SC Administrative Law Court Decisions

Under the Integrated Plant Concept, machinery is exempt if it performs an essential or indispensable function in the taxpayer's manufacturing operations, regardless of whether it actually causes a physical change. This legal concept originated in the case of Niagara Mohawk Power Corp. v. Wanamaker, 286 A.D. 446 (N.Y. 1955). The genesis of the Integrated Plant Concept occurred when the court determined that coal and ash handling equipment (crane and car dumper) was an integral part of a steam electric generating plant and concluded that this specific equipment was as essential to production as the generator itself. The court held that this equipment was necessary to the functioning of the plant as a whole even though the equipment did not play as active a role as the turbine. The court stated that a serious breakdown in its operation would quickly stop or impair the output of electricity and that one part could not operate without the other. Working together, they make up a system which supplies the power from which electricity is produced. Further, the court held that the directness of the activity is not the test--that the real test is whether all parts of the plant contribute, continuously and vitally, to production, and whether they are all integrated and harmonized. The court further held that a taxing statute should receive a practical construction.

The more narrow "Ohio rule" or "physical change theory" permits an exemption only for those assets which physically transform raw materials during the manufacturing process. This rule focuses on the "used directly" requirement. See The Youngstown Building Material & Fuel Co. v. Bowers, Tax Commr., 167 Ohio St. 363, 149 N.E. 2d 1 (1958). The court in Youngstown stated that the test to be applied is not when the actual manufacturing or processing activity begins or ends, nor is it whether the property is essential to the operation of the plant-- the test is whether the property is used or consumed during and in the manufacturing or processing period ("physical test"). The Ohio court soundly rejected the "integrated plant" theory. Even though some other states have adopted the "used directly" requirement, they have not interpreted this provision as narrowly as the Ohio court. The interpretation by the Ohio court is the minority view. ⁽⁵⁾

A supporting corollary to the "Ohio Rule" is that "the test is not whether the property is essential to the operation of the plant but whether it is an actual part of the process of manufacture." In Ohio Stove Co. v. Bowers, 171 Ohio St. 484, 485, 172 N.E.2d 295, 296 (1961), the Ohio Supreme Court held that machinery used to make sand cores and molds, which in turn were used to make or form gray iron castings which the taxpayers sold at retail, were not exempt as being "used directly" in the manufacture of the castings. In contrast, see John Sharp, Comptroller of Public Accounts v. Tyler Pipe Industries, Inc., Tex. Ct. App., No. 03-95-00212-CV, (March 13, 1996), wherein the court held that equipment used to produce sand molds, which molds are then used in the manufacture of high-pressure pipe and fittings, is necessary and essential to the production of the cast-iron pipe and fittings and therefore was exempt. ⁽⁶⁾

In the John Sharp case, the Texas court discusses the legal concepts utilized in the exemption statutes, i.e., "manufacturing", "actual manufacturing" and "directly". The Texas statute requires that the machinery, equipment, and replacement parts or accessories must be "used or consumed in or during the actual manufacturing, processing, fabrication or repair of tangible personal property for ultimate sale." The Comptroller argued that the term "actual manufacturing" differs from the term "manufacturing," that Texas law requires strict construction of tax exemptions, and that the term "actual manufacturing" mandates that there must be a direct contact with the finished product in order for the equipment to qualify for the exemption. The court noted the split among jurisdictions construing similar statutes. ⁽⁷⁾ However, the court noted that the cardinal rule of statutory construction, which requires strict construction in order to give effect to the intention of the legislature, does not require that a statute be interpreted unreasonably.

The Texas court, alluding to Niagara Mohawk Power Corp., noted that the legislature's general purposes for the passing of this enactment was: (1) to encourage economic development in the state; (2) to avoid pyramiding the sales tax on successive buyers and sellers, which would result in the ultimate consumer paying sales tax on sales tax; and (3) to strike a balance between the policy of avoiding multiple taxation and the need to raise revenue for the state. It then stated that courts of other jurisdictions have recognized that construing tax-exemption statutes too narrowly could defeat the legislative purpose of such statutes. ⁽⁸⁾ The Comptroller argued that the term "manufacturing" mandates a direct contact with the finished product in order to qualify for the exemption and that the term "actual manufacturing" is more akin to the "directly used in manufacturing" position of the Ohio court.⁽⁹⁾ However, the Texas court noted that the overwhelming majority of jurisdictions that have addressed similar tax exemption statutes, even those which contain the term "directly," have rejected Ohio's physical change theory in favor of a broader reading. The court also noted that one of the Ohio Supreme Court justices, in pleading with the majority to abandon the physical-change rule, stated that "The great weight of authority throughout the country supports adoption of the 'integrated plant' theory." See Oamco v. Lindley, 493 N.E.2d 1345, 1349 (Ohio 1986).

