ORDERS:
ORDER AND DECISION
This sales tax and accommodations tax matter comes before me pursuant to S.C. Code
Ann. § 1-23-310, et seq. (Supp. 1997) and S.C. Code Ann. § 12-60-460 (Supp. 1997), upon
Petitioners' request for a contested case hearing. Respondent South Carolina Department of
Revenue ("DOR") seeks various taxes, penalties and interest on income associated with
Petitioners' sales of resort golf packages for the period of March 1, 1990 through February 28,
1993. Petitioners exhausted their pre-hearing remedies pursuant to S.C. Code Ann. § 12-60-450
(Supp. 1997). By Order dated August 14, 1997, Petitioners' cases were consolidated for hearing
purposes only, with the consent of all parties and execution of Waivers of Confidentiality by
Petitioners. After notice to all parties, a hearing was conducted on October 3, 1997. Based on
relevant and probative evidence and applicable law, I find and conclude that Petitioners should
pay a 5% sales tax on: (1) overages in Account 305 during the audit period; (2) "no-show" funds
and golf course allowances in Account 766 during the audit period; (3) golf balls, tees, towels
and caps withdrawn from inventory during the audit period; and (4) switchboard connection fees
charged during the audit period. I further conclude that Petitioners owe no tax on administrative
fees for canceling reservations and processing refund checks.
DISCUSSION
I. BACKGROUND
Petitioners ("Taxpayers") operate resort hotels in Myrtle Beach, South Carolina.
Taxpayers have separately numbered accounts established for the recordation of various
categories of income and related expenses. As part of their business, Taxpayers sell golf
packages. The components of a golf package typically consist of sleeping accommodations,
meals, golf rounds and specialty items, such as golf balls, tees, caps, and towels. While the
guest bill indicates one package price, Taxpayers' internal records account separately for the
green fees, meals and specialty items. Funds attributable to golf rounds are normally passed
through to the participating golf course, and funds attributable to meals are normally passed
through to the restaurant.
II. ISSUES
A. Are revenues derived from administrative fees taxable; and if so, are they subject
to the 7% accommodations tax under S.C. Code Ann. § 12-36-920(A) (Supp. 1997), or the 5%
sales tax under subsection (B) of the statute?
B. Are revenues derived from unredeemed meal coupons and unused green fees
taxable; and if so, are they subject to the 7% accommodations tax under S.C. Code Ann. § 12-36-920(A) (Supp. 1997), or the 5% sales tax under subsection (B) of the statute?
C. Are revenues derived from allowances from golf courses taxable; and if so, are
they subject to the 7% accommodations tax under S.C. Code Ann. § 12-36-920(A) (Supp. 1997),
or the 5% sales tax under subsection (B) of the statute?
D. Are the specialty items included in golf packages subject to a 5% sales tax as they
are withdrawn from inventory, pursuant to S.C. Code Ann. § 12-36-110(1)(c) (Supp. 1997)?
E. Are revenues derived from telephone connection fees subject to a 5% sales tax
under S.C. Code Ann. § 12-36-910(B) (Supp. 1997)?
F. Is the negligence penalty DOR seeks to impose on Taxpayers justified under S.C.
Code Ann. § 12-54-40 (Supp. 1997)?
III. ANALYSIS
A. Administrative Charges
If a golf package purchaser cancels a full package reservation, Taxpayers charge a $15
administrative fee for the cancellation of tee times and other arrangements and refund check
processing. DOR maintains that the revenue from these fees is subject to the 7%
accommodations tax under S.C. Code Ann. § 12-36-920(A) (Supp. 1997).
South Carolina Code Ann. § 12-36-920 (Supp. 1997) sets the tax rate for hotel sleeping
accommodations and additional guest charges as follows:
(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.... The tax imposed by this subsection
(A) does not apply to additional guest charges as
defined in subsection (B).
(B) A sales tax of five percent is imposed on
additional guest charges at any place where rooms,
lodgings, or accommodations are furnished to
transients for a consideration, unless otherwise
taxed under this chapter. The term additional guest
charges includes, but is not limited to:
(1) room service;
(2) amenities;
(3) entertainment;
(4) special items in promotional tourist packages;
(5) laundering and dry cleaning services;
(6) in-room movies;
(7) telephone charges;
(8) rentals of meeting rooms; and
(9) other guest services.
(emphasis added).
DOR auditor Cherri Dix ("Dix") testified that she considered Taxpayers' administrative
charges to be taxable at 7%, since they were retained from deposits submitted by the customer.
