May 8, 2013

SC top court upholds sales-tax exemptions

The state Supreme Court declined Wednesday to strike down South Carolina’s 78 sales-tax exemptions, but it offered a blueprint to anyone who might want to challenge individual exemptions in the future.

The state Supreme Court declined Wednesday to strike down South Carolina’s 78 sales-tax exemptions, but it offered a blueprint to anyone who might want to challenge individual exemptions in the future.

In particular, Supreme Court Chief Justice Jean Toal suggested the state’s controversial $300 sales-tax cap on autos could be ripe for a legal challenge.

South Carolina charges a 6 percent tax on all retail sales, generating $2.3 billion a year that mostly goes to pay for education. However, state lawmakers have exempted 78 items from the tax — including textbooks, groceries, sweetgrass baskets and portable toilets —while capping how much tax can be collected on other items, including cars.

The exemptions and caps have grown so large the state now exempts more money from the sales tax — $2.7 billion — than it collects — $2.3 billion, according to a 2010 report by the S.C. Taxation Realignment Commission.

In 2011, Columbia attorney Matthew Bodman sued, asking the Supreme Court to throw out all of the exemptions, contending “the number of them has grown to the point where they no longer bear a rational relationship to the purpose of imposing the tax in the first place.”

The case angered state lawmakers, who argued they alone have the authority to determine what is and is not taxed.

After more than a year of deliberation, the Supreme Court rejected Bodman’s argument Wednesday, declining to throw out the exemptions. The court ruled Bodman’s argument was based solely on the number of exemptions, not the content of the exemptions themselves.

“We are concerned not with size or volume but with content,” the court said, quoting from a similar ruling in 2003. “Because Bodman’s challenge ... deals only with size and volume and not content, it must fail.”

However, the justices were careful to emphasize Wednesday’s ruling does not stop future challenges to the constitutionality of individual sales tax exemptions. Indeed, Toal encouraged it.

“Many of these exemptions and caps could not withstand even a minimal level of scrutiny,” she wrote in a separate, concurring opinion.

Toal said the “most egregious violation” is South Carolina’s cap on the sales taxes on vehicles. Whether you buy a car or an airplane, the most you will pay in sales taxes in South Carolina is $300.

“While South Carolina’s sales-tax cap for motor vehicles had a rational basis connected to a legitimate governmental purpose in 1984, in 2012 it has outlived the intended purpose of making South Carolina competitive with neighboring states with regard to the motor vehicle market,” Toal wrote.

Toal said the vehicle sales tax clearly was regressive, resulting in people who buy old, dilapidated vehicles paying the same tax as those buying luxury cars and airplanes.

It “represents an arbitrary and capricious exception to the sales tax,” she wrote. “It is likely that the same can be said for many of the other exemptions or caps when viewed on an individual basis.”

Dick Harpootlian, one of Bodman’s attorneys, said he would consider bringing another lawsuit — adding he thought Toal’s comments amounted to “a partial victory.”

“There are too many special interests (protecting their tax breaks before the Legislature), so the only thing ever going to get this done is the court,” he said.

House Speaker Bobby Harrell, R-Charleston, praised the ruling, saying if the court had thrown out the state’s tax exemptions, it would have amounted to a “$3 billion backdoor tax increase.”

Harrell said he was not concerned with Toal’s suggestion that the court would be willing to throw out the cap on taxes collected from the sale of motor vehicles.

“I don’t think the case today is about a hypothetical future court case. I think the real issue today is that the court spoke clearly that you can’t use the court to try to force a tax increase, particularly of this magnitude,” Harrell said. “We’ll deal with whatever things come down the path in the future.”

In 2012, state lawmakers — reacting to the Bodman case — announced they would try to reform the state’s sales-tax exemptions. State Rep. Tommy Stringer, R-Greenville, introduced a bill that would have eliminated 43 sales tax exemptions. Lawmakers whittled that number down to 20. Then, Stringer’s bill, which passed the House, died in the Senate.

Stringer tried again this year, but his proposal again is stuck in committee.

“No matter what you do, someone is going to be helped and someone is going to be hurt,” Stringer said. “Obviously, the people who are going to be hurt are always much more vocal than the people who are going to be helped.”

Harrell agreed “it is very difficult” to eliminate sales-tax exemptions. But he expects the House to try again next year.

“I’ll be surprised if we don’t pass something next year,” he said.

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