ORDERS:
FINAL ORDER AND DECISION
STATEMENT OF THE CASE
This matter is before the Administrative Law Judge Division (Division)
pursuant to the request of the Petitioners for a contested case hearing pursuant
to S.C. Code Ann. § 12-60-460 (2000). Petitioners challenge a Final Agency
Determination issued by the Respondent, South Carolina Department of
Revenue (Department), in which the Department assessed sales and
accommodations tax on the gross proceeds from the rental of the Petitioners'
beach home. A contested case hearing was held at the offices of the Division
in Columbia, South Carolina, on March 7, 2001.
FINDINGS OF FACT
Having observed the witnesses and exhibits presented at the hearing and
closely passed upon their credibility, taking into consideration the burden of
persuasion by the parties, I make the following Findings of Fact by a
preponderance of evidence:
- Notice of the date, time, place, and nature of the hearing was timely given
to all parties.
- The Petitioners are citizens and residents of Canada. They are the owners
of a two bedroom villa located on Hilton Head Island, South Carolina, in
the Palmetto Dunes Plantation. They purchased the home in 1992. At the
time the Petitioners purchased the home, it was under a rental agreement
with the rental agency for Palmetto Dunes. The Petitioners rented the
home pursuant to that rental agreement during the 1992 summer season.
Dissatisfied with the rental agency's performance, the Petitioners cancelled
the agency rental agreement in the fall of 1992.
- From the tax year 1993 forward, the Petitioners rented their home by
advertising on the Internet. In 1996, the Petitioners began living in their
South Carolina home for six months of each year and no longer rented the
property during the winter months. Petitioners have no rental agent,
office, or employees in South Carolina.
- Petitioners timely filed South Carolina nonresident income tax returns for
each year the house was rented. Each of those returns contained a
Schedule E from their federal tax return, which showed the rental income
from the Hilton Head property.
- Petitioners obtained copies of the South Carolina tax forms from the
public library for the years 1993 through 1996 because no South Carolina
nonresident tax forms were available at the post office and none were
mailed to them by the Department. Beginning in 1997, the Petitioners
received South Carolina tax forms from the Department by mail. Also,
beginning with the forms for tax year 1996, resident and nonresident
South Carolina tax forms were combined in one booklet.
- The 1993 South Carolina nonresident tax form booklet contains the
following statement on page 9:
ACCOMMODATIONS TAX
ACCOMMODATIONS TAX: Taxpayers who furnish accommodations to
transients for one week or less in any calendar quarter are required to remit
the accommodations tax at the rate of seven percent on the gross proceeds
derived from the rental or charges for accommodations. Please prepare Form
ST-388 to determine the tax.
If you own a rental agency or more than one rental unit or your rentals are in
excess of one week a quarter, you are considered a retailer. You must apply
on Form SCTC-111 and file returns as required. Form SCTC-111 may be
obtained by telephone or from one of our local Taxpayer Service Centers.
For further information contact your nearest Taxpayer Service Center. (See
the back of this booklet).
Substantially identical statements are found on page 9 of the 1994 booklet,
page 2 of the 1995 booklet, page 10 of the 1996 booklet, page 10 of the 1997
booklet, page 12 of the 1998 booklet, and page 15 of the 1999 booklet.
However, for the years 1996 through 1999, the statements are contained
within the instructions for filing a South Carolina resident income tax return.
There are no corresponding statements within the nonresident instructions in
the1996 through 1999 booklets.
- In April of 1999, the Petitioners received an e-mail notification from the
Department, advising of the requirement to obtain a retail license and pay
accommodations taxes on proceeds from the rental of rooms or houses on
a transient basis. Also in April of 1999, the Department audited the
Petitioners based upon their failure to report and pay accommodations
taxes on the proceeds from the rental of their Hilton Head home. After
the initial contact by the Department, the Petitioners and the Department
corresponded via e-mail, telephone and regular mail concerning a number
of questions the Petitioners had about the accommodations and local
option taxes.
- The Department issued a Proposed Assessment to the Petitioners on July
21, 1999, for sales and accommodations taxes in the total amount of
$2,632.22 for the years 1993 through 1998. This computation was based
upon information provided in the Schedule E forms submitted with the
Petitioners' federal income tax returns for those years, with a deduction for
long term rentals (those in excess of 90 days). Although the Proposed
Assessment referred to an "enclosed form" on which to submit a protest,
no such form was included with the Proposed Assessment.