In conclusion, the Texas court held that the Ohio exemption statute has a restriction requiring that the machinery must be used directly in the manufacturing process whereas the Texas statute does not. Further, the Texas court held that the term "actual manufacturing," which phrase is a part of the Texas exemption statute, does not prohibit the existence of any intervening medium or agent in the manufacturing process. However, the court held it was not necessary for it to adopt or approve the integrated-plant theory, deciding that the equipment Tyler Pipe used in making sand molds is "used...in the actual manufacturing" of its cast-iron pipe and fittings. South Carolina takes the position that, as a general rule, tax exemption statutes must be strictly construed. Southeastern-Kusan, Inc. v. S.C. Tax Comm'n, 280 S.E.2d 57 (S.C. 1981). However, the rule of strict construction simply means that constitutional and statutory language will not be strained or liberally construed in the taxpayer's favor. York County Fair Association v. S.C. Tax Comm'n, 249 S.C. 337, 154 S.E.2d 361 (1967). It does not mean that the court will search for an interpretation in Respondent's favor where the plain and unambiguous language leaves no room for construction. It is only when the literal application of a statute produces an absurd result that the court will consider a different meaning. Martin v. Ellisor, 266 S.C. 377, 223 S.E.2d 415 (1976).

In Southeastern-Kusan, the South Carolina Supreme Court exempted certain molds used in manufacturing, even though the molds were not owned by the taxpayer during the manufacturing. Southeastern manufactured plastic parts and sold them predominantly to other manufacturers where the parts became integrated into a final product, e.g., plastic components in furniture, in textile machinery, and in stereo equipment. Because these parts are generally custom ordered, a special mold must first be designed for each customer. The mold is inserted into and becomes a necessary part of Southeastern's machinery during production of the plastic parts and is then stored by the customer at Southeastern's plant for future orders. Southeastern bills the customer for the molds separately and no sales tax is added to customer billings for the molds.

The Supreme Court held that to allow Southeastern to claim the machine exemption would not produce an absurd result. It held that such a position is consistent with the general purpose of this exemption, which is to avoid the pyramiding of taxes on the sale of the same commodity, to promote new industry within the state and encourage expansion of present industry.

In reviewing the South Carolina machine exemption statute and in contrasting it with exemption statutes from other states, it is noted that the South Carolina statute uses the phrase "machines used in manufacturing." Our statutory language does not contain the words "used or consumed in or during the actual manufacturing" or "used directly" in manufacturing as do certain other state statutes.⁽¹⁰⁾ Notwithstanding the language of the statute, Respondent contends that the machine exemption should only be available for machines which are in the production line.⁽¹¹⁾

Taxpayer, however, argues that South Carolina should not be grouped with those states which have adopted the "production line" or "used directly" view of Ohio.⁽¹²⁾ It argues that the correct rule to apply in South Carolina is whether the equipment is integral and necessary to the operation of the plant, not whether it is an actual part of the process of manufacturing. ⁽¹³⁾

Further, Taxpayer argues that the wording of the exemption statute, case law in South Carolina and certain regulations and pronouncements by Respondent affirm that South Carolina does not require machinery to be used directly in manufacturing or to be a part of the production line to qualify for the exemption. Taxpayer submits that the only requirement to qualify for the machine exemption is that the machinery be used in the overall manufacturing process from which tangible personal property is produced for sale to consumers.

Taxpayer seeks support for its interpretative position in S. C. Code Ann. Regs. 117-173 and the decisional interpretation which has been given to that regulation by the South Carolina Court of Appeals in Hercules Contractors & Engineers, Inc. v. S.C. Tax Commission, 280 S.C. 426, 313 S.E. 2d 300 (Ct. App. 1984). This regulation clearly exempts from the sales or use tax the gross proceeds of the sale of machinery used at a mining or quarrying facility for the purpose of preventing or abating pollution. These machines are not a part of the production line. They are exempt because they are installed and operated, pursuant to order of a state or federal agency, to prevent or abate pollution of the air or water caused or threatened by the operation of other machines used in the mining, quarrying, compounding, processing or manufacturing of tangible personal property. Their installation and usage allows the primary manufacturing process to continue. This equipment is integral and necessary to the operation of the plant system as a whole. This regulation refutes the "production line" or "used directly" argument of Respondent. Further, the Court of Appeals in Hercules, a decision authored by its then Chief Judge, Alex Sanders, held that machinery and its various parts and attachments are exempt if they are "integral and necessary to the operation of the system as a whole." In determining the entire facility to be exempt, the Court stated that "even its railings, walkways and ladders, which were required by state and federal laws and therefore 'necessary to the overall function' of the system were exempt." The Court of Appeals, therefore, did not embrace the limited reading of the statute urged by the Respondent. Furthermore, in addition to the above regulation and the decision in Hercules, there are other regulations and policy documents issued by Respondent which do not support the limited "production line" view espoused by Respondent.⁽¹⁴⁾

The exemption statute in question exempts machines, their parts and attachments when "used in manufacturing". If so used, the machinery is exempt. I decline to adopt Respondent's argument and to impose additional restrictions sought by Respondent which would require that the machinery must be a part of the "production line." ⁽¹⁵⁾ Obviously, the court in Hercules, in its interpretation of the exemption statute, imposed no such restrictions. Thus, the proper test for the exemption, as enunciated in the Hercules case, is whether or not the machinery or its parts is "integral and necessary" to the manufacturing process.

