q. Is the exemption for construction material only for the eighteen-month investment
   period?
   A. No. The exemption is available to the taxpayer during the entire construction period for
   the new or expanded manufacturing or distribution facility.
   For example, if the construction of a nuclear power plant takes eight years, the
   construction material exemption is valid for the entire eight years, provided the taxpayer
   meets all the requirements of the exemption. Once construction is completed, the
   exemption ends.
8. Q. What must the taxpayer present to suppliers to make tax-exempt purchases under the
   exemption?
   A. The Department will issue an exemption certificate to the taxpayer. This certificate is to
   be presented to suppliers to make tax-exempt purchases of construction material.

1 SC Revenue Ruling #13-3 states that the notice for the material handling exemption should be mailed to the
Department’s “Office Operations Division.” This division is now the “Taxpayer and Business Services Division”
and the notice for both exemptions can be mailed to the above address.

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9. Q. Who will be held liable for any taxes due if the certificate is used to make purchases that
do not come within the exemption - the supplier or the purchaser?
A. If the certificate is used to make purchases tax-free that are not exempt, then the
purchaser will be held liable for any taxes due.

10. Q. If a taxpayer who has met the requirements of the exemption and has been using the
    exemption in the construction of its manufacturing or distribution facility sells that
    facility before construction is completed, may the new owner continue to use the
    exemption of the seller?
    A. No. Each taxpayer (i.e., each separate legal entity) must meet the requirements of the
    exemption on its own. The new owner would need to notify the Department of its intent
    to use the exemption and would need to meet the investment requirements of the
    exemption on its own.
    Note: South Carolina follows the federal tax treatment of limited liability companies.
    Based upon the federal rules and Code Section 12-2-25, a single member LLC that does
    not make a federal election to be taxed as a corporation is not considered for South
    Carolina tax purposes to be a separate entity from its single member. Therefore, in the
    case of a sale or transfer of a qualifying facility by the taxpayer to the single member
    LLC of which the taxpayer is the single member, the exemption of the taxpayer will still
    be applicable since the facility is considered to be owned by the same taxpayer for South
    Carolina tax purposes.
    Investment Requirements
11. Q. Must the eighteen-month investment period begin on the same date the taxpayer begins to
    use the exemption?
    A. No. The eighteen-month investment period begins on the date provided by the taxpayer in
    its notification to the Department and does not need to be the same date the taxpayer may
    first use the exemption.
    Investment Prior to Notification: The investment period may begin on a date prior to
    the date the taxpayer notifies the Department of its intent to invest $100 million over an
    eighteen-month period, provided the taxpayer can document that any investment made
    prior to the notification is a part of an eighteen-month plan in which the taxpayer will
    invest at least $100 million at a single manufacturing or distribution facility in the State
    of South Carolina.
    For example, a taxpayer with plans to build a large distribution facility in South
    Carolina purchases $1 million in realty for the distribution facility over a six-month
    period beginning in January 2015 prior to notifying the Department of its intent to
    invest at least $100 million. When this taxpayer notifies the Department in June 2015
    of its intent to invest $100 million and to use the exemption, the taxpayer may claim
    an eighteen-month investment period that begins on January 1, 2015 and ends on
    June 30, 2016. The taxpayer may begin using the exemption for purchases made on
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or after July 1, 2015 since the taxpayer cannot start using the exemption until the
first day of the month following the month in which the taxpayer notifies the
Department that it will use the exemption. However, it should be noted for purposes
of this example, that while any purchases of construction material made prior to July
1, 2015 will not be exempt, such purchases of construction material made on or after
January 1, 2015 and within the eighteen-month period will count toward the $100
million investment requirement.
Investment After Notification: The investment period may also begin on a date after the
date the taxpayer notifies the Department of its intent to invest $100 million over an
eighteen-month period.
For example, a taxpayer who has been operating within South Carolina for decades
decides to build a distribution facility on land it has also owned for decades. If the
taxpayer plans to begin construction in October 2015, but wants to begin purchasing
and storing construction material in April 2015, the taxpayer can submit the notice to
the Department in March 2015 2 with an investment period beginning date of October
1, 2015. This will allow the taxpayer to use the exemption beginning April 1, 2015
and to claim an eighteen-month investment period of October 1, 2015 through March
31, 2017.

12. Q. What expenditures meet the $100 million investment requirement?
    A. The $100 million investment is limited to real or personal property in South Carolina.
    This includes expenditures for:
    Buildings
    Equipment
    Fixtures
    Furniture
    Infrastructure development (roads, water, sewer, etc.)
    Land
    Machinery
    Office equipment (computers, copiers, and similar office equipment)
    Site preparation
    Expenditures by the taxpayer for employee wages, employee benefits, taxes, raw material
    and inventory are examples of expenditures that do not meet the investment requirement.
13. Q. Is it required that the investment in real and personal property be made at the same
    location where the construction material will be used to construct a manufacturing
    facility, a distribution facility, or a facility that serves both purposes?

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The taxpayer may submit the notice to the Department prior to March 2015 and still use the exemption beginning
April 1, 2015 (or sooner depending on when the notice is submitted to the Department). See Question No. 6 for
information on when a taxpayer may begin using the exemption.

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A. Yes. The investment must be made at the single site in South Carolina where the
manufacturing facility, the distribution facility, or a facility that is a combination of both
is constructed.

