News and Insights

Appeals Court Decision Affects South Carolina Manufacturing Machine Exemption

Tax Development Oct 23, 2003

The South Carolina Department of Revenue has historically interpreted its manufacturing machine exemption under the more restrictive "Ohio-Georgia rule" or the "physical change theory," which permits the exemption only for machinery causing a chemical or physical change to the raw materials during the manufacturing process. In addition to those machines, South Carolina has allowed the application of the machine exemption to equipment used to weigh, measure, and package when part of the "production line." Machinery is defined to include parts of machines, attachments, and replacements used on or in the operation of the machines.

The recent unpublished opinion in the case of South Carolina Department of Revenue v. Springs Industries, Inc. (Unpublished Opinion No. 2003-UP-029) overturns the Department of Revenue's narrow interpretation of the manufacturing machine exemption. In this opinion, the South Carolina Court of Appeals upheld the Administrative Law Judge's ("ALJ") broad interpretation of the machine exemption under the "Integrated Plant Theory." Under the "Integrated Plant Theory," machinery is exempt if it is necessary or essential to the manufacturing operations regardless of whether it actually causes a physical change.

Manufacturers affected by this decision may file a claim for refund for the past three years with the South Carolina Department of Revenue. While the Department of Revenue has stated it will exhaust all appeals before a determination is made on such claims, refund claims should be filed immediately to preserve the statute of limitations.