She characterized the administrative charge as "part of the accommodations when they sent the
deposit in for the room." Dix further stated that any funds from the golf package that did not
ultimately flow through to a third party were assessed at 7% because they were part of the
accommodations sold by Taxpayers. This reasoning is inconsistent with the legislative intent
clearly expressed in Section 12-36-920.
"The primary rule of statutory construction is to ascertain and give effect to the
legislature's intention or purpose as expressed in the statute." Scholtec v. Estate of Reeves, 327
S.C. 551, 490 S.E.2d 603, 606 (Ct. App. 1997). The language used should be given its plain and
ordinary meaning without resort to subtle or forced construction to expand or limit the scope of a
statute. See Berkebile v. Outen, 311 S.C. 50, 426 S.E.2d 760 (1993). Additionally, a tribunal
should not focus on any single section or provision but should consider the language of the
statute as a whole. Mid-State Auto Auction of Lexington, Inc. v. Altman, 324 S.C. 65, 476
S.E.2d 690, 692 (1996).
"A statutory provision should be given a reasonable and practical construction consistent
with the purpose and policy expressed in the statute." Town of Mount Pleasant v. Shaw, 315
S.C. 111, 432 S.E.2d 450, 451 (1993) quoting Hay v. South Carolina Tax Commission, 273 S.C.
269, 255 S.E.2d 837, 840 (1979). The language must be read in a sense which harmonizes with
its subject matter and accords with its general purpose. Scholtec, 490 S.E.2d at 607 (Ct. App.
1997).
Sand Dunes' Vice President of Operations, Frans Mustert ("Mustert"), testified that when
a customer sends in a deposit for a golf package, Taxpayers begin making arrangements for the
customer, which include reserving golf tee times. When a customer cancels a reservation,
Taxpayers charge a $15 administrative fee because they must cancel all arrangements that had
been made for the customer and process a refund check. The administrative fee is a legitimate
fee for the service of making golf reservations, and then canceling those reservations and
processing a refund check. The fact that the fee is retained from a portion of the customer's golf
package deposit, rather than separately billed, does not change its character.
S.C. Code Ann. § 12-36-920(A) (Supp. 1997) requires a 7% tax only on the gross
proceeds derived from the rental of sleeping accommodations. DOR argues that "gross
proceeds" as used in § 12-36-920(A) means all funds received by Taxpayers that do not flow
through to a third party, such as a golf course. The language in subsection (B) of the statute
makes it clear that the legislature did not intend for the term "gross proceeds" as used in
subsection (A) to include such things as charges for guest services and other charges not
specifically listed. DOR's interpretation of "gross proceeds" as used in section 12-36-920 would
render subsection (B) of the statute meaningless. Therefore, I reject this interpretation.
DOR also argues that the administrative fee "would not be charged 'but for' the taxpayers'
rental of accommodations." DOR cites Meyers Arnold, Inc. v. South Carolina Tax Commission,
285 S.C. 303, 328 S.E.2d 920 (Ct. App. 1985) in support of its position. In Meyers Arnold, the
South Carolina Court of Appeals held that lay away fees are part of the gross proceeds of sales of
the taxpayer. The Court reasoned that "[b]ut for the lay away sales, Meyers Arnold would not
receive the lay away fees."
The facts surrounding Taxpayers' administrative fees are distinguishable from those in
Meyers Arnold. In this case, no sale has been made. Taxpayers receive no income from the
rental of sleeping accommodations when the rental is canceled. If Taxpayers are required to pay
a 7% accommodations tax on the administrative fee, and Taxpayers collect this tax from the
customer, the customer would be taxed for something he did not buy. Moreover, the Court in
Meyers Arnold neither interpreted § 12-36-920, specifically applicable to hotels, nor the term
"gross proceeds" as used in that statute. Therefore, Meyers Arnold is not binding on this issue.
Because Taxpayers' administrative fees for canceling reservations and processing refund
checks are not connected with any sale, they are not taxable.
B. Package Overages
If a golf package purchaser fails to consume an item included in the package, such as a
meal or a round of golf, the funds attributable to these items are retained by Taxpayers and
recorded as an "overage" in a certain account. Certain overages are categorized as "no-show,"
indicating that a guest failed to show for a golf round, with no advanced notice to Taxpayers.
The overage from the "no-show" is recorded in a separate account upon notification from the
golf course.
1. Account Number 305 - Overages from Unredeemed Meal Coupons and Unused Green Fees
DOR maintains that a 7% tax should be assessed on any funds retained by
Taxpayers after the guest pays for a golf package. The logical extension of this argument is that
the funds allocated to meals or green fees change in character, from "non-sleeping
accommodations" to "sleeping accommodations," when customers fail to redeem coupons or
cancel tee times, creating an overage. I reject this argument as inconsistent with the legislative
intent clearly expressed in § 12-36-920.
