SC Administrative Law Court Decisions

STATEMENT OF THE CASE

This matter comes before the Administrative Law Court (ALC or Court) pursuant to S.C. Code Ann. § 12-60-460 (Supp. 2006). Petitioner is contesting a proposed assessment for sales and accommodations taxes issued to him by the South Carolina Department of Revenue (Department) for the periods between April 1, 2002 and December 31, 2003. A hearing was held before me on November 14, 2007 at the offices of the ALC.

FINDINGS OF FACT

Having observed the witnesses and exhibits presented at the hearing and taking into consideration the burden of persuasion and the credibility of the witnesses, I make the following findings of fact by a preponderance of evidence:

1. During the sales and accommodations tax periods between April 1, 2002 and December 31, 2003, Petitioner owned an oceanfront duplex in Garden City, South Carolina (Properties).[1] Each side of the duplex contained a dwelling with six bedrooms. However, neither dwelling was used by Petitioner as his place of residence. Rather the dwellings were used for commercial purposes.

2. Petitioner listed the Properties with a local realtor, Pendergrass Realty (Pendergrass), who advertised and rented the Properties to vacationers for Petitioner during the periods in question. The rentals arranged by Pendergrass were always on behalf of Petitioner and the renter, with no intervening sublease arrangements through Petitioner’s S-Corp. None of the leases/rentals arranged for Petitioner by Pendergrass were to any one person for a period of 90 or more continuous days. Pendergrass reported the gross rental receipts that it derived from leasing Petitioner’s Properties, and paid the appropriate sales and accommodations tax on these transactions. Pendergrass forwarded the net proceeds of these rentals to Petitioner.

3. During the applicable tax periods, Petitioner was also engaged in the business of soliciting clients interested in purchasing real estate tax liens at tax sales. That business was conducted through Petitioner’s S-Corp for which he is the sole shareholder. In an effort to promote his business, Petitioner intermittently supplied the Properties directly to S-Corp for use by clients of S-Corp as an incentive for them to retain S-Corp as an agent to purchase tax liens. In brochures issued during the periods in question, S-Corp advertised that a $20,000 or more investment into tax liens would entitle one to “free nights” at the Properties.

On a few occasions, when the clients stayed beyond the incentive period, Petitioner also supplied the Properties directly to S-Corp clients and/or other persons. However, there was never a period of time in which S-Corp clients used the Properties more than 90 consecutive days. Moreover, there was no formal or written lease between Petitioner and S-Corp as to S-Corp’s rental/lease of the Properties. Furthermore, S-Corp has never sublet the Properties to anyone.

As a result of the above rentals/leases Petitioner received $89,193.37 in gross receipts from S-Corp and other persons during the period involved in this case. Nevertheless, Petitioner failed to obtain a retail license and report these gross receipts for sales and accommodations tax purposes. The sales and accommodations tax on the gross proceeds of $89,193.37 including the interest owed interest through December 15, 2007 is as follows:

The Department also issued a penalty assessment for Petitioner’s failure to file and/or pay in the amount of $891.32 for the accommodations tax and $2,228.32 for the sales tax (total penalty being $3,119.64).

4. Petitioner submitted photographs of two “owner’s closets” on the top floor of the Properties which he asserts was used by S-Corp for more than 90 continuous days. The photographs showed that the “closets” were converted unused stairwells six steps deep at a 45-degree angle. The closets remained locked during the use of the property as an accommodation and as such were not available to occupants of the duplexes. Rather, the closets were used to store S-Corp’s sheets, towels, fishing rods, boogie boards, and advertising pamphlets in the closets.

5. Petitioner submitted a single document to establish S-Corp’s use of the Properties for 90 or more continuous days -- a schedule from his computer records dated September 24, 2007. The schedule reflects various irregularly-made payments ranging from $1,000 to $9,000 from S-Corp to Petitioner during the periods in question.

