/>iIt is well settled that states may not discriminate against interstate commerce in the name of intrastate economic development. Recently, in the consolidated cases Orthofix, Inc. v. Dep’t of Rev., App. No. 2023-000317 (S.C. June 26, 2024) and KCI USA, Inc. v. Dep’t of Rev., App. No. 2023-000318 (S.C. June 26, 2024), the South Carolina Supreme Court applied this principal to strike down a discriminatory sales tax exemption.
Facts: In 2007, South Carolina enacted a durable medical equipment (“DME”) exemption (the “Exemption”) whereby sales of DME paid for directly by Medicaid or Medicare funds are exempt from sales tax only when the seller’s principal place of business is located in South Carolina. Businesses who sell otherwise eligible DME are not able to claim the exemption if their principal place of business is outside of the State.
Orthofix, Inc. (“Orthofix”) and KCI USA, Inc. (“KCI”), two Delaware corporations selling DME with principal places of business outside of South Carolina, challenged the Exemption, arguing: (1) that it “facially discriminates against interstate commerce;” and (2) that the discriminatory “principal place of business in South Carolina” language should be severed from the Exemption. The circuit court agreed with Orthofix and KCI, finding the Exemption facially discriminatory, and severed the “principal place of business in South Carolina” language from the remainder of the Exemption.
Decision: In its decision, the South Carolina Supreme Court affirmed the circuit court’s decision in part. Applying the dormant Commerce Clause, the Court found that a state law is “virtually per se invalid” and results in “improper economic protectionism if the law in question has either a discriminatory effect or a discriminatory purpose.” The Department of Revenue (“DOR”) offered no argument that the law did not have a discriminatory effect. However, the DOR argued that the law did not have a “discriminatory purpose” because the law is “merely intended to ‘promote economic development’ in South Carolina.” The Court held that the DOR failed to put forth a “legitimate local purpose” that could not be served by non-discriminatory means.
Turning to the issue of severability, the Court first noted that its unconstitutional finding is limited to the part of the Exemption requiring the seller’s principal place of business be in South Carolina. To test whether this unconstitutional language could be severed from the Exemption, the Court asked “whether the constitutional portion of the statute remains complete in itself, [capable of being executed,] wholly independent of that which is rejected, and is of such a character as that it may fairly be presumed that the Legislature would have passed it independent” of the unconstitutional portion.
Orthofix and KCI, the proponents of severability, could offer no evidence of legislative intent that the Exemption would have passed without the unconstitutional language. As a result, the Court determined it could not sever the language. Moreover, the Court noted as “telling” the absence of a “savings clause” in the Exemption, which typically evidences a legislature’s intent that a law be “saved” should part of it be found to be unconstitutional.
Because the unconstitutional language could not be severed, the Court declared the entire Exemption invalid “going forward.” However, the Court affirmed the circuit court’s decision to order that Orthofix and KCI receive refunds of sales tax for the time periods at issue. Because it found the Exemption as a whole invalid, the Court “assum[ed]” going forward that all sellers of DME (including Orthofix and KCI) would be required to pay sales tax, absent the legislature enacting a new, modified DME exemption.
Four judges concurred with the majority, with one in a separate opinion explaining that severability was also not an option because if the Court “were to sever the unconstitutional language from the [Exemption], thereby expanding the scope of the [Exemption] to all sellers of DME, [the] Court would be making the decision to limit State revenue” prospectively in a way that would violate South Carolina’s Constitution.