At the hearing on the merits in this case, Professor Walter Hellerstein, author of the treatise State Taxation, Warren, Gorham & Lamont (3^rd Edition), who is a recognized expert on sales tax laws of other states, classified South Carolina as an "integrated plant theory state." His testimony offered assistance to the Court in discerning South Carolina's position with respect to other states. The wording of the South Carolina exemption statute, the analysis found in the Hercules case, cases and rulings from other jurisdictions, Professor Hellerstein's testimony and certain regulations and rulings of Respondent convince this court that South Carolina law is in keeping with the "integrated plant theory" and not the more restrictive "directly used" or "production line" rule advanced by Respondent and referred to as the Ohio Rule. Further, the legislative desire to promote capital investment, to be more competitive with other states, and to make South Carolina a more attractive choice for business expansion and location is patently inconsistent with a restrictive, impractical interpretation of this exemption.

B. Specific Exemptions

I have examined the testimony⁽¹⁶⁾ and submissions ⁽¹⁷⁾ for the particular items of equipment at issue and have found those so identified hereafter to be exempt from the sales and use tax for the reasons stated herein:

1. Screen washing machines. Taxpayer produces its textile products in many colors and patterns. In order to manufacture the same product patterns in various colors, Taxpayer must utilize screen washers. The washing of the print screen is done specifically for the purpose of manufacturing a final product. If the screen washing machine is not utilized, each screen will be rendered worthless thereby preventing any further manufacturing of a final product. The screens are a well-recognized part of the manufacturing process. The screens cannot be continually used without the screen washing machines. This machine is integral⁽¹⁸⁾ and necessary to the manufacturing process. Respondent argues that S. C. Code Ann. Regs. 117-174.130 (1976), titled "Machine Shop Machinery," would exclude this equipment from the exemption. However, it is clear that this regulation only refers to machinery located in a separate machine shop which is not considered a part of the manufacturing process. Clarifying its intent, the legislature in promulgating the regulation, included the following language: "Machines customarily used for both maintenance and manufacturing of tangible personal property will normally be considered to come within the machine exemption, except where manufacturing is an occasional, incidental or inconsequential part of the use of the machine." (Emphasis added). See also S. C. Code Ann. Regs. 117-174.110 (1976), titled "Machine Shops," which discusses property manufactured or fabricated by machine shops and custom foundries. It refers to repair work by a machine shop operator which consumes the materials which lose their identity in the repairing process, such as paint, solder, and lumber. It also refers to the machinist making repairs, fabricating or manufacturing a recognizable part or attachment. It is obvious that the screen washing machine is not utilized in a machine repair shop but is instead utilized to supplement the continuous operation of the production line. It is utilized often, is necessary, and is not inconsequential to the manufacturing process. Further, it is located close to the production line machinery. The screen washing machine is an exempt machine.

2. Screen cleaning chemicals. These chemicals are used to remove dye from the print screens and prepare the screens for another production run. The cleaning vat in which the screens are cleaned is a machine.⁽¹⁹⁾ The vat is useless without the usage of cleaning chemicals. These chemicals are essential to the functioning of the screen washing machinery. Chemicals are recognized as machines and parts of machines both generally and in the tax decisions of other states.⁽²⁰⁾ Most recently, the Ohio Board of Tax Appeals found that a sanitation system used in the processing operation of a yogurt manufacturer qualified for the manufacturing exemption because the primary purpose of the equipment was not a cleaning function, but to control the environment necessary for processing yogurt, without which the yogurt could not be made. Dannon Co, Inc.v. Tracy, Ohio Bd. of Tax Appeals, No. 97-M-233 (Sept. 11, 1998).⁽²¹⁾ The screen washing chemicals are integral, necessary and indispensable to the manufacturing process. They are exempt as a part of the cleaning vat.

3. Size box cleaners. Sizing is an integral part of the manufacture of yarn. Failure to clean the size box would result in dirty yarn, affect the quality of the warp and produce unusable yarn. The size box and the size box cleaners are an integral and necessary part of the manufacturing process and the removal of the sizing from the size box is an ongoing continuous operation which allows different styles of yarn to be processed. This continuous process is integral and necessary to the processing function so that production of useable yarn cannot take place unless the cleaning of the size box is performed. The size box is an exempt manufacturing machine and the size box cleaners are exempt parts of that machine under the same analysis stated in Paragraph 2 above. ⁽²²⁾

