Manufacturers

Manufacturers in both of the Carolinas enjoy similar tax exemption benefits but differ in the scale, tax rate and interpretation of what constitutes production machinery. Both states exempt raw materials which become part of the product being manufactured. Exemptions for utility usage vary with North Carolina providing a wider exemption. South Carolina provides a 100% exempt status for production machines while North Carolina taxes production machinery at a low rate capped at $80 per item. South Carolina appears to rely more on its Department of Revenue to provide guidance as opposed to the Legislature's intent than does North Carolina, having an elaborate and growing wealth of Tax Policy Documents.

North Carolina Manufacturers

North Carolina follows other states which have adopted the "Streamlined Sales Tax" thoughts, providing exemptions to all who seek manufacturing status, without needing an onsite review by Field Auditors. Manufacturers in North Carolina have the ability to purchase all goods 100% tax free and to account directly to the State for any taxes due. This approach places a greater burden on the taxpayer to be accountable for the use of their exempt status and to track the differing sales tax accrual rates in their AP system. Any local taxes due would normally be paid to the situs of the manufacturing facility.

Utility purchases are interesting in that the NC statutes currently allow the exemption to apply to all utility purchases by a manufacturer rather than utilities "used in manufacturing" as does their neighbor to the south. By this, offices, break rooms and other non-manufacturing related use of utilities enjoy the exemption in NC if located within the same compound.

Ideally, a review of a manufacturer in North Carolina would start with securing an export of accounts payable data. The data would be reviewed to insure purchases are properly coded to a cost area based on the actual use of the item and that subsequent accrual of one of the three rates (0% - Exempt, 1% - Manufacturing related, 6.75% or higher - Non-Manufacturing) have been correctly accrued. Source invoices would be reviewed to insure the vendors were not charging tax. Where proper accrual of the tax was not being made, adjustments would be scheduled to correct anomalies or errors. Where electronic records are not available, a physical review of all purchase invoices would be made and schedules of adjustments would be prepared as needed. Refunds of over-accrued and paid taxes would be requested from the State and any taxes paid in error to vendors would be requested back from the vendor. Vendors may assign their right-to-refund to the manufacturer and subsequent refund claims would be made directly to the State. Field verification of large refund requests by the Department of Revenue can be expected. Substantiation of all amounts requested must be maintained and submitted along with the original request for refund.

South Carolina Manufacturers

South Carolina is not a part of the Streamlined Sales Tax movement and tightly controls the issuance of its sales tax exemption certificates. In South Carolina, one must apply for an exemption certificate and have a Field Auditor review their processes. If the Field Auditor approves and the main office staff approve, a certificate of exemption will be issued.

There are two basic types of exemption certificates issued by the State. "Limited" exemption certificates permit the tax-free purchase of certain classes of items. A "Direct Pay" permit allows the manufacturer to purchase all items tax-free and to account directly to the State for any taxes due. Field Auditors prefer to issue "Direct-Pay" permits because it allows for easier future audits in that the auditor can hold the manufacturer liable for any taxes where a vendor failed to charge the tax even when the certificate was not extended. We suggest manufacturers in South Carolina secure a "limited" exemption certificate and use it judiciously so that liabilities for vendor mistakes do not become their responsibility. When being audited by the State, manufacturers holding a "limited exemption certificate" should insure they are not being held for liabilities which belong to others.

South Carolina manufacturers do not typically track sales tax accruals within their AP systems. We wish they would for their own internal control and for external review purposes! AP reviews for South Carolina manufacturers can still make use of exported paid invoice data even where tax information is not tracked. The data allows the reviewer to see where items are used and to have an insight on whether a purchase is taxable or exempt.

Regardless of the data available, handwritten lists, Excel spreadsheets or invoices with special stamps or marks, schedules are prepared showing incorrectly charged tax by vendors or tax incorrectly accrued and paid to the State. Often invoices scheduled for adjustment are held out for future review State Field Auditors. Refund claims in excess of $10,000 are sent to the field for confirmation and reduction. Most vendors, when contacted for a refund of tax paid in error, will assign their right-to refund rather than applying to the State themselves for a refund. This keeps the State away from their doors. South Carolina refunds the tax to the entity that paid the tax to the State unless an assignment has been made.

