SC Administrative Law Court Decisions

The issue to be addressed in this Order is whether certain materials purchased by Taxpayer to construct a manufacturing facility (“facility”) in Charleston County, South Carolina are exempt from the sales and use tax as machines or as parts of machines within the meaning of those terms as used in S.C. Code Ann. §12-36-2120(17) (Supp. 2002) (commonly referred to herein as the “sales and use tax exemption,” “sales tax exemption” or “machine exemption”). Taxpayer contends that its entire chemical processing facility is a machine and, therefore, all of the items in issue are exempt as parts of that machine. Alternately, Taxpayer submits that certain specific items are themselves machines, machine parts or attachments to machines and are therefore exempt.

At the request of the Department, a tour of the facility was conducted by the Taxpayer on December 17, 2002 for the benefit of the Court. Representatives and potential witnesses of both the Taxpayer and the Department were present, along with the undersigned. Thereafter, after notice to the parties, a hearing was conducted by the undersigned at the offices of the Administrative Law Judge Division in Columbia, South Carolina, on March 10, 11, and 12, 2003.

Based upon the evidence presented during the trial, I find and conclude that:

(1) The facility does not function as a “single machine” and, as

such, it does not qualify for the machine exemption.

(2) The following listed items are structural components of building(s) located on the facility property and, as such, do not qualify for the machine exemption and are subject to the sales and use tax:

a. Concrete foundations of the buildings;

b. Structural steel, steel decking, and checker plate within the buildings;

c. Hangers, supports, and conduit not attached to exempt machines;

d. Paint on walls, frames, and process equipment;

e. Vinyl ester on the floors of the buildings;

f. Insulation for the curing warehouse building;

g. Concrete block walls which comprise the interior walls of the climate controlled curing warehouse; and

h. Architectural roofing and siding which encloses all the buildings comprising the entire facility.

(3) The following items are used for storage only, are not used to manufacture tangible personal property, and as such, are not exempt under the machine exemption:

a. Intermediate storage racks located in the buffer storage area; and

b. Racks used to store fiber located in the curing warehouse.

(4) The HVAC equipment located in the polymerization area is used to cool electrical equipment which feeds other electrical processes in the building, is not used to manufacture tangible personal property which will be offered for sale and, thus, is not exempt under the machine exemption.

Any motions or issues raised in the proceedings, but not addressed in this Order are

deemed denied pursuant to ALJD Rule 29(C).

WITNESSES AND EXHIBITS

Witnesses-

For the Taxpayer:

1. Gary Dzura is an employee of Taxpayer and is one of Taxpayer’s directors of taxes. He oversees the area of sales tax for the Taxpayer. Mr. Dzura testified that the tax period in controversy is from January 1, 1992 through December 31, 1994. He stated that Taxpayer contests the approximately $ 401,000.00 sales tax deficiency, as alleged by the Department, and that Taxpayer has filed with the Department a claim for refund in the approximate amount of $ 117,840.00.

2. William F. St. John, employed by Taxpayer as the maintenance and engineering manager at the facility, testified that one of his responsibilities is to ensure that the facility is operational at all times and that all records and repairs are maintained and documented as required by OSHA requirements. Further, he stated that he was a part of Taxpayer’s “team” that built this facility. He described the process Taxpayer followed in designing the plant, engineering it, and then constructing it.

Mr. St. John also explained to the court (by referring to various large drawings, photographs and charts as well as various exhibits in Taxpayer’s notebook) the various processes that are involved to prepare or manufacture the final product at the facility.

3. Dr. Neal E. Tonks testified that he is a graduate of the Georgia Institute of Technology with a degree in chemistry and the University of Georgia with a doctorate in chemistry. He testified that he has been employed with Taxpayer for approximately 17 years. Dr. Tonks stated that he is responsible for Taxpayer’s global manufacturing, which includes research and development for the project division. Dr. Tonks testified about the plant design, identified some of the manufacturing processes and the curing times of the products produced, and explained the layout of the buffer storage area and the curing warehouse (with its movable racks) at the facility.

Dr. Tonks testified that he has visited some basic raw material synthetic plants, some polymeric materials synthesis plants, some synthetic fibers synthesis plants, some organic natural fiber spinning plants, some textile mills, some covering plants and some knitting and finishing mills. He opined that the facility is an integrated plant and that the cost to retrofit and make modifications to the facility for usage by another manufacturing company (technology) would be exorbitant; thus, he felt that the facility would need to be torn down and a new one constructed from the ground up if it were sold and operated by another manufacturing company.

4. Dr. Charles R. Manning, a graduate in mathematics and geology from Florida State University and a recipient of a doctorate from North Carolina State University, was offered as the next witness by the Taxpayer. During voir dire, Dr. Manning acknowledged that he was not a licensed engineer in the State of South Carolina. Subsequently, the Department made a motion to disqualify Dr. Manning from testifying as an expert witness, arguing that S.C. Code Ann. § 40-22-20 (22) (Supp. 2002) includes the offering of expert technical testimony under the definition of the “practice of engineering.” Further, S.C. Code Ann. § 40-22-30 (Supp. 2002) states that it is unlawful for a person in a public or private capacity to practice or offer to practice engineering without being licensed in South Carolina. The Department’s motion was granted and the Taxpayer was given the opportunity by the Court to hire another expert who could testify later during the trial.

5. Next, the Taxpayer offered Arthur R. Rosen, an attorney with the New York City office of the law firm of McDermott, Will and Emery. Mr. Rosen has a bachelor’s degree from New York University in physics and politics and received his law degree from St. John’s University. Also, he received his MBA from Renssalaer Polytechnic Institute. Mr. Rosen has been practicing law in the disciplines of state and local taxation for almost thirty years, has served as the chairman of the ABA, Tax Section, State and Local Tax Committee, and has served as a member of the executive committee of the New York State Bar Association Tax Section for about 20 years. Notwithstanding an objection made by the Department to disqualify this witness based upon his previous representation of Taxpayer in tax matters, as well as other partners or associates in his law firm having represented Taxpayer, the court noted that Mr. Rosen was being paid on an hourly basis for offering testimony in the case and allowed him to be qualified as an expert witness in the field of state and local taxation.

