South Carolina has issued Revenue Ruling #25-3 to clarify how sales tax applies when businesses withdraw items from inventory for their own use. This update is especially relevant for retailers, dual businesses, and industries with frequent inventory withdrawals.
Understanding the Sales Tax Impact for Retailers and Special Industry Operators
If your business buys goods at wholesale for resale and occasionally uses those goods internally—say, handing out a promotional item or using store products for operations—this new guidance from the South Carolina Department of Revenue directly affects you. Retailers, manufacturers, medical professionals with optical practices, and rental businesses need to pay close attention.
What’s Changing: South Carolina Defines Withdrawals for Use as Retail Sales
South Carolina law now makes it crystal clear: when a business removes items from inventory that were purchased at wholesale and uses them internally, those withdrawals are treated as taxable retail sales for use tax purposes. In other words, these are generally use tax liabilities—not sales tax—that apply when no transaction occurs with a customer.
Key Points:
- Tax Base = Fair Market Value: Tax is calculated based on the item’s fair market value—usually, the retail price you'd charge a customer.
- Promotional Giveaways Count: Giving away an item for free or below cost? That’s likely a taxable withdrawal, too.
- Discounts Matter: If the item is on sale when withdrawn, the discounted price can be used to determine the tax base.
- Minimum Value Rule: You can’t report less than what you paid for it at wholesale unless the withdrawal qualifies as a genuine sale (like a going-out-of-business discount).
Exemptions Include:
- Items already taxed on a previous withdrawal.
- Items used directly in manufacturing or processing.
- Replacement parts covered under free warranty terms.
- Certain uses by automobile dealers, railroads, and fixed base operators.
What Businesses Should Do Now to Stay Compliant
Review Inventory Use Practices:
- Are items being taken from stock for internal use, employee consumption, or promotional purposes? If so, those uses may result in use tax obligations.
- Make sure your team is using the correct fair market value (typically your retail price) to determine the tax base.
Understand Industry-Specific Rules:
- Special rules apply if you're a rental business, hotel, optical provider, railroad, or ice seller.
Evaluate Dual Business Status:
- If you both sell and use inventory from the same stock (like a food service company or optometrist office), you’re considered a “dual business” and must account for both sales tax and use tax liabilities, depending on the transaction.
How TaxValet Makes Sales Tax Compliance Easier
TaxValet monitors state-by-state changes like this one so you don’t have to. If you're a TaxValet client, we’ll evaluate your inventory withdrawal practices, update your sales tax filing processes, and ensure compliance with South Carolina’s new guidance—including remitting any necessary use tax accruals. You’ll never have to second-guess how to handle internal inventory use again.
Not sure if this applies to your business? Reach out for a free consultation and we’ll help you find out.