Is the South Carolina Department of Revenue’s Administrative Interpretation of Tax Laws Entitled to Deference by the Courts?

Burr & Forman

Burr & Forman

In disputed tax cases in South Carolina, the South Carolina Department of Revenue (SCDOR, DOR, or Department) will often argue that our courts should defer to SCDOR’s own interpretation of the tax laws at issue in the case.  Whether SCDOR’s administrative views are entitled to any weight and, if so, to what extent, are for our courts to decide.  In the recent decision of Synovus Bank v. South Carolina Department of Revenue, Docket No. 17-ALJ-17-0418-CC, the South Carolina Administrative Law Court (SCALC or ALC) identified the standard under which SCDOR’s administrative interpretation will be entitled to deference in South Carolina tax cases – and when deference to the tax agency and its views will not be given.

The Synovus case has been proceeding through the SCALC for a number of years, and involved the issue of whether the bank could deduct net operating loss (NOL) carryforwards when computing its South Carolina bank tax liability. The ALC issued a Final Order in the case on April 17, 2020, and the bank then filed a motion for reconsideration on May 12, 2020.  The ALC withdrew its prior Final Order to address the issues raised in the bank’s motion for reconsideration.  The key issue raised in the bank’s motion for reconsideration was whether SCDOR’s interpretation of the South Carolina bank tax and related NOL carryforward rules was entitled to deference from the ALC.

In its response to the bank’s motion, SCDOR argued that the ALC may give deference to the Department’s position under either of two separate standards. The first is when the agency charged with administering a statute interprets a statute that is a silent or ambiguous. This facet for agency deference was addressed in Kiawah Development Partners, II v. South Carolina Department of Health & Environmental Control, 411 S.C. 16, 32-33, 766 S.E.2d 707, 717 (2014) (Kiawah). In Kiawah, the South Carolina Supreme Court held that if a statute or regulation “is silent or ambiguous with respect to the specific issue,” then the court must give deference to the agency’s interpretation of the statute or regulation, assuming the interpretation is worthy of deference.   The second standard can apply when the agency has taken a uniform position for many years so that it can be characterized as a long-standing interpretation of a statute or regulation. This was addressed most recently in Charleston County Assessor v. University Ventures, LLC, where the South Carolina Supreme Court noted “[w]e have previously ‘held in many cases that where the construction of the statute has been uniform for many years in administrative practice, and has been acquiesced in by the General Assembly for a long period of time, such construction is entitled to weight, and should not be overruled without cogent reasons.'” 427 S.C. 273, 289, 831 S.E.2d 412, 420 (2019) (quoting Etiwan Fertilizer Co. v. S.C. Tax Comm’n, 217 S.C. 354, 359, 60 S.E.2d 682, 684 (1950).

In Synovus, the ALC reviewed these decisions, and determined these holdings must not be treated as separate and unrelated principals but as part of an overall consideration of when it is appropriate to apply agency deference.  In the ALC’s view, the danger of separately applying an agency’s “long-standing interpretation” of an ambiguous statute or regulation is illustrated by both extremes of its application. On one hand, ignoring the requirement of a long-standing administrative interpretation would allow an agency to construe its statutes or regulations on a case-by-case basis and seek deference for that “mutable interpretation”. The ALC noted the fallacy of that viewpoint and which can be seen in the arguments in Harry v. South Carolina Department of Health and Environmental Control, 09-ALJ-07-0255-CC, 2010 WL 8425978 (July 15, 2010). In Harry, the agency sought deference for a new interpretation of its regulations by a staff member who had been with the agency for eight months even though the agency had interpreted the regulation contrary to that staff member’s interpretation for over fifteen years.  Thus, if there is no requirement that the interpretation be long-standing, an agency can simply espouse a view of the law in one case and a different view of the law in the next case and seek deference for both views no matter how short the timeframe. On the other hand, if the long-standing interpretation requirement is a separate principle, then an agency that has a long-standing interpretation of a statute/regulation could claim deference even though that interpretation is contrary to the plain meaning of the law.

As a result of its analysis, the ALC ruled in Synovus that SCDOR’s interpretation of the applicable provisions of the South Carolina bank tax and NOL carryforward provisions was not supported, and that the South Carolina Supreme Court’s holding in Kiawah, that deference is given to an agency’s interpretation of a silent or ambiguous statute “assuming the interpretation is worthy of deference”, provides the basis for the ALC to consider the entire doctrine before granting deference.

South Carolina taxpayers need to carefully review Synovus, and related prior decisions of the when faced with arguments from DOR in a case that DOR’s views must be respected – or not.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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