The language of the statute as a whole clearly expresses the legislative intent for
the 7% tax to apply only to the rate charged for the rental of the guest room, with all other
charges for optional extras taxed at 5%. Subsection (B) states that the term "additional guest
charge" is not limited to the specifically enumerated items. The list of items in subsection (B) is
merely illustrative of the term "additional guest charge," and it is not meant to be exclusive.
DOR itself has recognized that the linchpin of analysis in determining whether a
hotel charge is subject to the 7% tax or the 5% tax is whether the charge is mandatory with the
rental of a room. See S.C. Revenue Ruling 97-3. If the hotel requires a guest renting only a
room to pay for something included with the room, regardless of use, the charge is mandatory
and is taxable at 7%. If the guest opts to purchase more than just sleeping accommodations, the
7% tax should be assessed only on the portion attributable to the mandatory charge for sleeping
accommodations.
When a guest rents a room at Taxpayers' resorts, he is not automatically charged
for a golf package. The purchase of a golf package is optional. Revenue from a golf package
over and above the mandatory room rate is an "additional guest charge." See S.C. Code Ann.
§ 12-36-920 (B)(4) (Supp. 1997) (special items in promotional tourist packages). This is so,
even though all components of the package are reflected in one price on the guest bill. By
including item (4) in subsection (B) of the statute, the legislature obviously recognized the tourist
industry's need to respond to consumer demand for package deals, without confusion over the
correct tax rate on package components. It would defeat the purpose of the package to itemize all
components on the guest bill. It is logical for all "non-sleeping accommodations" components to
be taxed at 5% to the entity retaining the funds paid for those items, whether it be the hotel, the
restaurant or the golf course.
Moreover, it is reasonable for a hotel to retain funds paid for unused meals and tee
times to absorb the cost of making these items available to guests. Therefore, the overage
resulting from an unused meal or tee time may be fairly characterized as "other guest services"
under subsection (B)(9).(1)
Based on the foregoing, I find that the overages in Account number 305 are
taxable at 5% instead of 7%.
2. Account Number 766
a. No Shows
In its Final Agency Determination dated May 7, 1997, DOR agreed to treat
the "no-shows" as an "additional guest charge" taxable at 5%. This is consistent with DOR's
current policy expressed in S.C. Revenue Ruling 97-3.
C. Allowances
Taxpayers also received certain allowances, in the form of discounts and rebates, from
participating golf courses. These allowances resulted from Taxpayers sending a target number of
guests to a golf course within a given period of time.
Taxpayers maintain that the purpose of the golf course allowances was to share
advertising expenses for golf packages. DOR has expressed a policy of not taxing funds
contributed by a golf course to a hotel's advertising expenses for golf packages when the amount
paid is reasonable and adequately supported by the taxpayer's records. See S.C. Revenue Ruling
# 97-3.
The record contained no written agreement or documentation of use of these funds for
advertising. Also, auditor Cherri Dix testified that she saw nothing during the audit that would
determine that these funds were used for advertising. Further, the testimony did not establish any
clear or definite agreement between Taxpayers and participating golf courses. Some of
Taxpayers' key employees were not even aware of Taxpayers' arrangement with participating
golf courses. Therefore, I find that there was insufficient evidence to show that these funds were
used for joint advertising expenses.
Because the allowances from golf courses represent funds originally collected by
Taxpayers for golf green fees, I find that they are taxable at 5% as an additional guest charge
under S.C. Code Ann. § 12-36-920(B) (Supp. 1997).
D. Specialty Items - Withdrawal from Inventory
DOR correctly maintains that Taxpayers should pay a 5% tax on golf balls, tees, towels
and caps when they withdraw these items from inventory. South Carolina Code Ann. § 12-36-110(1)(c) (Supp. 1997) defines "sale at retail" and "retail sale" as including "the withdrawal, use
or consumption of tangible personal property by anyone who purchases it at wholesale." Also,
S.C. Code Ann. § 12-36-90(1)(c) (Supp. 1997) includes in its definition of "gross proceeds of
sales" the fair market value of tangible personal property previously purchased at wholesale
which is withdrawn from the business or stock and used or consumed in connection with the
business. Taxpayers' withdrawal of the specialty items from their inventory, which they
purchased at wholesale, is clearly subject to a 5% sales tax.
The controlling case on this issue is Greystone Catering v. S.C. Department of Revenue,
326 S.C. 551, 486 S.E.2d 7 (Ct. App. 1997). In Greystone, the Court of Appeals found that
Embassy Suites' "complimentary" food and beverages provided with every room rental were
subject to a 5% sales tax as withdrawals from inventory. The Court stated that the last
transaction for a consideration is usually considered the taxable retail sale. Because Greystone's
"complimentary" food and beverages were not stated separately on the guest bill, the Court of
Appeals reasoned that Greystone, not the guest, was the final consumer and liable for the tax
when it withdrew the items from inventory.
