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Berkeley County School District v. South Carolina Department of Revenue
Citations: 383 S.C. 334; 679 S.E.2d 913; 2009 S.C. LEXIS 166Docket: No. 26682
Court: Supreme Court of South Carolina; July 6, 2009; South Carolina; State Supreme Court
Plaintiffs, comprising various school districts, initiated a legal action seeking a declaratory judgment and injunctive relief regarding the South Carolina Department of Revenue's (the Department’s) denial of reimbursement from the Homestead Exemption Fund for expenses related to lease-purchase and installment-purchase agreements for capital improvements. The court determined that these expenses, utilized for tax-exempt school operating purposes, qualify the Plaintiffs for reimbursement of taxes lost from the exemption, thus granting their request for a declaratory judgment. Historically, the Plaintiffs have used lease-purchase and installment-purchase agreements to finance new and renovated school facilities without incurring general obligation debt. Under lease-purchase agreements, school districts lease land and buildings to a non-profit for long periods, allowing the corporation to raise funds through certificates of participation. Payments from the districts cover principal and interest from taxes levied for general fund purposes, with ownership transferring at lease end. These agreements contain non-appropriation clauses, enabling districts to refuse renewal without penalty. For installment-purchase agreements, districts convey existing facilities to a non-profit and lease the land, while the corporation issues revenue bonds for renovations and new constructions. Districts make yearly payments to acquire partial ownership, with taxes also supporting these payments. Previous court rulings in 1988 and 1994 confirmed that such agreements do not constitute general obligation debt, allowing school boards to enter them without voter approval. However, a 2006 amendment to section 11-27-110 of the General Assembly requires voter approval for such agreements if they would exceed the district's constitutional debt limit. School districts have been using various types of agreements as financing mechanisms that do not qualify as general obligation debt under constitutional law. A court case, Colleton County Taxpayers Ass’n v. Sch. Dist. of Colleton County, clarified that an installment-purchase agreement was not considered a "financing agreement" as per the earlier definition in section 11-27-110(A)(6). This ruling noted significant amendments to the section in 2006, which defined lease-purchase and installment-purchase agreements for school districts. As long as the school district uses funds from general obligation debt issuance for installment-purchase payments, they comply with statutory requirements. To fund lease-purchase payments, school districts have relied on taxes from owner-occupied residential properties, which were previously exempted on the first $100,000 of fair market value from certain property taxes until 2006. The exemption then expanded to cover 100% of fair market value for school operating taxes, excluding those for general obligation debt repayment. To counteract revenue loss from these exemptions, the General Assembly introduced a one percent sales tax, with proceeds directed to the Homestead Exemption Fund, which also reimburses school districts for lost tax revenue. The reimbursement mechanism, outlined in section 11-11-156, includes a tier three provision that compensates districts dollar-for-dollar based on hypothetical property tax revenue from owner-occupied residential properties, adjusted for prior reimbursements. A district's tier three reimbursement for subsequent years is established at the 2007-2008 amount, adjusted for increases based on the Southeastern Consumer Price Index and population growth, as determined by the Office of Research and Statistics. County auditors and treasurers for specific school districts—Berkeley, Orangeburg Consolidated School District Five, and Spartanburg School Districts One and Five—did not levy necessary taxes on owner-occupied residential properties for the 2007-2008 payments due under lease/installment agreements, believing they would receive reimbursement via a one-percent sales tax increase allocated to the Homestead Exemption Fund. In contrast, the Lexington County auditor did impose taxes on owner-occupied residential properties to cover lease/installment payments for School Districts One and Four, with the county treasurer successfully collecting these taxes for District One. For District Four, sales tax revenue was sufficient to cover the payments, and thus the treasurer did not collect the levied taxes. In May 2008, the Office of Research and Statistics indicated that several school districts were seeking tier three reimbursements for lease-purchase and installment-purchase expenses related to capital improvements. In response, the Department issued Property Opinion 2008-03, concluding that tier three reimbursements do not include millage for payments under financing agreements. The Department specified that reimbursements under the relevant statute do not cover millage imposed for general obligation debt, financing agreements, or any agreements that are essentially financing arrangements for capital improvements. The analysis emphasized that 'property tax for school operating purposes' refers to funding required for daily school operations, excluding amounts for capital improvements financed through debt or other agreements. The Department argued that if 'operating' were not significant, the legislature would have used broader terms like 'school purposes.' Prior to the Property Tax Reform Act, section 12-37-251(A) (2000) indicated that property tax exemptions and State reimbursements for legal residences did not extend to bonded indebtedness or lease-purchase agreements for capital construction. The Department concluded there was no legislative intent to broaden the exemption under section 11-11-156 to include these items, supporting this interpretation with statutory provisions regarding millage rate increases. S.C.Code Ann. § 6-1-320(D) (Supp. 2007) clarifies that millage levied for bonded indebtedness or lease-purchase agreements is not considered for operating purposes and can be increased without restriction. The Department noted that all property taxes contribute to capital improvements and that S.C.Code Ann. § 11-27-110 (Supp. 2007) treats lease-purchase agreements like general obligation bonds under constitutional debt limits. Therefore, the Department argued that reimbursing school districts for lease-purchase agreements while excluding bonds would contradict legislative intent. The Plaintiffs challenge this