Mr. Rosen discussed the rationale for the passage of the sales and use tax by some forty-five (45) states, gave a review of their applicable sales and use tax statutes and, noted that there is little conformity or uniformity among them in defining and applying their machine or sales tax exemption. He noted that many of the statutes have incorporated the word “directly;” however, the states interpret and apply their statutes differently. Mr. Rosen discussed Niagara Mohawk Power Corp. v. Wanamaker, 286 App.Div. 446, 144 N.Y.S.2d 458 (1955); aff’d 157 N.Y.S.2d 972, 2 N.Y.2d 764 (1956), noting that the “integrated plant concept” was the theory adopted by New York. He noted that there had been a movement over the last few years by many states in their interpretation of their statutes to consider “form over substance” and to look more at the legislative intent. It was his opinion that the more conservative approach, known as the “production line concept,” is only applied in two or three states.

Mr. Rosen opined that the primary manufacturing building at the facility qualified for the sales tax exemption since it would have no economic use for any other manufacturing or production plant unless a “zillion dollars” was spent to retrofit it. Further, he opined that the concrete, structural steel, hangers, conduits, cable trays, pipe racks and related items, specialized floor covering, painting, insulation and the interior walls of the curing warehouse were all components which were necessary and integral for production at the facility and, thus, they should be exempt from the sales and use tax. Finally, Mr. Rosen gave the opinion that the entire facility was conceived and built as one integrated entity and that the entire plant should qualify for the machine exemption.

6. Taxpayer called as its last witness Alan Owens, a registered engineer in the State of South Carolina. Mr. Owens is employed with the engineering firm of Campbell, Scheider & Associates. Without objection, he was qualified by the court as an expert in the field of structural engineering. He testified that he has designed slabs, walls and roofs for various facilities, as well as piles and pile caps for foundations and piers. Mr. Owens stated that he is presently working on a design project for a seventeen story high rise building in Atlanta, Georgia. Mr. Owens testified that he had been retained by Taxpayer just a few days prior to his appearing to testify in this trial. He acknowledged that he had never visited the facility; further, he stated that he had never had any conversation with any of the engineers at Taxpayer’s plant. Mr. Owens testified that he had reviewed reports, depositions, and architectural drawings of the facility, and that he had studied the manufacturing process at the facility. He opined that Taxpayer’s facility had been “overdone” and “over-engineered” and had been designed to exceed the criteria needed to support its production process. Also, Mr. Owens opined that the facility constituted a “single integrated machine” with every entity being dependent on the other.

Notwithstanding the fact that he had visited other fiber plants which had been retrofitted, Mr. Owens opined that it would be very expensive and cost prohibitive to remove all the equipment and to retrofit the facility for another manufacturing process.

For the Department:

1. John Patrick McCormick, an employee of the Department who presently works as a senior revenue law consultant, testified that he has had experience with the Department in the sales and use tax area for approximately 20 years. Mr. McCormick has held various positions over the last 23 years with the Department, and since 1987 has been assigned to the policy section. Further, Mr. McCormick stated that he has visited many facilities that have requested sales tax exemptions and has handled some fifty to seventy-five cases as the Department’s representative.

Mr. McCormick handled the audit from which the controversies herein arose. He stated that he visited and toured the facility on four separate occasions. During his testimony, he referred to the Department’s final determination in this case. He described the various exemptions that were allowed to Taxpayer and gave the rationale for each. He noted that neither the buildings, the concrete foundation for the buildings, the structural steel used to support the building, the hangars and supports which were not attached to machines, the vinyl ester applied onto the floors, nor the insulation installed in the curing warehouse building were allowed the sales tax exemption. He testified that the Department follows the “production line” theory and not the “integrated plant” theory in determining sales tax exemption questions.

2. Dr. Tim Arthur Jur testified next for the Department. His curriculum vitae was provided to the court for review. He began his engineering consulting company, Engineering Design and Testing Corporation, in 1979. Dr. Jur noted that his company has approximately 75 employees at the present time, which includes 39 engineers. The company operates out of 7 offices across the United States.

During his career Dr. Jur taught a number of courses at the University of North Carolina, which included mechanics, strength of materials, machine designs and the manner in which machines interact with each other. He is licensed in many states including North Carolina, Florida, South Carolina and Alabama. Dr. Jur was qualified by the court, without objection, as an expert witness in the area of design engineering, reconstruction of accidents, standards of particular products, as well as metallurgical engineering. Dr. Jur stated that he has consulted with the Department concerning sales and property tax cases six times over the last ten plus years.

After defining various terms including machine (and its four different types), process equipment, instrumentation and control systems, buildings, foundations, tank farms, cooling towers, chiller buildings, and the warping area, Dr. Jur explained to the court the manufacturing process at the facility. During his explanation he referred to the general flow diagrams listed in Department’s Exhibit 2, Appendix II. He noted that it is common for the designers of a plant to lay out the planned facility to accommodate the machinery and the manufacturing process which will be used.

Dr. Jur opined that the facility could be converted to other manufacturing processes. Referring to the individual items in controversy, Dr. Jur gave his opinion that the concrete foundation could be used in other manufacturing processes, the structural steel was a part of the shell of the building, the hangars and support were part of the building, the conduit was part of the distribution system and thus a part of the building, the paint on the walls, frames and processing equipment were all part of the building or necessary for maintenance of the equipment, the vinyl ester paint on the floor was a part of the building, the heating and air conditioning system was part of the building, the interior concrete walls were a part of the building, and the roof was a part of the exterior structure of the building, as was the siding.

3. Mr. Steven Wesley Morris testified that he has been employed as a civil structural engineer with Engineering Design and Testing Corporation for the last 12 years in its Charlotte, North Carolina office. He was presented and was qualified by the court, without objection, as an expert in structural engineering. Mr. Morris is licensed as an engineer in many of the southeastern states, including South Carolina, as well as in some mid-western states. Mr. Morris has performed design support for structural work on several high rise buildings in the Maryland and Washington, D. C., areas as well as a forty story bank building in Charlotte, North Carolina.

