Yesterday, the South Carolina Supreme Court issued its long-awaited decision in Bodman v. South Carolina, holding that the state’s sales and use tax exemption and cap scheme, as a whole, does not violate the state constitution’s equal protection guarantee and prohibition against special legislation.1 A copy of the court’s decision can be viewed here.
However, the Bodman decision may be a beginning, rather than an end, to challenges to the state’s sales tax exemption and cap scheme. Although the court ruled in favor of the state, it does so reluctantly, finding that the plaintiff’s presentation of the case as a challenge to all exemptions and caps precluded the court from determining whether any specific exemptions and caps are unconstitutional under state law. The court invited future challenges to specific exemptions and caps. Will a taxpayer take the court up on its offer?
Bodman, a South Carolina resident, filed suit in the original jurisdiction of the South Carolina Supreme Court, seeking to strike down all of South Carolina’s sales and use tax exemptions and caps as unconstitutional. Currently, there are seven caps on the amount of sales tax and 78 exemptions from the sales tax. Bodman alleged that the sheer number of exemptions and caps removes any rational relationship they have to the underlying tax itself. In particular, he argued that the entire exemption and cap scheme violates the state constitution’s equal protection guarantee and prohibition against special legislation.
The South Carolina Supreme Court disagreed. The court explained that based on the limited grounds on which Bodman presented the case, he failed to meet his burden in proving that the exemptions and caps are unconstitutional. Specifically, by challenging the entire statutory scheme, rather than any individual exemptions or caps, Bodman precluded the court from determining whether the exemptions and caps violate equal protection or the prohibition against special legislation.
The Court Invites a Future Challenge to the Exemption and Cap Scheme
The court’s majority and concurring opinions did not shy away from expressing the Justices’ frustration in the conclusion they were "forced" to reach. The majority opinion stated:
We emphasize that our holding rests solely on the fact that Bodman’s challenge is to the number of caps and exemptions and not whether individual ones would withstand constitutional scrutiny. Thus, nothing in our opinion today should be construed as precluding a challenge based on the content of individual caps and exemptions at a later date.
Chief Justice Toal’s concurring opinion further encouraged a future challenge. In it, Chief Justice Toal stated:
I … write separately to emphasize our conclusion that today’s result does not foreclose a future challenge based on the content of individual exemptions and caps. In my opinion, many of these exemptions and caps could not withstand even a minimal level of scrutiny under an equal protection analysis.2
Chief Justice Toal went on to provide a specific example of a sales tax cap that she considers to be "the most egregious violation of equal protection" – the $300 cap on the tax imposed on purchases of aircraft, motor vehicles, motor cycles, boats, certain trailers and recreational vehicles.3 The Chief Justice noted that this cap was evaluated by the South Carolina Taxation Realignment Commission, which found that the cap was obsolete and represented "one of the most regressive aspects of the State’s entire sales and use tax code today".4 The Chief Justice’s comments are not surprising. In 2003, the court considered an identical challenge to the same statutory scheme.5 In a 3-2 decision, the court determined in that case that a challenge of the number of exemptions alone was without merit. Chief Justice Toal is the only Justice from the 2003 court who remains on the current bench, and she ruled in favor of the taxpayer in the 2003 case.
Taxpayers should keep an eye out for subsequent challenges to South Carolina’s sales tax exemption and cap scheme. Challenges to specific sales tax exemptions and caps, based on the court’s comments, are expected in the immediate future. Business-related exemptions that exempt specific products are particularly vulnerable as the Chief Justice has opined that this results in disparate treatment of retailers and manufacturers of exempted vs. non-exempted products. Business-related exemptions that are not supported by prior case law or Department of Revenue regulations are also vulnerable.
For more information on the Bodman decision, or South Carolina’s sales and use tax exemption and cap scheme, please contact one of the authors, or the Reed Smith attorney with whom you regularly work. For more information on Reed Smith’s state tax practice, visit www.reedsmith.com/statetax.
About Reed Smith State Tax
Reed Smith’s state and local tax practice is comprised of lawyers across seven offices nationwide. The practice focuses on state and local audit defense and refund appeals (from the administrative level through the appellate courts), as well as planning and transactional matters involving income, franchise, unclaimed property, sales and use, and property tax issues. Click here to view our State Tax team.
1. S.C. Supreme Ct. Opinion No. 27248 (May 8, 2013).
2. S.C. Supreme Ct. Opinion No. 27248 (May 8, 2013) (Toal, C.J., concurring) emphasis in original.
3. S.C. Code Ann. § 12-36-2110(A).
4.The South Carolina Taxation Realignment Commission Report at 73. The South Carolina Taxation Realignment Commission (SC TRAC) is a temporary and independent commission created by the South Carolina General Assembly to assess the effectiveness of the state’s tax structure. One of the authors of this alert, Alexandra Sampson, testified before the SC TRAC in 2010 on an unrelated South Carolina tax issue.
5. Ed Robinson Laundry & Dry Cleaning, Inc. v. South Carolina Department of Revenue, 356 S.C. 120 (SC 2003).
Client Alert 2013-129