TRAC Recommends Nixing SCRA’s Sales Tax Exemption

November 10, 2011

Investigative Reports

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The NerveThe S.C. Research Authority, a state-created and state-controlled technology and real estate company, is adept at spreading its tentacles farther and deeper into South Carolina’s economy.

For a change, however, a proposal with legislative roots would cut off one of the SCRA’s tentacles that give the Research Authority an advantage over its private-sector competitors.

The proposal calls for eliminating a sales tax exemption the SCRA enjoys.

The suggestion was made by the S.C. Taxation Realignment Commission, a special panel the General Assembly created to recommend state tax reforms.

“It just seemed out of balance to us,” commission Chairman Burnie Maybank says of the Research Authority’s sales tax break. A member of the Columbia law firm Nexsen Pruet, Maybank also served two stints as director of the S.C. Department of Revenue.

“We saw no reason to give the SCRA a sales tax exemption,” he says. “After all, state government pays sales taxes.”

Indeed, as do local governments.

If, for example, the S.C. Department of Education buys replacement parts for the state school bus fleet, or a city with a municipal water system purchases pipes for the utility, the agency and the city would pay sales tax on those transactions.

By contrast, the Research Authority – a state entity without question – pays no sales tax on its transactions.

The SCRA also is exempt from income and property taxes.

Chartered under legislation in 1983, the Research Authority was created by the Legislature and then-Gov. Richard Riley to “promote the development of high technology industries and research facilities in South Carolina,” that legislation says.

In essence, the SCRA is a state entity that behaves like a private company. The Research Authority mainly chases federal contracts, mostly in the defense arena, working to apply scientific and technological discoveries in laboratories to commercial uses.

The SCRA takes home a pretty penny for its efforts – in the neighborhood of $180 million in gross revenue last fiscal year, Research Authority CEO Bill Mahoney estimated to a legislative committee in June.

Among its hooks in the Palmetto State’s economy, the SCRA operates three Innovation Centers that work in conjunction with the University of South Carolina, Clemson University and the Medical University of South Carolina.

The Research Authority also controls SC Launch, which is a venture capital program funded by $6 million per year in contributions from corporations and other parties. The contributions are good for a dollar-for-dollar credit against state taxes.

The Research Authority’s tax breaks are granted in the legislation that established the SCRA, Title 13, Chapter 17 of the S.C. Code of Laws, and there are a few restrictions regarding the sales levy.

One of those limits the exemption to transactions related to Research Authority contracts with companies doing business in South Carolina, “where these contracts do not place these entities in competition with other private, for-profit entities” operating in the state.

So how does the SCRA avoid contracting with companies conducting business in South Carolina in a way that does not cause them to compete with other commercial enterprises?

Mahoney did not respond to questions along those lines emailed to him Tuesday and a phone message that day alerting him to the inquiry.

The questions included how the SCRA uses its sales tax exemption; how the break benefits the Research Authority; and how much the SCRA saves as a result of it.

The Nerve also asked Mahoney for his reaction to the Taxation Realignment Commission’s recommendation that lawmakers nix the Research Authority’s sales tax exemption.

The panel, known as TRAC, included the suggestion on page 85 of a 240-page final report the commission issued in December 2010.

The Legislature created TRAC to take a hard look at most of the state tax code and come up with ways to modernize and overhaul it. But, rather than carefully considering the commission’s report, lawmakers consigned it to a cul-de-sac where ideas are lured and then quietly strangled.

“The General Assembly never acted on the report,” TRAC Chairman Maybank says.

One legislator with a measure of SCRA oversight puts it another way.

“So far the General Assembly hasn’t had the guts to do anything about the tax structure, which we all know is not balanced,” says Rep. Jim Battle, D-Marion.

Battle is a member of the Ways and Means Committee, which oversees tax issues and controls appropriations and the budget process in the House. One level below that, he serves on a subcommittee with jurisdiction over the Research Authority.

Battle says he has not seen TRAC’s recommendation to repeal the SCRA’s sales tax break. But he says he has a lot of respect for Maybank when it comes to such matters. “And Burnie is probably right (about this),” the lawmaker says.

Reach Ward at (803) 254-4411 or eric@thenerve.org.