Constitutional – Sales Tax Exemption – Durable Medical Equipment Exemption – Dormant Commerce Clause Challenge – Interstate Commerce

Listen to this article

Because the South Carolina Department of Revenue failed to show that the durable medical equipment exemption advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives, the DME exemption fosters the type of economic protectionism prohibited by the dormant Commerce Clause.

We affirmed the circuit court’s decision as modified.

South Carolina law recognizes a sales tax exemption for the sale of durable medical equipment (DME), which is paid for directly by Medicaid or Medicare funds, but only when the seller’s principal place of business is located in South Carolina (the DME exemption). Respondents are both Delaware corporations, and each has its principal place of business out of state. Respondents do not qualify for the DME exemption because their principal places of business are located out of state. As a result, purely because they participate in interstate commerce, respondents have been forced to remit sales tax that other, similar in-state sellers have not. Respondents now raised identical dormant Commerce Clause challenges to the DME exemption. Agreeing with respondents that the DME exemption facially discriminates against interstate commerce, the circuit court severed the unconstitutional “principal place of business in South Carolina” language from the DME exemption and ordered the South Carolina Department of Revenue (DOR) to refund the sales tax respondents paid during the contested time periods.

We agreed the DME exemption unconstitutionally discriminates against interstate commerce in violation of the dormant Commerce Clause, and, under the facts of this case, the ordered refunds are therefore appropriate. However, because we found respondents have not satisfied their burden of proof to show the legislature would have passed the remainder of the DME exemption absent the unconstitutional language, we declined to sever only the offending language and instead declared the entire DME exemption void going forward. We acknowledged our decision to invalidate the entire DME exemption presents a close question, as it is based on a lack of evidence regarding legislative intent rather than affirmative evidence to that effect. The legislature may, if it elects, reenact the exemption, save the unconstitutional limitation on a seller’s principal place of business.

The State, through the DOR, cannot provide sales tax exemptions in a manner that discriminates against interstate commerce. We affirmed the circuit court’s decision declaring the “principal place of business in South Carolina” language of the DME exemption unconstitutional under the dormant Commerce Clause. However, because respondents have not carried their burden to show the legislature’s intent, we decline to sever the unconstitutional language and instead declare the entire DME exemption invalid. Under the facts of this case, we affirmed the circuit court’s decision to order refunds to respondents for the sales tax imposed upon the DME they sold during the contested time periods. However, having found the DME exemption as a whole is invalid, we assume going forward that all sellers of DME, including respondents, will be required to pay sales tax unless and until the legislature enacts a new, modified DME exemption.

Affirmed as modified.

Orthofix Inc. v. South Carolina Department of Revenue (Lawyers’ Weekly No. 010-028-24, 10 pp.) (John Kittredge, J.) Appealed from Lexington County Circuit Court (William P. Keesley, J.) Marcus Dawson Antley III and Jason Phillip Luther, both of Columbia, for appellant; James F. Reames III and Jennifer Joan Hollingsworth, both of Maynard Nexsen PC, of Columbia; Catherine A. Battin, of McDermott Will & Emery, LLP, of Chicago, IL; and Michael J. Hilkin, of McDermott Will & Emery, LLP of New York, NY, all for respondents. South Carolina Supreme Court