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Income Tax BasicsSales Tax Exemptions

Burnet R. Maybank, IIINexsen Pruet, LLC

1230 Main Street, Suite 700Columbia, SC 29201

803-771-8900bmaybank@nexsenpruet.com

Income Taxes

South Carolina Corporate Incomeand License Tax Basics

INCOME AND LICENSE TAXES

The starting point of South Carolina taxation forcorporations, partnerships, limited liability companies,individuals, estates, and trusts is federal taxableincome. South Carolina law provides for modificationsto be made from federal taxable income in determiningSouth Carolina taxable income.

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INCOME AND LICENSE TAX BASICS

South Carolina’s corporate income tax rate of 5%is among the lowest income tax rate in theSoutheast.

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South Carolina’s license fee, or franchise tax, isimposed on the privilege of doing business as acorporation in South Carolina. The measure of thelicense fee is based on (1) the capital stock and paid-inor capital surplus of the corporation or (2) SouthCarolina gross receipts and property. Mostcorporations pay an annual license fee based oncapital (.001 of the corporation’s capital stock and paid-in-surplus, plus $15).

INCOME AND LICENSE TAX BASICS

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Almost every city and some seven counties imposea business license tax on businesses operatingwithin the corporate limits of the county or city.The annual business license tax normally takes theform of a gross receipts tax on the revenues of thebusiness located within the limits of the county orcity.

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INCOME AND LICENSE TAX BASICS

CALCULATION OF INCOME TAXES FOR MULTI-STATE MANUFACTURER C CORPORATION

1. Taxpayer (Txp) calculates its federal income taxes

2. Txp makes certain add-backs (e.g. bonus depreciation) anddeductions to federal taxable income

3. Txp subtracts allocations made to other states (e.g. incomefrom the sale of real property in another state.)

This equals net income subject to apportionment.

CALCULATION OF INCOME TAXES FOR MULTI-STATE MANUFACTURER C CORPORATION

4. Txp takes net income subject to apportionment and multiplesby apportionment ratio

5. Txp adds back allocations made to South Carolina (e.g.income from sale of property in South Carolina)

This equals total South Carolina net income.

CALCULATION OF INCOME TAXES FOR MULTI-STATE MANUFACTURER C CORPORATION

6. Txp subtracts South Carolina Loss carry forwards

This equals total South Carolina net income subject to tax

7. Txp multiplies this amount by corporate income tax rate of5%

8. Txp subtracts tax credits (e.g. Job Tax Credit, ITC, etc.)

9. Txp subtracts certain adjustments (e.g. Tax Withholdings)and this equals tax due

South Carolina Code §12-6-2210 provides for the determinationof whether taxable income of a business will be apportioned. Ataxpayer whose entire business is transacted or conducted inSouth Carolina is subject to income tax based on the entiretaxable income of the business for the taxable year. A taxpayerthat transacts or conducts its business partly within and partlyoutside of South Carolina is subject to income tax based on theportion of its business carried on in South Carolina. This portionis determined through allocation and apportionment of income.The sum of these amounts is South Carolina taxable income.

INCOME TAXESALLOCATION AND APPORTIONMENT OF INCOME

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South Carolina Code §§12-6-2220 and 12-6-2230 provide thatcertain classes of income, less related expenses, are allocated.Items directly allocated include nonbusiness interest,nonbusiness dividends, nonbusiness rents and royalties fromthe lease or rental of real estate or tangible personal property,gains and losses from the sale of real property, andnonbusiness gains and losses from sales of intangible property.

INCOME TAXESALLOCATION OF INCOME

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INCOME TAXESAPPORTIONMENT OF INCOME

The income remaining after allocation is apportioned in accordance withSouth Carolina Code §12-6-2240. South Carolina generally requires theuse of one of the following apportionment methods:1. A single factor apportionment method (based on sales) for taxpayers

whose principal business in South Carolina is dealing in tangiblepersonal property.

2. A “gross receipts” apportionment method for taxpayers not dealing intangible personal property. This method is typically used by financialbusinesses and service businesses. See South Carolina Code §§12-6-2290 and 12-6-2295.

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INCOME TAXESAPPORTIONMENT OF INCOME

3. A “special” apportionment method provided in SouthCarolina Code §12-6-2310 for certain companies, suchas railroad companies, telephone companies, pipelinecompanies, airline companies, and shipping lines.

4. An individualized apportionment method tailored to aparticular taxpayer (a) because the standard method forthat taxpayer does not fairly represent the extent of thetaxpayer’s business in South Carolina, or (b) as aneconomic incentive allowed the taxpayer.

