Berkeley County Sch. v. Dept. of Rev.
| Decision Date | 06 July 2009 |
| Docket Number | No. 26682.,26682. |
| Citation | 383 S.C. 334,679 S.E.2d 913 |
| Court | South Carolina Supreme Court |
| Parties | BERKELEY COUNTY SCHOOL DISTRICT, Lexington County School District No. 1, Lexington County School District No. 4, Orangeburg County Consolidated School District Five, School District No. 1 of Spartanburg County, and School District No. 5 of Spartanburg County, Plaintiffs, v. SOUTH CAROLINA DEPARTMENT OF REVENUE, Defendant. |
Milton G. Kimpson, Ronald W. Urban, Ray N. Stevens, Harry T. Cooper, Jr. and Nicholas P. Sipe, all of Columbia, for Defendant.
The Plaintiffs, the above-listed school districts, filed this action for a declaratory judgment and injunctive relief in this Court's original jurisdiction pursuant to S.C. Const. art. V, § 5, S.C.Code Ann. § 14-3-310 (1976), and Rule 245 (formerly Rule 229), SCACR. The Court granted the Plaintiffs' petition and now reviews the South Carolina Department of Revenue's (the Department's) decision denying the Plaintiffs reimbursement from the Homestead Exemption Fund1 for expenses incurred under lease-purchase and installment-purchase agreement obligations for capital improvement projects. Because these expenses are used for "school operating purposes," for which owner-occupied residential property is tax exempt, we find the Plaintiffs are entitled to reimbursement for the taxes lost as a result of this exemption. Accordingly, we grant the Plaintiffs' request for a declaratory judgment.
In past years, the Plaintiffs have entered into lease-purchase agreements and installment-purchase agreements to obtain the current use of, and as a method of financing, new and renovated school buildings and other school-related facilities. The school districts have utilized these types of agreements as alternative financing mechanisms that do not constitute "general obligation debt."2
Under the lease-purchase agreements, a school district would typically lease its land and buildings to a non-profit corporation for a long period of time. After execution of the year-to-year lease, the corporation would privately raise funds to finance the school renovation and construction by selling certificates of participation to investors. The school districts' payments are set at an amount sufficient to pay the principal and interest due under the certificates of participation and are made from the proceeds of school district taxes levied for general fund purposes. In a lease-purchase transaction, ownership of the facilities transfers at the end of the lease term. The agreements include a non-appropriation clause that permits the school districts to decline, without penalty, to renew the annual lease by failing or refusing to appropriate necessary funds for payments.
In terms of the installment-purchase agreements, the school districts convey the existing school facilities to the non-profit corporation and lease the land on which these facilities sit to the corporation. In turn, the corporation will then issue corporate revenue bonds to fund the renovation of the existing facilities and the construction of new facilities. The school districts, instead of annual payments, make yearly purchases of an undivided partial ownership interest in certain facilities at a sale price set at an amount sufficient to pay the principal and interest due under the financial obligations issued by the corporation. Pursuant to this type of agreement, undivided partial ownership of the facilities transfers with each installment payment. The school districts use taxes levied for general fund purposes to make the annual installment purchases. These agreements include a non-appropriation clause.
In 1988 and 1994, this Court issued decisions holding that lease-purchase agreements and installment-purchase agreements do not constitute general obligation debt. Redmond v. Lexington County Sch. Dist. No. Four, 314 S.C. 431, 445 S.E.2d 441 (1994) (); Caddell v. Lexington County Sch. Dist. No. 1, 296 S.C. 397, 373 S.E.2d 598 (1988) ().
In 1995, the General Assembly enacted, and in 2006 amended, section 11-27-1103 to limit lease-purchase agreements and installment-purchase agreements. As a result of the 2006 amendment, the General Assembly specifically prohibited school districts from entering into such agreements without voter approval if counting the proposed transaction would cause the school district to exceed its constitutional debt limit.
In response to the General Assembly's pronouncement, the school districts continued to utilize different variations of these types of agreements as financing mechanisms that did not constitute, for constitutional purposes, general obligation debt and that did not meet the statutorily-defined criteria that the General Assembly pronounced to limit lease-purchase transactions. After an installment-purchase agreement was specifically challenged as to its constitutionality, this Court refined its analysis holding that such an agreement did not constitute a "financing agreement" as defined in section 11-27-110(A)(6) at the time the agreement was entered into. Colleton County Taxpayers Ass'n v. Sch. Dist. of Colleton County, 371 S.C. 224, 638 S.E.2d 685 (2006).
In so holding, the Court noted that section 11-27-110(A)(6) dealing with lease-purchase agreements had been substantially revised in 2006 to include and specifically define and explain lease-purchase and installment-purchase agreements entered into by school districts. Id. at 232, 638 S.E.2d at 689. Based on this amendment, the Court concluded that Id. at 236, 638 S.E.2d at 691.
In order to make payments on lease-purchase agreements, the school districts have used taxes levied on owner-occupied residential real property. Between 1995 and 2006, these properties received a property tax exemption on the first $100,000 of the property's fair market value for taxes "calculated on the school operating millage imposed for tax year 1995 or the current school operating millage, whichever is lower, excluding taxes levied for bonded indebtedness and payments pursuant to lease purchase agreements for capital construction." S.C.Code Ann. § 12-37-251(A)(1) (2000) (emphasis added).
In 2006, the General Assembly increased the amount of the tax exemption for owner-occupied residential property to "one hundred percent of the fair market value" of the property and provided the property was "exempt from all property taxes imposed for school operating purposes but not including millage imposed for the repayment of general obligation debt." S.C.Code Ann. § 12-37-220(B)(47)(a) (Supp.2007) (emphasis added). In order to reimburse school districts for the revenue lost as a result of the exemption, the General Assembly imposed an additional one percent sales tax. S.C.Code Ann. §§ 12-36-1110 to -1130 (Supp.2007) (outlining provisions for additional sales, use, and causal excise tax and directing taxes imposed under these sections to be credited to the Homestead Exemption Fund as established pursuant to section 11-11-155). In conjunction, the General Assembly established the "Homestead Exemption Fund," in which the collected funds are deposited. S.C.Code Ann. §§ 11-11-155, 12-36-1120 (Supp.2007). Section 11-11-156 sets forth a three-tier reimbursement mechanism to reimburse school districts out of the Homestead Exemption Fund for taxes lost as a result of various property tax exemptions. At issue in this case is tier three, which provides:
The tier three reimbursement is derived from revenue of the tax imposed pursuant to Article 11, Chapter 36 of Title 12, and for fiscal year 2007-2008, consists of an amount equal dollar for dollar to the revenue that would be collected by the district from property tax for school operating purposes imposed by the district on owner-occupied residential property for that fiscal year as if no reimbursed exemptions applied, plus an amount that a district may have received in its fiscal year 2006-2007 reimbursements pursuant to Section 12-37-251 in excess of the computed amount of that exemption from school operating millage for that year, reduced by the total of the district's tier one and two reimbursements.
S.C.Code Ann. § 11-11-156(A)(1) (Supp. 2007) (emphasis added). A district's tier three reimbursement in succeeding years is fixed at the 2007-2008 amount plus increases based on the Southeastern Consumer Price Index and population increases as determined by the Office of Research and Statistics of the State Budget and Control Board (ORS). S.C.Code Ann. §...
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