In this case, Taxpayers did not bill separately for the golf balls, etc. Therefore, Taxpayers
were the "final consumers." Taxpayers are liable for a 5% tax on the items as they withdraw
them from inventory.
E. Telephone Switchboard Charges
Taxpayers also manage the rental of a group of villas associated with the hotels for the
villas' owners. Taxpayers require each villa to have a telephone connected to Taxpayers'
switchboard, which Taxpayers lease from BellSouth. Taxpayers pass on the cost of the
switchboard lease to the villa owners by charging connection fees.
These charges are clearly subject to a 5% sales tax under S.C. Code Ann. § 12-36-910(B)
(Supp. 1997), which provides that:
[t]he sales tax imposed by this article also applies to the:
. . . . .
(3) gross proceeds accruing or proceeding from the charges for the
ways or means for the transmission of the voice or messages,
including the charges for use of equipment furnished by the seller
or supplier of the ways or means for the transmission of the voice
or messages[.]
The term "gross proceeds of sales" is defined in S.C. Code Ann. § 12-36-90(1)(b) (Supp. 1997)
as including:
the proceeds from the sale of tangible personal property without
any deduction for:
(i) the cost of the goods sold;
(ii) the cost of materials, labor, or service;
(iii) interest paid;
(iv) losses;
(v) transportation costs;
(vi) manufacturers or importers excise taxes imposed by
the
United States; or
(vii) any other expenses.
The amounts in question are charges paid to Taxpayers by the villa owners for connection
to their switchboard, a means of voice transmission. These charges are, therefore, "gross
proceeds" under §§ 12-36-910(B)(3) and 12-36-90(1) and are subject to sales tax. Further,
Taxpayers are "retailers" or "sellers" of tangible personal property under S.C. Code Ann. § 12-36-70(1)(c) (Supp. 1997) which provides that a retailer or seller includes every person "renting,
leasing, or otherwise furnishing tangible personal property for a consideration." The furnishing
of the switchboard for consideration is, thus, a retail sale. Gross proceeds, as defined above, are
clearly subject to sales tax.
Taxpayers argue that the collection of taxes on their switchboard connection fees results
in the equipment lease being taxed twice. While there may be ultimately two taxes involved with
Taxpayers' switchboard, the equipment lease itself is not being taxed twice. When questioned as
to whether Taxpayers or the villas owners use the switchboard, Frans Mustert testified that
Taxpayers use it for minor administrative functions. Mustert also stated that Taxpayers
requested the villa owner to have a phone in the villa and that it be connected to the switchboard.
Taxpayers would most likely have the equipment lease with BellSouth regardless of the existence
of its management contract with the villas owners.
Therefore, the lease transaction between Taxpayers and BellSouth was taxable to
Taxpayers as a retail transaction. PalmettoNet, Inc. v. South Carolina Tax Comm'n, 318 S.C.
102, 456 S.E.2d 385 (1995) ("To determine whether a transaction is wholesale or retail, the
threshold consideration is whether the buyer purchased for resale or for its own use.").
Taxpayers' provision of a switchboard connection to a villa is incidental to Taxpayers' use of the
switchboard equipment. It is not a "resale" in the true sense of the word, but rather a separate
retail transaction, taxable as such. If Taxpayers choose to require villa owners to connect to their
switchboard, it is up to Taxpayers to determine how best to recoup this component of the cost of
managing the villas.
F. Negligence Penalty
DOR also seeks a negligence penalty against Taxpayers. Auditor Dix testified that "part
of the reason" was due to purported evidence of Taxpayers' intent to avoid paying taxes. Dix
referred to a postscript at the end of a November 5, 1990 letter from Frans Mustert to a golf
course concerning allowances: "In order to prevent payment for sales and/or admission taxes,
you may wish to show these allowances as a discount on the October invoices." No DOR
witness stated any other reason for imposition of a negligence penalty. Mustert testified that the
postscript was meant to make sure that there was no duplication in tax payments by both the
resort and the golf course.
S.C. Code Ann. § 12-54-40(b)(2)(c)(1) (Supp. 1997) provides that if a part of an
underpayment is due to negligence or disregard of regulations, there must be added to the tax an
amount equal to the sum of five percent of the underpayment ... and an amount equal to fifty
percent of the interest payable under § 12-54-25. Subsection (b)(2)(c)(3) states that
"negligence," as used in subsection (b)(2)(c)(1), includes a failure to make a reasonable attempt
to comply with the provisions of Title 12, and "disregard" includes careless, reckless, or
intentional disregard.
