Tax Law Insights

The South Carolina Infrastructure and Economic Development Reform Act, 2017 Act 40, was recently enacted and is designed to enhance South Carolina's economic competitiveness. The Act, commonly referred to as the gas tax bill, increased the South Carolina gas tax to pay for infrastructure improvements. In addition, the Act provided several tax credits and incentives, including a new property tax exemption for manufacturers.

The Act provides an exemption equal to 14.2857% of the property tax value of manufacturing property. S.C. Code § 12-37-220(B)(52)(a). The exemption is designed to reduce the default assessment ratio on manufacturing property from 10.5% to 9%. The 10.5% default assessment ratio is set in Article X of the South Carolina Constitution and could not be changed directly without an amendment to the South Carolina Constitution. The new manufacturing property tax exemption is effective for the 2018 property tax year but phased in equally over 6 years. Thus, the full exemption will not be available until the 2023 property tax year.

The new manufacturing property tax exemption will provide a welcome reduction in a manufacturers property tax liability for all property that is not subject to a negotiated fee-in-lieu of tax (a FILOT). How the Act applies to property that is subject to a FILOT is not clear. The manufacturing property tax exemption is expected to be construed to apply only to property that is subject to regular ad valorem property tax, not property that is subject to a FILOT. The South Carolina Department of Revenue is working on guidance on the new manufacturing property tax exemption but it has not yet been issued.

Most manufacturers in South Carolina negotiate a FILOT to lower their property tax liability on new investment, typically providing for a 6% assessment ratio. The new manufacturing property tax exemption, assuming it does not apply to property in a FILOT, reduces the savings provided by a FILOT. Nonetheless, a negotiated FILOT should continue to be the incentive of choice for large manufacturers making new investments. Smaller manufacturers will need to carefully analyze whether the benefits of a FILOT are sufficient to warrant the time and expense associated with negotiating a FILOT.

All new manufacturing establishments or additions to existing manufacturing establishments in which an investment of $50,000 or more is made are entitled to a statutory abatement/exemption from county operating taxes for a period of five years from the year of investment. However, if a manufacturer enters into a FILOT, they may not take advantage of the abatement. Since the new manufacturing property tax exemption and the existing county operating millage exemption are available only outside of a FILOT and are applied by default, a small manufacturer may find the savings from a FILOT are not sufficient to justify the expense of negotiating a FILOT and the associated compliance costs to comply with the FILOT in future years. Modeling the various incentive alternatives is the only way to determine whether the benefits and burdens of a negotiated incentive are sufficient to warrant deviating from the new default property tax regime.