At the Department’s request, Mr. Morris collaborated with Dr. Jur in studying the facility and its processes. His concentration was on the structural aspects of the building(s) whereas Dr. Jur concentrated on the machinery aspect. Mr. Morris explained the process of designing buildings for construction and the need to concentrate on its uses as well as the loads the buildings must support. He discussed the many considerations that are involved. He referenced the Concrete Steel Reinforcing Institute which sets standards for steel bars. He discussed the usage of pile caps as well as steel girders and beams, referring to the Manual of Steel Construction. Mr. Morris testified that the roof was fairly light and possibly lighter than that which he would have designed for the building. He did note that it is common in the industry to install membrane roofs on facilities as was constructed at the facility.

Mr. Morris was asked questions related to various exhibits and photographs which were introduced into the record. He noted that the facility had no unusual design. He testified that there were no unusually large beams or columns in the building. In conclusion, Mr. Morris opined that the facility was not a single purpose facility and that it could be retrofitted. He gave examples of other plants of which he had knowledge which had been retrofitted. He opined that the plant could be used as a fiber plant by another company by removing the equipment, piping, tanks, and controls and redesigning the plant for the new equipment. Mr. Morris testified that he considered this facility to be a textile plant.

Upon recall, Mr. Morris talked about “wind load” and the need in a coastal area to give more consideration to it. He testified that there are greater lateral forces in coastal areas and that buildings constructed there would require stronger steel framing as well as larger pile caps to ensure they do not blow over. Further, Mr. Morris testified that roofs must be strong in order to hold rain water, that stairways are critical for the protection of life and safety, and that heating and air conditioning systems are critical for climate control in plants. 4. Richard D. Pomp was the last witness tendered by the Department. He is a

magna cum laude graduate of Harvard Law School. He has taught tax law on occasion since 1973 at the following law schools: Harvard, Boston College, University of Texas, University of Tokyo, Chulalongkorn (Bangkok, Thailand), New York University and Columbia. Prof. Pomp has been the Alva P. Loiselle Professor of Law at Connecticut Law School since 1992. He was presented to and qualified by the court, without objection, as an expert in the field of state and local taxation.

Prof. Pomp testified that numerous states, in seeking to attract industry, have developed and enacted statutes authorizing certain tax exemptions. One such tax policy which has been enacted into law in South Carolina is the sales and use tax exemption for machines. He testified that the states apply different interpretations and applications to the statutes which authorize a sales and use tax exemption. Prof. Pomp discussed that the “Ohio school/rule” theory applies a very narrow meaning or interpretation of the statute authorizing the machine exemption, requiring that the machine must actually act on the material or product and actually change it. He noted that on the opposite end are those states that have adopted the “necessary and integral part of the production process” rule or, the “integrated plant rule.” He stated that these states which have the “necessary and integral part” rule apply the statutes or regulations differently, based upon their various interpretations. Also, he testified that in some of the “integrated plant theory” states, not all machinery used in the manufacturing process is exempt.

Prof. Pomp discussed separately each of the items in controversy in this case. First, he applied the “Ohio rule” concept to each item, and then he applied the “integrated plant rule” enunciated by the South Carolina Court of Appeals in Hercules Contractors and Engineers Inc. v. S.C. Tax Comm’n, 280 S.C. 426, 313 S.E.2d 300 (Ct. App. 1984). He noted that the court in the Hercules case provides a “bright line” test to qualify buildings for the machine exemption. If the improvements benefit the land generally and may serve various users of the land, they are subject to taxation and do not qualify for the machine exemption. He noted the court stated that, in order to qualify for the exemption, the structure must have no use apart from the “machine” of which it is an integral part. Prof. Pomp opined that, if the Hercules test is applied to the instant matter, the six acre plant site could not qualify as a machine for which the sales tax exemption could apply. Also, he noted that the court in Hercules cited and borrowed language from the Pennsylvania Supreme Court in adopting its test to qualify materials/machinery for the machine tax exemption in South Carolina. Using that test, Prof. Pomp opined that the various items of machinery alleged by Taxpayer to qualify for the machine exemption should be excluded. He opined they were parts of the building(s) and were not items of machinery qualifying for the sales and use tax exemption.

Exhibits

Prior to the trial, both parties provided to the court notebooks containing exhibits which the parties intended to use in their presentation of evidence during trial. Taxpayer’s pretrial notebooks (labeled I and II) contained 40 exhibits (a report, a position paper, various documents, photographs and diagrams). The Department’s pretrial notebook contained a legal brief, a report by Dr. Tim A. Jur of Engineering Design & Testing Corporation (with various photographs, sketches, diagrams and other documents attached thereto), drawings of the facility, excerpts from the engineering publications (e.g., CRSI Design Handbook), excerpts from the deposition of Dr. Neal Tonks, Appeal Correspondence with proposed assessment/letter of appeal and claim for refund, various legal authority citations, as well as curricula vitae on its two expert witnesses (Dr. Tim A. Jur and Richard D. Pomp). All the exhibits contained in the notebooks submitted to the court pretrial by both parties were stipulated to by the parties and became a part of the record as evidence to be considered by the court in arriving at its decision.

FINDINGS OF FACT

I make the following Findings of Fact, taking into consideration the burden on the parties to establish their respective cases by a preponderance of the evidence, and taking into account the credibility of the witnesses:

1. Taxpayer is an Indiana corporation headquartered in Pittsburgh, Pennsylvania. It is a part of a worldwide chemical and pharmaceutical company based in Germany.

2. Taxpayer’s subsidiary is a manufacturer of, inter alia, an elastic spandex fiber. The facility is located in Berkeley County, South Carolina, in an industrial park. The manufacture of the elastic spandex fiber takes place in a series of buildings which are collectively referred to herein as the “facility.”

3. The chemical manufacturing performed at the facility is a complex process involving a long series of interrelated operations from the initial storage of raw materials within insulated and heated tanks, to the chemical reaction process that produces a spinning solution, to the winding of fiber onto beams for shipment to customers. Numerous processing machines throughout the facility perform simultaneous processes that combine to produce the elastic fiber.

