Practice and Procedure: Proposed Business License Legislation in South Carolina Prompts Constitutionality Questions and Rewrites

Earlier this month, the South Carolina Office of the Attorney General weighed in on legislative efforts to standardize the business licensing process in state counties and municipalities, asserting in part, that “‘the taxing authority is not one which may simply be delegated away to a private entity.’”

H.B. 5109, cited as the South Carolina Business License Tax Standardization Act, was introduced in the South Carolina General Assembly during the 2015–2016 legislative session and referred to the Committee on Labor, Commerce and Industry. The bill proposes standardizing the business licensing process in municipalities and counties by assigning authority to determine business license tax rates and classes and administer such taxes to the Municipal Association of South Carolina (MASC) and the South Carolina Association of Counties (SCAC), respectively.

Specifically, the proposed legislation states that municipalities “must accept a standard business license application as established and provided by the [MASC].” The legislation further stipulates that municipalities “must adopt, by ordinance, the latest Standardized Business License Class Schedule as provided by the [MASC],” and must “determine and revise the Standardized Business License Class Schedule every even year using the business classification codes of the latest North American Industry Classification System.” The legislation proposes the same for counties, but the SCAC is the designated administrator.

Because these broad responsibilities would be assigned to a non-governmental organization, South Carolina Rep. Bill Sandifer (R) requested an opinion from the state’s Office of the Attorney General regarding whether “‘such delegation of taxing authority rise[s] to a level that it is no longer a purely ministerial act but rather a constitutionally suspect transfer of a sovereign function inherent to municipalities [.]’”

The attorney general’s opinion affirms that “the power to impose a business license tax may be and has been delegated to municipalities in South Carolina by the General Assembly” but also expresses strong reservations about the constitutionality of certain municipal powers being delegated to private organizations.

Specifically, the opinion expresses concern with language in H.B. 5109 that imposes “‘automatic’ adoption requirements” on municipalities based on MASC determinations, opining that such requirements are “likely to be challenged as an unlawful delegation of sovereign authority.” The opinion does specify, however, that any legislation enacted by the General Assembly “carr[ies] a strong presumption of constitutionality” and that “only a court may adjudge the validity of H. 5109” if passed as written.

Rep. Sandifer and others introduced H.B. 3650 on Feb. 2, prior to receiving the attorney general’s opinion on H.B. 5109. Also cited as the South Carolina Business License Tax Standardization Act, H.B. 3650 would instead assign the power to determine and revise the Standardized Business License Class Schedule and generally administer the business licensing process to the South Carolina Secretary of State. The bill would also create a Business License Class Schedule Board within the Office of the Secretary of State to work with the secretary to determine the business license class schedule. Two members of the board would be representatives of MASC and SCAC, respectively, but the remaining seven members would be government officials and business owners appointed by government officials.

H.B. 3650 received a favorable report, with amendments, from the Committee on Labor, Commerce and Industry and is scheduled for debate on March 1.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What are some of the hazards associated with states delegating significant tax-related powers to non-governmental organizations?

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