South Carolina Supreme Court Reverses Important Business License Tax Case: Counties and Municipalities May be Required to Change Business License Ordinances and to Issue Tax Refunds

South Carolina counties and municipalities are authorized to impose business license taxes on the "gross income" of a business. On August 8, 2018 the South Carolina Supreme Court issued a major decision, Todd Olds v. City of Goose Creek, construing what constitutes gross income under a municipal business license ordinance.

In the case, a licensed realtor was in the business of flipping houses. He obtained a business license from the City of Goose Creek (the "City") and reported the gain he recognized on his flips as his gross income for business license purposes. The City determined he should have reported the gross receipts from the flips (i.e. total selling price, and without any reductions for his purchase price for the home and other costs incurred). The Circuit Court and the South Carolina Court of Appeals agreed with the City. The South Carolina Supreme Court, however, has now reversed the lower court decisions, determining that "gross income" under the City's business license ordinance is not the full selling price for the property but only the net gain on the sale of the properties.

Municipalities in South Carolina are authorized to "levy a business license tax on gross income" in S.C. Code § 5-7-30. Counties are also authorized to impose business license taxes, and the "tax must be graduated according to the gross income of the person or business taxed."

"Gross income" is not defined under our South Carolina legislation authorizing municipalities and counties to impose business license taxes.

The City enacted a business license ordinance defining gross income as the total revenue of a business, received or accrued. The ordinance also stated that gross income for business license purposes "shall conform to the gross income reported to the State Tax Commission or the State Insurance Commission." The ordinance allowed the City to verify reported gross income by inspection of tax returns filed with the Internal Revenue Service and the South Carolina Department of Revenue. The language in the City's ordinance defining gross income is a common definition used by many counties and municipalities throughout our state.

Based on the definition of gross income in the City ordinance, the South Carolina Supreme Court looked to the definition of gross income set forth in the Internal Revenue Code. The Internal Revenue Code defines gross income to include all income from whatever source derived, including "gains derived from dealings in property." South Carolina has adopted the federal definition of gross income under our state's "federal tax conformity" statute.

The South Carolina Supreme Court observed it has allowed gross income to be equated with total revenue when calculating the business license fee, but it determined the City ordinance narrowed the definition of gross income to the gross income a business reports on its tax return by virtue of the provision in the ordinance providing that gross income shall conform to the gross income reported on a business tax return. Thus, only the net gain on the sale of the flipped property was subject to the business license fee, not the total sales price.

Municipalities and counties in South Carolina have long interpreted "gross receipts" to include total receipts - i.e. the full sales price on property sales. With the South Carolina Supreme Court now rejecting this interpretation, South Carolina municipalities and counties must carefully review their business license ordinances and determine whether it is being administered in accordance with the South Carolina Supreme Court's decision.

Many counties and municipalities in our state will need to change their practices or amend their business license ordinances. It is also likely that businesses and individuals throughout our state may begin to file business license tax refund claims with counties and municipalities, and our counties and municipalities need to be prepared to address these claims.

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