4. Department examined Taxpayer’s books and records for sales and use tax purposes

covering the period January 1, 1992 through December 31, 1994 (“audit period”). As a result of the examination, a proposed assessment was issued. The proposed assessment reflected sales tax due in the amount of $401,809.82 (plus interest)^[1] on materials purchased for construction of the buildings housing the fiber manufacturing process. Taxpayer submitted a separate claim for a refund in the amount of $117,840.23 (plus interest) which represented sales tax accruals on additional building materials used to construct the facility. The Department denied the claim.

5. Taxpayer submitted a timely protest of the assessment and the denial by the Department of the claim for refund. Taxpayer claimed that all items were exempt pursuant to the machine exemption.

6. The facility is comprised of six areas:

(1) the tank farm where raw materials (i.e. chemicals) are either stored in tanks, processed in tanks, or fed to parts of the manufacturing system;

(2) the polymerization area where chemicals (received from the tank farm) are mixed and heat is applied;

(3) the spinning area where products (received from the polymerization area) are spun dried and fibers are formed. The fiber is extruded onto winders. The winders wind the fiber onto spools. During this part of the process, oils are applied to the fiber and the spools are boxed and sent to buffer storage.

(4) the inspection area where the product is inspected for quality control and sent to the curing warehouse;

(5) the curing warehouse where the product is maintained within a certain range of temperatures to insure strength and elasticity. Curing times vary according to the denier (a measurement of the linear density) of the product. After the curing time has elapsed, the product goes to

(6) (a) the warping area, if the customer desires that the product be provided on a different size beam so the spools can be rewound onto beams that can be better utilized by the customer; or (b) the delivery area to begin the delivery process to the customer.

7. The concrete in dispute represents foundations, containment basins and supporting structure for buildings. Because this facility was constructed in a coastal area, which has certain soil conditions and a frequency of hurricanes/tornadoes, additional concrete was needed at the facility to insure the stability of the buildings as they were constructed. Concrete was also used to support various loads within the building, e.g., machinery, pedestals, floors, and spill basins. The concrete floors provide a level surface for the installation of machines, which minimizes side to side vibration of the machines.

8. The structural steel, steel decking, and checker plate represents girders, rivets, bolts, welds, etc. used to construct the framing of the facility and the decking used as flooring in some areas. Also, the steel is used as support for the spinning tubes which are several stories in height. The steel decking, while providing flooring, also helps to support machines, including certain HVAC equipment, and is directly attached to some of the processing equipment.

9. Hangers, supports, and conduit, which includes pipe racks and cable trays, are used for a variety of purposes. Pipe racks and hangers support process piping of varying lengths from one area to another throughout the facility. Cable trays support electrical wiring and facilitate the distribution of electricity throughout the facility. Conduit is hollow metal or plastic piping through which electrical wires are directed to specific machines. The purpose of these items is to protect piping and cables from chemical spills and from the heat generated by the machinery.

10. The walls, frames, and process equipment were painted to provide chemical resistance, and to protect process equipment from corrosion.

11. Some floors throughout the facility were painted in vinyl ester to provide chemical resistance and to prohibit any spill from seeping through the concrete floor into the soil and/or underground water. In the warping area, the floor was painted black to make it easier to see the fibers and thread the warping machine.

12. Building insulation in the curing warehouse was purchased to efficiently maintain the climate controlled curing warehouse.

13. The HVAC in question is located in the switch gear room of the polymerization area. The switch gear equipment directs the flow of electricity throughout the facility. Some of the switch gear equipment operates at a high temperature and requires a temperature controlled environment to operate effectively. The HVAC units serve to remove hot air from this room, to provide heat or cool air, and to maintain a positive pressure in that room. Positive pressure is required in the switchgear room to keep potential leaks of vapor from combusting with the electrical equipment.

14. Concrete block walls inside the curing warehouse serve as a fire wall and an insulator between the curing warehouse and other portions of the plant.

15. The architectural roofing and siding are needed to provide shelter for the equipment. In addition, each provides some insulation to the overall facility.

16. The intermediate storage racks in the buffer storage area are used to store the product between the time it has been extruded onto winders and the time that quality control inspection takes place. The fiber has been boxed by the time it reaches the buffer storage area.

17. The racks in the curing warehouse are movable racks used to hold the boxes of fiber during the curing process. The purpose of allowing the fiber to cure is to have a marketable product with consistent properties. The fiber is allowed to cure (age) in a carton to insure that the reaction chemistry is complete and the adhesion values have reached levels for shipment. Curing takes from sixteen hours to twenty-one days depending on how heavy the denier is. The heavier the denier, the longer the curing time. The fiber is not a marketable product until curing is complete.

DISCUSSION

The two issues for determination in this case are:

(1) Whether the structures comprising the facility function as a single machine so as to make the construction materials exempt under S.C. Code Ann. § 12-36-2120 (17), the sales tax machine exemption; or in the alternative,

(2) Whether certain building materials purchased to construct the facility independently act as machines such that they are exempt from sales and use tax pursuant to the machine exemption.

In analyzing any tax exemption matter, it is a well-settled rule that a statute granting a tax exemption is to be strictly construed against the exemption. Chronicle Publishers, Inc. v. S.C. Tax Comm’n, 244 S.C. 192, 136 S.E.2d 261 (1964). Likewise, exemptions are a matter of legislative grace and a person seeking the benefit of the exemption must place himself squarely within the terms of the statute granting the same. Fennell v. S.C. Tax Comm’n, 233 S.C. 43, 103 S.E.2d 424 (1958); 68 Am.Jur.2d Sales and Use Taxes Section 117.

THE FACILITY AS A “SINGLE MACHINE”

Taxpayer argues that the facility is a single highly integrated chemical-processing machine within a climate-controlled environment. Whereas the facility (excluding the tank farm) is superficially several buildings, Taxpayer asserts that the functionality of its walls, floors, and roof is that of a large cooler customized in size and utility to surround the required machines and their attachments. Thus, it argues that all purchases of building materials for the entire facility should be exempt pursuant to Hercules Contractors and Engineers, Inc. v. S.C. Tax Comm’n, 280 S.C. 426, 313 S.E.2d 300 (Ct. App. 1984).

Taxpayer presented testimony at the hearing from various witnesses who stated that the facility was built for a single purpose and the layout of the buildings was designed to facilitate the process. Taxpayer’s witnesses also testified that the concrete foundation and structural steel were specifically designed to support the machinery inside. As such, Taxpayer’s witnesses concluded that the concrete and structural steel are much more massive than that which is normally found in other manufacturing buildings.