- Since no protest form was included with the Proposed Assessment, the
Petitioners filed a timely protest by letter dated August 18, 1999,
contesting the accommodations tax due for tax years 1993 through 1995
and the interest and penalties for tax years 1993 through 1998.
Subsequent to the deadline for filing a protest, the Petitioners received
protest forms and an "Information Guide" from the Department.
Petitioners filed an amended protest on September 30, 1999, using the
protest form. On September 15, 1999, the Department received a payment
of $1,397.41 from the Petitioners for the tax due from the period of June
1996 through September 1998, and on September 30, 1999.
- On August 4, 1999, the Petitioners filed their initial returns for sales and
accommodations taxes for the months of May, June, and July of 1999,
using forms which had been provided by the Department. These forms did
not provide for the payment of local option taxes. Subsequently, the
Department sent the Petitioners new forms by letter dated August 3, 1999.
These forms varied from the forms originally sent to the Petitioners, and
reflected the fact that a local option tax of 1% was due for Beaufort
County. On August 14, 1999, the Petitioners refiled a Sales, Use,
Accommodation and Local Option Tax Return for the period ending July
31, 1999, using the new forms. With this return, the Petitioners enclosed a
check for $37.17 for the 1% local option tax due for the period in question.
The return was marked "Received" by the Department on August 31,
1999. However, the Petitioners were not properly credited with the
payment of the local option tax, and the Department issued a Notice of
Adjustment on October 25, 1999, stating that Petitioners owed $38.67 in
local option taxes for July, 1999. The Petitioners contacted the
Department, stating that they had already paid these taxes. Nevertheless,
the Department erroneously issued a Notice of Assessment on January 5,
2000, demanding payment of the local option taxes, penalties, and interest,
and threatening collection action. Petitioners again paid the taxes. At a
meeting on February 24, 2000, attended by the Petitioners and a
representative of the Department's appeals office, the Department
representative produced the checks originally submitted by the Petitioners,
which had been misplaced in the Department's files.
- In March of 2000, the Petitioners lodged a complaint with the Director of
the Department, setting forth a number of issues. In response, the Director
appointed an internal auditor to review the Petitioners' file.
- On September 8, 2000, the Department issued its Final Agency
Determination, in which it rejected the Petitioners' arguments and held that
Petitioners owed sales and accommodations taxes for the tax years 1993
through 1998, in the amount of $1,234.81. Thereafter, the Petitioners
timely requested a contested case hearing before the Division.
- The Department has attempted to notify the public about the
accommodations tax in the following ways:
a. The South Carolina income tax return booklets contain instructions
notifying taxpayers who rent to transients that an accommodations tax is due.
b. The Department's newsletter to the public and practitioners, "Revenews,"
has contained numerous articles dealing with the accommodations tax, as
well as synopses of policy documents which the Department has issued
regarding the accommodations tax.
c. The Department publishes and disseminates at any taxpayer's request a
"Business Tax Guide" which discusses the accommodations tax.
d. The Department publishes a "Summary of Tax Law Changes" each year.
This publication is available upon request of any taxpayer.
e. The Department publishes a "Sales and Use Tax Brochure" to assist
taxpayers in understanding South Carolina's sales and use tax laws. This
brochure discusses the accommodations tax.
f. The Department sponsors Sales Tax Seminars and meets with taxpayer
groups to answer questions and assist taxpayers.
g. The Department has a public assistance office which is available to the
public to answer questions and to assist with the preparation of returns and
other tax documents.
h. Since sometime in 1995, the Department has maintained a site on the
Internet which can be accessed by taxpayers.
There is no evidence, however, that the Petitioners received any of the above
information prior to the Department's audit.
CONCLUSIONS OF LAW
Based upon the foregoing Findings of Fact, I conclude, as a matter of law, the
following:
- This Division has personal and subject matter jurisdiction.
- Taxpayers renting accommodations in South Carolina have a duty to
collect and remit accommodations tax on proceeds from such rentals
pursuant to S.C. Code Ann. § 12-36-920 (2000). That statute provides in
pertinent 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. . . .
* * *
(E) The taxes imposed by this section are imposed on every person engaged
or continuing within this State in the business of furnishing accommodations
to transients for consideration.
