Summary: South Carolina issued a private letter ruling in which it applied the true object test to conclude that an insulation contractor that used scaffolding to provide its services was not renting the scaffolding to its customer, but that the vendor who supplied the scaffolding to the contractor was a retailer and required to collect sales tax.
The South Carolina Department of Revenue (Department) recently issued a private letter ruling addressing whether providing scaffolding in connection with contracts for the installation of insulation constitutes a taxable rental of tangible personal property or a nontaxable service.[1] The ruling applies the true object test and offers useful guidance for contractors and subcontractors alike when determining who bears the sales tax liability in multi-party construction arrangements.
Background on the XYZ and ABC Arrangement
In this case, an insulation contractor (Contractor), regularly used temporary scaffolding to install insulation for commercial and industrial property owners. A related entity (Vendor), owned the scaffolding and was responsible for delivering, assembling, and removing it at the Contractor’s job sites. While at the job site, the Contractor (not Vendor) used and exercised control over the scaffolding.
The Vendor billed the Contractor only for the labor and materials associated with delivery, setup, and removal of the scaffolding, without charging any separate rental fee or daily/monthly usage fees. The Contractor then passed those costs through to its customers with a small markup. For sales tax purposes, the Vendor classified itself as a contractor, and therefore, paid sales tax on its purchases of tangible personal property, including the scaffolding delivered to the Contractor’s job sites.
Applying the True Object Test to Multi-Party Construction Contracts
South Carolina law imposes sales tax on the sale, lease, or rental of tangible personal property at retail.[2] However, under the state’s regulation, the “receipts from services, when the services are the true object of the transaction, are not subject to the sales and use tax, unless the sales and use tax is specifically imposed by statute on such services (i.e. accommodation services, communication services).”
The ruling provides a detailed description of the true object test, with the relevant portion for this situation stated as follows:
If the article sold is the substance of the transaction and the service rendered is merely incidental to and an inseparable part of the transfer to the purchaser of the article sold, then the vendor is engaged in the business of selling at retail, and the tax which he pays . . . [is measured by the total cost of article and services].
Distinguishing Between Taxable Rentals and Nontaxable Services
In reviewing the contract between the Contractor and its customer, the Department found that the true object of the transaction was the installation of insulation, not the rental or use of scaffolding. The scaffolding was merely incidental to performing the service, and it was the Contractor, and not its customer that used the scaffolding. Accordingly, the Contractor was not renting tangible personal property to its customer, and no sales tax applied to the transaction.
In contrast, when the Vendor provided scaffolding to the Contractor, the Department considered it a taxable rental of tangible personal property subject to sales tax. Even though the Vendor labeled its charges as delivery, setup, and removal fees rather than a rental fee, the Department concluded that the scaffolding itself was the true object of the transaction. Without the scaffolding, the delivery, setup, and removal services would not exist, making those services incidental to a taxable rental. The ruling stated that “the characterization of the transaction through mere nomenclature cannot be controlling as to whether there is a retail sale of tangible personal property, but rather the application of the true object test is determinative.”
Additionally, the ruling further confirmed that the entire charge by the Vendor to the Contractor, including the incidental services, is taxable unless separately stated and reasonable in relation to the rental price.
More importantly, the Vendor was not entitled to a credit for sales tax paid on its original scaffolding purchases. The Department explained that, as a retailer, the Vendor should have presented a resale certificate to its supplier at the time of purchase if the scaffolding was intended for rental, and that “[f]ailing to utilize a resale certificate on its original purchases . . . does not grant [Vendor] or any other taxpayer a credit for sales tax liability determined after the fact.”[3]
Final Thoughts: Navigating Sales Tax Liabilities
These ruling highlights two important points:
- First, substance may take precedence over form when applying the true object test.
- Second, understanding how the true object test will apply to your business is crucial for determining how sales tax will apply. For instance, by incorrectly treating itself as a contractor and not as a retailer, the Vendor paid sales tax on its purchase of scaffolding that may not have been required and getting that tax back is not guaranteed.
[1] South Carolina Private Letter Ruling #25-1 (September 15, 2025).
[2] S.C. Code Ann. §§ 12-36-910(A) and 12-36-90.
[3] The ruling notes that ABC could seek a refund claim for the tax paid on its original purchase provided that the claim falls within the applicable statute of limitations period; however, there is no guarantee that such claim would be accepted by the Department.