Evans v. State, 25260.

• Decision Date: 12 March 2001
• Docket Number: No. 25260.,25260.
• Citation: 344 S.C. 60,543 S.E.2d 547
• Court: South Carolina Supreme Court
• Parties: Victor EVANS, individually and on behalf of all others similarly situated, Appellants/Respondents, v. The STATE of South Carolina; South Carolina State Retirement System; Retirement System for Judges and Solicitors of the State of South Carolina; Retirement System for Members of the General Assembly of the State of South Carolina; South Carolina Police Officers' Retirement System; South Carolina Department of Revenue; and South Carolina Budget and Control Board, Respondents/Appellants.

344 S.C. 60

543 S.E.2d 547

Victor EVANS, individually and on behalf of all others similarly situated, Appellants/Respondents, v. The STATE of South Carolina; South Carolina State Retirement System; Retirement System for Judges and Solicitors of the State of South Carolina; Retirement System for Members of the General Assembly of the State of South Carolina; South Carolina Police Officers' Retirement System; South Carolina Department of Revenue; and South Carolina Budget and Control Board, Respondents/Appellants.

No. 25260.

Supreme Court of South Carolina.

Heard January 10, 2001.

Decided March 12, 2001.

John M.S. Hoefer and Paige J. Gossett, of Willoughby & Hoefer, P.A., and A. Camden Lewis, of Lewis, Babcock & Hawkins, L.L.P., of Columbia, for appellants/respondents.

Vance J. Bettis, of Gignilliat, Savitz & Bettis, L.L.P., for respondents/appellants; Joseph D. Shine, Edwin E. Evans, and Anne Macon Flynn, for Respondent/Appellant South Carolina State Budget and Control Board; Harry T. Cooper, Jr., Ronald W. Urban, and Sarah G. Major, for Respondent/Appellant South Carolina Department of Revenue; Stephen R. Van Camp for Respondents/Appellants South Carolina State Retirement System, Retirement System for Judges and Solicitors of the State of South Carolina, Retirement System for Members of the General Assembly of the State of South Carolina and the South Carolina Police Officers' Retirement System, all of Columbia.

BURNETT, Justice:

This case presents cross-appeals from the order of the circuit court denying, in part, and granting, in part, respondents/appellants' motion to dismiss. We reverse.

FACTS

In Davis v. Michigan Dep't of Treasury, 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989), the United States Supreme Court held the doctrine of intergovernmental immunity and 4 U.S.C. § 111 (1997) prohibit the states from taxing federal government retirees at a greater rate than state and local government retirees are taxed. Davis held states could cure the infirmity "either by extending the tax exemption to retired federal employees (or to all retired employees), or by eliminating the tax exemption for retired state and local government employees." Id. at 818, 109 S.Ct. 1500.

Prior to Davis, state retirement benefits in South Carolina were fully exempt from taxation while only the first three thousand dollars of federal retirement benefits were exempt from taxation. In response to Davis, the General Assembly deleted the full tax exemption, rendering state retirement benefits in excess of three thousand dollars taxable. Act No. 189, Part II, § 39, 1989 S.C. Acts 1436 (Act 189). In addition, the General Assembly increased the pension benefits for state retirees by 7% to offset the increased tax liability resulting from the lost exemption. Act No. 189, Part II, § 60, 1989 S.C. Acts 1436.¹

Appellants/Respondents Evans and all others similarly situated (State Retirees) brought this declaratory judgment action in circuit court against Respondents/Appellants the State of South Carolina, the various State Retirement Systems, the Department of Revenue (DOR), and the Budget and Control Board (the State) alleging a cause of action for breach of contract and causes of action challenging the constitutionality of Act 189.² State Retirees also seek an injunction against future imposition of state income taxes on their retirement benefits and damages in the form of an income tax refund for state income taxes paid on their retirement benefits.

The State filed a motion to dismiss. The trial judge denied the motion insofar as the State claimed the action should be dismissed because State Retirees failed to pursue their administrative remedies under the Revenue Procedures Act. S.C.Code Ann. §§ 12-60-10 to -3390 (2000). However, concluding State Retirees had no contractual or property right in a tax exemption, the trial judge granted the State's motion to dismiss for failure of the complaint to state facts sufficient to constitute a cause of action for breach of contract, contract clause impairment, and takings. The parties filed cross-appeals.

ISSUES

I. Did the trial judge err by denying the State's motion to dismiss on the ground State Retirees failed to pursue their administrative remedies in accordance with the Revenue Procedures Act?

II. Did the trial judge err by deciding a novel issue on a motion to dismiss?

III. Did the trial judge err by ruling State Retirees have neither a contractual right nor a property interest in the full tax exemption of their retirement benefits?