CONCLUSIONS OF LAW

Based upon the above Findings of Fact, I conclude the following as a matter of law:

1. S.C. Code Ann. § 1-23-600 (Supp. 2006) grants jurisdiction to the Court to hear contested cases under the Administrative Procedures Act. Specifically, § 12-60-460 grants the ALC the authority to conduct contested case hearings in matters concerning tax assessments. The burden of proof in these cases is with the party asserting the affirmative in an adjudicatory administrative proceeding. 2 Am. Jur. 2d Administrative Law § 354 (2004). In the instant matter, it is Petitioner who has requested a contested case hearing to challenge the Department's proposed assessment. Thus, since Petitioner asserts the affirmative, he must carry the burden of proving the Department's proposed assessment is incorrect. Id.; cf. Cloyd v. Mabry, 295 S.C. 86, 367 S.E.2d 171 (1988) (Citations omitted). Other jurisdictions have also reached the same conclusion in tax matters. See, e.g., In re Broce Const. Co., Inc., 27 Kan. App. 2d 967, 980, 9 P.3d 1281, 1290 (2000) (“[O]ur Supreme Court has long held that the tax found by the tax commission to be due is presumed to be valid [and] the taxpayer has the burden of showing its invalidity.”) (Citations omitted).

More specifically, the issue in this case is the taxation of the proceeds from the “sale” of accommodations to transients. S.C. Code Ann. § 12-36-950 (2000) provides that “all gross proceeds are subject to the tax until the contrary is established.” Section 12-36-950 further provides that “[t]he burden of proof that the sale of tangible personal property is not a sale at retail is on the seller.” Thus, Petitioner, as the seller, has the burden of showing that the gross proceeds subject to the Department’s proposed assessment were not derived from furnishing accommodations to transients for consideration.

2. Two taxes, both sales and accommodations, are at issue in this case. South Carolina’s sales tax is imposed by S.C. Code Ann. § 12-36-910 (2000). Section 12-36-910 (A) provides that: “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.” S.C. Code Ann. § 12-36-60 (2000) defines the term “tangible personal property” to include the “furnishing of accommodations.” In addition, S.C. Code Ann. §§ 12-36-60 and 12-36-70 (2000) define the term “seller” to include a person “furnishing accommodations to transients for consideration . . . .”

South Carolina’s accommodations tax is imposed by S.C. Code Ann. § 12-36-920(A) (Supp. 2001). That provision states, in relevant part:

(A) A sales tax equal to seven percent is imposed on the gross proceeds derived from the rental or charges for any rooms, campground spaces, lodgings, or sleeping accommodations furnished to transients by any hotel, inn, tourist court, tourist camp, motel, campground, residence, or any place in which rooms, lodgings, or sleeping accommodations are furnished to transients for a consideration. This tax does not apply where the facilities consist of less than six sleeping rooms, contained on the same premises, which is used as the individual’s place of abode. The gross proceeds derived from the lease or rental of sleeping accommodations supplied to the same person for a period of ninety continuous days are not considered proceeds from transients.[2]

Thus, all gross proceeds derived from the rental of any lodging or sleeping accommodations to transients are subject to sales and accommodations tax.

Here, Petitioner does not claim that either of the duplexes were his place of abode consisting of fewer than six sleeping rooms. Furthermore, Petitioner regularly used Pendergrass to rent the Properties to transients on a consistent basis for periods of time less than 90 consecutive days. Petitioner also allowed S-Corp to use the Properties to for periods of less than 90 consecutive days when the Properties were not rented through Pendergrass. Thus, neither exception to the Section 12-36-920(A) accommodations tax is applicable in the instant matter.

