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Richland County v. The South Carolina Department of Revenue

Supreme Court of South Carolina

March 7, 2018

Richland County, South Carolina, Appellant/Respondent,
The South Carolina Department of Revenue and Rick Reames, III, in his official capacity as its Director, Respondents/Appellants, and Central Midlands Regional Transit Authority, Respondent,
Richland PDT, a joint venture consisting of M.B. Kahn Construction Co. Inc., ICA Engineering, Inc., and Brownstone Construction Group, LLC, as a unit and Individually, Third-Party Defendants. Appellate Case No. 2016-001839

          Heard June 14, 2017

         Appeal from Richland County G. Thomas Cooper, Jr., Circuit Court Judge

          Andrew F. Lindemann, of Davidson & Lindeman, P.A., of Columbia, Benjamin E. Nicholson, V and M. Elizabeth Crum, both of McNair Law Firm, P.A., of Columbia, Ray N. Stevens and Ray E. Jones, both of Parker Poe Adams & Bernstein, LLP, of Columbia and Larry Smith, Richland County Attorney, of Columbia, for Appellant/Respondent.

          James E. Smith, Jr. and Dylan W. Goff, both of James E. Smith, Jr., P.A., of Columbia, Jason P. Luther, Milton G. Kimpson, Dana R. Krajack, Nicole M. Wooten and Lauren Acquaviva, all of South Carolina Department of Revenue, of Columbia, for Respondents/Appellants.

          Elizabeth Van Doren Gray, Robert E. Tyson, Jr. and Alexis K. Lindsay, all of Sowell Gray Robinson Stepp & Laffitte, LLC, of Columbia, for Respondent.

          Robert F. Lyon, Jr. and John K. DeLoache, both of Columbia, for Amicus Curiae, South Carolina Association of Counties.


         This direct cross-appeal involves the scope of the authority the Department of Revenue (DOR) to enforce various provisions of state law relating to the imposition of a transportation penny tax by Richland County (County) and the County's expenditure of the funds generated by the tax. After DOR conducted an audit and informed the County that DOR intended to cease future remittances to the County based on purported misuse of funds, the County filed a declaratory judgment action in circuit court, arguing DOR lacked the authority to stop payments and seeking a writ of mandamus compelling DOR to continue remitting revenues. DOR counterclaimed seeking a declaration that the County's expenditures were unlawful, an injunction to prohibit future unlawful expenditures, and alternatively, the appointment of a receiver to administer the County's tax revenues. Following a hearing, the circuit court issued a writ of mandamus compelling DOR to remit the tax revenues, denied injunctive relief, and refused to appoint a receiver. Both the County and DOR appealed. For the reasons that follow, we affirm in all respects except we reverse the circuit court's denial of DOR's request for injunctive relief. DOR is entitled to an injunction requiring the County to expend the funds generated by the tax solely on transportation-related projects in accordance with the law.


         Through the Optional Methods for Financing Transportation Facilities Act (Transportation Act), [1] the General Assembly has authorized the governing body of a county to "impose by ordinance a sales and use tax in an amount not to exceed one percent within its jurisdiction for a single project or for multiple projects and for a specific period of time to collect a limited amount of money." S.C. Code Ann. § 4-37-30(A) (Supp. 2017). This is commonly referred to as the "penny tax." The types of projects permitted to be funded with such a tax are "highways, roads, streets, bridges, mass transit systems, greenbelts, and other transportation-related projects." Id. § 4-37-30(A)(1)(a)(i) (emphasis added). The revenues generated from such a tax must be used in accordance with statutory restrictions imposed by the General Assembly-namely, proceeds must be used for the capital costs of the types of transportation projects identified in the Transportation Act. Id. § 4-37-30(A)(15).

         To implement a transportation penny tax, "[t]he governing body of a county may vote to impose the tax authorized by this section, subject to a referendum, by enacting an ordinance." Id. § 4-37-30(A)(1). The local ordinance must specify the projects for which the proceeds of the tax are to be used; the length of time for which the tax is to be imposed; "the estimated capital cost of the project or projects to be funded in whole or in part from proceeds of the tax;" and the "anticipated year the tax will end." Id. § 4-37-30(A)(1) (emphasis added). At issue in this case is whether and to what extent certain costs qualify as "capital costs" and thus are considered proper expenditures of penny tax revenues.

         DOR was "created to administer and enforce the revenue laws of this State, " S.C. Code Ann. § 12-4-10 (2014), and is authorized "to conduct audits involving all taxes." Id. § 12-4-387 (2014). The scope of DOR's activities is quite broad; indeed, DOR "employees and officers are acting within the scope of their employment when administering any South Carolina statute which has not been held to be unconstitutional or unlawful by a final decision of a court of competent jurisdiction." Id. § 12-4-325(B) (2014) (emphasis added). DOR administers and collects the penny tax in "the same manner that other sales and use taxes are collected." Id. § 4-37-30(A)(8); id. § 12-36-2660 (2014) (providing DOR "shall administer and enforce" the provisions of the Sales and Use Tax Act). Monies generated through a tax imposed under the Transportation Act are considered to be state tax revenues-not local tax revenues.[2] See id. § 12-54-15 (2014) (providing every tax imposed, along with increases, interest, and penalties are considered owed "to the State"); id. § 4-37-30(A)(9) (providing taxes authorized by the Transportation Act are subject to the general enforcement provisions of the tax code).

