How did South Carolina Revenue Ruling 92-11 tax contractors that fabricated standard finished products or one-project-only unique products for use in real-property construction?

Plain-English summary

South Carolina Revenue Ruling 92-11 created a historical tax framework for contractors that fabricated items such as concrete facades or cabinets and then installed them as real property.

The key questions were whether the item was a standard finished product or a unique product, and whether the business regularly sold fabricated products to others.

The ruling's two product categories

Standard finished products

These were standard or interchangeable products with resale value and fair market value. They were generally mass-produced and usable on many projects.

A taxpayer producing and selling them at wholesale or retail on a regular and continuous basis was a manufacturer of building materials. Incidental sales alone did not transform a construction contractor into a manufacturer.

When that manufacturer used its own standard building materials in a South Carolina construction contract, it became a manufacturer/contractor and owed sales tax on the materials' fair market value at the time and place of use at the jobsite.

No tax was due under the ruling when the jobsite was outside South Carolina. To the extent applicable, the manufacturer/contractor could also use the historical manufacturing exemptions for fuel, machinery, electricity, ingredient or component property, and property used directly in manufacturing, plus the other-state tax credit.

Unique products

These were designed for one particular project, not standard or interchangeable, and had no resale value or reasonable fair market value.

A taxpayer making unique products for its own construction contract was generally treated as a contractor rather than a manufacturer. For a South Carolina fabrication and South Carolina job, its purchases of raw materials were retail transactions subject to sales or use tax.

If the unique product was fabricated in South Carolina for use as realty at an out-of-state jobsite, the ruling said the raw materials were not taxable. If fabrication occurred outside South Carolina, the materials were also not taxable provided they had not been sold and delivered to the contractor in South Carolina.

A contractor generally could not claim the cited manufacturing exemptions unless a substantial portion of its business also involved fabricating unique or standard products for sale to contractors and other consumers.

Why regular sales mattered

The ruling relied on Southern Equipment Sales for the principle that a construction business making incidental asphalt sales did not thereby become a manufacturer. It said manufacturing status required producing tangible personal property for sale to others regularly and continuously.

It relied on Metromont Materials and related cases for the treatment of project-specific prestressed concrete forms as unique products without a reasonable fair market price.

Sales to other contractors remained taxable

When standard finished products or unique products were sold to contractors or consumers for construction or other real-property improvements, the sale was taxable on gross proceeds or sales price unless another exclusion or exemption applied.

What this means for you

Fabricator-installers

Document whether products are interchangeable and marketable, how often they are sold to third parties, and whether the business primarily produces goods for sale or performs construction contracts.

Manufacturer/contractors

Using your own standard products in a South Carolina job could create tax measured by fair market value rather than raw-material cost under this historical ruling.

Project-specific fabricators

For one-off products with no independent market value, the ruling generally taxed the contractor's raw-material purchases instead of a deemed sale of the finished item.

Multistate construction businesses

Fabrication and delivery location, jobsite state, and other-state tax credits materially changed the result.

Common questions

Q: What made a product “standard”?
A: It was interchangeable, had resale and fair market value, and could be used on multiple projects.

Q: What made a product “unique”?
A: It was designed only for a particular project and had no resale value or reasonable fair market value.

Q: Did occasional third-party sales make a contractor a manufacturer?
A: No. The ruling required regular and continuous sales to others.

Q: How was a manufacturer/contractor taxed on its own standard product?
A: On fair market value at the time and place the building material was used at the South Carolina jobsite.

Q: How was an in-state unique product taxed?
A: The contractor generally paid sales or use tax on the raw materials used to fabricate it.

Citations and references

• S.C. Code Ann. §§ 12-36-110 and 12-36-120 — retail sales, contractor use, wholesale exclusions, and manufacturing inputs
• S.C. Code Ann. §§ 12-36-910(A) and 12-36-1310(A), (C) — sales tax, use tax, and other-state credit
• S.C. Code Ann. § 12-36-2120(9), (17), (19), and (36) — historical manufacturing and out-of-state delivery exemptions
• S.C. Regulations 117-174.30(b) and 117-174.45 — direct use and building materials
• Hercules Contractors and Engineers, Inc. v. South Carolina Tax Commission, 280 S.C. 426, 313 S.E.2d 300 (1984)
• Southern Equipment Sales Company, Inc. v. South Carolina Tax Commission (S.C. Ct. Com. Pl. 1962)
• Metromont Materials Corp. v. South Carolina Tax Commission, No. 84-CP-42-14 (S.C. Ct. Com. Pl. 1985)
• State v. Acker, 233 So.2d 514 (Ala. Civ. App. 1970); State v. Air Conditioning Engineers, Inc., 174 So.2d 315 (Ala. 1965); Montgomery Woodworks, Inc., 389 So.2d 510 (Ala. 1980); and Tindall Concrete Products, Inc., No. 84-CP-42-13 (S.C. Ct. Com. Pl. 1985)