Further, Taxpayer’s witnesses testified that the fiber produced at the facility is sensitive to temperature changes and any large fluctuations would destroy its strength and elasticity. Thus, Taxpayer asserted the following:

(1) the roofing, siding, insulation, and HVAC throughout the buildings were so constructed to maintain temperature control;

(2) the paint on the walls was necessary to prevent the penetration of noxious gases;

(3) the paint on the process equipment and frames was needed to prevent corrosion;

(4) the vinyl ester painted on the floors was necessary to prevent potential spills

from seeping through the concrete foundation; and

(5) the concrete walls inside the curing warehouse were necessary to maintain constant temperature and provide a firewall between the warehouse and the other facility process buildings.

In contrast, the Department presented the testimony of two expert witnesses, a mechanical engineer and a structural engineer.^[2] Both experts testified that the structures were buildings and functioned as such, serving the same purposes as a multitude of other manufacturing buildings and facilities in this State. Steven Morris, the Department’s expert in structural engineering, testified that the amount of concrete in the foundation was a function of the soil conditions, the tendency for wind uplift (i.e., hurricanes, tornadoes, and violent weather), and the loads from within the building which the foundation would have to carry. Further, he testified that these considerations are typical in the construction of buildings. With regard to the structural steel used in constructing the building, Mr. Morris testified that the function of structural steel within a building is to take the loads from the operation of the facility and transfer such to the foundation, which in turn, transfers the load to the ground. He opined that the structural steel in these buildings performs that function. Further, it was his opinion that the remaining items (hangers, conduits, cable trays, pipe racks, insulation, interior walls in the curing warehouse, and architectural roof/siding enclosing the facility) are all part of the building envelope and function no differently in this facility than in any other manufacturing facility. Whereas to some extent these items do have an environmental control function, Mr. Morris noted that they are still part of a building. Finally, he testified that the HVAC provided climate control to the facility for purposes of quality control of the product and that such function did not make the building a machine. Rather, Mr. Morris opined that it is common to use HVAC units for this purpose in manufacturing buildings.

The issue of whether a structure functions as a machine has been addressed by the South Carolina Court of Appeals in the case of Hercules Contractors and Engineers Inc. v. S.C. Tax Comm’n, supra. In that case, an action was brought by Hercules Contractors seeking refunds of sales tax (pursuant to the sales tax machine exemption) paid on all materials used in the construction of the three waste treatment facilities. The portions of the facility in contest were the concrete and steel vats and basins, as well as certain railings, walkways, ladders, tanks, troughs, and pipes. The court found, inter alia, that the vats or basins functioned as one single entity and that the railings, walkways, ladders, tanks, troughs, and pipes were parts and attachments thereto. Since the railings, walkways, and ladders were required by federal and state law, the court found that they were necessary to the overall function of the system.

Several portions of that decision are critical to the determination of the case at hand. First, the court in Hercules established a test to determine what is “machinery and equipment.” Borrowing language from the Pennsylvania Supreme Court, the Court of Appeals adopted Pennsylvania’s test as follows:

“[I]mprovements, whether fast or loose, which (1) are used directly in manufacturing the products that the establishment is intended to produce; (2) are necessary and integral parts of the manufacturing process; and (3) are used solely for effectuating that purpose are excluded from real estate assessment and taxation. On the other hand . . . improvements which benefit the land generally and may serve various users of the land are subject to taxation.”

280 S.C. at 432, 313 S.E.2d at 304 (citing Commonwealth v. Philadelphia Electric Company, 472 Pa. 530, 372 A.2d 815 (1977)).

The court in Hercules concluded that the vats or basins in the waste treatment plant met the above definition. In a paragraph of particular importance to the case at hand, the South Carolina Tax Commission (now the South Carolina Department of Revenue) in the Hercules case voiced the concern that the above rationale would lead to the exemption from the sales and use tax of buildings which house textile mills and nuclear reactors as machines. The court responded as follows:

The Commission argues this rationale would lead to the treatment of buildings which house textile mills and nuclear reactors as tax-exempt machines. However, the difference between buildings and the vats and basins at issue here is readily apparent. The concrete vats and basins of Klopman, unlike buildings, have utterly no use apart from the machine of which they are an integral part.

The court in Hercules settles the exact issue presented by this taxpayer-- whether a building can be a machine. The Hercules court opines that something that is considered a structure or a fixture can also be considered a machine, notwithstanding that it is a fixture or a structure. However, it cannot be a machine if it is a building. Based upon the language cited above, the Hercules court resolves concerns about instances where taxpayers may wish to have buildings classified as machines. It borrows language from the Pennsylvania case, noting that “improvements which benefit the land generally and may serve various users of the land are subject to taxation.” 280 S.C. at 432, 313 S.E.2d at 304 (emphasis added). Second, the Hercules court states that the structure must have no use apart from the machine of which it is an integral part. The court makes explicit its intent to exclude single purpose buildings from the benefits of the machine exemption by referencing buildings that house nuclear reactors as an example of a building with a use separate and apart from the machine therein.

Unlike the vats and basins in Hercules, the facility buildings in this case could have a use separate and apart from the machinery within. The Department’s expert structural engineer testified that another manufacturer could examine the maximum loads dictated by the current structure and determine if the machinery and equipment it needed to install for its manufacturing process would exceed that load. Taxpayer’s machinery could be removed and the building could then be retrofitted to meet the needs of the new manufacturing process. Dr. Neal Tonks, the plant manager at Taxpayer’s facility, testified that the construction of this facility was patterned after a similar facility in Germany which had been retrofitted for the purpose of manufacturing the same fiber. Given these facts, the facility building is nothing more than a building constructed to house the machinery needed to manufacture the fiber. It benefits the land generally and could serve other users. See Hercules, supra. I find that the facility structures and all of its supporting members do not function in tandem with the machinery inside to create a single machine. The structure and its supporting members function as a building and, as such, are not exempt pursuant to the machine exemption. Accordingly, I find that the buildings do not qualify for the machine exemption as a single entity.