4. Print screen trucks. The print screen trucks are wheeled conveyances. These special trucks allow for movement of the print screens which are necessary for a particular pattern that is to be manufactured. In Schenley Distillers, the Kentucky court discussed the transportation or movement of materials within a plant. It quoted from an Ohio case ⁽²³⁾ which held that transportation to or from a particular activity generally does not involve tax-exempt machinery. However, the Kentucky court stated that the Ohio court had observed that a distinction must be made when the transportation "is a part of that activity or between essential steps of that activity." Respondent argues that these trucks are not used directly in the manufacturing process and posits S. C. Code Ann. Regs. 117-174.122 (1976) in support of its argument. This regulation reads as follows: "Materials or equipment which might constitute a machine or machinery when not used for processing or manufacturing are not exempted." Further, Respondent argues that S. C. Code Ann. Regs. 117-174.134 supports its position. However, this regulation states that "if material handling machinery is customarily used for a dual purpose, i.e., partly for an exempt purpose and partly for a taxable purpose, then the machinery may be purchased free of the tax pursuant to the machine exemption notwithstanding that the exempt purpose may represent a small portion of its use." In this case, the trucks may be used both to transport material back and forth to the production process machinery and also for warehouse purposes, such as loading and unloading, storing materials, etc. This court finds that the arguments of Respondent are without merit and that the print screen trucks are necessary and integral to the manufacturing process, are a part of the overall activity of moving cloth back and forth to the production line, are essential to the whole process, and thus are exempt machines.

5. Buffing machine and attachments. The buffing of the cot is an ongoing, continuous activity which allows a spinning machine to properly operate at required specifications. This operation is required to keep the yarn quality at a consistent level. If the rubber cots are not buffed, they would interfere with the manufacturing process. The production of yarn without use of the continually buffed cots would produce irregular and unusable yarn. These machines are necessary and integral to the manufacturing process in that they preserve the integrity of a part that is designed to be used up gradually. The buffing of the cot is an activity which prepares the spinning machines for production, not an activity which "repairs" or "maintains" the spinning machine or the cots. The buffing machines are essential to keep the production process operating efficiently and are located in close proximity to the production line machinery. They are clearly used in the manufacturing process and the buffing machines with their attachments are exempt machinery.

6. Waste Water Chemicals. The polymer chemical (EPFLOC 3100-H, (EPFLOC)) in issue is used for color removal that occurs in the wastewater treatment plant operation. The polymer is specifically added in order to remove the color resulting from the use of the black sulfur dyes which are used to dye sheeting material in the finishing plant. The polymer chemically reacts with the very small dye pigments that have not been biologically broken down and are too small to settle out of the water on their own. The polymer attracts the dye particles based on electrical charge and as the polymer settles in the clarifiers, the color is removed from the water. The National Pollutant Discharge Elimination System (NPDES) permit issued by South Carolina Department of Health and Environmental Control (SCDHEC) requires the monitoring and reporting of color in the wastewater effluent discharged into the Catawba River. South Carolina recognizes that certain chemicals constitute machinery or parts of machinery. ⁽²⁴⁾ It has long been settled in this State that the manufacturing exemption includes machines, parts and attachments for the prevention or abatement of air or water pollution caused by manufacturing. ⁽²⁵⁾ While recognizing an exemption for the machinery required to abate or minimize pollution, the Department of Revenue has refused to allow exemption for the chemicals used in the machinery, without which the machinery would be useless. ⁽²⁶⁾ Other states, such as Maine, Massachusetts, Arizona and Texas, which have reviewed this issue, have held that chemicals used in pollution control equipment qualify as machinery and/or parts of machines. ⁽²⁷⁾ I find and conclude that chemicals such as EPFLOC used in a pollution control facility qualify as machinery or parts of machinery and are therefore eligible for exemption under the same analysis posited in Paragraph 2 above.

7. Mezzanine Lift. This lift was designed to transport drums of color to a higher position so the color can be gravity fed for future dying of cloth. It is obviously a part of the production line process whereby the cloth is colored with different patterns. It is an integral and essential part of the manufacturing process. The analysis in Paragraph 1 above is adopted in the conclusion herein that this lift is exempt from the sale and use tax.

8. Battery chargers. Taxpayer purchases battery chargers to recharge the batteries that run the various self-propelled material handling trucks used in the manufacturing process. Taxpayer states correctly that the electricity being channeled into the batteries from the chargers is the fuel used to power the exempt machinery. Pursuant to S. C. Code Ann. § 12-36-2120 (9), fuel sold to manufacturers for energy to use in manufacturing tangible personal property for sale or for the generation of motive ⁽²⁸⁾ power for transportation is exempt from the sales and use tax. These battery chargers provide fuel or electricity which causes the trucks to move. Without such electricity, the trucks could not operate, the material would not be taken to and from the production line, and the production process would halt. The battery chargers are an integral and necessary part of the manufacturing process and qualify for the exemption. The electricity provided by these battery chargers to the batteries which propel the trucks is encompassed in the manufacturing process. The electricity provided through the battery charger is just as necessary as the electricity provided by a power company to operate the production line equipment to ensure that a final product is produced to sell to the consumer. I find that these battery chargers at their purchase by Taxpayer are exempt from the sales and use tax.

