SC Administrative Law Court Decisions

This matter is before the Administrative Law Judge Division (Division) pursuant to a request for a contested case hearing by the Petitioner, Anonymous Corporation, arising from the Respondent, South Carolina Department of Revenue's (Department) revocation of Petitioner's sales tax license pursuant to S.C. Code Ann. § 12-36-530 (Supp. 1997).

A hearing was held on Tuesday, January 20, 1998, at the offices of the Administrative Law Judge Division, Columbia, South Carolina. Notice of the hearing was timely given to the parties.

This Court, pursuant to ALJD Rule 18, required the parties to file pleadings to help narrow the issues in the case. The Respondent in its Answer included a motion for judgment on the pleadings or in the alternative a motion for summary judgment. Although counsel for the Petitioner stated that she did not receive the motions, she was afforded the opportunity by this Court to review the motions, and thereafter stated for the record that she was ready to argue the motions and waived any lack of notice.

Any issues raised in the proceedings but not addressed by this Order are deemed denied. ALJD Rule 29(B). Further, the filing of a motion for reconsideration is not a prerequisite to any party filing a notice of appeal of this Order. ALJD Rule 29(C).

Did the Department properly revoke Petitioner's retail sales tax license pursuant to S.C. Code Ann. § 12-36-530?

Counsel for both parties represented to the Court that the facts are not in dispute in this matter. The following are the facts stipulated to, which were included in the Final Agency Determination:

1. ABC Corporation (ABC) is a South Carolina corporation that operated a restaurant in Hilton Head Island, South Carolina, known as "XYZ Grill" (XYZ).

2. Petitioner is also a South Carolina corporation. It was incorporated for the purpose of purchasing XYZ, and thereafter operating a restaurant at the same location.

3. On January 3, 1996, ABC and Petitioner entered into an asset purchasing agreement whereby Petitioner purchased all "the [a]ssets of the business known as 'XYZ Grill.'"

4. The contract between Petitioner and ABC included the following agreements: Purchase and Sale Agreement; Absolute Assignment; Promissory Note; Bill of Sale; Covenant Not to Compete; and an Indemnity and Hold Harmless Agreement.

5. The tangible assets which were sold included all inventory, fixtures, and equipment of XYZ. The intangible assets included the trade name "XYZ Grill," and the goodwill, logos, copyrights, trademarks, service marks, and all other intangible assets associated with the business. Petitioner also received an assignment of the lease for the location, as well as all other contract and property rights owned by the business. Finally, Petitioner received a Covenant Not to Compete from ABC and its two principals.

6. According to the contract documents, the only tangible or intangible asset excluded from the sale was a "Hobart" mixer.

7. The consideration for the sale was the sum of $95,000. At the closing, ABC received $45,000 in cash along with a $50,000 promissory note from Petitioner. A portion of the $45,000, approximately $14,505, was held in escrow and paid to creditors of ABC.

8. Petitioner admits in its letter of protest that it knew prior to the sale that ABC was in financial trouble. Petitioner also acknowledged that ABC was behind in its rent and in danger of being evicted from the premises. The protest states "[a]t the time of the conveyance, [XYZ] was on the brink of being 3 months behind in rent. Now with full disclosure, it is evident that they were in debt to a number of sources and anxious to sell."

9. At the time of the sale, ABC had an outstanding sales tax liability in the principal amount of $11,463.

10. S.C. Code Ann. § 12-36-530 provides that all taxes due the State are due upon the sale of a business. This section gives the Department the discretion not to issue a retail sales tax license to a purchaser of a business when the seller has tax liability.

11. Although Petitioner asserts that it researched the public records in Beaufort County for liens against ABC, it failed to request a Certificate of Tax Compliance from the Department, which is a standard procedure required by counsel in any closing where the assets of a business are sold.

12. Any prospective purchaser of a business can request from the Department the issuance of a Certificate of Tax Compliance. No special form is required and the request can be made by letter. Upon receipt of a request, the Department will search its records to determine if any amount is owed by the taxpayer, and to determine whether the taxpayer has filed all returns required by law. If there is any amount due or, if the taxpayer has not filed a required return, the Department will notify the party making the request that it cannot issue a Certificate of Tax Compliance. If no amount is due and all returns have been filed, the Department will issue the certificate.

13. The Secretary/Treasurer of Petitioner is an attorney licensed to practice in this State. She attended the closing on Petitioner's behalf and executed all the contract documents.

14. On February 22, 1996, Petitioner submitted an application for a retail sales tax license to the Department.

15. The Department issued a retail sales tax license to Petitioner.

16. The Department issues approximately 20,000 retail sales tax licenses per year. At the time a retail license is applied for and issued, the Department has no efficient way of ascertaining whether the person applying for the license has purchased a business from a taxpayer who has a tax liability. The Department generally does not learn of the sale in this situation until a revenue officer visits the business location in an effort to collect the outstanding liability and discovers that the taxpayer has sold his business to a third party. This discovery usually occurs after the purchaser has obtained a retail sales tax license.

