South Carolina has some of the highest business property taxes in the Southeast, particularly for manufacturers. Property for manufacturers is taxed at: (1) the fair market value of land and buildings, and the depreciated cost of machinery and equipment (11% annually); (2) multiplied by an “assessment ratio” of 10.5%; and then (3) further multiplied by a local millage rate set by local government. To induce businesses to locate and expand in the state, South Carolina authorizes local county governments to enter into a “fee-in-lieu of property tax arrangement” (FILOT) which can helpfully reduce this significant property tax burden on manufacturers. However, not all businesses qualify for the FILOT, and the FILOT is generally a “negotiated” property tax incentive – and it is up to the local county government to offer it (or not).

In response to these issues, and as part of the State’s “Infrastructure and Economic Development Reform Act of 2017″ (the “Gas Tax Law”), the South Carolina General Assembly also added a new property tax valuation discount for manufacturers. The Gas Tax Law now provides a 14.2857% property tax valuation discount for manufacturers, phased-in over 6 years.

The South Carolina Department of Revenue has now released a draft of proposed “SC Revenue Ruling #18-x”, dated June 28, 2018, which offers DOR’s interpretative guidance on the new valuation discount for manufacturers. The ruling provides a general overview of the law, and then is structured in a “Question and Answer” format with 12 questions/answers concerning the new discount. Perhaps the most notable features of the new draft ruling from SCDOR:

• The only businesses eligible for the new discount are manufactures – no others.
• The new law implements a valuation discount, and not a reduction in the 10.5% assessment ratio which remains.
• The discount (defined by DOR in the draft ruling as a “partial exemption”) is phased in over six equal and cumulative percentage installments. The cumulative exemption amount, or discount, for each year is

2018:   2.38095%
2019:   4.7619%
2020:   7.14285%
2021:   9.5238%
2022:   11.90475%
2023:   and thereafter 14.2857%.

• The discount applies not only to property acquired by a manufacturer after the effective date of the Gas Tax Law, but to existing manufacturing property as well.
• Manufacturers do not need to separately file an application for this discount; it will automatically by applied by DOR each year when the manufacturer files its annual property tax return with the State.
• DOR flatly states that the new valuation discount is not available to manufacturers who are subject to a “negotiated” FILOT. DOR does recognize, however, that there can be other, perhaps more sophisticated property tax arrangements (beyond the scope of this post), such as a “non-negotiated FILOT” involving property located in a “multi-county industrial park”.

The new property tax valuation discount for manufacturers implemented through the Gas Tax Law is certainly welcome relief for manufacturers in South Carolina. There will be instances now with the new valuation discount, coupled with other potentially available property tax incentives, that certain manufacturers may be better off taking the discount and other available property tax incentives, rather than entering into a FILOT; however, this would generally be for smaller manufacturers, and each manufacturer must “do the math” to compare the benefits of the new law and a FILOT.