14. Q. Is a separate $100 million investment required if a manufacturing or distribution facility
    will be constructed in phases?
    A. The exemption applies to a new manufacturing or distribution facility or the expansion at
    an existing manufacturing or distribution facility. In each case, the taxpayer must make a
    capital investment of at least $100 million at the site over an eighteen-month period.
    Therefore, if a manufacturer has a new manufacturing facility constructed, the purchase
    of construction materials for that manufacturing facility will be exempt from the tax if the
    manufacturer makes a capital investment of at least $100 million at the site over an
    eighteen-month period. The purchase of construction materials for a subsequent and
    distinct expansion (e.g., phase 2 - a new manufacturing building) of that same facility
    will also be exempt if the manufacturer makes a separate and distinct capital investment
    of at least $100 million at the site over a separate and distinct eighteen-month period. The
    manufacturer must also comply with the notice requirements of this exemption for each
    phase in order for the purchases of construction material to be exempt.
    The determination as to whether a second phase is a subsequent and distinct construction
    project requiring a separate and distinct capital investment of at least $100 million at the
    site over a separate and distinct eighteen-month period or merely a separate phase of one
    single construction project is based on the facts and circumstances, including, but not
    limited to, the following:
    (a) Number of contracts executed – one for all phases or separate contracts or
    contractors for each phase;
    (b) Reasons for one or more phases;
    (c) Factors for determining the start of the second phase or subsequent phases (i.e., Is
    the start of Phase 2 dependent on various factors or will it start without delay when
    Phase 1 is complete? Is there a set time to start Phase 2 even if Phase 1 is not yet
    complete?); and
    (d) Time period between the end of Phase 1 and the beginning of Phase 2.
15. Q. For purposes of determining whether a taxpayer has met the $100 million capital
    investment requirement during the eighteen-month period, when is a capital investment
    considered to have been made?
    A. A “capital investment” is made when real or personal property is acquired at the site or an
    interest in real or personal property is acquired for use at that site as part of the
    manufacturing or distribution facility.

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With respect to the construction of the facility by a contractor hired by the taxpayer, an
investment is made when the taxpayer has a binding obligation to pay the contractor for
any completed work (not future work) at the site or for any construction material or other
tangible personal property (e.g., machines) purchased by the contractor that is located at
the site (acquired) within the eighteen-month investment period. It is not necessary that
the construction of the manufacturing or distribution facility (or expansion) be completed
in order for an investment to have been considered made by the taxpayer. Points in the
construction process when the taxpayer becomes obligated to pay the contractor a
“progress payment” for work completed, or for purchases of construction material or
other tangible personal property (e.g., machines) that is located at the site (acquired),
constitute an investment.
With respect to purchases of tangible personal property by the taxpayer, a “capital
investment” is made when payment (including a binding obligation to pay) is made for
personal property that has been acquired by, and is in possession of, the taxpayer for use
at that site as part of the manufacturing or distribution facility. It is not necessary that
such tangible personal property be located at the site within the eighteen-month period.
Such property must be in the possession of the taxpayer for future first use at the site on
or before construction of the new or expanded facility is completed and the facility or
expansion is operational.
However, two important points should be noted:
(a) The tangible personal property purchased for use at the site must eventually be
used at the site in order for its purchase to be considered a part of the “capital
investment” made during the eighteen-month period since the exemption requires an
investment “at a single site in the State.”
(b) The manufacturing or distribution facility must eventually become operational in
order for the exemption to apply since the exemption is for the construction of a new
or expanded “manufacturing or distribution facility.”

16. Q. If the taxpayer that will be operating the manufacturing facility or distribution facility has
    related entities (e.g., subsidiary corporations), are investments by these related entities of
    the taxpayer at the single manufacturing or distribution facility in South Carolina
    included in determining if the taxpayer has met the $100 million investment requirement
    under the exemption for construction material in Code Section 12-36-2120(67)?
    A. Yes. The exemption for construction material, unlike the exemption for material handling
    systems and equipment, defines the term “taxpayer” to include “a person who bears a
    relationship to the taxpayer as described in Section 267(b) of the Internal Revenue Code”
    (e.g., Code Section 12-36-2120(9)(e) &(f) and Code Section 12-36-2120(67)). Therefore,
    the investments at the site by any person who bears a relationship to the taxpayer as
    described in Section 267(b) of the Internal Revenue Code may be included in
    determining if the taxpayer has met the $100 million requirement under the exemption
    for construction material in Code Section 12-36-2120(67).

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Records

17. Q. What records must taxpayers keep with respect to this exemption?
    A. Taxpayers must be able to substantiate that they have met the $100 million investment
    requirement. Like other records maintained for tax purposes, the records must be readily
    available for inspection by the Department. Examples of records that must be maintained
    are real estate closing documents, building contracts, and purchase invoices with
    evidence of payment.
18. Q. How long must a taxpayer maintain records supporting its investment in South Carolina?
    A. Records substantiating that a taxpayer has met the investment requirement must be
    maintained for as long as the taxpayer continues to take the exemption, plus three years,
    unless the Department otherwise advises the taxpayer that it can discontinue maintaining
    the records.

SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Rick Reames III
Rick Reames III, Director
February 18
, 2015
Columbia, South Carolina

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