Books-A-Million v. SCDOR

THE STATE OF SOUTH CAROLINA
In The Court of Appeals
Books-A-Million, Inc., Appellant,
v.
South Carolina Department of Revenue, Respondent.
Appellate Case No. 2017-001519
Appeal From The Administrative Law Court
John D. McLeod, Administrative Law Judge
Opinion No. Op. 5721
Heard March 9, 2020 – Filed April 29, 2020
AFFIRMED
Burnet Rhett Maybank, III, and James Peter Rourke, of
Nexsen Pruet, LLC, of Columbia, for Appellant.
Sean Gordon Ryan and Adam J. Neil, of Columbia, for
Respondent.
THOMAS, J.: In this case arising from a sales tax audit by the South Carolina
Department of Revenue (SCDOR), Books-A-Million, Inc. (BAM) appeals from the
order of the Administrative Law Court (ALC) that upheld SCDOR's assessment of
taxes, penalties, and interest against BAM for BAM's failure to include sales of the
Millionaire's Club Memberships (Club Memberships) in BAM's gross proceeds of
sales. BAM argues the ALC erred in finding (1) the amounts collected by BAM
for Club Memberships are subject to sales tax; (2) renewals of Club Memberships
are subject to sales tax; and (3) the statutes are not ambiguous. We affirm.
FACTS
BAM operates a discount book retail business headquartered in Birmingham,
Alabama. BAM sells books, magazines, collectible supplies, cards, and other gifts
in retail stores throughout the country and online. BAM operates thirteen retail
locations in South Carolina. Customers pay a $25 annual fee (Membership Fee) to
belong to the Millionaire's Club (the Club). Customers can pay the Membership
Fee separately or along with other store purchases. Club Memberships expire one
year from the date of payment of the Membership Fee, unless the membership is
automatically renewed. Club Memberships automatically renew each year for a
one-year period unless customers affirmatively opt out of the automatic renewal or
the Club Membership is otherwise cancelled or terminated. If customers do not
opt out, BAM bills the annual Membership Fee to the credit or debit card provided
when the customer initially enrolled in the Club. BAM does not charge sales tax
on the cost of the Membership Fee.
On December 11, 2014, SCDOR informed BAM by letter that its sales and use tax
returns for January 1, 2012, to August 31, 2015, were selected for audit. BAM
provided SCDOR copies of its income statements for the audited periods.
SCDOR's auditor compared BAM's gross proceeds of sales from the income
statements to the gross proceeds of sales reported on BAM's sales and use tax
returns.
During the audit, SCDOR discovered BAM was not charging sales tax on the cost
of Membership Fees. Thus, on September 16, 2015, SCDOR issued a Proposed
Notice of Assessment (PNOA) to BAM in the amount of $242,076.97, due for
sales tax on the cost of Membership Fees for the audited periods (including
$15,703.13 in interest and $63.14 in penalties). The amounts listed in the PNOA
resulted from adjustments caused by applying sales tax to the cost of Membership
Fees. BAM timely objected to the PNOA by letter dated December 14, 2015, and
SCDOR issued its determination on the matter on March 15, 2016.
BAM requested a contested case hearing before the ALC, challenging SCDOR's
final determination. The sole issue before the ALC was whether the proceeds from
BAM's South Carolina sales of Club Memberships were subject to sales taxes and
should have been included in BAM's gross proceeds of sales. Both parties filed
motions for summary judgment, agreeing there were no material facts in dispute
but disagreeing as to the application of the law to the undisputed facts. Prior to the
hearing before the ALC, the parties filed stipulations of fact.
A hearing was held before the ALC on May 9, 2017. The ALC issued its order on
June 1, 2017; however, on June 6, 2017, the ALC issued an order vacating its June
1 order and amending its order granting SCDOR's motion for summary judgment.
BAM filed a motion for reconsideration, which was denied. This appeal follows.
STANDARD OF REVIEW
The Administrative Procedures Act provides our standard of review in an appeal
from the ALC. Schwiers v. S.C. Dep't of Health & Envtl. Control, 429 S.C. 43, 48,
837 S.E.2d 730, 733 (Ct. App. 2019). Section § 1-23-610(B) of the South Carolina
Code provides this court must confine our analysis to the record, and we may
reverse or modify the decision if the substantive rights of the petitioner have been
prejudiced because the finding, conclusion, or decision is:
(a) in violation of constitutional or statutory provisions;
(b) in excess of the statutory authority of the agency;
(c) made upon unlawful procedure;
(d) affected by other error of law;
(e) clearly erroneous in view of the reliable, probative, and
substantial evidence on the whole record; or
(f) arbitrary or capricious or characterized by an abuse of
discretion or clearly unwarranted exercise of discretion.
