Ed Woltz’s business license tax appeal reveals inconsistencies and inequities.

by Don Moniak

June 10, 2023

A legal hearing on a business license tax appeal has revealed irregularities in the program that could result in overtaxing of some licensees, tax exemptions for landlords owning single properties, a higher tax burden on City of Aiken based businesses, and double taxation. Some of the implications could be state-wide.

The Appeal

As reported in Ed Woltz’s Business License Citation (1), the City of Aiken cited businessman Ed Woltz, who is also a City Councilman, in late November of 2021 for an undefined business license violation. It turns out the issue strictly pertained his rental properties, but the citation never made that distinction.

As a result of the citation, the city alleged that taxes were underpaid and overdue. A criminal proceeding ensued and, after two cancelled jury trials, the case was dismissed in late August of 2022 by City Solicitor Laura Jordan.

Subsequently, Mr. Woltz paid some of what the city claimed was owed, but appealed the city’s assessment (2), as allowed under Section 12-41 of the City business license ordinance (3). His wife, Dr. Holly Woltz, was added to the proceedings as a party due to co-ownership of some rental properties. Aiken attorney Clark McCants III, who had represented Mr. Woltz since the citation was issued, filed the appeal on their behalf.

In November 2022, Aiken City Council selected North Augusta attorney Kelly Zier to hear the case.

After several continuations, Mr. Zier heard the appeal on Thursday in Aiken City Council chambers. One conclusion in the Ed Woltz’s Business License Citation article was that this case could have implications for other business tax licensees in the City of Aiken. That conclusion may have been understated.

There was no dispute as to whether the Woltzes had underpaid (4) business license taxes for 3-5 years on their rental properties. By the end of the hearing, though, the two sides were still debating what the applicable total gross income to be taxed would be. That debate involved the exchange of papers and not testimony, as business license taxes are exempt from public disclosure, in large part to prevent access to the data by competitors.

The defendants, represented by attorney Clark McCants, largely focused on the loopholes, lack of direction, and inconsistent implementation of the City of Aiken’s business license ordinance (3)—particularly as it pertains to rental properties. The appeal cites three constitutional issues; taxation outside of authorized jurisdiction, denial of equal protection under the law, and a lack of specificity in a tax revenue code.

Since the business license tax ordinance adopted in March 2021 is a standardized, “model” ordinance created by the Municipal Assocation (MASC) of South Carolina, any irregularities and inequities in the ordinance have state-wide implications. Although influential and powerful, MASC is not accountable to the voting public.

During the hearing, the Defense highlighted several issues suggesting the MASC Model Ordinance needs improved directions and better glue. Among the numerous issues identified, three rose to the forefront:

1. Long time city policies appear to exist that have no basis in city law , and one of these policies incentivizes the use of Limited Liability Companys (LLC’S) to avoid having to pay business license taxes.
2. Businesses whose base of operations are based within the city likely bear a larger tax burden than businesses whose base of operations is outside of the city. This legal distinction also incentivizes county based business owners to avoid annexation.
3. The business license tax arguably creates a system of double taxation, especially for rental income.

City Policies vs City Ordinances

The only information in the ordinance pertaining to rental properties is the tax rate. The only guidance on how rental property income should be assessed and taxed is contained within the license requirement identified in Section 12-31 of the ordinance;

“Every person engaged or intending to engage in any business, calling, occupation, profession, or activity engaged in with the object of gain, benefit, or advantage, in whole or in part within the limits of the City of Aiken, South Carolina, is required to pay an annual license tax for the privilege of doing business and obtain a business license as herein provided.”

In spite of this clear requirement that any person seeking gain obtain a license, the City of Aiken has a long standing policy of exempting owners of a single rental property. There is no clear basis in the ordinance to justify the policy.

Mr. McCants asked city employees serving as witnesses for the basis of this policy. Their honest answer was that the policy dates back to the 1980’s.

McCants then went through several hypothetical situations of how this policy discriminates against owners of more than one rental. Most notable is the landlord who is only renting a single home in a high-end real estate district like the historic Winter Colony area. That landlord pays no business license tax, while landlords with two or more lower-end rentals do pay business license taxes.

The largest loophole was saved for last—LLC’s with single properties are treated as single property owners, no matter who owns the LLC. Therefore a landlord who has an LLC for each property can avoid paying any business license tax on rental income.

Given the ease in which LLC’s can be arranged into so-called shell companies, which can then be used to disguise ownership, the implications for determining whether a single property owner actually owns multiple properties is obvious.

At another point the single rental exemption discrepancy more stark, when an attorney representing the city read a policy from the city website instead of citing from the ordinance. The two did not match. At issue was a separate ordinance (5) mandating that owners of rental properties register them in the city (Section 10-13).

