performance of a South Carolina construction contract is also considered a retail sale. In that instance, the tax is based on the fair market value of the building materials at the time of their use within South Carolina. S.C. Code Ann. § 12-36-110(1)(d) and § 12-36-
910(B)(4). However, an exclusion exists for sales of tangible personal property to a manufacturer or construction contractor if the tangible personal property is subsequently processed, partially or completely fabricated, or manufactured in South Carolina by the manufacturer or contractor for use in a construction contract outside of South Carolina. S.C. Code Ann. § 12-36-110(2).
h. Does the State allow contractors to purchase materials exempt: (1) for resale; (2) under direct pay permit authority; (3) for use in a project of an exempt
organization; or (4) other? If yes, what documentation must the contractor retain to evince the exempt character of the transaction?
(9) Generally, contractors are not permitted to purchase materials for resale, either directly or as part of a contract for the construction, repair or alteration of real property. S.C. Code Ann. § 12-36-110(1)(a). S.C. Code Regs. § 117-174.45, S.C. Code Regs. § 117.249. However, contractors that qualify as so-called “dual
operators”-operators of businesses making both retail sales and withdrawing for use from the same stock of goods-are authorized to make purchases for resale. S.C. Code Regs. § 117.174.82.
(10) A person performing construction contracts both within and without South Carolina may apply for a direct pay permit, and account directly for the tax on building materials as they are withdrawn for use or consumption within South Carolina. S.C. Code Regs. § 117.174.62.
(11) Tangible personal property purchased under a written contract with the federal government is exempt from South Carolina sales and use tax. The contract must provide that title and possession of the property are to transfer from the contractor to the federal government at or after the time of purchase. The
exemption also applies to purchases of tangible personal property that become part of real or personal property owned by the federal government or, as provided in the written contract, will transfer to the federal government. S.C. Code Ann. § 12-36- 2120 (29).
(12) Other material purchases exempt from South Carolina sales and use tax include:
• Sales of tangible personal property to a manufacturer or construction contractor when the tangible personal property is subsequently
processed, partially or completely fabricated, or manufactured in South Carolina 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 South Carolina, and thereafter used solely outside South Carolina. S.C. Code Ann. § 12-36-110(2); • Tangible personal property where the seller, by contract of sale, is
obligated to deliver to the buyer, or to an agent or donee of the buyer, at a point outside of South Carolina, or to deliver it to a carrier or to the mails for transportation to the buyer, or to an agent or donee of the buyer, at a point outside of South Carolina. S.C. Code Ann. § 12-36- 2120(36);
• Building materials, supplies, fixtures, and equipment for the
construction, repair, or improvement of, or that become a part of a self- contained enclosure or structure specifically designed, constructed, and used for, the commercial housing of poultry or livestock. S.C. Code Ann. § 12-36-2120(45).
12. Improvements to Realty
d. Please describe the sales and use tax implications of improving realty. Please address factors used to determine whether the installation of property constitutes a capital improvement.
Charges for the addition or alteration of real property in South Carolina are exempt from sales and use tax. The contractor, builder or building owner is generally subject to sales or use tax on building materials at the time of purchase, if those materials will be used for additions or alterations to real property in South Carolina. S.C. Code Ann. § 12-36-110 (1)(a) and (e). S.C. Code Regs. § 117-174.45. If a manufacturer uses self-produced building materials in the performance of a construction contract in South Carolina, the tax paid by the manufacturer on that use is based on the fair market value of the self-
produced materials at the time and place where same are used or consumed. S.C. Code Ann. § 12-36-110(1)(e). For “unique products”-items that are specifically designed for use on a particular construction project and that are not standard or interchangable-the tax could be as low as zero. Because these items are “unique”, they are considered to have no resale or fair market value. Therefore, if the unique product is manufactured outside South Carolina, sales to or purchases by the contractor of the materials used to
manufacture the unique product will not be subject to South Carolina sales and use tax. The South Carolina tax, if any, would be limited to the purchase or use of materials within South Carolina; for example, for job-site fabrication or installation. South Carolina Revenue Ruling 94-2, 3/1/94.
The concept of a “capital improvement” has no relevance under the South Carolina sales and use tax.