Petitioner nevertheless contends that the gross receipts the S-Corp paid him were not for short term use of the Properties by S-Corp’s clients, but instead were regular payments for S-Corp’s continuous use of the Properties as advertising and for S-Corp’s continuous use of the seven by four foot “owner’s closet” in each of the units. He argues that these two components constituted the S-Corp’s use of the Properties for 90 or more continuous days. Though the Petitioner admitted that he had no written or oral lease or contract with S-Corp regarding such use, he argues that the payments S-Corp made to him were sufficiently regular in time and amount to establish a continuous use of the Properties by S-Corp for advertising. To support this proposition, Petitioner submitted itemization of payments reflected in Respondent’s Exhibit 3 purportedly showing that that during the audit period he included in his S-Corp’s advertisements an incentive package that promised paying clients free accommodations at one of the two Properties.[3]

However, an itemization of payments Petitioner received for the Properties, including those from S-Corp, Pendergrass, and other third parties reflect otherwise. Exhibit 3 shows that the payments are highly inconsistent; the largest single payment was $9,000, the smallest was $1,000, and the payments followed no discernable regular schedule. The inconsistency of these payments reflects payment for the use of the Properties for temporary occupancy rather than regular payments demonstrating an ongoing advertising agreement between Petitioner and his S-Corp.

In fact, even if there is a component of the payments from S-Corp to Petitioner that is attributable to advertising, Petitioner neither documented what such an amount is, nor submitted any testimony as to how one could calculate such a component. Additionally, while Petitioner’s records do not indicate the periods in which S-Corp’s clients stayed at the Properties, the evidence clearly established that S-Corp’s clients did use the Properties for lodging or sleeping accommodations. Therefore, I conclude that Petitioner failed to prove that any of the proceeds were attributable to advertising and thus not subject to sales and accommodations tax.

As to S-Corp’s continuous use of the “owner’s closet,” S-Corp’s restricted use of the closets for ninety days simply establishes that those closets were not subject to sales or accommodations tax. However, no evidence established a component of the payments for those closets or showed that the closets were independently rented. Accordingly, I hold that Petitioner failed to prove that a portion of the gross proceeds at issue was for the use of the “owner’s closets” and thus not subject to sales and accommodations tax.

3. The Department assessed monetary penalties to Petitioner for his failure to file a sales tax return and his failure to pay sales and accommodations taxes. At the hearing, Petitioner testified that he had no knowledge of accommodations taxes prior to the audit. He further testified that he relied on his accountant for tax matters and that his accountant never mentioned that sales and accommodations taxes might be an issue with regard to the gross receipts at issue here. However, the fact that Petitioner’s failure to comply with Sections 12-36-910 and 12-36-920 was not due to any intentional attempt on his part to defraud the government does not relieve Petitioner from the imposition of the penalties. The fundamental purpose of the penalties is not to punish. See Plunkett v. Commissioner, 118 F.2d 644, 650 (1st Cir. 1941). Rather, the penalties “are provided primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayer's fraud.” Helvering v. Mitchell, 303 U.S. 391, 401 (1938).

In this case, Petitioner’s ignorance of sales and accommodations taxes does not warrant waiver or abatement of penalties for Petitioner’s failure to file a tax return or failure to pay tax owed. Courts have long held that ignorance of the law is no excuse. See, e.g., Barlow v. United States, 32 U.S. 404 (1833); Smothers v. U.S. Fidelity and Guar. Co., 322 S.C. 207, 470 S.E.2d 858 (1996). This is because it would be impossible to administer the law if ignorance of its provisions were a defense thereto. Utermehle v. Norment, 197 U.S. 40 (1905). Moreover, the negligent failure of an accountant or lawyer to prepare a taxpayer’s return is not a reasonable cause for failure to timely file. Logan Lumber Co. v. Commissioner, 365 F.2d 846 (5^th Cir. 1966). Accordingly, this Court upholds the Department’s assessment of penalties for failure to file and failure to pay.

ORDER

Based upon the above Findings of Fact and Conclusions of Law:

IT IS HEREBY ORDERED that Petitioners’ request be denied and the case DISMISSED.

AND IT IS SO ORDERED.

____________________________

Ralph King Anderson, III

Administrative Law Judge

December 31, 2007

Columbia, South Carolina