Struck Down

The South Carolina Supreme Court recently invalidated a statute that exempts sales of durable medical equipment from sales tax. Orthofix v. SCDOR. As written, the statute gave a sales tax exemption to medical equipment sellers whose principal place of business was within South Carolina. Sellers of medical equipment whose principal place of business was outside of South Carolina still had to pay the sales tax.

Finding that this disparate treatment violated the U.S. Constitution’s “Dormant Commerce Clause,” the Supreme Court had to decide whether to sever the unconstitutional portion of the statute and let the rest of the statute remain intact, or to invalidate the statute entirely. Its decision would be significant because either everyone would get the sales tax exemption, or no one would get it. The South Carolina Supreme Court chose the latter, and invited the General Assembly to rewrite the statute in compliance with the Constitution if it so chooses.

(Dormant) Commerce Clause

Let me start by saying that both Justice Kittredge’s majority opinion and Justice Few’s concurrence in Orthofix v. SCDOR are great examples of excellent legal writing. Clear, concise, and well organized. Law students and lawyers alike ought to study opinions like this if they want to improve their own writing.

Orthofix is a Delaware corporation with its principal places of business outside of South Carolina. They sell medical equipment in South Carolina. Under South Carolina law, Orthofix was required to pay sales tax on these sales because of their out-of-state-ness. In-state sellers did not have to pay this sales tax. Orthofix paid the sales tax to the SCDOR (South Carolina Department of Revenue) for a while, but eventually requested a refund which the DOR denied.

The Supreme Court analyzed the case under what is frequently referred to as the “Dormant Commerce Clause,” a concept that is implied from the U.S. Constitution. The U.S. Constitution gives Congress the power to “regulate commerce . . . among the several States.” U.S. Const. art. I, § 8, cl. 3. Because the Constitution gives Congress the power to regulate interstate commerce, the theory goes, states are not allowed to regulate interstate commerce.

Countless appellate decisions in the Supreme Court of the United States, every federal circuit, and every state supreme court have grappled with questions about regulations of commerce. You could probably spend a lifetime reading these decisions and trying to make sense of them but suffice it to say here that the general rule is that a state can’t regulate commerce in a way that benefits in-state financial interests while burdening out-of-state competition.

With that basic rule in mind, it was really no surprise that our Supreme Court found that the sales tax exemption on sales of medical equipment for in-state sellers, but not out-of-state sellers, violated the Dormant Commerce Clause. But that leaves the Court with a much more difficult question to answer. Does the sales tax exemption remain in force such that both in-state and out-of-state sellers of medical equipment receive the exemption, or does the exemption fall entirely such that neither in-state nor out-of-state sellers receive it?

Severability

Statutes passed by the legislative branch of government will occasionally be found to be unconstitutional in part. Courts faced with such a situation must decide what to do with the remainder of the law.

South Carolina has repeatedly endorsed the following general test in determining whether the unconstitutional portion of a statute can be severed such that the rest of the law remains in effect: “the test for severability is whether the constitutional portion of the statute remains complete in itself . . . wholly independent of that which is rejected, and is of such a character as that it may fairly be presumed that the Legislature would have passed it independent of that which is in conflict with the Constitution.” Thayer v. S.C. Tax Comm’n, 307 S.C. 6, 12, 413 S.E.2d 810, 814 (1992). The party arguing in favor of severance bears the burden of establishing both the independent nature of the constitutional portion of the statute and that the legislature would have passed the statute without the unconstitutional portion.

The Supreme Court in Orthofix found that the out-of-state sellers failed to provide any evidence that the General Assembly would have passed the sales tax exemption statute without the limitation on out-of-state sellers. For that reason, it found that the unconstitutional portion of the statute could not be severed, and the entire statute had to fall. It’s a significant ruling. Obviously Orthofix didn’t want the sales tax exemption to be eliminated. It just wanted the benefit. But now Orthofix, along with every in-state seller of medical equipment will have to pay the sales tax unless the General Assembly rewrites the law.

Justice Few wrote a compelling concurrence explaining an additional reason for striking the entire sales tax exemption as opposed to extending the sales tax exemption. “Sales taxes,” he wrote “of course, provide revenue to the State. Exemptions to sales tax reduce revenue.” Justice Few pointed out that “[i]f this Court were to sever the unconstitutional geographic limitation from the DME exemption, thereby expanding the scope of the exemption to all sellers of DME, this Court would be making the decision to limit State revenue in a way never considered by the General Assembly.” Under the South Carolina Constitution, the legislative branch is responsible for the State’s budget. And significantly expanding a sales tax exemption is a decision that ought to be left to the legislature and not the judiciary.

Conclusion

The South Carolina Supreme Court has dealt with the question of severability in a wide range of contexts from lifetime satellite monitoring of sex offenders to statutes regulating video poker and a whole host of statutes alleged to violate the State Constitution’s “one subject rule.” Now that the Court has struck down the entire sales tax exemption on the sale of medical equipment, it will be interesting to see if the General Assembly accepts the Court’s invitation to rewrite the statute. If not, I suppose the price of medical equipment is getting ready to go up.

adam@ruffinappeals.com

(803) 470-5629

1320 Main Street, Suite 300,

Columbia, SC 29201