         Under these enabling provisions of the Transportation Act, on July 18, 2012, the County enacted Ordinance No. 039-12HR (Ordinance) scheduling a referendum on November 6, 2012, for the purpose of seeking approval from voters for a penny sales and use tax (Penny Tax). The Ordinance referenced various provisions of the Transportation Act and proposed the imposition of a tax for twenty-two years for the following projects:

(d) The Sales and Use Tax shall be expended for the costs of the following projects . . . for the following purposes:
(i) Improvements to highways, roads (paved and unpaved), streets, intersections, and bridges including related drainage system improvements. Amount: $656, 020, 644;
(ii) Continued operation of mass transit services provided by Central Midlands Regional Transit Authority including implementation of near, mid and long-term service improvements. Amount $300, 991, 000; and
(iii) Improvements to pedestrian sidewalks, bike paths, intersections and greenways. Amount: $80, 888, 356.

         The Ordinance further provided:

The imposition of the sales and use tax and the use of sales and use tax revenue, if approved in the referendum, shall be subject to the conditions precedent and conditions or restrictions on the use and expenditure of sales and use tax revenue established by the [Transportation] Act, the provisions of this Ordinance, and other applicable law. Subject to annual appropriations by County Council, sales and use tax revenues shall be used for the costs of the projects established in this Ordinance, as it may be amended from time to time, including, without limitation, payment of administrative costs of the projects, and such sums as may be required in connection with the issuance of bonds, the proceeds of which are applied to pay costs of the projects. All spending shall be subject to an annual independent audit to be made available to the public.

(emphasis added). Among other things, the parties dispute whether the County properly characterizes certain costs as "administrative costs."

         The referendum passed. The Penny Tax became effective beginning May 1, 2013, and is authorized to run for twenty-two years (through April 30, 2035) to raise over $1 billion for specified transportation projects throughout Richland County. Since taking effect, the Penny Tax has generated around $5 million in revenues per month for Richland County. Prior to this dispute, and in accordance with its statutory mandate, DOR allocated and remitted net revenues to the State Treasurer on a monthly basis. Those monies (with interest) were then distributed by the State Treasurer to the County on a quarterly basis as required by the Transportation Act. Specifically, section 4-37-30(A)(15) provides the State Treasurer is to hold these funds in a designated account separate from the general fund of the state, and once distributed, "these revenues and interest earnings must be used only for the purpose stated in the imposition ordinance."

         At some point after the Penny Tax became effective, DOR received information concerning the County's possible misuse of Penny Tax funds. In April 2015, DOR initiated an audit to determine the County's compliance with state tax laws, specifically including the Transportation Act. See S.C. Code Ann. § 12-4-387 ("The Department of Revenue shall use available personnel to conduct audits involving all taxes to promote voluntary compliance and to collect revenues for the general fund of the State and designated accounts." (emphasis added)); id. § 12-54-100 to -110 (authorizing DOR to conduct examinations and investigations and to issue a summons for any person or political subdivision of the State requiring that person or entity to appear, produce documents, and answer questions). The County did not object to the audit or to DOR's authority to conduct it.

         Following the audit, DOR informed the County that it had uncovered (1) evidence of public corruption;[3] (2) evidence of criminal violations of state tax laws[4] and (3) unlawful expenditures of Penny Tax revenues by County Council.

         DOR identified specific expenditures it believed were problematic, including the use of more than $554, 000 in Penny Tax funds to organize and staff the County's Small Local Business Enterprise (SLBE) Program, which was established as a county-wide program intended to support all facets of County operations-not just Penny Tax projects. These expenses included more than $200, 000 in legal services related to "SLBE Program Administration"; approximately $219, 000 in personnel costs; $122, 000 for a software management system; and $13, 000 for website development. In noting these expenditures, DOR explained, "While a [SLBE] program may be laudable, it is simply not allowed under the state laws governing this type of [transportation] tax. If [County] Council wants to encourage small and local business participation in County projects[, ] it should do so with general fund dollars-not with dollars approved by voter referendum for an earmarked purpose."

         DOR also noted the County was paying two public relations firms monthly payments of $25, 000 each for the provision of "public information services" in addition to reimbursing these firms for expenses such as brochures, mailings, business cards, website maintenance, catering, mileage, and computer and cell phone allowances. It was unclear exactly what work these firms performed since a fully operational public information office already existed within the County and because no documentation existed to detail what specific services were provided, the number of hours spent on these projects, or how much each service cost.

         DOR further took issue with the more than $38, 000 the County spent under a vague and duplicative "mentor-mentee" arrangement whereby the County contracted with certain inexperienced individuals to perform more than $400, 000 in real-estate and legal services, then paid each of those individuals and an experienced contractor/vendor $200 per hour (for a combined cost of $400 per hour) to "mentor" and ...

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