The General Assembly established the county-level Local Option Sales Tax in 1990, and in the years since, 32 of the state’s 46 counties have enacted it as a means of providing property tax relief. Municipalities in those counties receive a portion of LOST revenue, and it’s important for them to understand how this funding works and to keep up with the necessary calculations.
LOST is a 1% tax, approved by a county’s voters and applied to taxable sales in that county.
The SC Department of Revenue collects LOST revenue generated in participating counties and remits it to the State Treasurer’s Office. That office splits a county’s LOST collections into two accounts — the Property Tax Credit Fund and the County/Municipal Revenue Fund — and issues two checks accounting for the two funds each month to the county and its municipalities.
Municipal Property Tax Credit Fund allocations
The Property Tax Credit Fund allocation is the larger of the two, as the State Treasurer’s Office allocates 71% of LOST revenue to it. The county receives a check for 67% of the credit fund revenue, and the municipalities receive checks for a portion of the remaining amount of 33%, multiplied by their percentage of the county’s total municipal population.
Municipalities must use their Property Tax Credit Fund revenue in the fiscal year it is received to reduce their taxpayers’ property tax liability.
Municipal Revenue Fund allocations
The State Treasurer’s Office places 29% of countywide LOST revenue in the Revenue Fund, and also divides it into checks for the county and its municipalities. For those checks, 50% of the amount is based on the county or municipality’s population as a percent of the total county population, and 50% is based on the location of the sale.
State law allows municipal councils to use this revenue for general fund purposes. Council can choose to add a portion, or the entire amount, to its Property Tax Credit Fund to provide additional property tax relief.
Determining the tax credit factor and individual tax relief amounts
Because Property Tax Credit Fund revenue must be used for property tax relief, cities and towns receiving LOST funds are required to calculate an annual "tax credit factor" to determine the amount of relief granted on the tax bill. Accurately calculating the required tax credit is a critical part of the budget process for all municipalities in LOST counties.
There are several steps in the calculation:
- Determine the total amount of money to be credited against property tax bills. This amount must at least equal the total projected deposits in the city’s Property Tax Credit Fund plus any amount Council directed to be used from the Revenue Fund to grant additional property tax relief.
- After adding together the projected Property Tax Credit Fund revenue and accrued interest in the fund, add any additional Revenue Fund amount that the city wishes to credit to property tax. Next, divide this amount by the total appraised value of all taxable property in the city. This produces a six-digit figure that is the tax credit factor.
- The tax credit factor then needs to be translated into the dollar amount that will be credited against the municipal property taxes for a single parcel. To determine the figure, multiply the tax credit factor by the appraised value, or market value, of the individual property for tax purposes. This produces the credit to be deducted on the tax bill from the gross amount of taxes due.
Impacts of incorrect calculations
If calculated properly and economic conditions remain stable, a city's LOST revenues will typically remain steady from year to year. If the tax credit factor is miscalculated or economic conditions change, a city could find itself in one of two situations that underscore the importance of closely monitoring LOST revenue.
One scenario occurs when a city collects more LOST revenue than it provided in property tax relief.
When this occurs, state law requires the city to hold the additional revenue in an interest-bearing bank account. The next year, the city must add the surplus funds from the previous year, including interest into the tax credit factor calculation.
The other scenario occurs when a city collects less LOST revenues than it provided in property tax relief. This creates a revenue shortfall, which the city must absorb. State law does not address recouping unrealized revenues granted as a LOST credit.
Monitoring revenue
A good starting point for calculating the tax credit factor is to develop and maintain a spreadsheet logging historical Municipal Revenue Fund and Tax Credit Fund receipts and detailed records on the calculation of prior years' tax credit factors. In addition, confirming the county auditor's appraised value figures will ensure a more accurate tax credit factor calculation.
Doing so will help keep the city's revenue stream moving in the right direction and ensure city residents get the property tax relief mandated by state law.
The Handbook for Municipal Officials in South Carolina provides more information on restricted-use municipal revenues, including LOST as well as accommodations taxes, hospitality taxes, capital projects sales taxes and tax increment financing. Learn more online.