The length of time it takes to receive a refund usually takes six (6) months for a simple request.

In South Carolina, how an item is used determines whether an exemption or exclusion from the tax will apply. South Carolina has adopted the phrase "integral and necessary" in recent years into its regulations on manufacturing. The application of this phrase has benefitted all manufacturers in the State but one cannot simply gain an exemption by simply saying an item is "needed".

Utilities and fuels in South Carolina are exempt from the tax to the extent they are "used in" manufacturing. Suppliers of electricity or fuels will exempt the entire purchase. It is up to the manufacturer to report tax due on non-manufacturing use. Failing to report the taxable use will result in a large liability over time. A detailed study of electricity and gas usage must be made so an accurate percentage can be reported. We do this for our clients. We have found many manufacturers to still be using random, unsubstantiated percentages suggested by Field Auditors sometime back in the past. This has always led to a large refund for the manufacturer since the random percentage was high.

Governmental Entities

All governmental entities have overpaid sales tax issues! Whether it is Federal, State, County, City or Town, we have observed overpayment of sales tax; some amounts are extremely large.

North Carolina Governmentals

North Carolina is unique in that it allows municipal government entities an annual recovery of most sales taxes paid directly to vendors, directly to the State as use tax and indirectly through construction contractors and service providers. NC entities keep track of their sales tax payments as a separate item, a receivable, in their AP systems. Reviews of such entities consist of isolating transactions where no sales tax was set up as a future receivable and where it appears that sales taxes reported by contractors is understated. Knowing whether tax statements supplied by contractors are understated is a judgment call based on experience with the type of construction being performed and the trades employed. Once additional sales tax has been found, amended or current refund claims are prepared.

South Carolina Governmentals

Governmental entities in South Carolina are not exempt on any purchases unless their activities include those of a manufacturer. Certain services are often taxed in error, either by the supplier or through incorrect accruals and are scheduled for recovery from the State or supplier. Sales tax is often overlooked and paid as a routine part of doing business even though it was not due.

Non-profit Entities

Sales tax treatment of non-profits differ between North and South Carolina in the handling of sales and are similar in the taxation of purchases. North Carolina allows a semi-annual recovery of taxes paid on purchases and indirectly on taxes paid through construction contractors and certain service providers.

North Carolina Non-profits

A 501(c)(3) non-profit in North Carolina must collect and remit sales tax on the items it sells. Items purchased for re-sale are to be purchased at wholesale, free of the tax. Normal purchases, not for resale, are subject to the State's sales or use tax. The tax paid to suppliers, accrued on out-of-state purchases and paid directly to the State and indirectly through contractors can be recovered semi-annually. The non-profit normally keeps track of all the sales and use tax paid on purchases as it represents recoverable funds which it can later use.

In a review of a North Carolina non-profit, an electronic download of accounts payable information is secured if available. In the absence of exported data, spreadsheets or other information is used to isolate the transactions where sales tax has already been recovered. Purchases where no sales tax appears to have been recovered are examined in detail to discover whether tax was included in the amount paid or in the case of a contractor pay application, reported in a tax affidavit to the non-profit. Any additional amounts found are recovered by the filing of amended refund claims or the next current refund claim as appropriate. Sales tax charged and remitted on sales made by the non-profit are not refundable. An inspection is made for duplicate payments or other payment anomalies and adjusted appropriately.

South Carolina Non-profits

A 501(c)(3) non-profit in South Carolina is exempt from charging sales tax on the sales it makes as long as it meets the requirements of South Carolina Code Section 12-36-2120(41). Purchases, not otherwise specifically exempted or subject to a $300 cap, are subject to the tax. There are no special refunds of taxes paid as there is in North Carolina.