Advocate's Journal

ALC Case Could Impact Telecom Tax Liability and County Revenues

The S.C. Administrative Law Court is considering a case that could have implications for the tax revenues of S.C. counties and the tax liability of rural telephone service providers.  S.C. law grants special tax treatment for property used in providing rural telephone service.  Specifically, S.C. Code Ann. § 12-37-220(B)(10) provides that such property that was exempt from taxation as of December 31, 1973 will continue to be exempt from taxation, and newly added property will be exempt from taxation in proportion to the ratio between tax-exempt property and all property in that tax district as of December 31, 1973.  As the meaning of “telephone service” has evolved to include services such as Voice over Internet Protocol, commonly known as VoIP, and as the property at issue may only provide telephone service incidentally to the provision of other services, such as internet data services, a fresh judicial analysis of this decades-old law is in order.

On January 8, 2017, the S.C. Department of Revenue (“DOR”) and Farmers Telephone Cooperative, Inc (“Farmers”) entered into a settlement agreement whereby Farmers’ subsidiaries were granted property tax exemptions for tax years 2010 through 2016 pursuant to S.C. Code Ann. § 12-37-220(B)(10).  The settlement agreement contemplates that the subsidiaries will file amended tax returns for the relevant tax years, and each affected county would calculate a revised property tax amount for each tax year.  Clarendon County filed a contested case with the Administrative Law Court challenging the tax exemption.  The case was joined by other affected municipalities, and the petitioners subsequently filed a motion for partial summary judgment.

On April 3, 2018, the Court issued an order denying the petitioners’ motion.  In the order, the Court noted that the statute at issue does not provide guidance as to the level of use required to claim the tax exemption, and that genuine issues of material fact exist as to what “telephone services” the Farmers subsidiaries provide within the meaning of the exemption, particularly in the historical context of the statute, and to what extent the subsidiaries provide telephone services.  These conclusions hint at a few possible outcomes.  Ultimately, the Court could:  (1) find that, because telephone services account for only a trivial portion of those provided by the property at issue—or because VoIP was not contemplated by the statutory framers—the tax exemption provided for in S.C. Code Ann. § 12-37-220(B)(10) does not apply; (2) adopt an expansive view of the tax exemption statute and affirm the treatment arrived at in the settlement agreement; or (3) adopt a middle ground, pro rating tax exempt treatment based the proportion of telephone service provided by the equipment at issue.  The case is ongoing, and parties have until mid-August 2018 to complete discovery.