News and Insights

Update on South Carolina Court of Appeals Decision Affecting the Manufacturing Machine Exemption

Tax Development Jan 22, 2004

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 state also provides an exemption for other tangible personal property used directly in the manufacturing, compounding, or processing of tangible personal property into products for sale. The term "used directly" is defined to mean materials or products that come into direct contact with and contribute to bring about some chemical or physical change in the component materials or ingredients during the manufacturing process.

The unpublished opinion in the case of South Carolina Department of Revenue v. Springs Industries, Inc. (Unpublished Opinion No. 2003-UP-029) overturned the Department of Revenue's narrow interpretation of the manufacturing machine exemption.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. Furthermore, the ALJ concluded that certain chemicals used in a pollution control facility qualified for exemption as machinery or parts of machinery necessary and essential to the manufacturing process.

The South Carolina Supreme Court has declined to hear the case; therefore, South Carolina Department of Revenue v. Springs Industries, Inc. (Unpublished Opinion No. 2003-UP-029) is the final decision.

The Department of Revenue expects to issue a policy statement to provide guidance with respect to the Court of Appeals decision. Subsequently, it will make determinations with regard to previously filed refunds. Manufacturers affected by this decision may file a claim for refund for the past three years with the South Carolina Department of Revenue.