Please see the attached Exhibit-South Carolina Sales Tax Chart-for a summary of the above.
13. Repair and Maintenance Contracts/Services
g. Please discuss the sales and use taxation of repair and maintenance contracts. Please include a description of the tax base.
Charges for the repair of real property in South Carolina are exempt from sales and use tax. The contractor, builder or building owner is generally subject to sales or use tax on building materials at the time of purchase, if those materials will be used for repairs to real property in South Carolina. . S.C. Code Ann. § 12-36-110(1)(a) and (e). S.C. Code Regs. § 117-174.45. If a manufacturer uses self-produced building materials in the performance of a construction contract in South Carolina, the tax paid by the
manufacturer on that use is based on the fair market value of the self-produced materials at the time and place where same are used or consumed. S.C. Code Ann. § 12-36-110 (1)(e). For “unique products”-items that are specifically designed for use on a particular construction project and that are not standard or interchangable-the tax could be as low as zero (see above). South Carolina Revenue Ruling 94-2, 3/1/94.
The provider of real property maintenance is generally liable for sales and use tax on any tangible personal property used in providing the maintenance service, unless the
purchaser provides documentation that the purchase should not be taxed (for example, machinery used in manufacturing, processing or compounding-See VII below). South Carolina Sales and Use Tax Reference Manual for Construction Contractors, fourth revision (May, 1998), page 17.
h. Please discuss taxable services related to the use of contractors.
There are no services taxed by South Carolina that are directly related to the use of contractors. S.C. Code Ann. § 12-36-910 (B).
14. Use Taxes
d. Describe the application of the South Carolina use tax on material, supplies and services purchased outside South Carolina and used within the State.
South Carolina imposes a use tax on tangible personal property purchased at retail for storage, use, or other consumption in South Carolina. S.C. Code Ann. § 12-36-1310(A). The use tax also applies to the fair market value of tangible personal property brought into South Carolina by the manufacturer thereof, for storage, use, or consumption in South Carolina. S.C. Code Ann. § 12-36-1310(B)(4). When a taxpayer is liable for the South Carolina use tax on tangible personal property purchased in another state, and on which a sales or use tax was due and paid in the other 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, upon proof of payment of the sales or use tax. However, the credit will not be allowed if the other state where the property was purchased does not allow substantially similar tax credits for tangible personal property purchased in South Carolina. If the amount of the sales or use tax paid in the other state is less than the amount of use tax imposed by South Carolina, the user is responsible for paying the difference. S.C. Code Ann. § 12-36-1310(C).
Specific provisions apply to the purchase of “transient construction property” outside of South Carolina for use in the State. Transient construction property purchased and
substantially used in another state is not subject to the use tax if the owner of the property uses it to construct or repair his own buildings, structures, or other property located in South Carolina. S.C. Code Ann. § 12-36-1320(F). In all other instances, use tax is due immediately from the owner or lessee of transient construction property. S.C. Code Ann. § 12-36-1320(A), (B) and (H). Transient construction property includes motor vehicles, machinery, tools or other tangible personal property brought into South Carolina for use, or stored for use, in construction activities. S.C. Code Ann. § 12-36-150. If the property originated outside South Carolina, the use tax may be prorated based on the percentage of its use within South Carolina as compared to its “total useful life”. S.C. Code Ann. § 12- 36-1320(C) and (G). South Carolina uses Bulletin F of the Internal Revenue Code, as revised in 1942, to determine total useful lives. S.C. Code Regs. § 117-174.62.
A credit may be claimed for sales and use tax legally due and paid to another state with respect to transient construction property. For the credit provisions to apply (1) the other state must grant substantially similar tax credits on property purchased in South Carolina; and (2) the other state must prorate the use tax calculation for transient construction property used by South Carolina contractors operating in that state. If the state in which the property was previously used does not prorate its use tax on, or depreciate the value for use tax purposes of, transient construction property used by South Carolina
contractors operating in that state, the full use tax applies based on 5% of the sales price. S.C. Code Ann. § 12-36-1320(D) and (E).
In addition, South Carolina will allow a credit against the use tax liability for new and unused building materials transferred out of South Carolina, which were purchased out- of-state and on which South Carolina use tax has been paid. S.C. Code Regs. § 117- 174.157.