17. Six warrants for distraint for ABC's outstanding indebtedness were issued by the Department in March of 1996 and subsequently recorded in the RMC Office for Beaufort County.

18. The Department, in beginning its efforts against ABC to collect its tax liability, discovered the sale of ABC's assets to Petitioner.

19. On April 16, 1996, the Department issued a notice of its intent to revoke Petitioner's retail sales tax license since all taxes due the state were not paid from the proceeds of the sale of the business as required by S.C. Code Ann. § 12-36-530.

20. On April 17, 1996, the Department issued a notice of levy pursuant to S.C. Code Ann. § 12-53-20 (1976) seizing all intangible property rights of ABC which were in the possession or control of Petitioner, including the right to receive payments from the $50,000 promissory note.

21. S.C. Code Ann. § 12-53-20 allows the Department to levy on intangible assets in the possession of a third party "belonging, owing, or to become due any taxpayer." This section imposes personal liability upon the third person for all sums due by the taxpayer to the extent of the value of the intangible asset levied upon.

22. By letter dated May 16, 1996, Petitioner protested the "Final Notice regarding payment of taxes for [XYZ] Grill."

In a motion for judgment on the pleadings, the court may only consider the pleadings. The court must take well-pleaded factual allegations as true; however, allegations which are conclusive rather than factual should be disregarded. Russell v. City of Columbia, 301 S.C. 117, 390 S.E.2d 463 (Ct. App. 1989). Summary judgment is appropriate when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Wilson v. Moseley, 327 S.C. 144, 488 S.E.2d 862 (1997). Both parties have represented to the Court that the facts are not in dispute in this matter; therefore, all that remains for this Court to consider is the application of the law to the facts.

The statute at issue in this case is S.C. Code Ann. § 12-36-530 (Supp. 1997). It provides:

Retailers, after closing or selling a business, must return the retail license to the commission for cancellation and remit any unpaid or accrued taxes. The commission may refuse to issue a new retail license to any person who has failed to comply with the provisions of this section.

In the case of sale of any business the tax is considered to be due at the time of the sale of the fixtures and equipment incident to the business and constitutes a lien against the stock of goods and the fixtures and equipment in the hands of the purchaser, or any other third party, until the tax is paid. The commission may not issue a retail license to continue or conduct the business to the purchaser until all taxes due the State have been settled and paid.

Applying this statute to the facts of this case, it is clear that the transaction between Petitioner and ABC, which included not only the tangible assets of XYZ but also the trade name of the restaurant and other intangible assets including the goodwill of the business, was a "sale of a business" within the meaning of S.C. Code Ann. § 12-36-530. Furthermore, the Petitioner is "continuing or conducting the business" within the meaning of that statute. It is operating the same type of business at the same location as its predecessor, XYZ. Certain items of property from the sale of XYZ were incorporated into Petitioner's restaurant. Moreover, Petitioner received a Covenant Not to Compete from the principals of XYZ, which prevented them from operating a restaurant within a three mile radius for three years, and from using the trade name "XYZ Grill." Since XYZ had an outstanding tax liability in the principal amount of $11,463 at the time of the sale of the business , which is still outstanding, Petitioner was not eligible to receive a retail license pursuant to S.C. Code Ann. § 12-36-530. It logically follows that because the Petitioner was ineligible to receive a retail license, that license, which was erroneously issued, may now be revoked by the Department. See 1986 Op. S.C. Att'y Gen. No. 86-77 at 243.

Petitioner has raised several arguments against the revocation of its retail license. First, the Petitioner asserts that it was a bona fide purchaser without notice of the outstanding tax liability, and that the Department's interpretation of S.C. Code Ann. § 12-36-530 is contrary to the legislative intent. This argument is without merit. Petitioner's situation does not fall within either of the two instances in which the bona fide purchaser concept is applicable. First, the Uniform Commercial Code does not protect Petitioner. See S.C. Code Ann. § 36-2-403(2)(1976) (which protects an innocent purchaser who buys goods in the ordinary course of business from a merchant who deals in goods of that kind). The transaction between the Petitioner and ABC did not involve a "sale of goods" within the meaning of Article 2 of the Uniform Commercial Code. The sale in question, a sale of a business, was not "in the ordinary course of business," and ABC was not a "merchant" because it was not in the business of selling businesses. See S.C. Code Ann. § 36-1-201(9)(Supp. 1997), and §§ 36-2-102, 36-2-104, 36-2-105, and 36-2-106(1) (1976). Moreover, the concept of "bona fide purchaser" outside the Uniform Commercial Code most commonly applies in the context of a sale of real estate. See, e.g., S.C. Tax Comm'n v. Belk, 266 S.C. 539, 225 S.E.2d 177 (1976). A bona fide purchaser for value has been defined as "a purchaser who purchases legal title to real property, without actual or constructive notice of any infirmities, claims or equities against the title." 77 Am.Jur.2d Vendor and Purchaser §425 (date). The transaction involved in this case did not involve the sale of real estate and therefore the bona fide purchaser defense is inapplicable. Even if such a defense were available to the Petitioner, in order to be a bona fide purchaser, a person must have made the purchase without either actual or constructive notice of the rights of other parties in the property purchased. See S.C. Tax Comm'n v. Belk, supra. In this case, Petitioner had actual notice of ABC's financial difficulties, evidenced by the fact that ABC had not paid its rent for three months prior to the sale. "When a person has notice of such facts as are sufficient to put him upon inquiry, which, if pursued with due diligence, would lead to knowledge of other facts, he must be presumed to have knowledge of the undisclosed facts." Norris v. Greenville, S. & A. Ry. Co., 111 S.C. 322, 97 S.E. 848 (1919). Petitioner's knowledge of ABC's financial situation was sufficient to put Petitioner upon inquiry. If Petitioner had fulfilled its duty of inquiry by requesting a letter of tax compliance with the Department, it would have known of XYZ's outstanding tax liability. Therefore, Petitioner cannot qualify as a bona fide purchaser without notice.

