Tax Law Insights

South Carolina imposes various taxes and reporting requirements on purchasers transacting business in the state. A sales tax is imposed on the sale at retail of tangible personal property and certain services in the state. South Carolina imposes a sales tax of six (6) percent (plus an additional one (1) percent "local option" tax in certain counties) on the retail sale of tangible personal property between a purchaser and seller within the state. A seller or retailer is required to collect the sales tax from a purchaser and remit the tax to the South Carolina Department of Revenue ("DOR"). Sales taxes are reported on Form ST-3, State Sales and Use Tax Return (6%), and must be filed with DOR by the 20th day following the month in which a taxable sale occurs.

The state sales tax applies to "tangible personal property". Tangible personal property is defined to include personal property which can be seen, weighed, measured, felt, touched, or which is in any other manner perceptible to the senses. The definition of tangible personal property is very expansive, and also includes certain services and intangibles. A retailer is defined very broadly to encompass almost all retailers who sell property and services. A retailer must remit the sales tax to DOR or be able to show that the retailer is exempt from tax. If a retailer does not have an exemption, it is liable for the tax and may be subject to penalties.

The South Carolina General Assembly provides purchasers with a means to alleviate the sales tax withholding requirement. A retailer may be eligible for a sales tax exemption certificate. South Carolina Code § 12-36-2510 allows DOR, at its discretion, to issue or authorize exemption certificates that allow a taxpayer to purchase tangible personal property tax-free and be liable for any taxes. However, DOR is required to prescribe an exemption for use by purchasers for certain purchases, which are specifically exempted by law. The holder of an exemption certificate is liable for any taxes due, and if an exemption is not applicable, the tax is due upon purchase or, if the application of the exemption or exclusion cannot be determined at the time of purchase, upon the withdrawal, use or consumption of the tangible personal property purchased with the certificate. The two types of exemption certificates for business sales tax purposes are direct pay and limited.

Direct Pay Exemption Certificate. A direct pay exemption certificate allows a customer to make all purchases tax-free and to report and pay directly to DOR any sales taxes due. The holder of a direct pay certificate is liable for any taxes due. If an exemption or exclusion is not applicable, the sales tax is due immediately upon the withdrawal, use, or consumption of the tangible personal property purchased with the certificate. Application for a direct pay certificate is made on Form ST-10, Application for Certificate, and the certificate is issued by DOR on Form ST-9, Exemption Certificate. Direct pay exemption certificates are not assignable or transferable to other purchasers. Normally, DOR will issue a direct pay certificate when the nature of a taxpayer's business renders it impracticable for the taxpayer to account for the sales tax at the time of purchase.

Limited Exemption Certificate. DOR may issue limited exemption certificates. As opposed to allowing customers to make all purchases tax-free with a direct pay exemption certificate, a limited exemption certificate allows its holder to make only certain purchases tax-free such as machinery, electricity, or raw materials. The holder of an exemption certificate is liable for any taxes due. If an exemption or exclusion is not applicable for the tangible property, the sales tax is due upon purchase, or upon the withdrawal, use, or consumption of the tangible personal property purchased with the certificate if the application of the exemption or exclusion cannot be determined at the time of purchase. Taxpayers may use Form ST-8, Single Sale Exemption Certificate, if the exemption is listed on the form otherwise taxpayers may use Form ST-10.

Taxpayer Impact

When a customer provides a retailer with an exemption certificate issued by DOR, the retailer should sell the items to the customer tax-free provided the transaction is exempted by the certificate. Then, the retailer will be relieved of sales tax liability for any tax due under the South Carolina Sales and Use Tax Act. The retailer should maintain a copy of the certificate in order to document that the sale qualified for the exemption and to document that the liability for the tax has been shifted to the customer. Without a valid exemption certificate, a retailer will need to collect sales tax from a purchaser absent an exemption certificate or risk potential penalties being imposed on the retailer.