S.C. Code Ann. § 1-23-610(B) (Supp. 2019). "In determining whether the decision
of the ALC was supported by substantial evidence, a reviewing court 'need only
find, looking at the entire record on appeal, evidence from which reasonable minds
could reach the same conclusion as the ALC.'" Schwiers, 429 S.C. at 49, 837
S.E.2d at 733 (quoting Kiawah Dev. Partners, II v. S.C. Dep't of Health & Envtl.
Control, 411 S.C. 16, 28, 766 S.E.2d 707, 715 (2014)). "However, the [c]ourt may
reverse the decision of ALC where it is in violation of a statutory provision or it is
affected by an error of law." Kiawah Dev. Partners, II, 411 S.C. at 28, 766 S.E.2d
at 715.
LAW/ANALYSIS
I. Club Membership Sales
BAM argues the ALC erred in finding the amounts collected by BAM for Club
Memberships are subject to sales tax. We disagree.
Under South Carolina law, "[a] sales tax, equal to five percent of the gross
proceeds of sales, is imposed upon every person engaged or continuing within this
State in the business of selling tangible personal property at retail." S.C. Code
Ann. § 12-36-910(A) (2014).1 For sales and use tax purposes, the term "person"
"includes any individual, firm, partnership, limited liability company, association,
corporation, receiver, trustee, any group or combination acting as a unit, the State,
any state agency, any instrumentality, authority, political subdivision, or
municipality." S.C. Code Ann. § 12-36-30 (2014). "Gross proceeds of sales, or
any similar term, means the value proceeding or accruing from the sale . . . of
tangible personal property." S.C. Code Ann. § 12-36-90 (2014). "Tangible
personal property" is defined as "personal property which may be seen, weighed,
measured, felt, touched, or which is in any other manner perceptible to the senses.
It also includes services and intangibles . . . the sale or use of which is subject to
tax under this chapter . . . ." S.C. Code Ann. § 12-36-60 (2014). "It is presumed
that all gross proceeds are subject to the tax until the contrary is established. The
burden of proof that the sale of tangible personal property is not a sale at retail is
on the seller." S.C. Code Ann. § 12-36-950 (2014).
When "an agency charged with administering a statute or regulation has interpreted
the statute or regulation, courts, including the ALC, will defer to the agency's
interpretation absent compelling reasons." Kiawah Dev. Partners, II, 411 S.C. at
34, 766 S.E.2d at 718. This court defers to an agency's interpretation of a statute
"unless it is 'arbitrary, capricious, or manifestly contrary to the statute.'" Id. at 34-
35, 766 S.E.2d at 718 (quoting Chevron, U.S.A., Inc. v. Nat. Res. Def. Council,
Inc., 467 U.S. 837, 844 (1984)).
At the hearing before the ALC, SCDOR argued a plain reading of the statute
demonstrated that all persons engaged in the sale of tangible personal property at
retail are liable for sales tax on their gross proceeds of sales. BAM argued sections
1
Section 12-36-1110 imposed an additional one percent sales tax as of June 1,
2007. S.C. Code Ann. § 12-36-1110 (2014).
12-36-910(A) and 12-36-90 only imposed a sales tax on the gross proceeds of the
sale of tangible personal property.
The ALC found BAM's argument failed to apply the plain meaning rule. Instead,
the ALC found BAM's reading of the statute required the deletion of the words
"persons engaged in the business of." Also, it found BAM's reading required
deleting the phrase "proceeding or accruing" from the statute. The ALC stated, "A
reading of a statute that requires eliminating words within the statute is not
reasonable and does not comport with the plain meaning rule." The ALC further
stated:
If [BAM] . . . were to stop selling tangible personal
property, its [Club Membership] would not be able to
survive as the [Club Membership] only exists as a means
to provide discounts on BAM's sales of tangible personal
property. Because the [Club Membership] cannot exist
without [BAM] offering tangible personal property for
sale, I conclude [BAM's Club Membership] and sales of
tangible personal property are inseparable. Thus, I
conclude [BAM] is in the business of selling tangible
personal property at retail, and [BAM's] business is
subject to South Carolina sales tax. (Emphasis added.).