For a current list of the states that South Carolina will credit sales and use taxes due and paid on purchases of tangible personal property, see South Carolina Information Letter #98-18.
15. Construction Contracts
f. Type of Contract Issues-Does South Carolina address different types of contracts and, if so, does South Carolina have specific rules that apply to different types of contracts? Are there specific elements of contracts that are looked to by South Carolina?
No. The statutory scheme in South Carolina is such that the type of construction contract is irrelevant. Generally, the taxability of all projects involving the repair, addition to or alteration of real property is the same. The sales or use tax is due from the purchaser- whether a contractor, builder, landowner or building owner-at the time of purchase or use of the building materials. Charges for construction services are exempt from South Carolina sales and use tax. S.C. Code Ann. § 12-36-110(1)(a) and (e). S.C. Code Regs. § 117-174.45.
g. Does an exemption exist for the transfer of tangible personal property from a contractor to a customer, which would favor the use of a split contract (not an exemption for direct purchases by the contractor)?
The use of a split contract in South Carolina is not advantageous from a sales and use tax perspective. In a certain limited fact pattern, a split contract could even work to the customer’s disadvantage.
While the sales and use tax exemption afforded an exempt purchaser does not flow through to the contractor in South Carolina (with the exception of federal government contracts), the list of purchasers who are able to buy building materials exempt from South Carolina sales and use tax is a short one (see II.b. above). Thus, except for federal government contracts and certain self-contained enclosures or structures specifically designed, constructed, and used for the commercial housing of poultry or livestock, the customer will be taxed on purchases to the same extent as the contractor. This removes the typical tax incentive for utilizing a split contract. Given that the contractor typically adds a markup to equipment sold, the amount of sales and use tax paid with respect to a project could actually be greater if the contract is split and the customer buys some or all of the building materials from the contractor. In addition, if the building materials in question are “unique products” manufactured by the contractor outside South Carolina for installation in the State, the sales and use tax consequences of a split contract may be very disadvantageous to the customer. While little or no South Carolina sales and use tax would be due from the contractor in that instance (see South Carolina Revenue Ruling 94-2, 3/1/94), the tax would be fully applicable to the sale of the building materials from the manufacturer-contractor to the customer (except for the commercial housing of
poultry and livestock exception noted above). That could add a significant expense to the total economic cost of the project.
h. Does South Carolina have specific contractor regulations?
No. See d. (below) for regulations covering individual aspects of the contracting business.
i. What other definitions or terms of contracts are addressed in the sales and use tax statutes and regulations?
The following statutes and regulations contain definitions relevant to the contracting business:
S.C. Code Ann. § 12-36-60-Defines “tangible personal property” S.C. Code Ann. § 12-36-90-Defines “gross proceeds of sales”
S.C. Code Ann. § 12-36-110-Defines “sale at retail” and “retail sale” S.C. Code Ann. § 12-36-130-Defines “sales price”
S.C. Code Ann. § 12-36-140-Defines “storage” and “use”
S.C. Code Ann. § 12-36-150-Defines “transient construction property” S.C. Code Ann. § 12-36-2120(17)-Defines “machines”
S.C. Code Regs. § 117-174.45-Defines “building materials”, “builders”, “contractors”, and “landowners”
j. Discuss the tax obligations of subcontractors.
There is no distinction between the South Carolina sales and use tax obligations of a prime contractor as compared to a subcontractor. Purchases of materials and supplies by a subcontractor are taxable to the same extent as purchases by prime contractors. A subcontractor does not collect tax on services performed for a prime contractor. 16. Machinery and Equipment Exemption and Contractors
k. Does South Carolina have a manufacturing exemption for machinery and equipment purchased to produce tangible personal property? Mention any permits or certificates which must be obtained to qualify for the exemption. Machines (excluding autos and trucks) used in manufacturing, processing, recycling, compounding, mining, or quarrying tangible personal property for sale are exempt from South Carolina sales and use tax. “Machines” include the parts of machines, attachments, and replacements used, or manufactured for use, on or in the operation of the machines
and which are necessary to the operation of the machines, and are customarily so used. “Recycling” means any process by which materials that would otherwise become solid waste are collected, separated, or processed and reused, or returned to use in the form of raw materials or products, including composting, for sale. S.C. Code Ann. § 12-36- 2120(17). The term “machine” includes machines, their parts and attachments, when the same are necessary to comply with the order of an agency of the United States or South Carolina for the prevention or abatement of pollution of the air or water that is caused or threatened by any machines used in the mining, quarrying, compounding, processing and manufacturing of tangible personal property. S.C. Code Regs. § 117-173.