BUILDING MATERIALS VIEWED INDIVIDUALLY

As an alternative to its argument that the facility operates and functions as one single machine, Taxpayer asserts that each of the separate building materials in dispute qualifies for the machine exemption pursuant to Anonymous Corporation v. South Carolina Department of Revenue, 99-ALJ-17-0153-CC, as affirmed by the South Carolina Court of Appeals in Unpublished Opinion No. 2003-UP-029. Taxpayer notes that the administrative law judge in that case found that the proper test to be used in applying the “machine exemption” was whether or not the item in question was “integral and necessary to the operation of the plant system as a whole.” On appeal, the Court of Appeals affirmed the administrative law judge, rejecting the Department’s argument that to qualify for the exemption the machines must be used in the production line. Taxpayer desires that the interpretation of the administrative law judge be applied in this case, arguing that all these building materials viewed separately are necessary and integral to the operation of the plant system as a whole. This court rejects Taxpayer’s argument, finding that each of the items in dispute herein are building materials which are necessary components in constructing a building. In addition, this court finds and concludes that each of these components is typical of those in many manufacturing facilities throughout the United States and are not peculiar to Taxpayer’s facility. Ample support for this court’s conclusion was provided by the Department’s expert engineering witnesses. The construction/ building materials which are excluded from the machine tax exemption are listed hereafter:

1. Concrete, consisting of piling, pile caps, elevated slab, slab on grade for

buildings, and nonexempt tanks in the tank farm

Concrete foundations of buildings in which manufacturing machines are housed are not exempt under the machine exemption. They are not machines, parts or attachments to exempt machines, nor are they used in the manufacturing process. Rather, they are part of the structure of the building; they are the building foundations. Taxpayer argues they are exempt because they support the processing equipment. However, the testimony of the Department’s engineers was that the piling, pile caps, elevated slab, and slab on grade were typical for manufacturing buildings constructed in coastal areas. Such testimony is persuasive to the court and further supports the court’s conclusion that they are part of the building structure and do not qualify for the sales tax exemption.

Likewise, concrete foundations supporting nonexempt machines in the tank farm are

not machines, are not parts or attachments to machines, nor are they used in the manufacturing process. As such, they do not qualify for the machine exemption. They are integral and necessary for the proper construction of the building, but they are not integral to the plant manufacturing process or system as a whole.

2. Structural steel, steel decking, and checker plate for buildings and machines

Structural steel, steel decking, and checker plate are not exempt under the machine

exemption because they are part of the building; they are not parts or attachments to an exempt machine. Further, they are not used in the manufacturing process. Taxpayer argues they support and hold the processing equipment in place. However, the structural steel, steel decking, and checker plate used in the facility buildings are typical of that used in the construction of other manufacturing facilities and are not exempt from sales tax.

3. Hangers, supports, conduits

Taxpayer utilizes conduit (e.g., plastic or metal pipe) to direct electrical wires to

machines, and to protect piping and cables from chemical spills and heat generated by the machinery. The conduit leading from or to exempt machines is an attachment to an exempt machine pursuant to 27 S.C. Code Ann. Regs.§ 117-174.121 (1976). As such, it is exempt from the sales tax and qualifies for the machine exemption.

Taxpayer did not separately account for its expenditures for conduit. It lumped the

expenditures for conduit with those for hangers and supports. As a result, the Department made an allocation, exempting 10% of the total expenditures by the Taxpayer for hangers, supports, and conduits in an effort to approximate the expenditures for the conduit that was attached to or immediately leading to or from exempt machines. This court adopts the allocation by the Department (of a percentage of expenditures which qualifies for the machine exemption).

Hangers and supports route the process piping from one area to another via pipe

racks and cable trays. It is the conclusion of this court that the hangers and supports are not exempt because they are parts of the buildings and are not integral and necessary in the manufacturing process as a whole. As such, they are not machines or parts of machines. They are typical of that used in the construction of manufacturing facilities.

4. Paint on walls, frames, and process equipment

The walls, frames, and process machines at the facility were painted to

provide chemical resistance. The paint on the process equipment was applied to prevent corrosion of the equipment.^[3] For purposes of the machine exemption, it is the conclusion of this court that the paint on the process machinery is not a machine or a part or an attachment to a machine.

Further, 27 S.C. Code Ann. Regs. § 117-174.191 (1976) entitled “Repairs to

Machines,” specifically provides that paint is taxable. Subsection (e) of that regulation reads as follows:

“Materials are taxable in any event when sold to repairmen for use in making repairs where such materials lose their identity as a result of such use. For instance, paint, solder, lumber, and sheet metal.”

As such, paint is not exempt.

Taxpayer also claims as a machine exemption the paint placed on the walls and frames (that goes around or under the machines and supports them). The walls referred to by the Taxpayer are concrete block walls. This court concludes that the paint on these walls, frames and process equipment constitute a part of the building. As such, the paint does not equate to a machine or a part or an attachment to a machine. Further, it is not used in the manufacturing process.

An argument can be made that the frames are exempt as an attachment to a machine.

Even if such were allowed (which is not the case), the paint on the frames would still not fall within the sales tax exemption because of the prohibition in Regs. § 117-174.191.

5. Paint/vinyl ester on floor

Taxpayer’s witnesses testified that the floors of the facility were painted with vinyl ester to provide chemical resistance in the event of a spill. Further, they testified that the floors of the warping area were painted black to facilitate the threading of the warping machine by employees at the facility. This court concludes that neither the paint on the floors in the warping area nor the vinyl ester placed on other floors at the facility qualify as they are neither a machine nor a part or an attachment to an exempt machine. They are not integral or necessary to the plant system as a whole. When applied to a floor, paint and vinyl ester become a part of the building. The paint and vinyl ester applied to the floors are not used in the manufacturing process and do not qualify for the machine exemption.

6. Insulation for curing the warehouse building

Taxpayer’s witnesses testified that the curing warehouse building was insulated to maintain a climate controlled atmosphere necessary to cure the product. However, the overwhelming testimony shows that it is common practice and an economic necessity to insulate buildings to provide climate control. Thus, insulation installed in a facility is not a machine, or a part or an attachment to an exempt machine. Further, insulation is not a part of the manufacturing process. It is the conclusion of this court that the insulation installed in the facility became a part of the building and does not qualify for the machine exemption. Further, it is not integral and necessary to the plant system as a whole.

