SC Lawyer, Jan. 2004, #6. South Carolina springs for tax refunds for manufacturers The machine exemption from sales and use tax for manufacturers.

• Author: By Jeff Z. Brooker III

South Carolina Lawyer

2004.

SC Lawyer, Jan. 2004, #6.

South Carolina springs for tax refunds for manufacturers The machine exemption from sales and use tax for manufacturers

South Carolina LawyerJanuary 2004 South Carolina springs for tax refunds for manufacturers The machine exemption from sales and use tax for manufacturersBy Jeff Z. Brooker IIIIn calendar year 2003, the "machine exemption" (as defined below) from sales and use tax in South Carolina was significantly expanded in its application to machines and parts of machines by an unpublished Court of Appeals opinion and the denial of certiorari by the South Carolina Supreme Court on October 8, 2003. As discussed below, the expanded application of the machine exemption could mean that manufacturers operating manufacuring facilities in South Carolina may now be entitled to refunds for sales and use taxes paid for items previously believed to be "non-exempt." This article discusses the underlying opinion from the South Carolina Administrative Law Judge Division and its potential application to lawyers representing South Carolina taxpayers engaged in manufacturing within South Carolina.

At the outset, the judicial interpretation of the "machine exemption" appears in an unpublished opinion of the Court of Appeals. As such, the ruling is subject to SCACR 239, which provides in part that, "Memorandum opinions and unpublished orders have no precedential value and should not be cited except in proceedings in which they are directly involved." Thus, a manufacturer / taxpayer may cite the case for the strict issue of the applicability of the "machine exemption" to which it may be entitled, although by rule such a citation has no precedential value.

"Manufacturer taxpayers, however, should be able to invoke the doctrine of "offensive collateral estoppel" against the Department of Revenue under the theory that the Department of Revenue has previously litigated the issue. "Only a party to a prior action or one in privity with the party can be precluded from relitigating an issue on the basis of offensive collateral estoppel." Nelson v. QHG of South Carolina Inc., 354 S.C. 290, 306, 580 S.E.2d 171, 179 (Ct. App. 2003).

South Carolina has long recognized an exemption from the South Carolina Sales and Use Tax Act (the Act) for "machines used in manufacturing, processing, recycling, compounding, mining, or quarrying tangible personal property for sale." S.C. Code Ann. § 12-36-2120(17) (1976, as amended). The statute continues:

"Machines" include the parts of machines, attachments, and replacements used, or manufactured for use, on or in the operation of the machines and which (a) are necessary to the operation of the machines and are customarily so used, or (b) are necessary to comply with the order of an agency of the United States or of this State for the prevention or abatement of pollution of air, water, or noise that is caused or threatened by any machine used as provided in this section. This exemption does not include automobiles or trucks. Id.

The foregoing statutory exemption from the sales and use tax is commonly referred to as the "machine exemption."

The purposes of the machine exemption include exempting property that will be used to make tangible personal property to be sold at retail and to reduce multiple taxes that would otherwise ultimately be paid by the end-use consumer (who would pay the taxes in the form of...