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INCOME TAXESAPPORTIONMENT METHODS

Single Sales Factor Apportionment Method

South Carolina Code §12-6-2252 provides that a taxpayerwhose principal business in South Carolina is manufacturing orany form of collecting, buying, assembling or processing goodsand materials in this state shall apportion income to SouthCarolina by multiplying the net income remaining afterallocation by the sales factor defined in South Carolina Code§12-6-2280. The single sales factor apportionment method istypically used by manufacturers and retailers having income inSouth Carolina.

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INCOME TAXESAPPORTIONMENT OF INCOME FORMULTI-STATE MANUFACTURERS

For many years multi-state taxpayers used a standard three-factor formula to calculate apportionment ratio; the factorswere property, payroll and sales.

INCOME TAXESAPPORTIONMENT OF INCOME FORMULTI-STATE MANUFACTURERS

Original Apportionment ratio:

Sales in SC * Property in SC * Payroll in SCSales everywhere Property everywhere Payroll everywhere

INCOME TAXESAPPORTIONMENT OF INCOME FORMULTI-STATE MANUFACTURERS

In about 1996, South Carolina joined a then small list ofstates that double-weighted the sales factor. (This wassometimes referred to as “doubleweighted sales” or “fourfactor” apportionment.)

Apportionment Ratio 1996-2007:

Sales SC * Sales SC * Property SC * Payroll SCSales everywhere Sales everywhere Property everywhere Payroll everywhere

APPORTIONMENT OF INCOME FORMULTI-STATE MANUFACTURERS

Beginning in 2007, manufacturers began moving from three-factor formula to 100% sales factor. The three-factorapportionment formula is eliminated entirely in tax year 2011.

APPORTIONMENT OF INCOME FORMULTI-STATE MANUFACTURERS

2011 Apportionment Formula

Apportionment Ratio = Sales in SCSales everywhere

APPORTIONMENT OF INCOME FORMULTI-STATE MANUFACTURERS

Definition of “Sales” in South Carolina

The term “sales in this State” includes sales of goods,merchandise, or property received by a purchaser in this State.The place where goods are received by the purchaser after alltransportation is completed is considered the place which thegoods are received by the purchaser. Direct delivery into thisState by the taxpayer to a person designated by a purchaserconstitutes delivery to the purchaser in this State.

CALCULATION OF INCOME TAXES FOR MULTI-STATE MANUFACTURER C CORPORATION

1. Taxpayer (Txp) calculates its federal income taxes

2. Txp makes certain add-backs (e.g. bonus depreciation) anddeductions to federal taxable income

3. Txp subtracts allocations made to other states (e.g. incomefrom the sale of real property in another state.)

This equals net income subject to apportionment.

CALCULATION OF INCOME TAXES FOR MULTI-STATE MANUFACTURER C CORPORATION

4. Txp takes net income subject to apportionment and multiplesby apportionment ratio

5. Txp adds back allocations made to South Carolina (e.g.income from sale of property in South Carolina)

This equals total South Carolina net income.

CALCULATION OF INCOME TAXES FOR MULTI-STATE MANUFACTURER C CORPORATION

6. Txp subtracts South Carolina Loss carry forwards

This equals total South Carolina net income subject to tax

7. Txp multiplies this amount by corporate income tax rate of5%

8. Txp subtracts tax credits (e.g. Job Tax Credit, ITC, etc.)

9. Txp subtracts certain adjustments (e.g. Tax Withholdings)and this equals tax due

USE OF TAX CREDITSBY PASS THROUGH ENTITIES

♦ Pass Through Entity Specifically Qualifying for Credit

South Carolina Code §12-6-3310(B) contains special provisionsconcerning the use of income tax credits by pass through entities.Unless specifically prohibited, an S corporation, limited liabilitycompany taxed as a partnership, or partnership that qualifies for acredit pursuant to Article 25 of Chapter 6, Title 12 may passthrough the credit earned to each shareholder of the Scorporation, member of the limited liability company, or partner ofthe partnership.

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USE OF TAX CREDITSBY PASS THROUGH ENTITIES (CONT.)

NOTE: The statutory language of a particular tax creditcontrols whether a credit generated by an entity may beused by a partner, shareholder, or member.

Great majority pass through.

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SALES TAXES

SALES TAXES

South Carolina imposes a "general” sales tax, equal to 6% of thegross proceeds of sales, upon every person engaged orcontinuing within this State in the business of selling tangiblepersonal property at retail.

