Tax Law Insights

South Carolina has some of the highest business property taxes in the Southeast. The state generally taxes land, buildings, machinery and equipment, and furniture and fixtures, but does not tax inventory, pollution control equipment, intellectual property, and other assets.

To reduce the effect of its high business property tax rates, and to make the state a more competitive environment for business, South Carolina offers a property tax incentive and tax savings for manufacturers, and certain other businesses, investing at least $2.5 million over a five year period in the state. This incentive is known as the negotiated fee-in-lieu of property taxes, or "FILOT".

Property taxes are calculated by taking the "value" of taxable property and multiplying it by an "assessment ratio" set by state law and then multiplying that product by an applicable "millage rate" set by local government. Real property owned and used by a "commercial enterprise" has an assessment ratio of 6%, and the personal property of the business is assigned an assessment ratio of 10.5%. Manufacturers are assigned an assessment ratio of 10.5% for both real and personal property.

Under a FILOT, the value of land and buildings is generally set at the value of this property at the beginning of the arrangement (typically, the cost or price paid for these assets) and this value remains constant throughout the term of the FILOT. This value may be adjusted to fair market value every five years, through agreement with the county. The value of personal property (e.g. machinery and equipment) begins with its cost and then is depreciated each year under a statutory rate (e.g. 11% per year for manufacturers) until the property is depreciated down to 10% of its cost.

The FILOT permits a business and the county to negotiate a reduction in the assessment ratio for all property, both real and personal, down to 6% (or even lower with larger investment levels), and the county can agree to "freeze" the millage rate at a fixed rate, or to adjust the millage rate every five years, throughout the term of the FILOT.

While a FILOT is certainly beneficial for many manufacturers, there may be other alternatives to reduce a manufacturer's South Carolina property taxes as well. For manufacturers who do not enter into a FILOT, but invest at least $50,000 in new machinery and equipment, South Carolina law authorizes a reduction in the "county portion" of the applicable millage rate for 5 years. The county portion of the total local millage rates in South Carolina averages about 25-35%. Also, and recently as part of South Carolina's new "Gas Tax Law", a property tax value exemption (discount) totaling 14.2857% is being phased-in over 6 years beginning in 2018. The effect of this valuation discount, once fully implemented, will to be essentially reduce the 10.5% assessment ratio for manufactures down to 9%. Importantly, neither the 5-year abatement of the county millage rate or the new valuation discount are available to manufacturers who enter into a FILOT.

Finally, in addition to, or as an alternative to a FILOT, a manufacturer can seek to negotiate a "special source revenue credit", also known as a "infrastructure improvement credit" (SSRC). An SSRC can be a simple discounted amount (e.g. $500,000), or a percentage of the manufacturer's annual FILOT or property tax liability (e.g. 10%/year for 10 years). Unlike a FILOT, however, the SSRC is designed to be a reimbursement mechanism, and where FILOT payments/property taxes of a manufacturer are reduced to allow the manufacturer to use these savings to pay for qualifying costs, such as for the purchase of land and the construction of buildings or certain "infrastructure" of a manufacturer.

Both the FILOT and SSRC property tax incentives are discretionary and must be negotiated with local government; however, the 5-year manufacturer abatement and the new phased-in valuation discount for manufacturers generally are "automatic" (the manufacture must report the new machinery and equipment on its annual property tax filed with the South Carolina Department of Revenue and this qualifies as the claim/notice for the incentive).

For many new and expanding manufacturer investments in South Carolina, the FILOT is often the preferred incentive. However, the SSRC does provide flexibility, and can be paired with a FILOT, or used on its own, provided the manufacturer has qualifying costs for the SSRC (e.g. land and buildings).

The minimum required investment for a FILOT is $2.5 million. There is no statutory minimum investment requirement for an SSRC. There are instances where a new or expanding manufacturer may not necessarily be making a large investment in the State, and, for these manufactures, an SSRC may be a better alternative. Moreover, a manufacturer may wish to consider not even entering into a negotiated incentive such as a FILOT or SSRC and simply claiming the benefit of the 5-year manufacturer abatement coupled with the new valuation discount. Making the best decision requires a careful analysis of the benefits of each of these potentially available incentives.