I find that the items listed hereafter do not qualify for the machine exemption from the sales and use tax:

1. Curtains. These curtains are heavy plastic drapes hung between different manufacturing processes to prevent dust from machines settling on the product being manufactured. These curtains perform the same function as a wall built between the manufacturing processes. Therefore, these curtains are not machines, parts of machines, or attachments to machines. I find that these curtains are not an integral and necessary part of the manufacturing process which qualify for the machine exemption.

2. Beam racks. These are racks that hold yarn after it has completed a certain level of processing. They are not machines which qualify for exemption since they are not used to manufacture tangible personal property, nor are they attachments to machines used to manufacture tangible personal property. They are used for storage purposes only. They are not an essential or integral part of the manufacturing process and are not exempt from the tax.

3. Ramp. The ramp is made of cement and is a part of the building. Its purpose is to assist the movement of the yarn waste to the weighing area so it can be weighed. It is not a part of the manufacturing process, is not essential to nor integral to the production and thus is not exempt from the sales and use tax.

II. The Contractor Issue

Taxpayer argues that certain agreements which it entered into are construction contracts. Accordingly, Taxpayer posits that the sale to the contractor of the various items was the last retail sale(s). ⁽²⁹⁾ Respondent argues that these contracts between Taxpayer and the contractors provided for retail sales to or purchases of certain items by Taxpayer, subject to the sales and use tax.

S. C. Code Ann. § 12-36-110 (1) (a) (Supp. 1998) provides that the sale of building materials to construction contractors, builders, or landowners for resale or use in the form of real estate is a retail sale. As such, sales tax is collected on the sale of such materials at the time they are purchased. S. C. Code Regs. 117-174.45 (1976) defines the term "building materials" to include "any material used in making repairs, alterations or additions to real property." S. C. Code Ann. § 12-36-110 (1) (e) provides that sales of items to contractors for use in the performance of construction contracts are retail sales. Also, S. C. Code Ann. § 12-36-110 (1) (d) provides that the term retail sale includes "the use within this State of tangible personal property by its manufacturer as building materials in the performance of a construction contract. The manufacturer must pay the sales tax based on the fair market value at the time and place where used or consumed."

Taxpayer contends that the print screen trucks, the built-in master clock system, print screen storage racks, cloth storage racks, roll rakes, modification of grey goods receiving conveyor, beam storage racks, rack relocating/reprofile, platform lift, automated materials handling system, overhead sortation system, comforter palletizer system, ramp and the grey roll storage racks are additions to real property. As such, Taxpayer contends that these items fall within the provisions of § 12-36-110 (1) (a) or (e), making it the responsibility of the contractor to pay sales tax on these items when they were purchased by the contractor.

In determining if these items should be classified as real property, S.C. Code Ann. Regs. 117-174.45 must be consulted. It provides examples of items that are building materials. The items are as follows:

The term "building materials" includes such tangible personal property as lumber, timber, nails, screws, bolts, structural steel, elevators, reinforcing steel, cement, lime, sand, gravel, slag, stone, telephone poles, fencing, wire, electric cable, brick, tile, glass, plumbing supplies, plumbing fixtures, pipe, pipe fittings, prefabricated buildings, electrical fixtures, built-in cabinets and furniture, sheet metal, paint, roofing materials, road building materials, sprinkler systems, air conditioning systems, built-in-fans, heating systems, floorings, floor furnaces, crane ways, crossties, railroad, rails, railroad track accessories, tanks, builders hardware, doors, door frames, window frames, water meters, gas meters, well pumps, and any and all other tangible personal property which becomes a part of real property.

Further, this regulation states that "none of the property designated as 'building material' comes within the machine exemption, except such items as can be identified at the time of purchase as a part or an attachment or replacement for a machine used in manufacturing, designed and manufactured for such use, customarily so used, and necessary to the operation of the completed machine." The regulation provides that such items as pumps, prefabricated processing tanks, and structural steel when purchased prefabricated to special design for a machine part, may come within the machine exemption. See also S. C. Code Regs. 117-174.190 which provides that "materials used in making repairs to real property including buildings of all kinds and descriptions, .....and including the making of any additions or alterations to real property are taxable when purchased by the repairman, the builder, or the contractor making such additions or alterations."

Thus, the contractor issue is primarily a factual one. I have examined the agreements between Taxpayer and several contractors which were made a part of the record. They call for: (1) job specifications; (2) progress payments based on inspections and hold-backs (referred to in numerous BICO documents as "sign offs"); (3) insurance provisions under which the entity performing the work agrees to keep insurance in effect on its (the entities) employees; (4) hold harmless clauses under which the entity agrees to hold the Taxpayer harmless for any injury to others based on defects in workmanship or for any accident which might occur during construction; (5) penalties for late "start up"; and finally, (6) the entities in their form documents refer to the agreements as "contracts" and call themselves "contractors." These provisions in the documents are characteristic of construction contracts.