Petitioner's second cause of action asserts that the contract documents specifically excluded from purchase any encumbered assets of XYZ. Since the tax lien arose at the time of transfer pursuant to S.C. Code Ann. § 12-36-530, thus encumbering all the assets of XYZ, Petitioner argues that no assets were legally transferred in the transaction and that § 12-36-530 is inapplicable. However, nothing in the statute predicates the Department's power to deny a retail license on the existence of assets subject to the lien. Regardless of the value or type of assets transferred, the Department still has the power not to issue a retail sales tax license to the purchaser of a business if the taxes due the state by the seller are not paid. In any event, the language of the contract documents does not prevent title to encumbered property from passing to the Petitioner. Instead, it merely gives the Petitioner the right to sue ABC for breach of warranty if the property is not free of all liens. Therefore, Petitioner's argument is without merit.

Petitioner next argues that the Department is estopped from revoking the Petitioner's retail sales tax license, because of the Department's delay in filing tax warrants in the RMC office. However, the law of South Carolina is clear that the doctrine of estoppel cannot be applied against the State. In Carman v. S.C. Alcoholic Beverage Control Comm'n, 315 S.C. 320, 433 S.E.2d 885 (1993), the Court of Appeals noted that "the doctrine of estoppel will not be applied to deprive the government of the due exercise of its police power, or to effect [sic] public revenues or property rights or to frustrate the purpose of its laws or thwart its public policy." The Supreme Court also held, in a case involving the collection of taxes, that the doctrine of estoppel could not be applied against the South Carolina Tax Commission. Heyward v. S.C. Tax Comm'n, 240 S.C. 347, 126 S.E.2d 15 (1962). Accordingly, Petitioner's argument must fail.

Finally, Petitioner asserts that the application of S.C. Code Ann. § 12-36-530 to it violates due process, stating that there must be "some definite link, some minimum connection, between the state and the person, property or transaction it seeks to tax and that the income attributed to the state for tax purposes must be rationally related to the party sought to be taxed." Petition, Paragraph 17. This argument, however, is a misstatement of the substantive due process requirements for a tax on interstate commerce, which requires a minimal connection or nexus between the taxing state and the interstate activity, and a rational relationship between the income attributed to the interstate and the intrastate values of the enterprise. See, e.g., Moorman Mfg. Co. v. Blair, 437 U.S. 267 (1978); Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159 (1983). The Petitioner's due process argument is inapplicable to the present situation because the Department is not imposing a tax upon the Petitioner, but rather is attempting to collect a tax previously imposed upon XYZ. Moreover, the tax which the Department is attempting to collect is not a tax on "income generated by the

activities of an interstate business." Moorman, supra, at 272-73. Therefore, the principles relied upon by the Petitioner are not pertinent here.

S.C. Code Ann. § 12-36-530 was enacted by the General Assembly to assist the Department in the collection of sales taxes. This section imposes a duty upon the purchaser of a business to make sure that all taxes owed the state by the business being sold are paid. If a purchaser fails in its statutory duty, it risks not having a retail license issued by the Department or having its retail license revoked. The Department, in revoking Petitioner's retail license, is merely utilizing a statutorily created tool for the collection of taxes. While the application of this statute may result in unfortunate consequences for the Petitioner, this situation could have easily been avoided if the Petitioner had exercised due diligence by requesting a letter of tax compliance from the Department, and deducting the amount of taxes due the state from the purchase price it paid to ABC.

For all the foregoing reasons, I conclude that the Petitioner's retail license should be, and it is hereby, revoked.

AND IT IS SO ORDERED.

___________________________________

Marvin F. Kittrell

Chief Judge

Columbia, South Carolina

March 17, 1998