South Carolina Court of Appeals, in Olds v. City of Goose Creek, Affirms Circuit Court Order Regarding Definition of Gross Income under Business License Tax

In Olds v. City of Goose Creek, 2016 S.C. App. LEXIS 147, the South Carolina Court of Appeals provides a thorough discussion of the application of the South Carolina business license tax to a taxpayer's gross income. The central issue of the case concerns the meaning of the term "gross income" and how that term is used in computing a taxpayer's business license tax under the City of Goose Creek's applicable business license ordinance.

The facts of this case indicate that Olds was engaged in the business of buying and selling real property. In January 2011, when Olds filed an application to renew his City business license, he reported actual gross receipts for 2010, but he did not include the "revenue" from the 2010 sale of real property located at 123 Evergreen Magnolia Avenue in Goose Creek.

In May 2011, City officials informed Olds of a deficiency in his 2011 business license payment because they said Olds should have included the sale price of the Evergreen Magnolia Avenue property as revenue on his 2011 business license renewal application. Olds appealed this decision to the City Finance Director, then to the City Administrator, then to the City Council, and then to the circuit court - losing at each step along the way. Olds then appealed to the South Carolina Court of Appeals, which affirmed the circuit court's order regarding the meaning of gross income under the ordinance.

Section 5-7-30 of the South Carolina Code provides that municipalities have the power to "enact regulations, resolutions, and ordinances, not inconsistent with the [c]onstitution and general law of this [s]tate." This Section also describes various powers possessed by municipalities, including the power to "levy a business license tax on gross income." Id. (emphasis added). This Section does not, however, define the term "gross income", nor is this term defined anywhere within Title 5 of the South Carolina Code which provides the statutes governing municipal corporations.

The City of Goose Creek defined "gross income" for purposes of its business license tax, as follows:

GROSS INCOME. The total revenue of a business, received or accrued, for one calendar year, collected or to be collected by a business within the city, excepting, therefrom, business done wholly outside of the city on which a license tax is paid to some other municipality or county and fully reported to the city or county. The term GROSS RECEIPTS means the value proceeding or accruing from the sale of tangible personal property, including merchandise and commodities of any kind and character and all receipts, by the reason of any business engaged in, including interest, dividends, discounts, rentals of real estate or royalties, without any deduction on account for the cost of the property sold, the cost of the materials used, labor or service cost, interest paid or any other expenses whatsoever and without any deductions on account of losses. The GROSS INCOME for business license purposes shall conform to the gross income reported to the State Tax Commission or the State Insurance Commission. In the case of brokers or agents, GROSS INCOME shall mean gross commissions received or retained, unless otherwise specified. GROSS INCOME for insurance companies means gross premiums collected. GROSS INCOME for business license tax purposes shall not include taxes collected for a governmental entity, escrow funds or funds, which are the property of a third party. The value of bartered goods or trade-in merchandise shall be included in GROSS INCOME. The GROSS INCOME for business license purposes may be verified by inspection of returns and reports filed with the Internal Revenue Service, the South Carolina Department of Revenue, the South Carolina Insurance Commission or other government agency.

Goose Creek City Code § 110.001. (emphasis added).

Olds' pointed out that a couple of the above-emphasized sentences in the City's business license ordinance show that gross income for business license purposes shall conform to the gross income reported to the State Tax Commission (now known as the South Carolina Department of Revenue) and that gross income may be verified by the inspection of state and federal tax returns. On this point, it is interesting to note the City agreed that under the Internal Revenue Code gross income on the sale of real property is equal to the seller's gain (i.e., it was conceded that gross income is not, for federal income tax purposes, the total sales price of the real property). Nevertheless, the Court of Appeals found that the City intended to define gross income for business license tax purposes as the total revenue of the business.

The Court stated as follows:

This is consistent with how our supreme court has historically defined gross income in the context of business license taxes. See Columbia Ry., Gas & Elec. Co. v. Jones, 119 S.C. 480, 494, 112 S.E. 267, 272 (1922) ("Gross income means the total receipts from a business before deducting expenditures for any purpose."). Applying the ordinance to the facts of the instant case, we find the City intended the business license tax to apply to the total sale price of real property rather than merely the business's gain...

This case is interesting because, in the final analysis, it appears that the Court gives greater weight to the first portion of the ordinance referencing "total revenue of a business" and gives little (or no) weight to the specific portions of the ordinance which indicate that gross income must conform to gross income reported to the SCDOR and which may be verified by inspection of returns filed with the IRS and the SCDOR. Also, while the Court of Appeals stated that this is consistent with the South Carolina Supreme Court's 1922 Columbia Ry. decision, that case did not appear to involve an ordinance that contained the types of "conforming" provisions that Olds pointed to in the current case. Given those "conforming" provisions in the City's ordinance, coupled with the federal income tax treatment of a sale of real property along with the fact that South Carolina's income tax rules generally follow the federal income rules, it is somewhat understandable as to why the taxpayer may have chosen to continue to appeal this case over the years.

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