South Carolina Supreme Court Rejects Challenge to Sales and Use Tax Exemptions…For Now

On Wednesday, May 8, 2013, the South Carolina Supreme Court (the “Court”) rejected a taxpayer’s constitutional challenge to the state’s sales and use tax caps and exemptions codified in South Carolina Code Sections 12-36-2110 and 12-36-2120.  However, the Court expressly provided that its decision rested solely on the fact that the taxpayer challenged “the sheer volume” of exemptions and caps and not whether any individual exemption or cap could withstand the Court’s constitutional scrutiny.  The Court left open the door for any future taxpayer to challenge an individual cap or exemption in the future. 

Under South Carolina Code Section 12-36-910(A), a sales tax, equal to five percent of the gross proceeds of sales, is imposed upon every person engaged or continuing within this State in the business of selling tangible personal property at retail.   South Carolina also imposes a companion use tax under Section 12-36-1310(A) on the storage, use, or other consumption in this State of tangible personal property purchased at retail for storage, use, or other consumption in this State, at the rate of five percent of the sales price of the property, regardless of whether the retailer is or is not engaged in business in this State.  Further, South Carolina Code Section 12-36-1110 increased the sales and use taxes by an additional one percent for the Homestead Exemption Fund, to reach a total of six percent. 

Matthew Bodman, a Richland County (SC) resident and taxpayer, brought an action in the Court’s original jurisdiction asserting that the total number of exemptions and caps to South Carolina’s sales and use tax removed any rational relationship to the underlying tax.  Specifically, the taxpayer asserted that the sales and use tax exemptions delineated in South Carolina Code Sections 12-36-2110 and 12-36-2120 violated the South Carolina State Constitution’s equal protection guarantee and prohibition against special legislation. 

In 2003, a divided Court held, in a 3 to 2 decision, that the sheer number of the state’s sales and use tax exemptions did not cause all of the exemptions to violate the equal protection clauses of the United States and South Carolina Constitutions.  See Ed Robinson Laundry & Dry Cleaning, Inc. v. South Carolina Department of Revenue, 356 S.C. 120; 588 S.E.2d 97 (2003).  This time, unanimously, the Court rejected the argument that the total number of sales and use tax caps and exemptions are arbitrary and capricious, which would violate the equal protection clause and the prohibition against special legislation.  The Court noted that its equal protection analysis required it to review each cap and exemption individually, and it could not group all eight-five (85) exemptions into one for its constitutional review.  The Court opined that each exemption and cap must be reviewed separately in order to determine whether its content is supported by any rational basis. 

However, in concurrence, Chief Justice Toal provided a blueprint to challenge an individual sales tax exemption and/or cap.  The Chief Justice stated that many of the sales tax exemptions and caps could not pass constitutional scrutiny if analyzed individually.  For example, Chief Justice Toal examined the sales tax cap of $300.00 on sales and leases of aircraft, motor vehicles, motor cycles, boats, trailers, recreational vehicles, and self-propelled light construction equipment found in South Carolina Code Section 12-36-2110. 

The Chief Justice noted that the General Assembly enacted this cap in 1984 to compete with the sales tax cap in North Carolina and to encourage sales and leases of automobiles in South Carolina.  Citing the South Carolina Taxation Realignment Commission (TRAC) report, the Chief Justice argued that this sales tax cap no longer serves a legitimate public purpose since the state of North Carolina no longer has the sales tax cap on automobiles and dealers are not losing sales and profits.  Chief Justice Toal maintained that this sales tax cap has “outlived its intended purpose” and does not bear a rational relationship to a legitimate governmental purpose thus violating the equal protection clause. 

Although the numerous exemptions and caps remain in South Carolina, the Court has issued an invitation for myriad lawsuits to reduce the number of sales tax exemptions.  By providing a paradigm for taxpayers to challenge these exemptions, the Court and taxpayers should expect to see more constitutional challenges to South Carolina’s sales and use tax exemptions and caps statutory scheme.

About the Author

Jeffrey T. Allen
Jeff focuses his practice on business and tax matters. He provides advice to clients on a variety of transactional matters and represents clients in tax controversy matters before the South Carolina Department of Revenue (DOR), Internal Revenue Service (IRS), South Carolina Administrative Law Court, United States Tax Court and United States District Court.