7. Concrete block walls comprising the interior walls of the curing warehouse

The concrete block walls at the facility (which Taxpayer claims qualify for the machine exemption) are those interior walls which separate the curing warehouse from the warping area, the inspection area, and the loading dock. However, just like walls in any other manufacturing facility, these block walls are for temperature control and fire protection. It is the conclusion of this court that these walls are not machines, nor are they parts or attachments to exempt machines. They are not used in the manufacturing process. These walls are a part of the building and thus are not exempt from sales tax under the machine exemption. They are not integral and necessary to the plant system as a whole. This determination is consistent with the decision of Anonymous Corporation v. South Carolina Department of Revenue, 99-ALJ-17-0153-CC, as affirmed by the South Carolina Court of Appeals in Unpublished Opinion No. 2003-UP-029, where a cement ramp was found to be a part of the real property rather than machinery and equipment, and it is consistent with the testimony of the Department’s expert witnesses in this case.

8. Architectural roof/siding enclosing the facility

The architectural roof referred to by Taxpayer is a rubber membrane roof. Dr. Neal Tonks testified in his deposition that Taxpayer needed “a roof that wouldn’t leak under any circumstances, would be hurricane resistant, and would be appropriate for the environment we’re dealing with here.” (Respondent’s Exh. Notebook, Tab 5, p. 123, lines 3-8) Steven Morris testified that the rubber membrane roof is the most cost effective roofing system and is the roof of choice in most industrial applications. This court concludes that the roof is not a machine nor is it a part of or an attachment to an exempt machine; it is a part of the building. As such, it does not qualify for the machine exemption.

Taxpayer seeks the machine exemption for siding used at the facility also. The siding is constructed of multi-layers composed of steel and rigid foam which provides insulation. This siding is widely used on manufacturing buildings because it is inexpensive and functional. It is a part of the building which assists in forming an enclosure for the protection of the equipment. Also, along with its insulation component, it assists with climate control.^[4] Neither the roof nor the siding are integral and necessary to the plant system as a whole.

It is the conclusion of this court that the roof and the siding are not machines, are not parts or attachments to machines, nor are they used in the manufacturing process. As such, they do not qualify for the machine exemption.

OTHER EQUIPMENT VIEWED INDIVIDUALLY

A. Intermediate buffer storage racks

The intermediate storage racks store the product between the time it is extruded onto winders and the time the quality control inspection takes place. Taxpayer argues that the fiber may cure for a short period of time while on the racks and, as such, the racks are a part of the manufacturing process. I find and conclude that these racks are not machines which qualify for the machine exemption. These racks are not used to manufacture tangible personal property, nor are they attachments to machines which are used to manufacture tangible personal property. They are not an integral part of the production process. They are used for storage purposes only. This conclusion is consistent with this court’s decision captioned Anonymous Corporation v. South Carolina Department of Revenue, 99-ALJ-17-0153-CC, which was affirmed by the Court of Appeals in its Unpublished Opinion No. 2003-UP-029. In that case, the Court of Appeals affirmed the administrative law judge’s order holding that racks were not exempt from the sales tax.

B. Racks used to store fiber in the curing warehouse

The equipment located in the curing warehouse consists of moving racks which are used to hold boxes of fiber. These racks are not used in the manufacturing of tangible personal property nor are they an integral part of that process. They are used solely for storage purposes. Therefore, they do not qualify for the machine exemption. This conclusion is consistent with this court’s decision in Anonymous Corporation v. South Carolina Department of Revenue, 99-ALJ-17-0153-CC, as affirmed by the Court of Appeals in its Unpublished Opinion No. 2003-UP-029.

C. HVAC equipment in the polymerization area

All other HVAC equipment at the plant was exempted by the Department because they directly affected the temperature of the product and the machinery involved in the manufacturing process. However, the HVAC equipment located in the polymerization area is used to cool electrical equipment which feeds other electrical processes in the building. This HVAC equipment does not affect the machinery which is involved in the manufacturing process and thus does not qualify for the machine exemption.

CONCLUSIONS OF LAW

Based on the foregoing Findings of Fact, I conclude, as a matter of law:

1.1. The Administrative Law Judge Division has jurisdiction of this matter pursuant to

S.C. Code Ann. § 12-60-460 (2000).

2. The standard of proof in administrative proceedings is a preponderance of the evidence. Anonymous v. State Board of Medical Examiners, 329 S.C. 371, 496 S.E.2d 17 (1998).

3. The trier of fact must weigh and pass upon the credibility of evidence presented. See

S.C. Cable Television Ass’n v. Southern Bell Tel. And Tel. Co., 308 S.C. 216, 417 S.E.2d 586 (1992). The trial judge who observes a witness is in the best position to judge the witness’ demeanor and veracity and evaluate his testimony. See, e.g., McAlister v. Patterson, 278 S.C. 481, 299 S.E.2d 322 (1982).

4. Where an expert’s testimony is based upon facts sufficient to form the basis for an

opinion, the trier of fact determines its probative weight. Berkeley Elec. Coop. v. S.C. Public Serv. Comm’n, 304 S.C. 15, 402 S.E.2d 674 (1991); Smoak v. Liebherr-Am. Inc., 281 S.C. 420, 422, 315 S.E.2d 116, 118 (1984). A trier of fact is not compelled to accept an expert’s testimony, but may give it the weight and credibility he determines it deserves. Florence County Dep’t of Social Serv. v. Ward, 310 S.C. 69, 425 S.E.2d 61 (1992); Greyhound Lines v. S.C. Public Serv. Comm’n, 274 S.C. 161, 262 S.E.2d 18 (1980).

5. The rules of statutory construction are provided to remove doubt but never to create

doubt. See 73 Am.Jur.2d Statutes Section 146, citing Englewood Water Dist. v. Tate, 332 So. 2d 626 (Fla. App. 1976). Thus “the primary rule of statutory construction is to ascertain and give effect to the legislature’s intention or purpose as expressed in the statute.” Scholtec v. Estate of Reeves, 327 S.C. 551, 490 S.E.2d 603, 606 (Ct. App. 1997). The language used should be given its plain and ordinary meaning without resort to subtle or forced construction to expand or limit the scope of a statute. See Berkebile v. Outen, 311 S.C. 50, 426 S.E.2d 760 (1993).