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR92-11.pdf

Original ruling text

SC REVENUE RULING #92-11

SUBJECT:

Manufacturers and Construction Contractors
(Sales and Use Tax)

TAX MANAGER:

John P. McCormack

EFFECTIVE DATE: January 1, 1993
REFERENCES:

S.C. Code Ann. Section 12-36-110 (Supp. 1991)
S.C. Code Ann. Section 12-36-120 (Supp. 1991)
S.C. Code Ann. Section 12-36-910 (A)(Supp. 1991)
S.C. Code Ann. Section 12-36-1310 (A)(Supp.1991)
S.C. Code Ann. Section 12-36-2120 (Supp. 1991)

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (Supp. 1991)
SC Revenue Procedure #87-3

SCOPE:

A Revenue Ruling is the Commission's official interpretation of how tax
law is to be applied to a specific set of facts. A Revenue Ruling is public
information and remains a permanent document until superseded by a
Regulation or is rescinded by a subsequent Revenue Ruling.

Question:
How do the State sales and use taxes apply to businesses that manufacture or fabricate items that
they will use in constructing real property?
Facts:
Construction contractors usually make items such as concrete facades, cabinets, etc. in one of two
ways - either they purchase materials such as concrete, lumber, nails, etc. and make the items onsite or they make the items off-site and take them to the job. Items made off-site are either made
for a particular job and have no other use aside from that particular job ("Unique Products") or they
are standard items that may be used on other jobs ("Standard Finished Products").
Businesses that make items off-site for their own use may also sell the items to others.

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For the purpose of this ruling:
1.

"Unique products" are items that are specifically designed for use on a particular
construction project. Such items are not standard or interchangeable in any sense and have
no resale value and no reasonable fair market value.

2.

"Standard finished products" are items that are not specifically designed for use on a
particular construction project. Such items are standard or interchangeable and have a
resale value and a fair market value. These items are generally mass-produced and are
suitable for use on many construction projects.

Discussion:
Code Section 12-36-910(A) reads:
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. (emphasis added)
Code Section 12-36-1310(A) reads:
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. (emphasis added)
Thus, for the sales or use tax to be imposed, there must be a retail sale or a retail purchase of
tangible personal property.
The terms "sale at retail" and "retail sale" are defined at Code Section 12-36-110 as:
...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;

(d) the use within this State of tangible personal property by its manufacturer as
building materials in the performance of a construction contract. The manufacturer
must pay the sales tax based on the fair market value at the time and place where used
or consumed; (emphasis added)

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The term "building materials" is defined at Regulation 117-174.45 as "tangible personal
property....which becomes a part of real property."
In summary, purchases of building materials by a contractor are retail transactions and the tax is
due on the material's purchase price. However, if a contractor is the manufacturer of his own
building materials, the use of the building materials by the contractor is a retail sale, with the tax
being due on the fair market value of the building materials at the time of use.
Therefore, in applying Code Section 12-36-110(1)(d), it must be determined if the taxpayer is a
"manufacturer" and whether the building materials used in the performance of the construction
contract have a "fair market value".
In Southern Equipment Sales Company, Inc. v. South Carolina Tax Commission, a 1962 Court of
Common Pleas case concerning sales of equipment used to produce asphalt for paving roads, it
was reasoned "[t]he business of Banks Construction Company is that of a road, street or highway
contractor. The incidental sales of asphalt to others does not change the character of the business to
that of a manufacturer".
In other words, to be a manufacturer, one must be in the business of producing tangible personal
property for sale to others on a regular and continuous basis.
In Metromont Materials Corp. v. South Carolina Tax Commission, Spartanburg County Court of
Common Pleas, No. 84-CP-42-14, (1985), the court addressed the issue of a business that
fabricates unique products at a facility and then transports those unique products to the
construction site for their own use under contracts or subcontracts. Metromont Materials fabricates
prestress concrete forms for use in buildings, stadiums, parking garages, etc. The court held:
Based on the evidence produced in the case, the Court concludes that the activities of
Metromont's Prestress Division do not constitute the "manufacture" of "building materials"
which have a "reasonable and fair market price" ... . Metromont's Prestress Division erects
buildings as a general or subcontractor for a completed contract price.