There can be a fine line between the definition of a seller/installer and a construction contractor. ⁽³⁰⁾ In the absence of regulations or pronouncements by Respondent which give guidance to taxpayers in attempting to distinguish seller/installers from contractors, the following factors may prove useful in the future: (1) a seller/installer will usually split its charges between the items sold and the installation cost; and/or (2) a seller/installer may have a showroom where items are available for sale without the requirement of attendant services.

On the other hand, a contractor usually has some of the following characteristics: (1) he specifically designs the item in question based on certain specifications, (2) a lump sum price may be charged, ⁽³¹⁾ (3) the cost may be paid in progress payments as the job is completed - after which a hold back is required and released only after final inspection, (4) a written contractual agreement may be signed setting forth the relationship between the parties and their respective obligations and liabilities.

The transactions in question do not have the characteristics of a seller/installer agreement; they are more akin to construction contracts. Thus, based on the agreements and other evidence (testimony and submissions), I find that the business entities with whom Taxpayer contracted were contractors. ⁽³²⁾ Also, I find and conclude that the agreements between them were construction contracts.

Finding the entities to be contractors and the transactions to be construction contracts does not conclude this inquiry. Respondent posits, quite accurately, that in order to be a retail sale to contractors pursuant to S. C. Code Ann. § 12-36-110(1)(a), a contract with the Taxpayer must include the sales of building materials to a contractor "for use in the form of real estate." In every instance herein Taxpayer has presented evidence that the various custom built items were, in fact, bolted to the floors and walls of the manufacturing plant and/or incorporated into the physical plant structure. Respondent argues however, that the mere bolting of fixtures and appliances to the plant structure is not sufficient. In Transcontinental Gas Pipeline Corporation v. Prince William County, 210 Va. 550 (1970), the court held that three tests are to be applied to determine whether an item of personal property placed upon realty becomes a part of the realty itself. These tests are: (1) annexation of the property to the realty; (2) adaptation to the use or purpose to which that part of the realty with which the property is connected is appropriated; and (3) the intention of the parties. In this instance, the items are annexed to the realty or plant, they are adapted to and bolted to the plant floors or walls and it is the clear intention of the parties that the contractor deliver, install and make the systems a part of realty. After reviewing the evidence presented, I find and conclude that the items constructed and installed under each of the contracts described in Finding of Fact #10 were used as a part of Taxpayer's realty.

It is not absolutely necessary that this court find that the various items subject to the construction contracts become a part of the realty (plant) to constitute a retail sale of the various items to the contractor. Unlike S. C. Code Ann. § 12-36-110(1)(a) which requires that the materials as constructed be used as a part of the realty, S. C. Code Ann. § 12-36-110 (1)(e), which also applies to construction contracts, contains no such requirement. This subsection provides only that the final retail sale be "to a contractor for use in a construction contract." This subsection renders irrelevant the often difficult question of whether or not the contract is a repair⁽³³⁾ or an alteration or addition to realty. So long as the transaction is a "contract" between a Taxpayer/consumer and a contractor, it cannot be treated as a retail sale to the Taxpayer. S.C. Code Ann. 12-36-110 (1) (e). Neither the price paid for the purchase of real estate nor consideration paid under a construction contract are subject to the sales and use tax.

Respondent has published certain instructions which relate to a contractor's responsibility for sales tax on purchases of tangible personal property used in the performance of construction contracts.⁽³⁴⁾ In these Taxpayer information manuals, Respondent has provided guidance to contractors who wish to purchase an exempt machine or materials to build an exempt machine.⁽³⁵⁾ Respondent offered into evidence a sample letter which it prepared and makes available to construction contractors who are furnishing exempt processing machinery.⁽³⁶⁾ The stated purpose of this form letter is to enable a contractor to purchase certain machines including parts and attachments, free of sales/use tax. Because the Respondent provides a sample letter expressing guidance for a contractor to avoid paying tax, it is obvious that without providing this letter to Respondent, a contractor will be responsible for paying the tax upon purchase of these items. If the contractor is not liable for the sales/use tax, but it is the liability of the contractor's customer, then there would be no need for this letter.

Accordingly, I find and conclude that the facts presented to me support Taxpayer's contention that these agreements were with contractors. The court is mindful that S. C. Code Ann. §§ 12-36-110(1)(a) and (1)(e) are definition statutes which relate to coverage and are not exemption statutes. Unlike exemptions, questions of coverage are to be construed against the application of the tax and in favor of the taxpayer. S. C. Code Ann. Regs. 117-174.30 (c). Therefore, the sales of materials to the contractors, who designed, constructed and installed the certain items, were retail sales; the transactions between Taxpayer and the contractors were not.⁽³⁷⁾

III. Wholesale Sale Exclusion

Taxpayer has argued that chemicals, such as EPFLOC, which are used as a part of a manufacturing pollution control system are excluded from tax pursuant to S. C. Code Ann. § 12-36-120 (3). This section defines "wholesale sale" as a sale of: "(3) tangible personal property used directly in manufacturing, compounding or processing taxable personal property into products for sale."

