On June 26, 2024, the South Carolina Supreme Court issued a decision finding the state’s sales tax exemption for durable medical equipment (DME) unconstitutional. The exemption, available only to sellers with a principal place of business in South Carolina, impermissibly discriminated against interstate commerce. In a surprising move, the court invalidated the entire exemption rather than severing the discriminatory clause. The decision arose from two consolidated cases: Orthofix, Inc. v. South Carolina Dept. of Revenue, Appellate Case No. 2023-000317 and KCI USA, Inc. v. South Carolina Dept. of Revenue, Appellate Case No. 2023-000318.
South Carolina’s sales tax DME exemption was available only to DME providers whose principal place of business was in the state. Two out-of-state providers requested refunds of sales tax paid on DME. The Department of Revenue denied the refunds for the sole reason that the sellers’ principal places of business were not in South Carolina. The trial court found this requirement unconstitutional as facial discrimination against interstate commerce and severed the requirement from the remainder of the exemption. This left the exemption intact and available to all providers no matter where they were located.
The Supreme Court agreed with the lower court that the exemption was unconstitutional. It facially discriminated against interstate commerce by providing a tax exemption only to in-state businesses. The Department of Revenue failed to show any legitimate purpose served by limiting the exemption to in-state businesses.
However, the Supreme Court reversed the lower court’s decision on severability, holding that the DME exemption’s discriminatory clause could not be separated from the rest of the exemption. To sever the discriminatory clause, the court had to find that the legislature would have passed the exemption even without the offending language. There was nothing in the legislative history of the exemption to suggest this was the case. There was no discussion or debate about the in-state requirement at all. Thus, it was impossible to determine if the unconstitutional language was crucial to the exemption. The court also noted the lack of a savings clause, which explicitly preserves the remainder of a law if portions of it are found invalid.
As a result, South Carolina no longer has a sales tax exemption for DME. The court invited the legislature to reenact such an exemption without the unconstitutional language. Whether the legislature chooses to do so or not remains to be seen.
If you have questions about available exemptions for your sales or purchases in South Carolina, reach out to Ryan’s tax experts listed below.
TECHNICAL INFORMATION CONTACTS:
Tony Gulotta
Principal
Ryan
212.871.3901
tony.gulotta@ryan.com
Adam Rupp
Principal
Ryan
484.253.7000
adam.rupp@ryan.com
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