All five S.C. Supreme Court justices on Wednesday aggressively questioned lawyers on both sides about whether the S.C. Department of Revenue has the power to audit and oversee Richland County’s penny sales tax proceeds.
The Supreme Court took no immediate action. Its opinion – which may be weeks or months away – could be historic and either allow or prohibit the state’s tax-collection agency from actively assuming a watchdog role in local sales tax matters.
“The role of the SC DOR ... is extremely limited,” Andrew Lindemann, a private Columbia attorney hired by Richland County, told justices to start off the 48-minute hearing.
Associate Justice Kaye Hearn interrupted, “Don’t they have authority to also do audits?”
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Lindemann: “They do not.”
John Nichols, a private Columbia attorney hired by the Revenue Department, told the justices that state law gives the agency the power to make sure the county’s sales tax money is spent lawfully.
“That has to mean something more than just collecting the tax and handing it over,” said Nichols, asserting the state agency has a fiduciary duty, a high guardian-like standard, to see the money it handles is spent lawfully. Also representing the state is Rep. James Smith, D-Richland.
Traditionally, the tax agency has not assumed a watchdog role in overseeing local sales tax collections. Its role has been limited to collecting local sales tax revenues generated in counties, then to pass them to the state treasurer, which disburses them back to counties.
But in 2015, the Revenue Department – apparently responding to tips about questionable spending by Richland County of millions raised from its then-2-year old penny sales tax for transportation – audited the program.
Money raised from the transportation penny only is supposed to go to projects such as road and sidewalk improvements, the Columbia-area bus system and for bikeways and greenways.
The audit found millions in expenditures that the revenue agency deemed unrelated to transportation and therefore unlawful. Revenue officials last summer impounded some $13 million of the county’s money. Richland County officials fought back in court, saying the state agency had no authority to oversee, monitor and pass judgment on how the county spent penny tax proceeds.
Among the expenses that revenue officials said was unlawful was a $600,000 annual payment for the equivilant of two employees at two public relations firms, as well as a mentoring program and a small-business support program.
Richland County’s transportation sales tax, which began collections in 2013, is expected to raise $1 billion over its 22-year life.
The case before the high court is complex. But basically, if the county prevails and the court finds the Revenue Department has no authority to aggressively monitor county spending, the state agency would have to cease its watchdog efforts over millions generated by Richland’s penny sales tax. Other counties also would likely be affected.
If the state wins, the matter would likely be bounced back to a lower court, where the Revenue Department would have the “standing,” or right to take Richland County to court, and get a ruling after a trial about whether individual expenditures were unlawful.