Court Opinion

ID: 8294571
Source: CourtListenerOpinion
Date Created: 2022-10-17 10:59:38.377015+00
Date Added: 2024-06-11T16:43:58.756628
License: Public Domain

Justice KITTREDGE:
I respectfully dissent. I vote to deny tier three reimbursements to Plaintiffs. I would hold that section 12-37-220(B)(47)(a) permits school districts, through proper taxing authorities, to tax owner-occupied residential property to make payments on capital construction projects financed by lease/installment-purchase agreements. S.C.Code Ann. § 12-37-220(B)(47)(a) (Supp.2008).
I.
There are 85 school districts in South Carolina. Six of those school districts (Plaintiffs) filed this action, which the Court accepted in its original jurisdiction. To avoid the constitutional limit on general obligation debt, some school districts construct capital improvements through financing mechanisms generally referred to as lease-purchase or installment-purchase agreements.14 A key feature of these financing mechanisms is the ability of the school districts to bypass the voters. Payments made under the lease/installment-purchase are sometimes characterized as “rent,” but this characterization is a misnomer, for each payment results in the school district acquiring an ownership interest in the facilities, with full ownership vesting upon the final payment.
*353The question before the Court concerns the proper method for acquiring tax dollars to pay for these capital financing arrangements. In 2006, the Legislature precluded school districts from entering into such financing arrangements if they would cause the school district to exceed its constitutional debt limit if considered general obligation debt. Also in 2006, the Legislature increased the tax exemption for owner-occupied residential property to “one hundred percent of the fair market value” of the property and provided the property “is 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.2008) (emphasis added).
To offset this loss of tax revenue for school operating expenses, the Legislature imposed a one percent sales tax to replace the property tax formerly levied on owner-occupied residential property. S.C.Code Ann. §§ 12-36-1110-1120 (Supp.2008). The money collected pursuant to the one percent sales tax increase is placed in the Homestead Exemption Fund and distributed to the school districts pursuant to statutory formula. S.C.Code Ann. § 12-36-1120 (Supp.2008); S.C.Code Ann. § 11-11-156 (Supp.2008).
One of the methods of distribution from the Homestead Exemption Fund is known as “tier three.” Reimbursement from tier three “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.” S.C.Code Ann. § 11-11-156(A)(1) (Supp.2008).
Plaintiffs seek tier three reimbursement for payments made pursuant to their respective lease/installment-purchase agreements. Plaintiffs contend that these payments are included in the school operating expense exemption, and as a result, owner-occupied residential property may not be taxed for this purpose. Hence, Plaintiffs assert their entitlement to tier three reimbursements from the Homestead Exemption Fund.
The South Carolina Department of Revenue rejected tier three reimbursements and construed the statutory scheme as excluding lease/installment-purchase agreements from the *354“school operating purposes” exemption. The Department of Revenue issued Property Opinion # 2008-03 setting forth its construction of the statutory scheme. I include that opinion in its entirety.
PROPERTY OPINION
OPINION # 2008-03

QUESTION:

Do the reimbursements for school operating purposes under S.C.Code Ann. Section 11-11-156 (Supp.2007) include (1) millage imposed for general obligation debt; (2) millage imposed for financing agreements as defined in Section 11-27-110(A)(6) regardless of the date the contract for the financing agreement was entered into; or (3) millage imposed for any other agreement which is in substance a financing agreement for capital improvements?

ANSWER:

The reimbursements under S.C.Code Ann. Section 11 — 11— 156 (Supp.2007) for school operating purposes do not include (1) millage imposed for general obligation debt; (2) millage imposed for financing agreements as defined in Section 11-27-110(A)(6) regardless of the date the contract for the financing agreement was entered into; or (3) millage imposed for any other agreement which is in substance a financing agreement for capital improvements.

