How did RR 94-2 tax standard and custom-fabricated building products used by their maker in construction contracts?

Plain-English summary

South Carolina Revenue Ruling 94-2 separated standard finished products from unique products fabricated for a particular construction job.

A business was a manufacturer only if it regularly and continuously produced tangible property for sale, created a new and substantially different article, and was commonly understood to be a manufacturer. If such a manufacturer used its standard finished building products in a South Carolina construction contract, it owed tax on their fair market value at the job site. It could receive the historical manufacturing exemptions described in the ruling.

A unique product was specifically designed for one project, was not interchangeable, and had no resale or reasonable fair-market value. A contractor fabricating such a product for its own South Carolina job owed tax on the raw materials rather than on a finished-product value. It generally did not receive manufacturer exemptions unless a substantial portion of its business also sold fabricated products to others.

For qualifying out-of-state construction, the ruling excluded standard products made in South Carolina and used by their manufacturer outside the state, and excluded raw materials for unique products fabricated in South Carolina and used solely at an out-of-state job site. Sales delivered to an out-of-state job site also received the treatment described.

Common questions

Q: Did occasional sales make a contractor a manufacturer? No. The ruling required regular and continuous sales plus the other manufacturing tests.

Q: What was the tax base for standard products used on a South Carolina job? Fair market value at the time and place used.

Q: What was taxed for a unique custom product used on a South Carolina job? The contractor's raw-material purchases.

Q: Did out-of-state jobs receive different treatment? Yes. The ruling described exclusions for products or materials used solely outside South Carolina.

Citations and references

• S.C. Code Ann. §§ 12-36-110 and 12-36-120 (retail, wholesale, and manufacturer use)
• S.C. Code Ann. §§ 12-36-910(A) and 12-36-1310(A) (sales and use taxes)
• S.C. Code Ann. § 12-36-2120 (historical exemptions)
• S.C. Regulation 117-174.45 (building materials)
• Metromont Materials Corp. v. South Carolina Tax Commission (1985) (unique fabricated products)

Subject

Manufacturers and Construction Contractors

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR94-2.pdf

Original ruling text

SC REVENUE RULING #94-2 (TAX)

SUBJECT:

Manufacturers and Construction Contractors
(Sales and Use Tax)

EFFECTIVE DATE: For sales or use of building materials after 1992, except for sales or use of
building materials that occur after 1992 pursuant to a binding contract
entered into before 1993.
SUPERSEDES:

SC Revenue Ruling #92-11

REFERENCES:

S.C. Code Ann. Section 12-36-110 (Supp. 1992)
S.C. Code Ann. Section 12-36-120 (Supp. 1992)
S.C. Code Ann. Section 12-36-910(A) (Supp. 1992)
S.C. Code Ann. Section 12-36-1310(A) (Supp. 1992)
S.C. Code Ann. Section 12-36-2120 (Supp. 1992)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (Supp. 1992)

SCOPE:

A Revenue Ruling is the Department of Revenue's official interpretation of
how laws administered by the Department are to be applied to a specific
issue or a specific set of facts, and applies to all persons or a particular
group. It is valid and remains in effect until superseded or modified by a
change in the statute or regulations or a subsequent court decision, Revenue
Ruling or Revenue Procedure.

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 on-site
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").
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Businesses that make items off-site for their own use may also sell the items to others.
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 Commission Decision S-D-176 (August 22, 1986) the Commissioners held:
Processing for sales tax purposes is best defined as the operation by which a raw material is
changed in form, context or condition so as to result in a finished product. Linwood Stone
Products Co. v. State Dept. of Revenue, 175 N.W. 2d 393, 394. However, manufacturing
requires more. There must be the creation of a new and substantially different article having
a distinctive name and substantially different character or use. Anheuser-Busch Brewing
Association V. United States, 207 u.s. 556, 562 (1908) and Prentice v. City of Richmond, 90
S.E. 2d 839, 843 (1956).
Finally, in Commission Decision #87-107 the Commissioners, based on case law, denied a
business the exemptions established for manufacturers since the business was commonly
understood to be that of a merchant.
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; create "a new and substantially
different article having a distinctive name and substantially different character or use" than that
of the raw materials from which it was made; and, be commonly thought of as a manufacturer.
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:

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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 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 1236-2120(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)]

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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 12-362120(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; creates "a new and substantially different article
having a distinctive name and substantially different character or use" than that of the
raw materials from which it was made; and, is commonly thought of as a manufacturer,
then the taxpayer is a "manufacturer" of "building materials". As a 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), 12-36-2120(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,
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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 12-36120, 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 DEPARTMENT OF REVENUE

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
, 1994
March 1
For questions concerning manufacturers and contractors, contact Research and Review Office Services Division at (803) 737-4744 or John P. McCormack at (803) 737-4438.

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SALES AND USE TAXES - STANDARD FINISHED PRODUCTS PRODUCED BY A MANUFACTURER

SOUTH CAROLINA JOB SITE

OUT OF STATE JOB SITE

The standard finished product is
manufactured in South Carolina, and
used by the manufacturer thereof in
the performance of a construction
contract.

The use of the standard finished product is
subject to the tax based upon its fair market
value.

The use of the standard finished product is
not subject to the tax.

The standard finished product is
manufactured out of state, and used
by the manufacturer thereof in the
performance of a construction
contract.

The use of the standard finished product is
subject to the tax based upon its fair market
value.

South Carolina sales and use taxes are not
applicable since the standard finished
product was manufactured out of state and
used by the manufacturer at a job site out of
state.

The standard finished product is
manufactured in South Carolina and
sold and delivered by the
manufacturer to the contractor or
consumer.

The sale and delivery to the job site of the
standard finished product is subject to the
sales tax based upon "gross proceeds of
sales".

The sale and delivery to the job site of the
standard finished product is not subject to
either the sales tax or the use tax.

The standard finished product is
manufactured out-of-state and sold
and delivered by the manufacturer to
the contractor or consumer.

The sale of the standard finished product is
subject to the use tax based upon "sales
price".

South Carolina sales and use taxes are not
applicable since the standard finished
product was fabricated out of state and
delivered and used at a job site out of state.

SITUATION

NOTE: SEE THE DISCUSSION SECTION OF THE DOCUMENT FOR A DEFINITION OF A "MANUFACTURER".
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SALES AND USE TAX - UNIQUE PRODUCTS
SITUATION

SOUTH CAROLINA JOB SITE

OUT OF STATE JOB SITE

The unique product is fabricated in
South Carolina and used by the
contractor who fabricated it in the
performance of a construction
contract.

The sales to, or purchases by, the contractor
of the materials used to fabricate the unique
product are subject to the sales and use tax.

The 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.

The unique product is fabricated out
of state and used by the contractor
who fabricated it in the performance
of a construction contract.

The 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.

The 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.

The unique product is fabricated in
South Carolina and sold and then
delivered to the contractor or
consumer at the job site.

The sale of the unique product is subject to
the sales tax based upon "gross proceeds of
sales".

The sale of the unique product is not
subject to either the sales tax or the use tax.

The unique product is fabricated outof-state and sold and then delivered to
the contractor or consumer at the job
site.

The sale of the unique product is subject to
the use tax based upon "sales price".

South Carolina sales and use taxes are not
applicable since the unique product was
fabricated out of state and delivered and
used at a job site out of state.

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