May 16, 2017
By Order dated May 8, 2017, Judge Deborah Brooks Durden of the South Carolina Administrative Law Court upheld the Department of Revenue’s (Department) denial of Greenville Hospital System’s (GHS) request for an exemption from sales and use tax for meals sold in its on-site cafeteria. The Court found that even though GHS was designated as a tax exempt organization under Section 501(c)(3) of the Internal Revenue Code, it was required to collect and remit sales tax because it is primarily a political subdivision of the State of South Carolina.
Generally, South Carolina imposes a six percent sales tax on entities making retail sales of tangible personal property. However, there are numerous exemptions from the collection of the tax, including sales by charitable or eleemosynary organizations exempt from federal income tax under Code Section 501(c)(3). There is no exemption, however, for political subdivisions and other governmental entities, which must collect and remit sales tax like a for-profit business.
GHS is a political subdivision formed pursuant to a 1947 Act of the General Assembly. GHS is also recognized as an organization exempt from income tax by a 1944 determination of the IRS. In this case, GHS argued that because it was both a tax exempt organization under Code Section 501(c)(3) and a political subdivision, it was not required to collect sales tax on its sales because the charitable organization exemption applied. The Department of Revenue, on the other hand, argued that as a matter of law, GHS could not be classified as both a political subdivision and a charitable organization – it must be classified as one or the other. Not surprisingly, the Department took the position GHS was a political subdivision subject to tax.
The Administrative Law Court found in favor of the Department.
It found that GHS, although exempt from income tax under Section 501(c)(3), was not a charity or charitable organization for purposes of the State sales tax provisions.
It found that although GHS’s facilities were intended for public benefit, they have been dedicated for civic purposes by the State. The Court found there was a clear and unmistakable legislative intent to require political subdivisions to collect and remit sales tax.
This case demonstrates the Department’s intent to assess sales and use tax on hospitals classified as political subdivisions. Hospitals should review their organizational affiliations to confirm whether the Department would consider them a tax exempt organization or a political subdivision. Also be on the lookout for an appeal of this Order – GHS has 10 days from the date of the Order to file a Motion for Reconsideration with the Court, and may ultimately appeal this decision to the SC Court of Appeals.
In the meantime, hospitals classified as political subdivisions should review their internal procedures to determine whether they are properly collecting and remitting sales tax. Led by two former Directors of the Department of Revenue, Burnie Maybank and Rick Reames, Nexsen Pruet’s State and Local Tax (SALT) Team is here to help. Please reach out directly to Burnie or Rick if you or your organization has any questions or concerns.