By Brandon McCafferty, JD/MBA, State and Local Tax Senior Manager
All taxpayers selling durable medical equipment (“DME”) within South Carolina must now collect and remit sales tax to the South Carolina Department of Revenue (“SCDOR”). The sales tax exemption previously available to some DME sellers was held unconstitutional under the dormant Commerce Clause by the South Carolina Supreme Court on June 26, 2024.
Overview of the Ruling
South Carolina provided an exemption for DME on the condition that it be purchased by funds directly from either Medicaid or Medicare and that it be sold by a retailer whose principal place of business was in South Carolina. DME includes items such as nebulizers, canes, wheelchairs, hospital beds, walkers, and CPAP machines.
Orthofix, Inc. and KCI USA, Inc., two sellers of DME located outside South Carolina, filed an action in circuit court challenging the constitutionality of the exemption. Specifically, they argued that the exemption violated the dormant Commerce Clause because it discriminated against interstate commerce by treating out-of-state retailers differently than in-state retailers. The circuit court agreed and granted summary judgment to the DME retailers.
However, the circuit court held that the portion of the exemption that ran afoul of the Constitution (the principal place of business be in South Carolina), could be severed from the statute, thereby leaving the remaining exemption intact. The SCDOR then appealed the decision to the South Carolina Supreme Court (“Court”).
Dormant Commerce Clause Explained
The Commerce Clause grants Congress the power to regulate interstate commerce which implies that states have a limited authority to regulate in that area. That implied limitation is commonly referred to as the dormant Commerce Clause.
A state law that favors in-state businesses and burdens out-of-state businesses is improper economic protectionism if it either has a discriminatory effect or a discriminatory purpose. The Court found that the South Carolina law that limited the DME exemption to in-state sellers had both a discriminatory effect and purpose.
The Court went further and held that the offending language could not be severed from the statute because “there is nothing in the legislative history of the DME exemption to suggest one way or the other whether the legislature would have passed the exemption absent the unconstitutional language”. Accordingly, they found the entire DME exemption to be invalid.
Current Status
On July 1, 2024, the SCDOR released Information Letter #24-10 notifying DME sellers that they are required to collect and remit sales tax on their sales of DME as of June 26. Further, the SCDOR informed those DME sellers who are paid partially or fully by Medicaid or Medicare that they must remit sales tax on those DME sales regardless of whether Medicaid or Medicare will reimburse the tax.
What’s Next?
The Court correctly held that the exemption improperly benefitted in-state DME sellers. The result is that both taxpayers and DME retailers are negatively affected. In the future, the South Carolina legislature may attempt to correct the exemption language, but for now the sale of durable medical equipment in South Carolina is taxable.
Please contact Brandon at bmccafferty@hancockaskew.com or 813.739.5355 if you have questions.
Orthofix, Inc. v. Dep’t of Rev., App. No. 2023-000317 (S.C. June 26, 2024)
KCI USA, Inc. v. Dep’t of Rev., App. No. 2023-000318 (S.C. June 26, 2024)
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