I. Ad Valorem Taxation

• Library: Practical Guide to Commercial Real Estate in South Carolina (SCBar) (2024 Ed.)

I. Ad Valorem Taxation

A. Imposition

The Constitution of the State of South Carolina, 1895, as amended, provides in Article X, Section 1 that "The General Assembly may provide for the ad valorem taxation by the State or any of its subdivisions of all real and personal property."²

The Constitution further provides that real and personal property be classified into four categories: manufacturer's property (including mining and utilities), residential property (legal residence and not more than five acres), agricultural property, and all other property (generally commercial property).

Each category of property is taxed based on "an assessment" of the property's fair market value. Manufacturer's property is taxed on an assessment equal to 10.5% of the fair market value of the property; commercial property is taxed on an assessment equal to 6% of the fair market value of the property and a taxpayer's legal residence and agricultural real property is taxed on an assessment of 4% of fair market value.³

The tax is computed by multiplying the assessed value of the property by the millage set annually by the County. By way of example, if a principal residence in Richland County has a value of $500,000 and the millage rate set by Richland County is 493.10 per 1,000, the ad valorem tax would be computed in the following manner ($500,000 x 4% x .4931 = $9,862).

B. Classification

1. Manufacturing

The Code is relatively silent as to what constitutes manufacturing or utility property. It simply provides that "all real and personal property owned by or leased to manufacturers and utilities and used by the manufacturer or utility in the conduct of the business must be taxed on an assessment equal to ten and one-half percent of the fair market value of the property."⁴ The Code carves out of the definition of "manufacturer property" real property owned by or leased to a manufacturer and: (i) "used primarily for research and development;"⁵ (ii) used primarily as an office building if the office building is not located on the premises of or contiguous to the plant site of the manufacturer;⁶ (iii) used primarily for warehousing and wholesale distribution if the facility is not physically attached to the manufacturing plant unless the warehousing and wholesale distribution area is separated by a permanent wall.⁷

2. Legal Residence

A taxpayer's legal residence and not more than five acres of property contiguous thereto is assessed at the 4% assessment ratio. The legal residence must be: (i) owned by the taxpayer in part, in fee, or by life estate; and (ii) occupied by the owner.⁸ Additional dwelling units located on the same property and occupied by immediate family members of the owner also qualify as part of the legal residence. Additionally, (i) if the legal residence is held in trust and the income beneficiary of the trust occupies the property as a residence⁹ or, (ii) if the property is owned by a single member LLC and that member occupies the property as his/her principal residence, the property qualifies as the taxpayer's legal residence.¹⁰

A residence will not qualify as a legal residence for assessment purposes unless the residence is determined to be the domicile of the owner occupant.¹¹ The Department of Revenue and the County Assessor take the position that a taxpayer can only have one principal residence and if that principal residence is the taxpayer's domicile that the taxpayer file income tax returns in this state as a resident. In determining "domicile," County Assessors will often make inquiries as to the filing of tax returns in this state. To further ensure compliance, a taxpayer must now certify that "neither I, nor any member of my household, claim to be a legal resident of a jurisdiction other than South Carolina for any purpose; and that neither I, nor a member of my household, claim the special assessment ratio allowed by this section on another residence."¹² This provision will effectively stop each spouse from claiming a principal residence. (For example: One spouse claiming a principal residence in South Carolina and one spouse claiming a residence in New York, or a spouse claiming a beach house as his/her residence and the other spouse claiming a different house as his/her principal residence.). This language is also designed to stop the practice of parents buying a college condominium (and placing it in the child's name) while the child is going to college and claiming the 4% assessment ratio on the condominium.

