January 22, 2004
FOR IMMEDIATE RELEASE
Update on South Carolina Court of Appeals Decision Affecting the Manufacturing Machine Exemption.
Overview
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The unpublished opinion in the case of South Carolina Department of Revenue v. Springs
Industries, Inc. (Unpublished Opinion No. 2003-UP-029) overturned the Department of Revenue's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Department of Revenue v. Springs Industries, Inc. (Unpublished Opinion No. 2003-UP-029) is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.
Opportunity
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.
If you have any questions regarding this information, please call Mr. John A. Walter, Principal
in Charge of the Ryan & Company Atlanta Office, at 404.365.0922. Mr. Walter can also be reached by
e-mail.
<< Back to Tax Developments