The rental registration policy read from the city’s website states, in part;

“Owners of two or more rental properties must provide their current business license number and contact information to us.”

The defense produced a hard copy of the ordinance to point out that there is no reference to the number of rental properties in the ordinance. The city’s policy on its website, which is more widely read and referenced, does not match the less-read ordinance.

The implications for lost revenues due to the single rental property exemption was also noted during the testimony. The only City Council member present to hear that implication was Ed Woltz.

The Tax Burden of City-based Businesses

Section 12-32 makes the following distinction between City residents and non-residents pertaining to gross income determinations:

‘If the licensee has a domicile within the Municipality, business done within the Municipality shall include all gross receipts or revenue received or accrued by such licensee. If the licensee does not have a domicile within the Municipality, business done within the Municipality shall include only gross receipts or revenue received or accrued within the Municipality.”

Domicile is defined as “a principal place from which the trade or business of a licensee is conducted, directed, or managed. For purposes of this ordinance, a licensee may be deemed to have more than one domicile.”

In the case of multiple property owners like the Woltzes whose domicile is in the city, this means that gross income from all properties outside the City of Aiken is taxable. The only exemption are properties subject to a business tax by another municipality or county.

This means that, in the case of city-based multiple rental property owners, rental income from anywhere in the country is subject to business license taxes. For the Woltzes, this means rental property income in places as different as Augusta and Colleton County is subject to taxation.

In contrast, landlords operating outside city limits only pay taxes on the gross income of city rental properties. This disincentives annexation into the city.

This discrepancy could apply to other businesses. For example, a building contractor based in the city may be required to pay taxes on work completed outside the city, whereas a contractor based in the county only pays on work completed in the city. However, this possibility was not specifically discussed.

Double Taxation

Section 12-36 allows for deductions from gross income only for income earned in other jurisdictions that require payment of business license taxes.

For landlords, this means money spent on improvement or maintenance work completed by contractors is not deductable for the purposes of business license tax. The landlord pays taxes on the money spent, and the contractor pays taxes on the money earned. A landlord who has a negative income one year due to maintenance or other issues pays a tax based on gross income, while the contractor(s) pay a tax on their gross income earned via the landlord’s loss.

The Future of the Model Business Ordinance and the Woltzes’ Business License Taxes.

Hearing Officer Kelly Ziers will ultimate decide how much, if any, the Woltzes still owe the city.

Less clear is how much authority he has to rule on the discrepancies between city policy and city ordinances.

Even less clear is how much authority he has to rule on the MASC business license ordinance that has been adopted by municipalities across the state.

During the hearing one of the City’s contracted attorneys suggested to Mr. Woltz that “you are on City Council, you can change the ordinance.’

But it takes four votes to approve, amend, or repeal an ordinance. As a City Councilman, Ed Woltz cast the sole vote against the adoption of the MASC model ordinance in March 2021, arguing there are too many confusing clauses in it.

Since Mr. Zier’s decision can be further appealed, Ed Woltz the businessman may have the opportunity to challenge the legal validity and constitutionality of business license ordinance via the judicial system after having failed in a legislative objection as a member of City Council.

Given the facts that business license tax revenues are a third of all city revenues, , the implications of this appeal are substantial for the revenue stream of municipalities across South Carolina and the businesses that provide the revenues.

(Update. Mr. Zier ruled on behalf of the City of Aiken).

Footnotes

(1) https://aikenchronicles.com/2022/11/01/ed-woltzs-business-license-citation/

(2) The Appeal is on Pages 26-28 of the file of related records at;

https://drive.google.com/file/d/1orjlOMTrqI83KwNzxJ4_lNpapblx3OA8/view

(3)The business license ordinance can be found at;

https://library.municode.com/sc/aiken/codes/code_of_ordinances?nodeId=CICO_CH12BU

(4) The other issue that arose is that Ed Woltz the businessman went to City Manager Stuart Bedenbaugh for guidance on the business tax issue as early as 2019, because ‘he is the man in charge.’ Woltz testified under oath that he was seeking guidance and not intervention because Mr. Bedenbaugh “is the man in charge.”

Woltz testified that Mr. Bedenbaugh did not respond for a year, and when he did it was to say the City Attorney had advised him against any involvement. Since neither Mr. Bedenbaugh nor City Attorney Gary Smith were called to testify during the hearing, that issue is only added as a footnote here.

(5) Section 10.13 of Aiken’s Municipal Code can be found at

https://library.municode.com/sc/aiken/codes/code_of_ordinances?nodeId=CICO_CH10BUBURE_S10-13RE

The website policy that is not law can be found at
https://www.cityofaikensc.gov/doing-business-in-the-city/doing-business-in-the-city-of-aiken-rental-property-registration/