6. The tax statutes, regulations, and case law applicable to this case are as follows:

a. South Carolina imposes a sales tax pursuant to S.C. Code Ann. § 12-36-910(A) (2000). This statute reads, in part, as follows: “A sales tax, equal to five percent of the gross proceeds of sales, is imposed upon every person engaged or continuing within this State in the business of selling tangible personal property at retail.”

b. As a complement to the sales tax, S.C. Code Ann. § 12-36-1310(A) (2000) imposes a use tax and reads, in part, as follows:

A use tax is imposed on the storage, use, or other consumption in this State of tangible personal property purchased at retail for storage, use, or other consumption in this State, at the rate of five percent of the sales price of the property, regardless of whether the retailer is or is not engaged in business in this State.

c. S.C. Code Ann. § 12-36-2120(17)(Supp. 2002) provides a sales and use tax exemption for machines used in manufacturing. The exemption reads as follows:

Exempted from the taxes imposed by this chapter are the gross proceeds of sales, or sales price of:

. . .

(17) machines used in manufacturing, processing, recycling, compounding, mining, or quarrying tangible personal property for sale. "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 . . . .

d. Many of the terms used in the above exemption are interpreted in 27 S.C. Code Ann. Regs. § 117-174.120 (1976). This regulation reads:

Definition: The term " . . . Machines used in mining, quarrying, compounding, processing and manufacturing . . ." shall include all machines used for this purpose. The Statute provides that the term "machines" as used therein " . . . shall include the parts of such machines, attachments, and replacements therefor, which are used, or manufactured for use, on or in the operation of such machines and which are necessary to the operation of such machines and are customarily so used . . . ". The terms " . . . parts of such machines," are restricted to the following: (a) they must be used or manufactured for use, on or in the operation of such machines; (b) necessary to the operation of such machines and (c) customarily so used. These restrictions are interpreted to mean that the part or attachment must be purchased in the form in which it will be used by the manufacturer without any fabrication or alteration by him, except the usual and customary minor adjustment, (except as stated at 117-174.123) and that it is a standard part or attachment customarily used and, further, that the machine or machinery on which it is used would not do the work for which it was designed if it were not used.

e. 27 S.C. Code Ann. Regs. § 117-174.191(e) (1976), indicating that paint used

to repair machines is taxable, reads in part: “Materials are taxable in any event when sold to repairmen for use in making repairs where such materials

lose their identity as a result of such use. For instance, paint, solder, lumber, and sheet metal.”

f. The case of Hercules Contractors and Engineers Inc. v. S.C. Tax Comm’n, 280 S.C. 426, 313 S.E.2d 300 (Ct. App. 1984), is controlling authority in this case. The Court of Appeals explicitly provided that buildings are not exempt from the sales and use tax. Taxpayer argues that the court in Hercules, 280 S.C. at 432, 313 S.E.2d at 304, in stating that “a particular ‘structure’ may or may not constitute a machine for tax purposes, depending not upon its form but upon its use,”determined that an enclosed building could qualify for the exemption from sales tax. Such is misplaced. The court made it clear it was only referring to the waste water treatment facility’s concrete vats and basins, not enclosed buildings when it stated that buildings housing textile mills and nuclear reactors are not exempt from the sales tax.

g. The buildings comprising the facility do not function as a machine pursuant to S.C. Code Ann. § 12-36-2120(17) (Supp. 2002). The materials used to construct the buildings are subject to sales tax.

h. The building materials used to construct the facility’s buildings viewed individually are not exempt because they are parts of buildings and are not machines. Further, they are not parts of exempt machines nor attachments to exempt machines.

i. The racks in the buffer storage area and in the curing warehouse are not used in manufacturing and thus, they do not come within the exemption provisions of S.C. Code Ann. § 12-36-2120(17) (Supp. 2002). The racks are not exempt from the sales tax.

j. The HVAC in the polymerization area is not used to manufacture tangible personal property for sale, nor does it affect directly the machines used in the manufacturing process. It is not exempt pursuant to the provisions of S.C. Code Ann. § 12-36-2120(17) (Supp. 2002). This HVAC system is not exempt from the sales tax.

ORDER

Accordingly, it is hereby

ORDERED that the buildings located at and comprising the facility do not function as or qualify as a single machine for purposes of the machine exemption; and it is further

ORDERED that the building materials used to construct the buildings viewed individually, such as: (1) the exterior siding (which is constructed of multi-layers of steel and rigid foam); (2) the rubber membrane roof; (3) the concrete (consisting of piling, pile caps, elevated slab, slab on grade for buildings, and nonexempt tanks in the tank farm); (4) the structural steel, steel decking, and checker plate for the buildings and machines; (5) the conduit (e.g., plastic or metal pipe) which is used to direct electrical wires to machines and also to protect piping and cables from chemical spills and heat generated by the machinery; (6) the hangers and supports which route the process piping from one area to another via pipe racks and cable trays; (7) the paint on the walls, frames, and process machines; (8) the paint and vinyl ester applied to the floors; (9) the insulation in the curing warehouse building; and (10) the interior walls (concrete block) which separate the curing warehouse from the warping area, the inspection area, and the loading dock, are not exempt from the sales tax because they are parts of buildings and are not machines, nor are they parts of exempt machines or attachments to exempt machines; and it is further

ORDERED that the conduit leading from or to exempt machines qualifies as an attachment to an exempt machine pursuant to S.C. Code Ann. Regs.§ 117-174.121 (1976) and, as such, this court allows an exemption for the conduit that is attached to exempt machines, adopting the allocation made by the Department in an amount equal to ten (10 %) per cent of the total expenditures by Taxpayer for all conduit, hangers and supports; and it is further

ORDERED that the racks located in the buffer storage area and in the curing warehouse are not used in manufacturing, and are thus subject to sales tax;

AND IT IS SO ORDERED.

Marvin F. Kittrell

Chief Administrative Law Judge

Columbia, South Carolina

July 8, 2003