Respondent has refused to recognize pollution control chemicals as wholesale sales which are excluded from the sales and use tax. It argues that the chemicals are not "used directly" in the manufacturing process. South Carolina Code Ann. Regs. § 117-174.30(b) provides:

(b) By 'used directly' is meant that the materials or products so used come into direct contact with and contribute to bring about some chemical or physical change in the ingredient or component properties during the period in which the fabricating, converting or processing takes place. It is not necessary that such materials or products be used up or entirely consumed, provided there is a compliance with the requirements set forth herein.

I find that these chemicals qualify under the wholesale sale provision, utilizing the same analysis applied to screen cleaning chemicals qualifying for the machine exemption. They are an integral, necessary and indispensable part of the manufacturing process. Without the removal of the dye from the wastewater through the use of these chemicals, the entire manufacturing operation would be shut down in violation of the plant's environmental permits.

IV. $300.00 Sales/Use Tax Cap

Taxpayer purchased forklifts and materials handling equipment with compatible attachments limited to a maximum of one hundred sixty net engine horsepower. It seeks the $300.00 sales and use tax cap for these forklifts and equipment. Respondent denied the cap, asserting that the equipment is not used in construction. S. C. Code Ann. § 12-36-2110 (A) (7) provides:

The maximum tax imposed by this chapter is three hundred dollars for each sale made after June 30, 1984, or lease executed after August 31, 1985, of each:

(7)self-propelled light construction equipment with compatible attachments limited to a maximum of one hundred sixty net engine horsepower.

There are six other items made subject to the $300.00 cap by the legislature in this statute. All are motorized apparatus that are self-propelled and each is generally required to be registered and titled with a state agency.

The following quotes are from 73 Am. Jur. 2d, Statutes:

Section 200. It is a general rule that the courts, in the interpretation of a statute, may not take, strike, or read anything out of a statute, or delete, subtract, or omit anything therefrom. To the contrary, it is a cardinal rule of statutory construction that significance and effect should, if possible, be accorded to every word, phrase, sentence, and part of an act.

Section 250. In the interpretation of a statute, the legislature will be presumed to have inserted every part thereof for a purpose. A statute should not be construed in such manner as to render it partly ineffective or inefficient if another construction will make it effective. Indeed, it is a cardinal rule of statutory construction that significance and effect should, if possible, without destroying the sense or effect of the law, be accorded every part of the act, including every section, paragraph, sentence or clause, phrase, and word.

In summary, it follows that the legislature inserts words and phrases in statutes for a purpose; and the courts will not delete any such words and phrases. All language contained in a statute must be considered. Thus, it must be presumed that the legislature had some purpose in mind when it inserted the phrase "light construction equipment." Taxpayer contends that this phrase in the statute is merely descriptive of the type of equipment and, that the actual use of the equipment is not controlling. If this were true, all self-propelled equipment would qualify for the cap, and the term "construction" would serve no purpose.

A rule of statutory construction is that words used in a statute should be taken in their ordinary and popular meaning, unless there is something in the statute which requires a different interpretation. Hughes v. Edwards, 265 S.C. 529, 220 S.E.2d 231 (1975); Investors Premium Corp. v. S.C. Tax Comm'n, 260 S.C. 13, 193 S.E.2d 642 (1973). Also, where the terms of a statute are clear and unambiguous and leave no room for construction, they must be applied according to their literal meaning. Mitchell v. Mitchell, 266 S.C. 196, 222 S.E.2d 217, (1976); Green v. Zimmerman, 269 S.C. 535, 238 S.E.2d 323 (1977).

In resorting to the dictionary to determine the literal meaning of a word, The American Heritage College Dictionary, 3rd Edition, defines the word "construction" as "the act or process of constructing, the art, trade, or work of building, something fashioned or devised systematically." The word "construct" is defined as "something formed or constructed from parts or to form by assembling or combining parts." Thus, it is clear to this court that the term "construction" as used in the phrase "light construction equipment" refers to equipment that will be used in the building or construction trade, not some other trade or application. Although the legislature might have been more careful in its drafting and stated that the equipment must be used in construction, it is clear to this court that the intent of the legislature was that the equipment must be used in construction. Therefore, I find that Taxpayer's analysis is without merit.

Due consideration and much weight is given to an interpretation of a statute by an agency which is charged with its administration, particularly where such an interpretation has been in existence for a lengthy period and has not been changed by the legislature. Prior to the creation of the Administrative Law Judge Division, the courts who heard the review of decisions from the South Carolina Tax Commission applied a strong presumption that the agency's interpretation or construction is correct. Ryder Truck Lines, Inc. v. S.C. TAX Comm'n, 248 S.C. 148, 149 S.E.2d 435 (1966) and Etiwan Fertilizer Company v. S.C. Tax Comm'n, 217 S.C. 354, 60 S.E.2d 682 (1950). This court, which now makes the final administrative decision in contested cases in controversies in which the Respondent is the affected agency, also gives much weight to the agency's interpretation of a statute. However, it is the prerogative of this court to render the final administrative interpretation.