As a result of the decision in Hercules Contractors and Engineers, Inc. v. The South Carolina Tax Commission, 280 S.C. 426, 313 S.E.2d 300, South Carolina recognizes that a manufacturer, processor or compounder can purchase machines, parts and/or
attachments from contractors exempt from tax under the manufacturing exemption. See the South Carolina Sales and Use Tax Reference Manual for Construction Contractors, fourth revision (May, 1998), page 16.
l. Is there a specific South Carolina exemption form required in order for a contractor to take advantage of the machinery and equipment exemption? South Carolina cites the following as some of the methods that may be utilized to assist the contractor in purchasing items exempt from tax on behalf of the manufacturer, processor or compounder (referred to as the “owner”) below [See the South Carolina Sales and Use Tax Reference Manual for Construction Contractors, fourth revision (May, 1998), page 16].:
1. The contractor should obtain Form ST-8-Exemption Certificate-from the manufacturer to evidence an exempt sale.
2. The purchaser provides “documentation “ (unspecified) to the contractor, indicating that the item(s) purchased qualify for the manufacturing exemption.
3. The contractor may be designated as the agent of the equipment owner, and therefore entitled to use the owner’s exemption or direct pay
certificate to make purchases of manufacturing machinery exempt from tax.
4. The owner may purchase the exempt items directly and have the contractor furnish the labor to construct the facility.
5. The owner may furnish documentation in the form of a letter to the contractor’s suppliers establishing that the equipment is eligible for the manufacturing exemption.
6. The Department of Revenue and the owner may execute a “Special 19 Agreement”, whereby the owner will accept liability and responsibility for the payment of all sales and use tax due on the construction project.
m. How may a customer take advantage of the machinery and equipment exemption in South Carolina when using a contractor?
The customer must provide the contractor with Form ST-8-Exemption Certificate-in order to claim the machinery and equipment.
n. What are the rules for obtaining an exemption certificate or permit in South Carolina?
Exemption Certificates (Form ST-8) are issued to a contractor by a purchaser when buying machinery to be used in manufacturing, processing, compounding, mining or quarrying tangible personal property for resale; or for equipment to be used in recycling or pollution control.
Contractors are generally not permitted to purchase materials for resale. Resale Certificates (Form ST-8A) may only be issued by (1) a “dual operator” [see II.b.(1) above] or (2) a fabricator/contractor for purchases of building materials or supplies. Agricultural Exemption Certificates (Form ST-8F) are issued to a contractor by a
purchaser when buying machinery to be used in building materials, supplies, fixtures and equipment for the construction, repair or improvement of, or that become part of a self- contained enclosure or structure designed, constructed and used for the commercial housing of poultry or livestock [see II.b.(4) above].
Exemption Certificates (Form ST-9) are issued by direct pay permit holders to a contractor when authorized [see II.b.(2) above].
An Application for Exemption for Federal Government Contract (Form ST-10G) is used by a contractor to gain assurance that a federal government contract will qualify for the
exemption from South Carolina sales and use tax found at S.C. Code Ann. § 12-36-2120 (29) [see II.b.(3) above].
17. General Planning Suggestions
Please describe any planning opportunities to reduce sales and use tax exposure. There is no advantage to be gained from splitting contracts in South Carolina if the contractor will provide construction services, as well as the building materials or
equipment to be installed to realty in the performance of those services. In addition, there is no advantage to splitting contracts in order to take advantage of the customer’s
manufacturing, processing, compounding, mining or quarrying exemption: that relief is
provided statutorily. An unintended benefit may accrue to the bottom-line pricing when a contractor that manufactures “unique” equipment at a manufacturing location outside South Carolina is used for a South Carolina furnish and install contract. That benefit occurs because South Carolina holds that the sales and use tax is based on the fair market