Generally, the burden of proof is on the party asserting the affirmative in an adjudicatory
administrative proceeding. 2 Am.Jur.2d Administrative Law § 360 (1994). The government is
the proponent of an order seeking sanctions against a private party. Id. The fact that a party
requests an administrative hearing does not, ipso facto, make him the proponent of the issue. Id.
I find that DOR has failed to carry its burden of proving that Taxpayers' underpayment resulted
from the conduct described in S.C. Code Ann. § 12-54-40(b)(2)(c)(3) (Supp. 1997). The
preponderance of the evidence shows that Taxpayers interpreted the tax laws in good faith, albeit
differently from that of DOR. The law on accommodations and sales tax, as applied to resort
hotels and tourist packages, is not settled enough to impose on Taxpayers a negligence penalty
under the circumstances of this case. Therefore, a negligence penalty against Taxpayers is not
justified.
FINDINGS OF FACT
Based upon the parties' Stipulation of Facts, as well as the preponderance of the evidence
presented at the hearing, I make the following findings of fact:
1. Notice of the time, place, date and subject matter of the contested case hearing was given to
all parties.
2. Taxpayers are engaged in business partnerships doing business as the Sand Dunes Resort and
Ocean Dunes Resort, respectively. Leslie M. Morris, Jr. is the general partner for both partnerships.
3. Taxpayers are registered retailers in the State of South Carolina and operate resort hotels
which provide sleeping accommodations to transients.
4. Taxpayers also operate restaurants, lounges, convenience stores, banquet facilities, health
clubs, and a rental management program for villa owners, as well as the sale of golf packages. Most
of these businesses are related to the operation of their hotels.
5. In operating their businesses, Taxpayers receive income from the rental of sleeping
accommodations, as well as telephone charges, movie rentals, the operation of restaurants, vending
machine sales, and other miscellaneous sources related to the operation of their businesses.
6. Taxpayers also manage the rental of a group of villas associated with the hotels for the villas'
owners. Taxpayers retain 50% of the rental fees as income in exchange for their management of the
rental of these properties.
7. Taxpayers also make sales of golf packages to the general public. Taxpayers began selling
these packages in the early 1970's in response to consumer demand for value through "package
deals."
8. These golf packages typically include sleeping accommodations, golf green fees, meals, and
specialty items, such as golf balls, tees, caps, and towels. Taxpayers purchase these items at
wholesale price from outside South Carolina. Their cost is factored into the selling price of the golf
package.
9. While the guest bill indicates one package price for a golf package, Taxpayers' internal
records account separately for the green fees, meals, and specialty items.
10. A guest may choose the rental of sleeping accommodations only. Taxpayers do not
automatically charge a golf package to a guest who rents sleeping accommodations. The golf
package is an option for the guest.
11. Taxpayers charged the funds paid for the rental of sleeping accommodations to a room
accommodations account; as in the case of Sand Dunes, Account Number 401.
12. Taxpayers occasionally sell golf packages that do not include sleeping accommodations.
13. Taxpayers determine golf package prices by comparative analysis with other hotels and other
businesses selling golf packages. Taxpayers charge different prices for different packages,
depending on the components of the package.
14. Guests pay for the golf packages either upon arrival or departure.
15. After receiving a golf package guest's deposit, Taxpayers begin making arrangements for the
guest's golf rounds and other package components.
16. If a golf package purchaser cancels a reservation, Taxpayers retain a $15 administrative fee
from the purchaser's deposit for the cancellation of tee times and other arrangements and refund
check processing. Taxpayers return the remainder of deposited funds to the purchaser.
17. Taxpayers neither collected nor remitted to DOR taxes on these administrative fees.
18. If a guest departs early, Taxpayers refund the unused sleeping accommodations portion of
the golf package.
19. Taxpayers charge the cost of golf balls, tees, towels and caps to a separate account, as in the
case of Sand Dunes, Account Number 305. These amounts are posted to Account Number 305 upon
departure of the guest.
20. Guests purchasing golf packages receive coupons for meals at certain restaurants. To record
the coupons, Taxpayers make a charge to the corresponding golf package account when the coupons
are redeemed. If the coupons are not redeemed, the package will show an "overage."
21. Taxpayers do not return these funds to the guests, but retain them as receipts. Taxpayers
place the overage receipts into Account Number 305.
22. Other overages charged to Account Number 305 include unused green fees when a guest
advises Taxpayers in advance that he will not play a round of golf.
