The S.C. Supreme Court recently issued an opinion that is likely to impact businesses’ municipal tax reporting, municipalities’ balance sheets, and city and county tax law more generally. In its opinion, the Court broke with both the City of Goose Creek’s interpretation of its own ordinance and the Court of Appeals’ determination supporting that interpretation, and did so by applying the federal Internal Revenue Code.
Todd Olds is in the business of flipping houses, and, in his business license renewal filing with the City of Goose Creek, he reported as gross income his net gains on the sale of such properties. The City informed him that, consistent with its ordinance, he should instead report his total revenue, i.e., the sales price of the flipped houses, as his gross income. Indeed, the City’s ordinance defines “gross income” as “[t]he total revenue of a business, received or accrued . . . .”
However, the City’s ordinance also stipulates that the gross income for business license purposes “shall conform to the gross income reported to the State Tax Commission or the State Insurance Commission,” and that such may be verified by inspecting the returns filed with the Internal Revenue Service or the S.C. Department of Revenue (“SCDOR”). Further, the federal Internal Revenue Code (“IRC”), at § 61(a), provides that, as applied to property transactions, “gross income” refers only to gains. For income tax purposes, South Carolina has adopted the federal definition of and method for calculating gross income.
Olds appealed the City’s method of calculating gross income to the City Administrator and City Council, then to the circuit court, and then to the S.C. Court of Appeals, who all affirmed the City’s interpretation of “gross income” as meaning the business’s total revenue. The Court of Appeals determined in particular that, although the ordinance stipulated that the gross income figure shall conform to that reported to the state, the City intended to define gross income as the total revenue of the business.
On review, in Olds v. City of Goose Creek, Op. No. 27829 (S.C. Sup. Ct. filed Aug. 8, 2018), the S.C. Supreme Court acknowledged that it must give effect to the intent of the City when interpreting the ordinance in question. The Court also acknowledged that the City’s ordinance defines “gross income” as “[t]he total revenue of a business . . . .” However, the Court pointed out that the ordinance goes from this broad definition to narrowly requiring that the gross income figure conform to that which is reported to the State Tax Commission, now SCDOR. The Court concluded that “such a clear mandate made by the City in its ordinance requires Olds’ gross income figure to conform to the gross income figure he reported to the SCDOR.” As explained, based on S.C. law, that figure is calculated using the federal IRC’s method of only reporting gains on property rather than the property’s total sales price. The Court therefore concluded that, based on these provisions, the “plain language of the City’s ordinance mandates that a business’s gross income comport to the gross income reported to the State Tax Commission (now SCDOR).”
In its opinion, the Court noted that of the forty other cities’ ordinances the City included in the record, thirty-one did not include the language requiring that the reported gross income figures conform to that reported to SCDOR, and also that the City had itself deleted the language in 2017. Practically, the Olds opinion should chasten municipalities and businesses alike to thoroughly and carefully understand applicable ordinances, and to regularly review municipal codes for opportunities to improve reporting and compliance.
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