DISCUSSION:

In 2006, the Legislature enacted the Property Tax Reform Act (Act), 2006 Act No. 388. This Act substantially changed the way local school districts are funded. Under the Act, a portion of the funding previously provided by property taxes on legal residences has been shifted to the State using a 1% increase in sales tax. The mechanism for the State to reimburse school districts for the loss of property tax revenues as a result of this change is provided in Section 11-11-156. Section 11-11-156(A) provides State reimbursement for fiscal year 2007-2008 in three tiers as follows:
(1) The tier one reimbursement is based on the amount received by the district pursuant to Section 12-37-251 ($100,000 exemption for legal residences) as applied for *355fiscal year 2006-2007. The tier one reimbursement is fixed at the fiscal year 2006-2007 amount and continues into succeeding fiscal years at this fixed amount.
(2) The tier two reimbursement is the amount to be received by the district pursuant to the provisions of Section 12-37-270 for fiscal year 2006-2007 for the school operating millage portion of the reimbursement for the homestead exemption allowed pursuant to Section 12-37-250 ($50,000 homestead exemption for residents 65 or older and individuals who are permanently disabled or legally blind). The tier two reimbursement is fixed at this fiscal year 2006-2007 amount and continues into succeeding fiscal years at this fixed amount.
(3) The tier three reimbursement consists of “an amount equal dollar for dollar to the revenue that would be collected by the district from property tax for school operating expenses 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 tier two reimbursements.”
The question before the Department is whether “property tax for school operating purposes” includes the millage associated with financing agreements, such as lease purchase agreements for capital improvements.
The term “property tax for school operating purposes” is not defined in Section 11-11-156 nor is it defined in the rest of the South Carolina Code of Laws. This term, however, does have a generally accepted meaning within the local government and legislative community. The term refers to amounts required for the general day-to-day operations of the school. It does not include amounts for capital improvements financed either through debt obligations such as bonds or through other financing mechanisms such as lease purchase agreements. The Legislature did not intend the term “operating” to be ignored. If the Legislature were referring to all property taxes used to finance schools, they *356would have used the terms “school purposes” or “all school purposes.”
Prior to the enactment of the Property Tax Reform Act, S.C.Code Ann. Section 12-37-251(A) (2000), provided the property tax exemption and State reimbursement for $100,000 of the fair market value of legal residences. That exemption and reimbursement did not include bonded indebtedness or lease purchase agreements for capital construction. There is no reason to believe that the Legislature intended to expand the exemption and State reimbursement in Section 11-11-156 to include these items. This interpretation is supported by S.C.Code Ann. Section 6-1-320 (Supp.2007). Section 6-1-320 provides limitations on operating millage increases. Section 6-l-320(D) provides that the restrictions on operating millage increases do not “affect millage that is levied to pay bonded indebtedness or payments for real property purchased using a lease-purchase agreement or used to maintain a reserve account.” In other words, millage for these items are not considered for “operating purposes” and school districts are still able to raise the millage to pay bonded indebtedness and lease purchase agreements for real property. As a result, reimbursement by the State is not necessary. Property taxes from all taxpayers, including property taxes for legal residences, continue to pay for capital improvements.
Finally, in S.C.Code Ann. Section 11-27-110 (Supp.2007) the Legislature expressed its interest in treating financing agreements, including lease purchase agreements, in the same manner as debt from bonds. Both bonds and lease purchase agreements are methods of financing capital improvements. Reimbursing districts that used lease purchase agreements to finance capital improvements and not reimbursing districts that used bonds to finance capital improvements is contrary to the legislative decision to treat these methods of financing in the same manner.
Based on the foregoing, the reimbursements provided in Section 11-11-156 do not include (1) the millage imposed for general obligation debt; (2) millage imposed for financing agreements as defined in Section ll-27-110(A)(6) regardless of the date the contract for the financing agreement *357was entered into; or (3) any other agreement which is in substance a financing agreement for capital improvements.
II.
Plaintiffs challenge the Department of Revenue’s statutory construction in this action. If payments pursuant to the lease/installment-purchase agreements are considered school operating expenses, Plaintiffs are entitled to tier three reimbursements. Conversely, if payments pursuant to the lease/installment-purchase agreements are not considered school operating expenses, owner-occupied residential property may be taxed for such purpose, and the school districts are not entitled to tier three reimbursements. A majority of the Court agrees with Plaintiffs. I do not. I believe the phrase “school operating purposes” creates no genuine ambiguity and means what it says — operational expenses, not capital improvements.