decision, seeking a declaration that they are entitled to reimbursement under sections 11-11-156 and 12-37-220(B)(47)(a) for capital construction financed through lease-purchase and installment-purchase agreements. They assert that the language of section 12-37-220(B)(47)(a) does not permit taxation on owner-occupied residential property for lease/installment-purchase obligations and that the General Assembly's narrowing of tax exemption exclusions to "general obligation debt" implies lease/installment-purchase agreements are now included in the exemption. Consequently, they argue that any lost tax revenue should be reimbursed through tier three of the Homestead Exemption Fund under section 11-11-156(A)(1). The case centers on statutory interpretation, which is a legal question rather than a broad review of the entire tax reform scheme. The declaratory judgment action pertains to the interpretation of statutory sections 11-11-156(A)(1) and 12-37-220(B)(47)(a), focusing on the exemption for "school operating purposes." The analysis emphasizes that understanding the exemption requires examining the specific wording of the statutes and the legislative intent, as established in prior case law. The term "from all property taxes imposed for school operating purposes" lacks a defined meaning in the statutes, necessitating the use of statutory construction rules that prioritize the legislature's intent and the plain meaning of terms. It is noted that interpretations by the administering agency carry significant weight and should only be overruled for compelling reasons. Tax exemption statutes are strictly construed against the claimed exemption. In instances where terms are undefined, courts may refer to standard dictionary definitions. The Department's interpretation of "school operating purposes" as covering necessary operational expenses aligns with older definitions but has evolved in more recent interpretations. The divergent views on whether expenditures for site acquisitions and capital improvements qualify as "school operating purposes" highlight the complexity of the issue. Ultimately, the analysis favors the Plaintiffs’ argument, concluding that lease and installment-purchase payments are included in the definition, as the functionality of a school district relies on adequate infrastructure, including school buildings. Lease and installment-purchase payments are deemed essential for school operating purposes, as they contribute to the necessary expenses for school districts. Operating expenses encompass various costs, including payroll, employee benefits, rent, and repairs. Limiting the definition of school operating purposes to administrative costs alone overlooks the integral components required for school functionality, such as facilities funded through lease payments. Therefore, these payments qualify for exemption under section 12-37-220(B)(47)(a) and are reimbursable under section 11-11-156(A)(1). The legislative history supports this conclusion, indicating that previous statutory language excluded lease-purchase agreements from tax exemptions related to bonded indebtedness. The current statute has been amended to exclude only general obligation debt from tax exemptions, suggesting that lease/installment-purchase payments are now included within the definition of school operating purposes. The principle of legal interpretation, expressio unius est exclusio alterius, reinforces that by specifically listing exclusions, all other relevant items, including lease payments, should be considered included under the statute unless explicitly stated otherwise. The Legislature's inclusion of specific exclusions in the statute implies that no other exclusions from the exemption were intended. This interpretation is reinforced by prior court decisions distinguishing lease/installment-purchase agreements from general obligation debt. Adding lease/installment payments back into the tax exemption would contradict legislative intent, as demonstrated by the deletion of such payments from the exemption. The court noted that it cannot add omitted words based on personal interpretations of symmetry or policy. Additionally, the court evaluated the Department’s argument regarding section 6-1-320, finding it unpersuasive; instead, the section supports the Plaintiffs' position by limiting its applicability to "general operating purposes." It allows for millage rate increases for capital improvements, suggesting that the General Assembly did not consider these items as operating purposes, thus justifying the suspension of millage limitations. The court also found the Department's reliance on section 6-1-320(D) misplaced, as it pertains to tax millage increases and does not relate to the case's focus on uncollected taxes. The agency's decision, while deserving of respect, was ultimately deemed incorrect due to substantial reasons provided by the court. The court concluded that lease/installment-purchase payments are classified under "school operating purposes," entitling the Plaintiffs to tier three reimbursements for expenses incurred in the 2007-2008 fiscal year related to capital construction improvements. The decision may have adverse financial implications by treating traditional general obligation debt differently than lease/installment agreements, but the court's role is limited to interpreting legislative intent, leaving any necessary statutory revisions to the General Assembly. A declaratory judgment has been issued in favor of the plaintiffs, with Justices Waller and Pleicones concurring, while Justice Kittredge dissents, joined by Chief Justice Toal. The judgment references South Carolina Code Ann. § 11-11-155(A), which establishes that tax revenue from Article 11, Chapter 36 of Title 12 is allocated to the separate Homestead Exemption Fund. This fund is utilized to reimburse school districts for revenue losses due to property tax exemptions, as outlined in § 11-11-156(A)(1). General obligation debt for school districts, defined by the Court, is secured by the district's full faith, credit, and taxing power, with constitutional limitations set forth in Article X, § 15 of the South Carolina Constitution. A school district may incur such debt up to eight percent of its assessed taxable property value unless a referendum permits otherwise. Additionally, § 11-27-110(C) stipulates that any limited bonded indebtedness, combined with existing financial agreements, must not exceed the constitutional debt limit unless approved by voters in a referendum. The majority opinion disagrees with the dissent regarding tier-three reimbursements, asserting that rejecting these reimbursements would disregard established jurisprudence on general obligation debt and the significant legislative history relevant to the case.