SC Administrative Law Court Decisions

This matter is before me pursuant to a letter from the Petitioners, filed on May 4, 2001, in which the Petitioners request consideration of certain "misstatements" in the Final Order and Decision in this matter, which was issued on April 17, 2001. I have construed the letter as a Motion for Reconsideration. Upon careful consideration of the Motion, the Order of April 17, 2001 is hereby rescinded and the following Order substituted therefor. Any issues raised in the Motion for Reconsideration but not addressed in this Order are hereby denied.

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.

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:

1. Notice of the date, time, place, and nature of the hearing was timely given to all parties.

2. 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 October of 1991. 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.

3. 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.

4. 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.

5. Petitioners obtained xerox copies of SC 1040NR, the South Carolina nonresident tax forms and pages 4 through 7 of the instructions for those forms, from the public library for the years 1993 through 1995 because no South Carolina nonresident tax forms were available at the post office and none were mailed to them by the Department. Beginning in 1996, the Petitioners received South Carolina tax forms from the post office. Also, beginning with the forms for tax year 1996, resident and nonresident South Carolina tax forms were combined in one booklet. Petitioner did not receive any tax forms by mail from the Department until October 18, 2000, and has not received any forms since then.

6. The 1993 South Carolina nonresident tax form booklet contains the following statement on page 9:

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. 7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

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

1. This Division has personal and subject matter jurisdiction.

2. 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

3. 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

4. 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. See S.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. Under Quill, 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.

5. 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

6. 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

7. 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.

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

June 5, 2001

Columbia, South Carolina