Orthofix v. South Carolina Department of Revenue
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Orthofix, Inc. and KCI USA, Inc., both Delaware corporations with principal places of business outside South Carolina, sold durable medical equipment (DME) in South Carolina and remitted the 6% sales tax without protest. However, they later requested refunds for the sales tax paid during certain periods, arguing that they should qualify for a sales tax exemption for DME paid for by Medicaid or Medicare funds. This exemption, however, was only available to sellers whose principal place of business was in South Carolina. The South Carolina Department of Revenue (DOR) denied the refund claims, stating that the companies did not meet the statutory requirements for the exemption.
The companies appealed the decisions within the DOR, arguing that the exemption's limitation to in-state businesses violated the dormant Commerce Clause of the U.S. Constitution. The DOR issued determinations finding that the companies were not entitled to a refund of sales tax paid for DME. The companies then filed actions in the circuit court challenging the constitutionality of the exemption under the dormant Commerce Clause. The circuit court granted summary judgment to each company, finding the exemption's discrimination against interstate commerce unconstitutional and severing the "principal place of business in South Carolina" requirement from the remainder of the exemption.
The South Carolina Supreme Court affirmed the circuit court's decision as modified. The court agreed that the exemption unconstitutionally discriminated against interstate commerce in violation of the dormant Commerce Clause and that the ordered refunds were appropriate. However, the court found that the companies had not satisfied their burden of proof to show the legislature would have passed the remainder of the exemption absent the unconstitutional language. Therefore, the court declined to sever only the offending language and instead declared the entire exemption void going forward. The court invited the legislature to reenact the exemption, excluding the unconstitutional limitation on a seller's principal place of business.
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