The ALC continued:
When applying the plain meaning rule to the words in the
statute, it is clear that the statute is broad and
encompasses the total value of a sale, not simply the
amount paid for tangible personal property. Moreover, a
review of the case law demonstrates that gross proceeds
of sales can include the value of services and intangibles
that are derived from the sale of tangible personal
property. . . . Therefore, I agree with [SCDOR] and
conclude that gross proceeds of sales includes all value
that comes from or is direct result of the sale, lease, or
rental of tangible personal property, including proceeds
from fees related to incidental services, intangibles, or
other benefits. (Emphasis added.).
The ALC considered two South Carolina cases in making its decision. In
Travelscape, LLC v. South Carolina Department of Revenue, 391 S.C. 89, 97, 705
S.E.2d 28, 32 (2011), Travelscape contended it was not required to pay sales tax on
the service and facilitation fees it retained from online hotel reservations because
such fees were "derived from" the services it provided, not from the rental charge
for the hotel room. Our supreme court found the fees charged by Travelscape for
its services were subject to sales tax under the plain language of section 12-36-
920(A) as gross proceeds because the service was merely incidental to the
purchase of the accommodations and the cost of services is specifically included in
the definition of gross proceeds of sales. Id. at 98, 705 S.E.2d at 33.
In Meyers Arnold, Inc. v. South Carolina Tax Commission, 285 S.C. 303, 307, 328
S.E.2d 920, 923 (Ct. App. 1985), the issue was whether a layaway fee was part of
the gross proceeds of sales. The court reasoned that "[b]ut for the lay away [sic]
sales, Meyers Arnold would not receive the lay away [sic] fees. The fees are
obviously charged for the service rendered in making lay away [sic] sales." Id.
Thus, this court held the layaway fees were part of the gross proceeds of sales and
subject to the sales tax. Id.
The ALC also considered two Administrative Law Court cases in making its
decision. In Textile Restoration Services, Inc. v. South Carolina Department of
Revenue, 2015 WL 7443800, at *4 (S.C. Admin. Law Ct. Nov. 12, 2015), the court
found SCDOR properly included charges for repairing, altering, storing, pick-up,
and delivery of items incident to the dry cleaning service in the taxpayer's gross
proceeds of sales. In Tronco's Catering, Inc. v. South Carolina Department of
Revenue, 2010 WL 5781622, at *3 (S.C. Admin. Law Ct. Apr. 12, 2010), the court
held ''the value of the sale of catered meals includes service, labor, and room
charges [because] [s]uch charges are incidental to and merely enhance the value of
the sale of catered meals." "The statute further expressly states that the value of
the sale must include costs for materials, labor, service, transportation, or for any
other expense." Id. "When the terms of a statute are clear and unambiguous, as
they are here, there is no room for construction and the terms must be given their
literal meaning." Id.
The ALC in this case concluded, "South Carolina case law demonstrates that gross
proceeds of sales includes all value that comes from or is a direct result of the sale,
lease, or rental of tangible personal property." Its order stated:
Customers pay the Membership Fee to obtain discounts
and free shipping on their purchases of tangible personal
property. Thus, the Membership Fee is a direct result of
the sale of tangible personal property. But for [BAM's]
sale of tangible personal property, [BAM] would not be
able to sell [Club Memberships] and, therefore, would
not collect Membership Fees. The Membership Fees are
payment for services or benefits that are incident to the
sale of tangible personal property. Moreover, the
Membership Fees are inextricably linked to, and
incapable of being separated from, the sale of tangible
personal property.
Thus, the ALC held BAM's Club Membership Fees are includable in BAM's gross
proceeds of sales and are subject to sales tax.
On appeal, BAM argues under the plain meaning of section 12-36-910, the
Membership Fees collected by BAM are not subject to sales tax because Club
Memberships are not tangible personal property under section 12-36-60, and
therefore the Membership Fees cannot constitute gross proceeds of sales under
section 12-36-90. BAM argues this case is distinguishable from Meyers Arnold
and Travelscape:
The facts in Meyers Arnold and Travelscape . . . both
involve the imposition of sales tax on fees charged by a
retailer providing a service where the fees were
inextricably intertwined with the sale of specific tangible
personal property or accommodations. In Meyers
Arnold, the customer could not purchase the lay away
[sic] merchandise without paying the subject fee.
