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Calculating the right LOST credit factor

​Since its creation more than 25 years ago, the Local Option Sales Tax has provided property tax relief to hundreds of thousands of South Carolina homeowners and has become a widely used revenue source for many local governments. Thirty-one of the state's 46 counties have enacted the sales tax.

LOST is a 1-percent levy approved by voters at the county level and applied to taxable sales in that county.

The South Carolina Department of Revenue collects LOST revenue generated in participating counties and remits it to the State Treasurer's Office. There, the total countywide LOST collections are split into two separate accounts: the Property Tax Credit Fund and the County/Municipal Revenue Fund.

The State Treasurer's Office issues two checks each month to the county and its municipalities. The larger of the two checks is the Property Tax Credit Fund allocation. The smaller check represents the Municipal Revenue Fund allocation.

The State Treasurer's Office allocates 71 percent of LOST revenue generated in the county to the Property Tax Credit Fund. The county receives a check for 67 percent of the credit fund revenue, and each municipality in the county receives a check based on the remaining revenue in the fund (33 percent of total) multiplied by their percentage of the county's total municipal population.

Each municipality must use its Property Tax Credit Fund revenue in the fiscal year it is received to reduce taxpayers' property tax liability.

The remaining 29 percent of the countywide LOST revenue collections is allocated by the State Treasurer's Office to the Revenue Fund. The State Treasurer's Office divides the revenue in this fund and issues checks to the county and its municipalities. The amount each receives is based 50 percent on the county or municipality's population as a percent of the total county population and 50 percent 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

Local Option cities must calculate an annual "tax credit factor" to determine the amount of mandated tax relief to be 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.

The first step involves determining the total amount of money to be credited against property tax bills. At a minimum, this amount must equal the total projected deposits in the city's Property Tax Credit Fund.

Second, the sum of the projected Property Tax Credit Fund revenue plus accrued interest in the fund plus the amount of any additional LOST revenue that city council may wish to be credited as property tax relief is the numerator. The amount is then divided by the total appraised value of all taxable property in the city (the denominator). The resulting six-digit figure is the tax credit factor.

The tax credit factor is then translated into the dollar amount that will be credited against the municipal property taxes for a single parcel. To determine the figure, the tax credit factor is multiplied by the appraised (market) value of the individual property for tax purposes. This credit is deducted on the tax bill from the gross amount of taxes due.

If calculated properly and economic conditions remain stable, a city's LOST revenues 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.

The first scenario occurs when a city collects more LOST revenues than it provided in property tax relief. State law requires the city hold the additional revenue in an interest-bearing bank account until the next fiscal year.

When calculating the next fiscal year's tax credit factor, the city must add the surplus funds from the prior year, which include the original overage plus accrued interest, to the total projected Property Tax Credit Fund collections and the amount of additional LOST revenue that city council may wish to be credited as property tax relief.

The second situation occurs when a city collects less LOST revenues than it provided in property tax relief. The city must absorb the shortfall. State law does not address recouping unrealized revenues granted as a LOST credit.

These two scenarios underscore the tremendous importance for city officials to monitor LOST revenue closely.

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.

Used together, these tips 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.