Sales taxes must be uniform as between companies located in-state and out-of-state.
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In a strongly worded opinion, the South Carolina Supreme Court has ruled that an existing sales tax statute “unconstitutionally discriminates against interstate commerce in violation of the dormant Commerce Clause.” The exemption favored in-state sellers over those out-of-state—a distinction that isn’t allowed.
Facts
South Carolina law provides a sales tax exemption for the sale of durable medical equipment (DME), which is paid for directly by Medicaid or Medicare funds, but only when the seller’s principal place of business is located in South Carolina (the DME exemption).
Orthofix, Inc. and KCI USA, Inc. are two companies that do not qualify for the DME exemption because each has a principal places of business located out of state. Specifically, each company is a Delaware corporation with headquarters in Texas. Each company also holds a South Carolina retail sales license and sells DME and related supplies in South Carolina.
Under South Carolina law, a 6% sales tax is typically imposed on the gross proceeds of most sales in the state. However, 83 categories of sales are exempt from the tax. One of those provisions exempts DME if it’s sold by a provider with a South Carolina retail sales license with a principal place of business located in the Palmetto State.
Initially, Orthofix and KCI paid over the appropriate sales tax to the state. The companies subsequently requested refunds for the sales tax paid between October 1, 2014, and September 30, 2017 (KCI), and March 1, 2017, and March 31, 2020 (Orthofix).
Dormant Commerce Clause
The South Carolina Department of Revenue (DOR) turned down the refund claims, noting that the companies’ principal places of business were not in South Carolina.
The companies appealed (separately), arguing that the DME exemption violated the dormant Commerce Clause of the U.S. Constitution.
If you feel like you’ve heard that term recently, you’re not wrong—it’s the same clause cited in a Philadelphia wage tax case that the U.S. Supreme Court Justices may entertain (the U.S. Supreme Court Justices have invited the Solicitor General of the United States to weigh in on that matter). The dormant Commerce Clause was first introduced in principle in the 19th century and has come to mean that states cannot discriminate against interstate commerce or unduly burden it, even if there is no specific federal legislation related to commerce.
After another loss at the administrative level, the companies filed an action in circuit court challenging the constitutionality of the DME exemption.
Following separate hearings, the circuit court granted summary judgment to each company, finding that the DME exemption discriminated against interstate commerce. Additionally, the court held that the “principal place of business in South Carolina” requirement could be severed from the remainder of the DME exemption, thus extending the exemption’s application to all DME sellers, resulting in refunds for the companies.
It’s worth noting that the circuit court in this instance was a state court—the term is also used in the federal context which can be confusing. South Carolina’s trial courts are referred to as circuit courts and are located in every county in the state. A circuit court judgment can be appealed to the South Carolina Court of Appeals, or directly to the S.C. Supreme Court. The latter is what happened here—the DOR appealed, and the S.C. Supreme Court consolidated the cases for purposes of the appeals.
Supreme Court
At the S.C. Supreme Court, the companies again raised the dormant Commerce Clause as a challenge to the DME exemption. The court agreed that the DME exemption “unconstitutionally discriminates against interstate commerce in violation of the dormant Commerce Clause” and found the refunds appropriate.
The court cited previous cases, including Armco Inc. v. Hardesty, noting “[A] State may not tax a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the State.”
As part of their analysis, the court looked to see whether the law has either a discriminatory effect or a discriminatory purpose. They only needed to find one, but here, the court found that the DME exemption has both.
The first part is easy: a seller of DME with its principal place of business out-of-state must remit sales tax, whereas a similar seller of DME with its principal place of business in-state is not required to remit the tax.
As to the second part, the DOR argued the DME exemption is constitutional because it does not have a discriminatory purpose. The differential treatment, they say, is merely intended to “promote economic development” in South Carolina. But, the court found that the DOR failed to show that the DME exemption “advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.”
The Supreme Court could have allowed the DME to remain and merely hacked out the offended language—but it found that there wasn’t sufficient proof to show the legislature would have passed the DME exemption without the unconstitutional language. As a result, the Supreme Court declined to modify the DME exemption and instead declared the entire exemption void.
There was one saving grace for the state—the Supreme Court noted that the legislature could bring back the DME exemption in the future so long as there isn’t any unconstitutional limitation on a seller’s principal place of business.
The cases are Orthofix, Inc. v. South Carolina Department of Revenue (Appellate Case No. 2023-000317) and KCI USA, Inc. v. South Carolina Department of Revenue (Appellate Case No. 2023-000318).
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Publish date : 2024-08-15 01:00:00
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