23. If a golf package guest failed to show up for a tee time, with no advanced notice, Taxpayers
were first notified of the "no-show" upon receipt of the monthly golf course bill. At that time,
Taxpayers charged the "no-show" overage for the unused green fee to a separate account; as in the
case of Sand Dunes, Account Number 766. This is the same account from which Taxpayers paid
advertising expenses.
24. During the audit period, Taxpayers received certain allowances, in the form of discounts and
rebates, from golf courses participating in golf package programs. These allowances resulted from
Taxpayers sending a target number of guests to a golf course within a given period of time. The
allowances typically resulted in the golf course lowering the per-player fee charged to Taxpayers.
After the target number was reached, the golf course retroactively reduced the per-player fee by
$10.00 per round. On some occasions, the golf course returned this money to Taxpayers. On other
occasions, the golf course treated the allowance as a discount on future invoices to Taxpayers.
25. Taxpayers recorded the receipt of income resulting from these allowances in the account
containing "no-show" overages (Account # 766). This income offset Taxpayers' advertising
expenses.
26. Taxpayers did not return any of the income resulting from these allowances to their guests.
27. Taxpayers paid no sales tax on the income resulting from these allowances.
28. Revenue attributable to the rental of sleeping accommodations is not posted to Account 305.
29. Revenue attributable to the rental of sleeping accommodations is not posted to Account 766.
30. Taxpayers lease telephone switchboard equipment from BellSouth for the hotels'
administrative functions.
31. BellSouth collects sales tax on the equipment lease from Taxpayers.
32. Taxpayers' management agreement with each villa owner requires each villa to have a
telephone connected to Taxpayers' switchboard.
33. Taxpayers pass the cost of the switchboard lease on to the villas owners by charging
connection fees.
34. Taxpayers would most likely have the equipment lease with BellSouth regardless of the
existence of its management contract with the villa owners.
35. Taxpayers do not collect sales tax on the connection fees charged to villa owners.
36. Taxpayers pay no sales tax on the golf balls, tees, towels and caps when they purchase them
from third parties.
37. Taxpayers paid no sales tax to DOR on the golf balls, tees, towels and caps as they were
withdrawn from inventory.
38. DOR's Field Services Division conducted an audit of the sales, use, and accommodations tax
records of the taxpayers for the period March 1, 1990, through February 28, 1993. Adjustments were
made in the following areas:
a. Administrative Charges: DOR auditors assessed these
charges at a 7% rate.
b. Package Overage (Sand Dunes Account 305): Taxpayers
reported these funds at 5%. The audit assessed them at 7%.
c. Package Overage (Sand Dunes Account 766): DOR auditors
assessed the funds in this account at 7%.
d. Telephone Switchboard Charges to villa owners: DOR
auditors assessed these charges at 5%.
e. Golf Balls, tees, towels and caps: DOR auditors found these
items to be taxable at 5% as withdrawals from inventory.
39. DOR issued assessments to Taxpayers on September 29, 1994, based on the issues and
amounts identified in DOR's audit.
40. In its Final Agency Determination dated May 7, 1997, DOR agreed to treat the funds
attributable to "no-shows" as an "additional guest charge" taxable at 5%. This is consistent with
DOR's current policy expressed in DOR Revenue Ruling #97-3.
CONCLUSIONS OF LAW
Based upon the foregoing Findings of Fact, I conclude as a matter of law:
1. The Administrative Law Judge Division has subject matter jurisdiction of this case pursuant
to S.C. Code Ann. § 1-23-310 et seq. (Supp. 1997) and S.C. Code Ann. § 12-60-460 (Supp. 1997).
2. As the finder of fact, the administrative law judge has the authority to weigh the evidence
presented and determine the credibility of witnesses. See Doe v. Doe, 324 S.C. 492, 478 S.E.2d 854
(Ct. App. 1996); Rogers v. Kunja Knitting Mills, Inc., 312 S.C. 377, 440 S.E.2d 401 (Ct. App.
1994), cert. dismissed, 318 S.C. 187, 456 S.E.2d 918 (1995).
3. "The primary rule of statutory construction is to ascertain and give effect to the legislature's
intention or purpose as expressed in the statute." Scholtec v. Estate of Reeves,___ S.C. ___, 490
S.E.2d 603, 606 (Ct. App. 1997). The language used should be given its plain and ordinary meaning
without resort to subtle or forced construction to expand or limit the scope of a statute. See
Berkebile v. Outen, 311 S.C. 50, 426 S.E.2d 760 (1993). Additionally, a tribunal should not focus
on any single section or provision but should consider the language of the statute as a whole. Mid-State Auto Auction of Lexington, Inc. v. Altman, 324 S.C. 65, 476 S.E.2d 690, 692 (1996).