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The tax will therefore be applicable if:

a person is engaged or continuing in the business ofselling,

the person is selling tangible personal property in SouthCarolina, and

the sales of tangible personal property in South Carolinaare retail.

The tax, if the above conditions are met, will be based upon the"gross proceeds” of sales.

SALES TAXES

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South Carolina enjoys a lengthy list of sales taxexemptions for manufacturers

MANUFACTURER’S SALES TAX EXEMPTIONS

MANUFACTURER’S SALES TAX EXEMPTIONS

Tangible Personal Property that is an “Ingredient orComponent Part” or “Used Directly” in the Process

South Carolina does not tax the sale of tangible personalproperty to a manufacturer or compounder that is an ingredientor component part of the tangible personal property or productsmanufactured or compounded for sale, section 12-36-120(2).

MANUFACTURER’S SALES TAX EXEMPTIONS

Tangible Personal Property that is an “Ingredient orComponent Part” or “Used Directly” in the Process

Further, South Carolina does not tax the sale of tangible personalproperty “used directly” in manufacturing, compounding, or processingtangible personal property for sale, section 12-36-120(3). An item isused directly if the materials or products so used come in directcontact with and contribute to bring about some chemical or physicalchange in the ingredient or component properties during the period inwhich the fabricating, converting or processing takes place, see DORReg. 117-302.1

MANUFACTURER’S SALES TAX EXEMPTIONS

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12-36-2120(9)(a)-(d) - Coal, coke, or other fuel formanufacturers, transportation companies, electric powercompanies, and processors

MANUFACTURER’S SALES TAX EXEMPTIONS

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12-36-2120(50) - The following items when used by a qualifiedrecycling facility: recycling property, electricity, natural gas,fuels, gasses, fluids and lubricants, ingredients or componentparts of manufactured products, property used for thehandling or transfer of postconsumer waste or manufacturedproducts or in or for the manufacturing process, andmachinery and equipment foundations

MANUFACTURER’S SALES TAX EXEMPTIONS

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12-36-2120(51) - Material handling systems and materialhandling equipment used in the operation of a distributionfacility or a manufacturing facility of a taxpayer that investsat least $35 million in South Carolina

MANUFACTURER’S SALES TAX EXEMPTIONS

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12-36-2120(52) - Parts and supplies used by persons engagedin the-business of repairing or reconditioning aircraft owned byor leased to the federal government or commercial air carriers.This exemption does not extend to tools and other equipmentnot attached to, or that do not become a part of, the aircraft.

SALES TAX EXEMPTIONSTECHNOLOGY INTENSIVE FACILITY

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12-36-2120(65)(a) and 12-36-2120(66) - Computer equipmentused in connection with, and electricity and certain fuel used by,a technology intensive facility (defined in South Carolina Code§12-6-3360(M)(14)(b)) that invests $300 million over 5 years,creates at least 100 new jobs during the 5 years with an averagecash compensation of 150% of the per capita income of thestate, and spends at least 60% of the $300 million investment oncomputer equipment

MANUFACTURER’S SALES TAX EXEMPTIONS

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12-36-2120(65)(b) - Computer equipment used in connectionwith a manufacturing facility where the taxpayer invests at leastseven hundred fifty million dollars in real or personal propertyor both comprising or located at the facility over a seven-yearperiod and creates at least three thousand eight hundred full-time new jobs at the facility during that seven-year period. Thisexemption is effective November 1, 2009 and only applies totaxpayers that notify the Department prior to October 31, 2015of their intent to utilize the exemption.

MANUFACTURER’S SALES TAX EXEMPTIONS

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12-36-2120(67) - Construction material used in the constructionof a single manufacturing or distribution facility, or one thatserves both purposes, that invests at least $100 million at asingle site in South Carolina over an 18 month period. Thisexemption will be phased-in from July I, 2007 - July 1, 2011.After July, 1, 2011, the exemption will be fully phased-in.

MANUFACTURER’S SALES TAX EXEMPTIONSELECTRICITY

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The sale of electricity used by manufacturers, processors,miners, quarriers, or cotton gins to manufacture, mine, orquarry tangible personal property for sale is exempt from thetax under section 12-36-2120(19).

This exemption applies to electricity that provides lightingnecessary for the operation of machines used inmanufacturing tangible personal property for sale and toelectricity used to control plant atmosphere as to temperatureand/or moisture content, in the quality control of tangiblepersonal property being manufactured or processed for sale.

MANUFACTURER’S SALES TAX EXEMPTIONSELECTRICITY

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This exemption does not apply to sales of electricity used inadministrative offices, supervisory offices, parking lots,storage warehouses, maintenance shops, safety control andcomfort air conditioning.