Pursuant to this statute, a tax of seven percent is due on the rental of lodging
in a residence to transients for periods of less than ninety days, where the
residence in question is not the taxpayer's place of abode. Furthermore, the
statute imposes the tax upon the person engaged in furnishing the
accommodations to transients. Since the Hilton Head property is not the
Petitioners' place of abode and since the rentals in question were all for less
than ninety days, the Department argues that the accommodations tax is due
on all rentals of the Petitioners' property during the audit period.
The Petitioners raise several arguments objecting to the imposition of the
accommodations tax on the proceeds of the rentals of their property. First,
they argue that the accommodations tax should not be charged because the
Department failed to inform them of their duty to report and pay the tax.
Alternatively, they assert that all of their business transactions were
conducted over the Internet and are therefore not taxable in South Carolina.
Petitioners further argue that the Department's failure to comply with the
South Carolina Taxpayers' Bill of Rights, S.C. Code Ann. § 12-58-10 et seq.,
vitiates the requirement to pay the accommodations tax. Finally, Petitioners
assert that the Department cannot assess taxes for the period from April 1993
through March 1995, because that period is outside the three-year limitations
period for assessments set forth in S.C. Code Ann. §12-54-85 (2000).
Effect of Failure to Notify
- The Petitioners argue that they should not be required to pay the
accommodations tax because they were unaware of the requirement to pay
the tax prior to receiving the April 27, 1999, e-mail from the Department.
Petitioners state that, despite the fact that they filed South Carolina
nonresident income tax returns which disclosed income from the rental of
their Hilton Head property, the Department did not send them income tax
booklets or any other forms or literature setting forth the obligation to pay
accommodations taxes for any of the tax years in question.
Notwithstanding the fact that the Petitioners had no knowledge of the
requirement to pay accommodations tax, the law unquestionably imposes
such a requirement upon any person who furnishes accommodations to
transients for consideration in South Carolina. See S.C. Code Ann.
§12-36-920 (Supp. 2000). Moreover, it is well settled that ignorance of the
law is no defense to its enforcement. All persons are presumed to know, and
are bound to take notice of, the general public laws of the state in which they
have their residence or do business. 31A C.J.S. Evidence § 147 (1996). The
courts of South Carolina also follow this general rule. As the Court of
Appeals stated in Gregory v. Gregory, 292 S.C. 587, 358 S.E.2d 144 (Ct.
App. 1987):
It is a fundamental principle of law that everyone is charged with or deemed
to have knowledge of the law. The legal axiom that ignorance of the law is
no excuse has long been the law of this nation and state.
See also Benn v. Camel City Coach Co., 162 S.C. 44, 160 S.E.2d 135 (1931);
Anonymous Taxpayer v. S.C. Dep't of Revenue, 96-ALJ-17-0380-CC (May
23, 1997). Therefore, regardless of whether Petitioners were aware of the
statutory requirement to pay accommodations taxes, the taxes must
nonetheless be imposed.
Taxability of Transactions via the Internet
- Petitioners next contend that the Department lacks the authority to tax the
proceeds of the rental of their Hilton Head property because the rental
transactions were conducted over the Internet, entirely outside of the State
of South Carolina. Petitioners argue that the Department's assessment
constitutes an unlawful taxation of interstate commerce, and that they
cannot be required to collect and remit accommodations taxes because
they reside outside the State of South Carolina and have no place of
business, office or agent therein. Instead, Petitioners contend that the
renters of the property should be required to pay use tax to South Carolina.
South Carolina treats sales conducted over the Internet in the same manner as
it treats mail order sales for sales tax purposes. See S.C. Information letters
#98-25 and #99-9. Mail order sales are subject to either the South Carolina
sales or use tax, depending upon whether the seller has a nexus with South
Carolina. If a seller has nexus with South Carolina, then the seller is required
to collect and remit sales tax. See S.C. Code Ann. § 12-36-910 (2000) (sales
tax is imposed upon "every person engaged or continuing within this State in
the business of selling tangible personal property at retail"). If the seller does
not have nexus with South Carolina, then the purchaser is required to remit a
use tax based upon the purchase price of the item purchased. See S.C. Code
Ann. § 12-36-1310 (2000). See also S.C. Code Ann. §§ 12-36-1330 and
-1340 (2000). These provisions are also applicable to the rental of
accommodations, since "tangible personal property" includes the furnishing
of accommodations and a "retailer" or "seller" includes persons furnishing
accommodations to transients for consideration. SeeS.C. Code Ann. §§
12-36-60 and -70(1)(a) (2000).