DISCUSSION

I.

The State argues the trial judge erred by denying its motion to dismiss on the ground State Retirees failed to pursue their administrative remedies in accordance with the Revenue Procedures Act. We agree.

In two provisions, the South Carolina Constitution states:

The General Assembly may direct, by law, in what manner claims against the State may be established and adjusted.

S.C. Const. art. X, § 10; S.C. Const. art. XVII, § 2.

Section 12-60-80 of the Revenue Procedures Act provides: "[t]here is no remedy other than those provided in this chapter in any case involving the illegal or wrongful collection of taxes, or attempt to collect taxes." It further specifies, "[i]f a taxpayer brings an action covered by this chapter in circuit court, other than an appeal of an [Administrative Law Judge] decision ..., the circuit court shall dismiss the case without prejudice." § 12-60-3390.

The Revenue Procedures Act establishes administrative procedures for taxpayers who claim a refund of any state tax. After a claim is filed with the DOR, the appropriate DOR division determines what refund, if any, is due. § 12-60-470(A) and (D). The taxpayer may appeal the division's decision to the DOR by filing a protest. § 12-60-470(E). If the DOR makes a determination adverse to the taxpayer, the taxpayer may request a contested case hearing before the Administrative Law Judge Division. § 12-60-470(F). If the case either raises constitutional issues or does not qualify as a "small claims case" under § 12-60-520 [cases in which no more than $10,000 is in controversy], the Administrative Law Judge Division's decision may be appealed to the circuit court. § 12-60-3380.

State Retirees argue it would have been futile to pursue the administrative remedies provided by the Revenue Procedures Act because neither the DOR nor an Administrative Law Judge (ALJ) could rule on the merits of their claims. More particularly, State Retirees assert their constitutional causes of action are challenges to the facial validity of Act 189, claims which the separation of powers doctrine precludes executive branch officers from determining, not a request for a tax refund.

This Court recently addressed a similar issue. In Ward v. State, 343 S.C. 14, 538 S.E.2d 245 (2000), federal government retirees brought a declaratory judgment action also challenging the constitutionality of Act 189. The federal retirees asserted § 60 of Act 189, which increased the state retiree benefits to offset the elimination of the full tax exemption in § 39, violated the doctrine of intergovernmental immunity.

Recognizing the separation of powers doctrine prohibits an agency and ALJ from ruling on the constitutionality of a statute, we concluded § 12-60-3390 was inapplicable "where the sole issue [was] whether a statute or other legislative action is constitutional." Id., 343 S.C. at 20, 538 S.E.2d at 248. See Video Gaming Consultants, Inc. v. South Carolina Dep't of Revenue, 342 S.C. 34, 535 S.E.2d 642 (2000)

(if only issue is a constitutional challenge to a statute, party should seek declaratory judgment from circuit court rather than ALJ). The Court concluded the federal retirees were not required to exhaust their administrative procedures under the Revenue Procedures Act because the issue under consideration was the facial constitutionality of Act 189. The Court noted, however, "an agency or ALJ can still rule on whether a party's constitutional rights have been violated ... Merely asserting an alleged constitutional violation will not allow a party to avoid an administrative ruling." Ward, 343 S.C. at 18,

538 S.E.2d at 247.

The DOR and the ALJ division have authority to rule on State Retirees' constitutional claims. As specified in their complaint, the class of persons whom State Retirees intend to represent are those persons employed by the State, its political subdivisions, and agencies before June 8, 1989. While State Retirees assert they are challenging the facial validity of Act 189, in actuality they are only challenging Act 189 as it applies to a limited class of state employees, not the constitutionality of Act 189 as a whole. Pursuant to Ward, the DOR and ALJ Division have authority to rule on State Retirees' constitutional claims.³

Moreover, State Retirees' position is that they are entitled to full tax exemption of their retirement benefits and, therefore, the DOR illegally or wrongfully collected excess taxes from them. This is precisely the type of action the General Assembly mandated must be remedied by the DOR. § 12-60-80 (only remedy involving illegal or wrongful collection of taxes is under the Revenue Procedures Act). Additionally, State Retirees contend requiring them to comply with administrative procedures would deprive them of their constitutional right to a jury trial on their breach of contract action.⁴ We disagree.

In their breach of contract cause of action, State Retirees assert the various Retirement Systems breached their contracts with them by unilaterally reducing the amount of tax exemption on their retirement benefits.⁵ Assuming there is a contract between the Retirement System and State Retirees and that the full tax exemption is a part of that contract, the Retirement Systems cannot be liable for the alleged breach because it was impossible for Retirement Systems to perform under the contract's terms once Act 189 became law. Hawkins v. Greenwood...