South Carolina ~ Corporate Income Tax: Department Had Burden of Proving Alternative Apportionment Formula Was Appropriate

The South Carolina Court of Appeals has determined that a party seeking to override the legislatively determined apportionment method must bear the burden of proving that the method is not appropriate and that an alternative method more accurately reflects the taxpayer’s business activity within South Carolina for corporate income tax purposes.

The lower court had determined that the taxpayer had the burden of proving that the Department of Revenue’s (DOR) alternative apportionment formula was not appropriate for apportioning the taxpayer’s corporate tax liability.

A significant element of the business structure involved was the payment of a royalty by one division of a retail operation to a different division and the mixing of that intangible income with the retail income earned by the latter entity for state tax reporting purposes. This payment provided a deduction to one division, reducing its overall tax burden in those states in which it operated, including South Carolina. The mixing of the royalty payments with retail income produced a significantly lower apportionment ratio than that of the taxpayer’s royalty income considered alone.

The DOR found that neither the standard formula nor the gross receipts formula fairly represented the extent of the taxpayer’s business in South Carolina. The department applied an alternative method to calculate the taxpayer’s taxable income in South Carolina.

The alternative apportionment formula divided the taxpayer’s income from royalties and financing receipts from within South Carolina by its royalties and financing receipts from everywhere it does business to determine its ratio of apportionable income taxable in South Carolina. This alternative method did not include the retail income earned by the taxpayer in other states.

The taxpayer appealed, arguing that the department should have the burden of proving that the standard statutory apportionment method did not accurately reflect the taxpayer’s business and that the alternative accounting method was reasonable.

The appellate court agreed with the taxpayer and noted that the DOR, as the proponent of an alternative apportionment method, was required to establish that its alternative method was not only appropriate, but more appropriate than any competing methods.

CarMax Auto Superstores West Coast, Inc. v. South Carolina Department of Revenue, South Carolina Court of Appeals, Opinion No. 4953, March 14, 2012


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