4. "A statutory provision should be given a reasonable and practical construction consistent
with the purpose and policy expressed in the statute." Town of Mount Pleasant v. Shaw, 315 S.C.
111, 432 S.E.2d 450, 451 (1993) quoting Hay v. South Carolina Tax Commission, 273 S.C. 269, 255
S.E.2d 837, 840 (1979). The language must be read in a sense which harmonizes with its subject
matter and accords with its general purpose. Scholtec, 490 S.E.2d at 607 (Ct. App. 1997).
5. S.C. Code Ann. § 12-36-920 (Supp. 1997) is the statute that sets the tax rate
for hotel sleeping accommodations and additional guest charges:
(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.... The tax imposed by
this subsection (A) does not apply to additional guest
charges as defined in subsection (B).
(B) A sales tax of five percent is imposed on
additional guest charges at any place where rooms,
lodgings, or accommodations are furnished to
transients for a consideration, unless otherwise taxed
under this chapter. The term additional guest charges
includes, but is not limited to:
(1) room service;
(2) amenities;
(3) entertainment;
(4) special items in promotional tourist packages;
(5) laundering and dry cleaning services;
(6) in-room movies;
(7) telephone charges;
(8) rentals of meeting rooms; and
(9) other guest services.
6. South Carolina Code Ann. § 12-36-920(A) (Supp. 1997) requires a 7% tax only on the gross
proceeds derived from the rental of sleeping accommodations.
7. The language in subsection (B) of the statute makes it clear that the legislature did not intend
for the term "gross proceeds" as used in subsection (A) to include such things as charges for guest
services and other charges not specifically listed.
8. The facts in this case are distinguishable from Meyers Arnold, Inc. v. South Carolina Tax
Commission, 285 S.C. 303, 328 S.E.2d 920 (Ct. App. 1985). Therefore Meyers Arnold is not
binding on the issue of administrative charges.
9. Because Taxpayers' administrative fees for canceling reservations and processing refund
checks are not connected with any sale, they are not taxable.
10. The language in South Carolina Code Ann. § 12-36-920 (Supp. 1997) as a whole clearly
expresses legislative intent for the 7% accommodations tax to apply only to the rate charged for the
rental of the guest room, with all other charges for optional extras taxed at 5%. Subsection (B) states
that the term "additional guest charge" is not limited to the specifically enumerated items. The list
of items in subsection (B) is merely illustrative of the term "additional guest charge," and it is not
meant to be exclusive.
11. The linchpin of analysis in determining whether a hotel charge is subject to the 7% tax or the
5% tax is whether the charge is mandatory with the rental of a room. If the hotel requires a guest
renting only a room to pay for something included with the room, regardless of use, the charge is
mandatory and is taxable at 7%. If the guest opts to purchase more than just sleeping
accommodations, the 7% tax should be assessed only on the portion attributable to the mandatory
charge for sleeping accommodations.
12. Revenue from a golf package over and above the mandatory room rate is an "additional guest
charge." See S.C. Code Ann. § 12-36-920 (B)(4) (Supp. 1997) (special items in promotional tourist
packages). This is so even though all components of the package are reflected in one price on the
guest bill. By including item (4) in subsection (B) of the statute, the legislature obviously recognized
the tourist industry's need to respond to consumer demand for package deals, without confusion over
the correct tax rate on package components.
13. The overage resulting from an unused meal or tee time falls under the category "other guest
services" under subsection (B)(9).
14. The overages in Account number 305 are taxable at 5% instead of 7%.
15. "No-shows" are an additional guest charge taxable at 5%.
16. The golf course allowances in Account 766 are taxable at 5% as an additional guest charge
under S.C. Code Ann. § 12-36-920(B) (Supp. 1997).
17. South Carolina Code Ann. § 12-36-110(1)(c) (Supp. 1997) defines "sale at retail" and "retail
sale" as including "the withdrawal, use or consumption of tangible personal property by anyone who
purchases it at wholesale."
18. South Carolina Code Ann. § 12-36-90(1)(c) (Supp. 1997) includes in its definition of "gross
proceeds of sales" the fair market value of tangible personal property previously purchased at
wholesale which is withdrawn from the business or stock and used or consumed in connection with
the business.
19. Taxpayers' withdrawal of golf balls, tees, towels and caps from their inventory, which they
purchased at wholesale, is subject to a 5% sales tax. Because Taxpayers did not bill separately for
these items, they were the "final consumers," liable for a 5% tax on the items as they withdrew them
from inventory.
20. S.C. Code Ann. § 12-36-910(B) (Supp. 1997) provides that:
[t]he sales tax imposed by this article also applies to the:
. . . . .
