The South Carolina Department of Revenue (SCDOR) has had an active start to the year, issuing new administrative guidance that impacts a variety of businesses operating in the state. Each year, the department issues advisory opinions that provide guidance concerning the application of its laws.

Three revenue rulings and a revenue procedure update are of particular interest to businesses because they address issues for which the business community has been seeking guidance for quite some time, including textile tax credits, the applicability of sales tax on certain equipment, and sales tax implications for retail businesses withdrawing items from inventory for their own use.

Below is a summary of each ruling and key takeaways for businesses on how the rulings impact them. 

Updated Guidance on Textile Tax Credits 

In February, the SCDOR issued what’s widely viewed as a taxpayer-friendly ruling that updates its guidance on the state’s popular textile tax credit program. Revenue Ruling 25-1 offers clarity for developers and other real estate practitioners on the rules governing textile credits, which have been amended four times since the department’s most recent ruling on the subject in 2015.

The Department of Revenue’s ruling gives developers a clearer playbook on the South Carolina Textile Communities Revitalization Act, which provides a credit for the renovation, rehabilitation, and redevelopment of abandoned textile mill sites across the state. In short, taxpayers are allowed to earn a tax credit on 25% of their eligible rehabilitation expenses incurred in rehabilitating a textile mill site. 

For more details on the ruling, you can read our previous client alert on the topic here.

Do Automotive Dealers Charge Sales Tax or do Buyers Pay IMF on Trailer Sales? 

In February, the department provided new guidance on the applicability of sales tax or the infrastructure maintenance fee (IMF) to boat trailers, farm trailers, and other utility trailers sold in South Carolina.

Most trailers purchased for personal or business use are subject to sales tax, while those trailers that will be "for hire" are subject to the IMF, which is paid to the Department of Motor Vehicles upon registration of the trailer. A purchaser will never pay both sales tax and the IMF.

The key point of Revenue Ruling 25-2 is to clarify that trailers exempt from DMV registration — given they are privately owned and not for hire — are subject to sales tax, not the IMF. Previously, the SCDOR had instructed that any trailer used for business purposes was subject to the IMF. This revenue ruling brought South Carolina in line with most other jurisdictions that have concluded that trailers "for hire" are limited to those that are used to haul persons or property for a fee. 

Here are some other important points in the trailer ruling:

• Boat trailers under 2,500 pounds, farm trailers, and utility trailers that are privately owned and not for hire are exempt from DMV registration and the IMF, but the dealer must charge sales tax to the purchaser. 
   
• Farm trailers used in planting, cultivating, or harvesting are likely exempt from sales tax under the farm machinery exemption. These trailers would not be subject to the IMF either unless they are held out "for hire."
   
• Sales to nonresidents who will register the trailer in another state are subject to South Carolina sales tax unless the purchaser cannot receive a credit in their home state. 
   
• Trailer sales are exempt from sales tax if the dealer is obligated to deliver the trailer outside of South Carolina. Since the trailer will not be registered in South Carolina, the purchaser is not required to pay the IMF either.

The sales tax rate is 6% on retail sales of tangible personal property, while the IMF is 5% of the gross proceeds of the sale, not exceeding $500. Trailer dealers must maintain records to substantiate whether a sale was subject to or exempt from sales or use tax. 

Withdrawals for Use Guidance 

Revenue Ruling 25-3 provides guidance on the sales tax implications for retail businesses withdrawing items from inventory for their own use. When a retailer withdraws inventory for use (rather than for sale) the retailer owes sales tax on the item as if it were sold in the regular course of the store’s business.

Some retailers may wrongfully conclude that the tax is calculated on the wholesale price that it paid for the item. The ruling instructs that the sales tax is actually calculated on the fair market value (most likely the retail sale price) of the withdrawn inventory. Even if items are withdrawn for promotional purposes or sold for nominal consideration, the sales tax is based on the fair market value.

The ruling also lays out guidance for dual businesses. Businesses that make both retail sales and withdrawals for use from the same stock must report sales tax on both, based on the fair market value of the stock.

Compliance Audits of the Capital Project Sales Tax 

In late March, the SCDOR issued Revenue Procedure 25-1 outlining the department’s process for completing compliance audits in county’s that have enacted local capital project sales taxes. The purpose of the audit is to make sure that the counties are using the sales tax revenue for the appropriate purposes. SCDOR has been responsible for overseeing local option sales taxes since 2018, but had never fully explained its oversight process. 

The capital project sales tax can fund various projects, including infrastructure, public facilities, cultural and recreational facilities, water and sewer projects, flood control, beach access, dredging, and joint projects between counties and other entities.

The department is responsible for administering and collecting the tax, ensuring compliance with the Capital Project Sales Tax Act, and distributing the collected revenues to the counties. 

Accordingly, SCDOR will conduct periodic audits of counties with a capital project sales tax to ensure compliance with all statutory requirements as described in the revenue procedure.

At the conclusion of the audit, the SCDOR will provide written audit report detailing its findings and describing any required remedial measures or repayments. Counties can protest the audit report following procedures in the Revenue Procedures Act.

This should be welcome news for counties because the audit process has been largely undefined since the Supreme Court tasked SCDOR with oversight of these local sales taxes almost seven years ago. 

For more information, please contact me or your regular Parker Poe contact. Click here to subscribe to our latest alerts and insights.