South Carolina's position with regard to Internet and mail-order sales is
consistent with the United States Supreme Court decision in Quill
Corporation v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91
(1992). In Quill, the Supreme Court analyzed the issue of whether an
out-of-state mail order business with no outlets or sales representatives in the
state of North Dakota could be required to collect and pay a use tax on goods
purchased for use in that state. The corporation in question challenged the
tax on both due process and Commerce Clause grounds. The Court first held
that a retailer need not have a physical presence within a state in order to have
sufficient "minimum contacts" with the state to meet the requirements of due
process. Rather, the question is whether the foreign corporation has availed
itself of the benefits of an economic market within the state, and whether the
tax is related to any benefits received by the corporation by virtue of its
connections with the state. Quill, 112 S.Ct. at 1909-11. With respect to the
Commerce Clause issue, the Court applied the four-part test which had been
set forth in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct.
1076, 51 L.Ed.2d 326 (1977), as follows:
(1) The tax is applied to an activity with a substantial nexus with the taxing
state;
(2) The tax is fairly apportioned;
(3) The tax does not discriminate against interstate commerce; and
(4) The tax is fairly related to the services provided by the state.
Applying its previous decision in National Bellas Hess, Inc. v. Dept. of
Revenue of Illinois, 386 U.S. 753, 87 S.Ct. 1389, 18 L.Ed.2d 505 (1967), the
Court held that the "substantial nexus" requirement for the Commerce Clause
is more stringent than the "minimum contacts" required by the Due Process
Clause, and that Quill, whose only contact with North Dakota was via mail or
common carrier, lacked a "substantial nexus" with North Dakota and could
not be required to collect and pay the use tax.
The Petitioners in this case appear to be making both a due process and a
Commerce Clause argument, in that they contend that they lack a place of
business in South Carolina, that all their rental transactions are conducted via
the Internet, and that they cannot thus be required to collect and remit South
Carolina sales and accommodations taxes on transactions with buyers outside
the state.
Applying the principles set forth in Quill, supra, to this case, it is clear that
the Petitioners have sufficient minimum contacts with South Carolina to
satisfy the requirements of the Due Process Clause. The Petitioners own real
property on Hilton Head Island, the rental of which they have purposefully
advertised over the Internet. As such, the Petitioners have availed themselves
of South Carolina's tourism market and have earned income from their
property. Moreover, the Petitioners have received benefits from South
Carolina such as police and fire protection for their property. I therefore find
and conclude that the imposition of sales and accommodations taxes upon the
Petitioners does not violate the Due Process Clause.
With respect to the Petitioners' Commerce Clause argument, the applicable
test is the one set forth in the Complete Auto Transit case, supra, and restated
in Quill. There are four parts to the test, each of which must be satisfied in
order for a tax to withstand a challenge under the Commerce Clause. First,
the taxpayers and the activity being taxed must have "substantial nexus" with
the taxing state. UnderQuill, a vendor whose only connection with the taxing
state is via mail or common carrier lacks such a nexus. However,
notwithstanding the fact that the Petitioners conducted their rental
transactions via the Internet, they have an actual physical presence in South
Carolina by virtue of the Hilton Head property which they own and have
marketed to earn income. It is the rentals of this property, located within
South Carolina, which the Department now seeks to tax. Thus, I conclude
that the Petitioners have a substantial nexus with South Carolina.
Second, the tax must be fairly apportioned. In this case, the accommodations
tax is only applied to income derived from rentals of property located within
South Carolina. Therefore, no apportionment is necessary.
Next, the tax must not discriminate against interstate commerce. Since the
accommodations tax is the same regardless of who rents the property and
regardless of whether the property is owned by a South Carolina resident or
by a resident of another state or country, the tax does not unfairly
discriminate against out-of-state retailers or business entities.
Finally, the tax must be fairly related to the services provided by the state. As
discussed above, Petitioners have received police protection and other
benefits from this State by virtue of their ownership of the Hilton Head
property. Since South Carolina is only seeking to tax the proceeds of the
rental of property located within the state, the tax is fairly related to the
services provided. I therefore find and conclude that the imposition of sales
and accommodations taxes upon the Petitioners does not violate the
Commerce Clause.