.... The prestress forms are unique in that the specific members must be designed for
each particular project. Members are not standard or interchangeable in any sense and
have no resale value and no "reasonable and fair market price".
The court, in supporting its conclusion, cited the similarities between the South Carolina statute
and the Alabama statute and cited several Alabama court cases with respect to this issue. See
State v. Acker, 45 Ala. Civ. App. 574, 233 So. 2d. 514 (1970) and State v. Air Conditioning
Engineers, Inc., 277 Ala. 675, 174 So, 2d. 315 (1965). For additional support, see also
Montgomery Woodworks, Inc., 389 So. 2d. 510 (1980) and Tindall Concrete Products, Inc.,
Spartanburg Court of Common Pleas, No. 84-CP-42-13 (1985).
In summary, with respect to Code Section 12-36-110(1)(d), a taxpayer must be a manufacturer of
"standard finished products", since unique products do not have a fair market value. In addition,
based on Southern Equipment Sales Company, Inc. v. South Carolina Tax Commission, a
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taxpayer must fabricate items, whether "standard finished products" or "unique products", that
are sold by the taxpayer on a regular and continuous basis in order to qualify as a manufacturer.
Our discussion would not be complete without mentioning the exclusions and exemptions
available to manufacturers.
Manufacturers may make the following purchases free of tax:

1. Machines used in manufacturing tangible personal property for sale, including parts,
   attachments, and replacements. [Code Section 12-36-2120(17)]
   However, to enjoy this exemption, a particular machine must be used substantially in
   manufacturing tangible personal property for sale. [Hercules Contractors and Engineers,
   Inc. v. South Carolina Tax Commission, 280 S.C. 426, 313 S.E.2d 300, 308, 309 (1984)]
2. Electricity used to manufacture tangible personal property for sale. [Code Section 12-362120(19)]
3. Coal, coke or other fuel used in manufacturing tangible personal property for sale. [Code
   Section 12-36-2120(9)]
4. Tangible personal property which becomes an "ingredient or component part" of the
   materials manufactured. [Code Section 12-36-120(2)]
5. Tangible personal property "used directly" in manufacturing tangible personal property
   for sale. [Code Section 12-36-120(3) & Regulation 117-174.30(b)]
   In addition, sales of tangible personal property to a manufacturer or construction contractor that
   is "subsequently processed, partially or completely fabricated, or manufactured in this State by
   the manufacturer or contractor, for use in the performance of a construction contract if the
   property is transported to, assembled, installed, or erected at a job site outside the State and
   thereafter used solely outside the State" are not subject to tax [Code Section 12-36-110(2)].
   Also, the sales of "building materials" where the seller, by contract of sale, is obligated to deliver
   the building materials out of state are exempt from the tax [Code Section 12-36-2120(36)].
   Finally, "[w]hen a taxpayer is liable for the [State] use tax ... on tangible personal property
   purchased in another state, the amount of the sales or use tax due and paid in the other state is
   allowed as a credit against the use tax due [South Carolina] ..."
   Conclusion:
   The State sales and use taxes apply to businesses that manufacture or fabricate items, that they
   will use in constructing real property, as follows:
   Standard Finished Products:
   If the taxpayer produces "standard finished products" that it sells at wholesale or at retail on a
   regular and continuous basis, then the taxpayer is a "manufacturer" of "building materials". As a
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manufacturer, if the taxpayer uses such building materials in the performance of a construction
contract, then the taxpayer is a "manufacturer/contractor", and is liable for the sales tax based on
the fair market value of the building materials at the time and place where used or consumed the job site. However, if the job site is located outside of South Carolina, then no tax is due.
In addition, as a "manufacturer/contractor", the taxpayer is entitled, to the extent applicable, to
the exemptions and exclusion provided in Code Sections 12-36-2120(9), 12-36-2120(17), 12-362120(19) and 12-36-120. Also, the credit provisions of Code Section 12-36-1310(C) may be
applicable.
Unique Products:
If the taxpayer produces "unique products" that it uses in the performance of a construction
contract, then the taxpayer is a contractor. As such, sales to, and purchases by, the taxpayer of
the raw materials used to fabricate (within South Carolina) the unique product are subject to the
sales and use tax. However, if the fabricated item will be used, and become a part of realty, at a
job site located outside of South Carolina, then the sales to, and purchases by, the taxpayer of the
raw materials used in the fabrication of that unique product are not subject to the sales and use
tax.
If the unique product is fabricated out of state, sales to or purchases by the contractor of the
materials used to fabricate the unique product are not subject to the sales and use tax, provided
the materials were not sold and delivered to the contractor within South Carolina.
In addition, as a contractor, the taxpayer is not entitled to the exemptions and exclusions
provided in Code Sections 12-36-2120(9), 12-36-2120(17), 12-36-2120(19) and 12-36-120,
unless a substantial portion of its business also includes the fabrication of "unique products"
(and/or standard finished products) that it sells to contractors and other consumers. However, the
credit provisions of Code Section 12-36-1310(C) may be applicable.
Note: Sales of "standard finished products" or "unique products" to contractors and other
consumers who use them in the performance of a construction contract, or to otherwise make
improvements to realty, are subject to the sales and use tax based upon gross proceeds of sales or
sales price, unless otherwise excluded or exempted from the tax.

SOUTH CAROLINA TAX COMMISSION
s/A. Crawford Clarkson Jr.
A. Crawford Clarkson, Jr., Chairman
s/T. R. McConnell
T. R. McConnell, Commissioner
s/James M. Waddell Jr.
James. M. Waddell, Jr., Commissioner
Columbia, South Carolina
, 1992
September 30
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