To qualify a property as a taxpayer's principal residence, the owner must apply with the County Assessor's office for the exemption.¹³ The application must be filed with the County Assessor's office before the first penalty date for taxes due (usually January 15^th). If a taxpayer acquires a residence from another taxpayer whose property has qualified for the 4% assessment ratio, the purchaser will be entitled to the 4% assessment ratio (and the exemption from property taxes levied for school operation)¹⁴ for the remainder of the year.¹⁵

3. Agricultural Property

Agricultural property enjoys both a 4% assessment ratio and a special valuation feature.¹⁶

Agricultural real property is defined as "any tract of real property which is used to raise, harvest, or store crops, feed, breed or manage livestock, or to produce plants, trees, fowl or animals useful to man, including the preparation of the products raised thereon for man's use and disposed of by marketing or other means. It includes, but is not limited to, such real property used for agriculture, grazing, horticulture, forestry, dairying and mariculture."¹⁷ If the property is used to grow timber, it must be five acres or more or contiguous to or under the same management system as a tract of timberland which meets the minimum acreage requirement, or is owned in combination with other tracts of non-timberland agricultural real property that qualifies as agricultural real property.¹⁸

Tracts not used to grow timber must be ten acres or more unless such tract is contiguous to other non-timber agricultural tracts which when added together meet the ten-acre requirement to qualify as agricultural property. Non-timberland tracts of less than ten acres may qualify as agricultural property if the owner earned at least $1,000 of gross farm income in at least three of the first five years of operations. If the owner fails to meet the three out of five years income requirement, the property will not be considered agricultural property and will be subject to the roll back tax discussed below. Property idle pursuant to a state or federal land retirement program such as a federal or state retirement program or as an "accepted agricultural practice" is treated as agricultural property if it would otherwise qualify as agricultural property. Similarly, unimproved real property subject to a perpetual conservation easement will be treated as agricultural property, if the property would otherwise qualify as agricultural property. (This is a curious provision in that upon analysis it says nothing. It is sometimes read as saying that if a conservation easement is placed on property, it will be taxed as agricultural property, and while that may have been the intent of the legislature, that is not what the statute says.)

To qualify for the Agricultural Use Assessment (often called the Agricultural Use Exemption), a taxpayer must file an application¹⁹ with the Assessor's office on or before the first penalty date for taxes due (usually January 15^th).²⁰ Once the filing has been accepted, no additional filing is required. The Agricultural Use Assessment is limited to individuals, partnerships (including limited liability companies), and corporations which do not have more than ten shareholders, have as a shareholder a person (other than an estate) who is not an individual, have a nonresident alien as a shareholder, or has more than one class of stock.²¹ Agricultural property owned by a corporation which fails to meet the test outlined above is assessed at the 6% assessment ratio.²²

Great care should be taken in preserving and protecting the agricultural use exemption. Farmland otherwise qualifying for the agricultural use exemption has lost the exemption when the landowner built a house or other nonagricultural improvements on the property, constructed a dock on the property that was used for personal rather than agricultural purposes or failed to farm idle crop land.²³

If the Agricultural Use Exemption is lost, roll back taxes are imposed. The roll back tax is equal to the difference between the taxes paid with the property assessed as agricultural use property and the tax that would have been paid if the property were valued and assessed as commercial property for the current tax year and each of the five immediately preceding years. Roll back taxes are due and payable if the use of the property changes. It should be noted that the value used to compute the roll back tax is the assessed value of the property without the agricultural use exemption. As noted further in this chapter, property owners in a reassessment year must timely file an objection to the reassessment amount. Most taxpayers do not bother to challenge the value established in a reassessment because the agricultural use value is so much lower than the reassessed "Fair Market Value." This strategy works fine until the property is no longer used for agricultural purposes. At that time, the taxpayer realizes that the value established by the Assessor in the last (and perhaps prior) reassessment year is going to be the value used by the Assessor for roll back tax purposes and since the taxpayer failed to appeal the value during the reassessment year, he is stuck with that value for roll back tax purposes. Accordingly, taxpayers with agricultural property should carefully review reassessment notices and appeal, if appropriate, the "Fair Market Value" established by the reassessment even though the

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