Likewise, in Travelscape, the customer could not
purchase the accommodation without paying the fee.
The charge for layaway/service fee in each case occurs
only after the purchase of the underlying tangible
personal property. In addition, neither customer would
only pay the fee—presumably, neither taxpayer could
charge only the fee, since that fee is so inextricably
linked to the underlying purchase of tangible personal
property or services.
BAM also cites to other states' cases interpreting their tax statutes in support of its
argument. One of these cases is Barnes & Noble Superstores, Inc. v. Huddleston,
1996 WL 596955 (Tenn. Ct. App. Oct. 18, 1996). In that case, the Tennessee
Commissioner of Revenue appealed from the trial court's grant of summary
judgment in favor of Barnes & Noble. Id. at *1. The primary issue on appeal was
whether Barnes & Noble's sale of $10 annual membership cards, entitling the
members to merchandise discounts, was subject to Tennessee sales tax. Id. The
Commissioner's position was that the cards themselves were tangible personal
property subject to sales tax, and payment of the $10 fee constituted prepayment
for merchandise because Barnes & Noble customers were in effect applying $10
towards the later purchase of inventory. Id. At that time, Tennessee statute section
67-6-102(28) (1994) defined "tangible personal property" as personal property that
"may be seen, weighed, measured, felt, or touched, or is in any other manner
perceptible to the senses." Id. at *2. The court looked to the "language of the
statute in order to ascertain and effectuate the intent of the General Assembly," and
noted "[i]t is a general rule of construction that sales and use taxes will not be
extended by implication beyond the clear import of the language used and will not
be enlarged to embrace matters not specifically named." Id. The court then held
the membership sales were not subject to taxation because the "true object of the
subject transactions between [Barnes & Noble] and its customers is to bestow upon
club members the intangible right to receive a discount on merchandise." Id.
Further, "[t]he membership card is merely an indicia of that intangible right and
incidentally aids in the exercise of that right." Id.
However, this court does not have to follow other states' interpretations of their tax
laws in interpreting our own tax laws. See State Farm Mut. Auto. Ins. Co. v.
Goyeneche, 429 S.C. 211, 224, 837 S.E.2d 910, 917 (Ct. App. 2019) ("When there
is no South Carolina case directly on point, our courts may look to persuasive
authority from other jurisdictions."); S.C. State Highway Dep't v. Wilson, 254 S.C.
360, 366, 175 S.E.2d 391, 395 (1970) ("The decisions of courts from other
jurisdictions are, of course, only persuasive authority."); cf. Widenhouse v. Colson,
405 S.C. 55, 59 n.2, 747 S.E.2d 188, 191 n.2 (2013) (noting a state is not "required
to defer to another state's judgment regarding 'the disposition or devolution of
realty' in the forum state" (quoting Williams v. State of North Carolina, 317 U.S.
287, 294 n.5 (1942)), or required "to apply the law of another state in an action in
its own courts" (citing Magnolia Petroleum Co. v. Hunt, 320 U.S. 430, 436-37
(1943))).
BAM also argues its Club Membership is similar to the purchase of gift cards and
membership-only warehouses, which are not subject to sales tax in South Carolina.
BAM points out SCDOR has determined the sale of prepaid telephone cards are
not subject to sales tax at the time of sale if they are for use with a landline;
however, they are subject to sales tax at the time of sale if they are for use with a
mobile phone. S.C. Rev. Rul. 04-4. In a 2004 ruling, the SCDOR held:
The sale or recharge at retail of a prepaid telephone
calling card . . . for use in making local, long distance, or
international telephone calls, that can be used to make a
call from a land-based phone, is not subject to sales tax
since this transaction is not a sale of tangible personal
property. The transaction is merely the exchange of
money for an intangible evidence of debt—a future right
to telephone service. The taxable transaction takes place
when the telephone calling card is used. . . . The
provider of the local telephone call is liable for the 5%
sales tax on local calls made with the calling card.
...
The sale or recharge at retail of a prepaid telephone
calling card for use in making local, long distance, or
international telephone calls . . . that can only be used
with a wireless phone or other wireless device, is subject
to South Carolina sales tax at the time of purchase.
S.C. Rev. Rul. 04-4 (emphasis added). That ruling further states: "Other similar
nontaxable transactions include the sale of gift certificates or traveler's checks.