MANUFACTURER’S SALES TAX EXEMPTIONSMACHINE EXEMPTION

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Section 12-36-2120(17) exempts machines used inmanufacturing, processing, recycling, compounding, mining, orquarrying tangible personal property for sale.

MANUFACTURER’S SALES TAX EXEMPTIONSMACHINE EXEMPTION – GENERAL RULE

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A machine qualifies for the machine exemption if the machinemeets the following three requirements:

1. The machine is used at a manufacturing facility whosepurpose is manufacturing a product "for sale." It does notapply to machines used at a facility whose purpose maybe retailing, wholesaling, or distributing. For example,machines used by an industrial baker manufacturingbreads for sale may be exempt; however, similar machinesused by a local retail bakery are not exempt;

MANUFACTURER’S SALES TAX EXEMPTIONSMACHINE EXEMPTION – GENERAL RULE

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The machine is used in, and serves an essential andindispensable component part of the manufacturing process andis used on an ongoing and continuous basis during themanufacturing process. Note: A machine "integral andnecessary" to the manufacturer, such as a machine used solelyfor warehouse, distribution, or administrative purposes, is notexempt under the machine exemption since it is not "integral andnecessary" to the manufacturing process;

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MANUFACTURER’S SALES TAX EXEMPTIONSMACHINE EXEMPTION – GENERAL RULE

The machine must be substantially used (not necessarilyexclusively used) in manufacturing tangible personal propertyfor sale, i.e., more than one-third of a machine's use is formanufacturing.

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MANUFACTURER’S SALES TAX EXEMPTIONSMACHINE EXEMPTION – GENERAL RULE

A machine meeting the above requirements may be exempteven if it does not have moving parts or is a fixture upon the realestate where it stands. However, buildings and parts ofbuildings, as well as other improvements which benefit the landgenerally and may serve other users of the land, are not exempt.

MANUFACTURER’S SALES TAX EXEMPTIONS

Machines Used Substantially in Manufacturing(Dual Usage Machines)

“Substantial” use, but not “exclusive” use, of a machine in the manufactureof tangible personal property for sale is required in order for the machineexemption to apply.

For example, the purchase of a forklift that is used substantially to movematerials from from one stage of the production process to another (anexempt purpose) and also used to load trucks (a non-exempt purpose) isallowed the machine exemption from sales and use tax. In addition,purchases of parts for the forklift are also exempt from tax.

MANUFACTURER’S SALES TAX EXEMPTIONSMACHINE EXEMPTION

Machines Owned by Someone Other Than a Manufacturer

Ownership of the machine by the manufacturer is not required toqualify for the machine exemption. The use of a machinedetermines whether it is exempt from sales and use tax.

MANUFACTURER’S SALES TAX EXAMPTIONSEXAMPLES OF NON-EXEMPT MACHINES OR PARTS

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material handling machinery and/or mechanical conveyors up to the pointwhere the materials go into process

chemicals used to clean non-exempt machines, such as storage tanks, orthe manufacturing facility

paint used on exempt manufacturing machines to prevent machinecorrosion

machines used for maintenance purposes storage racks used for warehouse purposes warehouse machines used for warehouse purposes power lines bringing electricity into the plant

POLLUTION ABATEMENT MACHINES

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Section 12-36-2120(17) exempts pollution control machinesqualify for the machine exemption when installed and operatedfor compliance with an order of an agency of the United Statesor of this state to prevent or abate air, water, or noise pollutioncaused or threatened by the operation of other exemptmachines used in the mining, quarrying, compounding,processing, and manufacturing of tangible personal property forsale.

MANUFACTURER’S SALES TAX EXAMPTIONSPACKAGING

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Section 12-36-120(4) exempts the sale of materials,containers, cores, labels, sacks, or bags that are usedincident to the sale and delivery of tangible personalproperty are not subject to the tax.

“Materials” include wrapping paper, twine, strapping, nails,staples, wire, lumber, cardboard, adhesives, tape, waxedpaper, plastic materials, aluminum foils, and pallets used inpackaging tangible personal property incident to its salesand delivery and used by manufacturers, processors, orcompounders in shipping tangible personal property.

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MANUFACTURER’S SALES TAX EXAMPTIONSPACKAGING

“Containers” include paper, plastic or cloth sacks, bags,boxes, bottles, cans, cartons, drums, barrels, kegs, carboys,cylinders, and crates.

“Cores” include spools, spindles, cylindrical tubes and the likeon which tangible personal property is wound.