(3) gross proceeds accruing or proceeding from the charges for the
ways or means for the transmission of the voice or messages,
including the charges for use of equipment furnished by the seller or
supplier of the ways or means for the transmission of the voice or
messages[.]
21. The term "gross proceeds of sales" is defined in S.C. Code Ann. § 12-36-90(1)(b) (Supp.
1997) as including:
the proceeds from the sale of tangible personal property without any
deduction for:
(i) the cost of the goods sold;
(ii) the cost of materials, labor, or service;
(iii) interest paid;
(iv) losses;
(v) transportation costs;
(vi) manufacturers or importers excise taxes imposed by the
United States; or
(vii) any other expenses.
22. Switchboard connection fees paid to Taxpayers by the villa owners are "gross proceeds"
under §§ 12-36-910(B)(3) and 12-36-90(1) and are subject to sales tax.
23. Taxpayers are "retailers" or "sellers" of tangible personal property under S.C. Code Ann.
§ 12-36-70(1)(c) (Supp. 1997) which provides that a retailer or seller includes every person "renting,
leasing, or otherwise furnishing tangible personal property for a consideration." The furnishing of
the switchboard for consideration is, thus, a retail sale.
24. Taxpayers' switchboard, the equipment lease itself is not being taxed twice.
25. The lease transaction between Taxpayers and BellSouth was taxable to Taxpayers as a retail
transaction. PalmettoNet, Inc. v. South Carolina Tax Comm'n, 318 S.C. 102, 456 S.E.2d 385 (1995)
("To determine whether a transaction is wholesale or retail, the threshold consideration is whether
the buyer purchased for resale or for its own use").
26. Taxpayers' provision of a switchboard connection to a villa is incidental to Taxpayers' use
of the switchboard equipment. It is not a "resale" in the true sense of the word, but rather a separate
retail transaction, taxable as such.
27. South Carolina Code Ann. § 12-54-40(b)(2)(c)(1) (Supp. 1997) provides that if a part of an
underpayment is due to negligence or disregard of regulations, there must be added to the tax an
amount equal to the sum of five percent of the underpayment ... and an amount equal to fifty percent
of the interest payable under § 12-54-25.
28. South Carolina Code Ann. § 12-54-40(b)(2)(c)(3) states that "negligence," as used in
subsection (b)(2)(c)(1), includes a failure to make a reasonable attempt to comply with the provisions
of Title 12, and "disregard" includes careless, reckless, or intentional disregard.
29. Generally, the burden of proof is on the party asserting the affirmative in an adjudicatory
administrative proceeding. 2 Am.Jur.2d Administrative Law § 360 (1994). The government is the
proponent of an order seeking sanctions against a private party. Id. The fact that a party requests
an administrative hearing does not, ipso facto, make him the proponent of the issue. Id.
30. The standard of proof in administrative proceedings is a preponderance of the evidence,
absent an allegation of fraud, or a statute or court rule requiring a higher standard. Anonymous v.
State Board of Medical Examiners, Op. No. 24754 (S.C.Sup.Ct. filed January 26, 1998) (Davis
Adv.Sh. No. 5 at 11).
31. DOR has failed to carry its burden of proving that Taxpayers' underpayment of taxes resulted
from the conduct described in S.C. Code Ann. § 12-54-40(b)(2)(c)(3) (Supp. 1997). Therefore,
imposition of a negligence penalty against Taxpayers is not justified.
32. Any motions or issues raised in the proceedings, but not addressed in this Order are deemed
denied pursuant to ALJD Rule 29(B).
ORDER
IT IS THEREFORE ORDERED that Petitioners pay a 5% sales tax on: (1) overages in
Account 305 during the audit period; (2) "no-show" funds and golf course allowances in Account
766 during the audit period; (3) golf balls, tees, towels and caps withdrawn from inventory during
the audit period; and (4) switchboard connection fees charged during the audit period, plus interest
as provided by law.
IT IS FURTHER ORDERED that Petitioners pay no tax on administrative fees for
canceling reservations and processing refund checks.
IT IS FURTHER ORDERED that Petitioners pay no negligence penalty.
____________________________________
STEPHEN P. BATES
ADMINISTRATIVE LAW JUDGE
April 24, 1998
Columbia, South Carolina
1. DOR makes a similar analysis with respect to "no-shows" in S.C. Revenue Ruling 97-3,
Question 16, Example 1: "If the hotel's guest is unable to play golf that day ... and under the
terms of the golf package the guest must still pay the hotel the full [golf package price], ... the
hotel is liable for the 5% tax on the [golf] portion of the [golf package price] paid by the guest
since it now represents an additional guest charge for the service of making the golf arrangements
that were not used." |