The taxable transaction occurs at the time the gift certificate or traveler's check is
redeemed." BAM cites to SCDOR's South Carolina Sales and Use Tax Manual
(2017 Ed.), chapter 6, page 9, which provides that "[m]embership fees charged by
a membership-only warehouse offering a selection of brand-name merchandise to
business owners and others where all membership types receive the same benefits"
are not subject to the sales tax or use tax. The manual states in a footnote to the
membership-only warehouse exemption that
A membership fee would be includable in gross proceeds
and subject to the tax if the membership fee is the sales
price for the tangible personal property. For example, if
a direct mail movie rental company charged an annual or
month[ly] fee to receive movies for short term use of
movies and no other charges are paid by the customers to
receive the movies, then the annual or monthly fee is the
sales price of the tangible personal property and subject
to the tax.
After reviewing the record, we find the decision of the ALC was supported by
substantial evidence. South Carolina case law provides that gross proceeds of sales
includes all value that comes from or is a direct result of the sale of tangible
personal property. The Membership Fee is a direct result of the sale of tangible
personal property because BAM would not be able to sell Club Memberships but
for BAM's sale of tangible personal property. Thus, the ALC did not err in finding
the amounts collected by BAM for Club Memberships are subject to sales tax.
II. Club Membership Renewals
BAM argues the ALC erred in finding renewals of Club Memberships are subject
to sales tax. We disagree.
Because we find the ALC correctly determined sales of Club Memberships are
subject to sales tax, we also find the ALC correctly determined renewals of Club
Memberships are also subject to sales tax. See Hagood v. Sommerville, 362 S.C.
191, 199, 607 S.E.2d 707, 711 (2005) (declining to address an issue when the
resolution of a prior issue is dispositive).
III. Ambiguous Statutes
BAM argues the ALC erred in finding the statutes are not ambiguous. We
disagree.
"The cardinal rule of statutory interpretation is to ascertain and effectuate the intent
of the legislature." Sloan v. Hardee, 371 S.C. 495, 498, 640 S.E.2d 457, 459
(2007). Courts "must give the words found in the statute their 'plain and ordinary
meaning without resort to subtle or forced construction to limit or expand the
statute's operation.'" CFRE, LLC v. Greenville Cty. Assessor, 395 S.C. 67, 74, 716
S.E.2d 877, 881 (2011) (quoting Sloan, 371 S.C. at 499, 640 S.E.2d at 459). "Thus
if the words are unambiguous, we must apply their literal meaning." Id. at 74, 716
S.E.2d at 459; Beach v. Livingston, 248 S.C. 135, 139, 149 S.E.2d 328, 330 (1966)
("The language of a tax statute must be given its plain ordinary meaning in the
absence of an ambiguity therein."). "The interpretation of a statute is a question of
law reviewed de novo." S.C. Dep't of Transp. v. Powell, 424 S.C. 206, 210, 818
S.E.2d 433, 435 (2018).
At the hearing before the ALC, BAM argued sections 12-36-910(A) and 12-36-90
were ambiguous and should be construed in favor of the taxpayer. The ALC found
BAM failed to point to any ambiguity in either section. Thus, the ALC concluded
sections 12-36-910(A) and 12-36-90 were unambiguous, and the plain meaning
rule applied. The ALC found the application of the plain meaning rule to the terms
in the statutes at issue demonstrated the Membership Fees were includable in
BAM's gross proceeds of sales and subject to sales tax.
On appeal, BAM again argues the statutes are ambiguous regarding whether
optional membership fees are included in the sales tax base, and such ambiguity
must be resolved in favor of the taxpayer.
S.C. Code Ann. § 12-36-910(A) (2014) states "[a] sales tax, equal to five percent
of the gross proceeds of sales, is imposed upon every person engaged or continuing
within this State in the business of selling tangible personal property at retail."
S.C. Code Ann. § 12-36-90 (2014) provides "[g]ross proceeds of sales, or any
similar term, means the value proceeding or accruing from the sale, lease, or rental
of tangible personal property."
Based on our review, we find the language of the statutes is not ambiguous, and the
ALC's reading of the statutes was correct and consistent with the intent of the
legislature. Thus, the ALC did not err in finding the statutes are not ambiguous.
CONCLUSION
Accordingly, the decision of the ALC is
AFFIRMED.
HUFF and MCDONALD, JJ., concur.