Plaintiffs, in their brief, assert section 12-37-220(B)(47) creates an exemption for owner-occupied homeowners for “all school property taxes.” Plaintiffs’ brief is misleading, for the statute says no such thing. The section 12-37-220(B)(47)(a) statutory exemption is limited to property taxes for “school operating purposes,” an unambiguous term excluding capital construction projects.15
The Court today accepts Plaintiffs’ premise of an ambiguity, and construes the “school operating purposes” exemption so broadly that we must conclude the Legislature intended no bounds. The settled principle that a tax exemption must be strictly construed against the claimed exemption is ignored today. TNS Mills, Inc. v. S.C. Dep’t of Revenue, 331 S.C. 611, 620, 503 S.E.2d 471, 476 (1998) (“The language of a tax exemption statute must be given its plain, ordinary meaning and must be strictly construed against the claimed exemption.”).
*358The Court takes the statutory term and exemption for “operating purposes” and instructs that “a school would not be operational without an infrastructure which necessarily includes school buildings.” We learn, therefore, that the Legislature intended the acquisition of property through capital improvements (clothed as lease/installmentpurchase agreements) to be included as operating expenses, and thus subject to tier three reimbursements.
I see no reason to depart from the common understanding of “operating purposes.” Moreover, I see no reason to reject the statutory construction of the Department of Revenue. See Brown v. S.C. Dep’t of Health & Envtl. Control, 348 S.C. 507, 515, 560 S.E.2d 410, 414 (2002) (“The construction of a statute by the agency charged with its administration will be accorded the most respectful consideration and will not be overruled absent compelling reasons.”) (citation omitted).
In my judgment, the Legislature has given no indication of an intent to broaden “school operating purposes” to include expenditures for capital construction under lease/installment-purchase agreements. I believe the Legislature intends the very opposite. For example, section 6-1-320 imposes limitations on a local governing body’s authority to raise property tax millage rates for “general operating purposes,” but the statute expressly relieves the local government from such restrictions for tax millage for lease/installment-purchase agreements: “The restriction contained in this section does not affect millage that is levied to pay bonded indebtedness or payments for real property purchased using a lease-purchase agreement....” S.C.Code Ann. § 6-l-320(D) (Supp.2008). I find it incongruous to suggest that the Legislature expressly lifted restrictions on increasing tax millage for payments on lease-purchase agreements if real property is not taxable for this purpose at all.
It is manifest in my judgment that the Legislature has authorized local governing bodies to levy taxes on real property for the payment of capital construction under lease/installment-purchase agreements. I thus believe the Department of Revenue’s statutory construction is buttressed by a review of the taxing statutory scheme as a whole. In any event, were I to accept the premise of ambiguity in the phrase “school *359operating purposes,” I see no compelling reason to depart from the construction assigned by the Department of Revenue. Brown, 348 S.C. at 515, 560 S.E.2d at 414.
And finally, I observe that two of the school district plaintiffs also agree with the Department of Revenue and believe that lease-purchase agreements are not school operating expenses, and consequently are not included in the exemption. Plaintiffs Lexington County School Districts No. 1 and No. 4 levied taxes on owner-occupied residential property to make payments on lease-purchase agreements for capital construction.16 I believe Lexington County School Districts No. 1 and No. 4 acted lawfully in taxing owner-occupied residential property to make payments on their respective lease-purchase agreements. The conduct of these school districts juxtaposed to their position in this lawsuit is troubling, at least to me.
TOAL, C.J., concurs.

. S.C. Const art. X, § 15 (stating that “the governing body of any school district may incur general obligation debt in an amount not exceeding eight percent of the assessed value of all taxable property of such school district" but to exceed the eight percent general obligation debt limit the school district must first receive the approval of "a majority vote of the qualified electors of the school district voting in a referendum authorized by law”).

. The South Carolina General Assembly knows how to write an unqualified property exemption. See S.C.Code Ann. § 12-37-250 (Supp.2008) (providing an unqualified homestead tax exemption for taxpayers sixty-five and older, among others). Section 12-37-220(B)(47)(a) is a qualified statutory exemption.

. Lexington County School District No. 1 levied and collected the taxes. Lexington County School District No. 4 levied, but did not collect, the taxes because its collection of sales tax revenue under the Lexington County School District Property Tax Relief Act, Act No. 378, 2004 S.C. Acts 3142, was sufficient to make the lease-purchase payments.