In S. C. Technical Advice Memorandum ("TAM") 89-13, Respondent's predecessor, the South Carolina Tax Commission, determined that tractors, loaders, and other self-propelled equipment used to maintain golf courses, parks, and campgrounds were not the equivalent of "light construction equipment" within the meaning of this statute and thus the equipment was not entitled to the $300.00 sales tax cap upon purchase.

Based upon the analysis set forth above, I find that this specific equipment purchased by Taxpayer and used in its plants, for which it is seeking the sales tax cap, is not equipment used for construction purposes. The longstanding administrative policy of Respondent as enunciated in S.C. TAM # 89-13 is adopted in this decision.

CONCLUSIONS OF LAW

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

1. The Administrative Law Judge Division has jurisdiction of this matter pursuant to S.C. Code Ann. § 12-60-460 (Supp. 1998).

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's 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 she 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 taxing statutes applicable to monthly tax periods between January 1, 1991 and December 31, 1993 are as follows:

a. Pertaining to the Machine Exemption:

S.C. Code Ann. § 12-36-2120(17). Exempted from the taxes imposed by this chapter are the gross proceeds of sales, or sales price of:

(17) machines used in manufacturing, processing, 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 are necessary to the operation of the machines and are customarily so used. . . .;

b. Pertaining to the Contractor Issue (Definition of Retail Sale):

S. C. Code Ann. §§ 12-36-110(1)(a) and (1)(e): "Sale at retail and retail sale" mean all sales of tangible personal property except those defined as wholesale sales.

(1) The terms include:

(a) Sales of building materials to construction contractors, builders, or landowners for resale or use in the form of real estate.

(e) Sales to contractors for use in the performance of construction contracts.

c. Pertaining to the "wholesale sale" exclusion:

S.C. Code Ann. §12-36-120(3). "Wholesale sale" and "sale at wholesale" means a sale of:

(3) Tangible personal property used directly in manufacturing, compounding, or processing tangible personal property into product for sale.

d. Pertaining to the $300.00 Sales and Use Cap on Equipment:

S. C. Code Ann. § 12-36-2110 (A) (7) (Supp. 1998): The maximum tax imposed by this chapter is three hundred dollars for each sale made after June 30, 1984, or lease executed after August 31, 1985, of each:

(7) self-propelled light construction equipment with compatible attachments limited to a maximum of one hundred sixty net engine horsepower.

6. The rules of statutory construction are provided to remove doubt but never to create doubt. See 73 Am. Jur. 2d Statutes § 146, citing Englewood Water Dist. v. Tate, 334 So.2d 626 (Fla. App. 1976). Thus "[t]he 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).

7. A court cannot seek ways to rewrite statutes. To depart from the plainly expressed meaning causes the tribunal to legislate rather than interpret since "[t]he responsibility for the justice or wisdom of legislation rests with the Legislature, and it is the province of the courts to construe, not to make the laws." Creech v. South Carolina Pub. Serv. Auth., 200 S.C. 127, 146, 20 S.E.2d 645, 652 (1942) (superseded on other grounds by S.C. Code Ann. § 5-7-30). In short, a court cannot add conditions to the language of S. C. Code Ann. § 12-36-2120(17) (the machine exemption) in an effort to interpret what the General Assembly has plainly promulgated.

8. Items 1-8, as listed in Part I (B) of the Discussion, supra, are machines or parts or attachments to machines used in manufacturing tangible personal property for sale. As such, they come within the literal wording of and plain meaning of the machine exemption statute. The exemption statute will not be construed to insert the additional requirement that the machinery, together with its parts or attachments, be used directly in manufacturing or that it compose a part of the production line.

9. The transactions between the Taxpayer and certain entities (which I have found to be contractors), are construction contracts pursuant to S. C. Code Ann. § 12-36-110(1)(a) or alternatively S. C. Code Ann. § 12-36-110(1)(e). They are taxable retail sales to Taxpayer. The sale to the contractor was the final retail sale subject to the sales tax.

10. The sale of waste water treatment chemicals to Taxpayer was a wholesale sale within the meaning of S. C. Code Ann. § 12-36-120(3) and, therefore, is excluded from the sales and use tax by that provision.

ORDER

Based upon the foregoing Findings of Fact, Discussion, and Conclusions of Law,

IT IS HEREBY ORDERED that the taxpayer's request for refund is granted in part, as previously set forth herein.

AND IT IS SO ORDERED.

___________________________________

Marvin F. Kittrell

Chief Judge

Columbia, South Carolina

November 9, 1999