- Petitioners also contend that pursuant to S.C. Code Ann. § 12-26-910
(2000), sales and use taxes do not apply to the "gross proceeds accruing or
proceeding from charges for use of data processing." Petitioners argue that
the activity they are engaged in is the advertising of data stored by
computers and made accessible to potential clients by electronic transfer
via the Internet, and that this activity is exempt. However, the proceeds
received by the Petitioners, which the state now seeks to tax, are not
charges for the use of the information stored on computers, or for the
processing of that information. Instead, they are charges for the privilege
of renting the Petitioners' property, which is located in South Carolina and
which is properly subject to the accommodations tax, as discussed above.
I therefore find that S.C. Code Ann. § 12-26-910 is inapplicable to this
case.
Statute of Limitations
- The Petitioners further contend that they should not be assessed sales and
accommodations taxes for the period of April 1993 through March 1995,
on the grounds that the time limitation for the assessment of taxes had
expired. Petitioners base this argument on S.C. Code Ann. § 12-54-85
(2000), which generally provides that the Department must assess
additional taxes within thirty-six months of the date a return is filed or due
to be filed, and provides certain exceptions to the thirty-six month
limitation. One such exception is found in S.C. Code Ann. §
12-54-85(C)(3) (2000), which provides in pertinent part: "Taxes may be
determined after the thirty-six month limitation if . . . . the taxpayer failed
to file a return or document as required by law[.]" Petitioners admit that
they did not file sales and accommodations tax returns for the periods in
question, but they argue that their timely filing of South Carolina
nonresident income tax returns for those years limits the Department's
authority to assess the sales and accommodations taxes. However, the
filing of a return for one type of tax does not relieve the Petitioners of the
responsibility for filing a return for any other tax for which they may be
liable. Because the Petitioners rented their vacation home to transients,
they were liable for sales and accommodations taxes on these rentals, and
were required by law to file a Sales, Use, Accommodations, and Local
Option tax return. Although Petitioners filed individual nonresident
income tax returns for the years in question, they did not file their
accommodations tax returns as required by S.C. Code Ann. §§ 12-36-920
and 12-36-2570 (2000). Therefore, pursuant to S.C. Code Ann. §
12-54-85(C)(3), the thirty-six month time limitation does not apply and
the Department has the authority to assess the sales and accommodations
taxes beyond the thirty-six month period. Accordingly, I conclude that the
Petitioners are liable for sales and accommodations taxes for the period of
April 1993 through March 1995.
Taxpayers' Bill of Rights
- Finally, the Petitioners contend that the Department failed to fulfill its
duties and obligations under the South Carolina Taxpayers' Bill of Rights,
S.C. Code Ann. § 12-58-10 et seq. (2000), and that this failure vitiates the
requirement that Petitioners pay sales and accommodations taxes on the
rentals of their property. Specifically, the Petitioners contend the
following:
a. That the Department failed to provide Petitioners with any publications,
up-to-date forms, or other information to inform them of their obligation to
pay the taxes, despite the fact that they had filed South Carolina nonresident
income tax returns showing income from the rental of their property, in
violation of S.C. Code Ann. §§ 12-58-40 through -60;
b. That the Department failed to inform the Petitioners that they had the right
to have an attorney, accountant, or other designated agent present at a hearing
in Beaufort in February of 2000, in violation of S.C. Code Ann. § 12-58-90;
c. That the Department improperly threatened a lien for nonpayment of local
option taxes, despite the fact that such payment had been timely made and the
check was held in the files of a Department employee from August 1999 to
February 2000, in violation of S.C. Code Ann. § 12-58-160.
Even assuming that the Department violated its own published procedures
and policies, there is no statute in the Taxpayers' Bill of Rights, or anywhere
else in Title 12, which would excuse a taxpayer's obligation to pay any taxes
for which he may be liable as a result of such conduct. The Petitioners' only
remedy, if they believe that they have been aggrieved by the Department's
failure to follow its procedures, is to file a civil action for damages against the
State of South Carolina in Circuit Court pursuant to S.C. Code Ann. §
12-58-170 (2000). This Division does not have the jurisdiction to entertain
the Petitioners' claims in this regard or to excuse the payment of the sales and
accommodations taxes.
ORDER
For all the foregoing reasons, I find that the Petitioners are liable to the
Department for sales and accommodations taxes on the proceeds from the
rental of their Hilton Head property, in the amount of One Thousand Two
Hundred Thirty-Four and 81/100 Dollars ($1,234.81).
AND IT IS SO ORDERED.
__________________________________
MARVIN F. KITTRELL
Chief Administrative Law Judge
April 17, 2001
Columbia, South Carolina |