South Carolina ~ Corporate Income Tax: DOR Did Not Meet Burden to Require Alternative Apportionment Formula

CCH Tax Day Report

The South Carolina Supreme Court reversed an administrative law court (ALC) decision and held that the standard statutory corporate income tax apportionment formula fairly represented the taxpayer’s business activities in South Carolina and that the Department of Revenue (DOR) failed to establish that an alternative method of apportionment was necessary. The taxpayer owned and licensed its parent company’s intellectual property, including the trademarks and trade names, but did not operate any retail stores in South Carolina. The royalty payments for the use of the intellectual property by the South Carolina stores were the taxpayer’s only activity in South Carolina.

The taxpayer filed its corporate income tax returns for 2003, 2004, and 2005 using the standard statutory three-factor apportionment formula. The DOR audited the 2003-2005 initial tax returns and determined that the standard apportionment formula did not fairly represent the taxpayer’s activity in South Carolina. The DOR applied an alternative apportionment method which resulted in the taxpayer owing additional corporate income tax, interest and penalties. The ALC agreed with the DOR. The taxpayer appealed, arguing that the DOR’s alternative apportionment method for calculating its income tax was unreasonable and did not fairly represent its business activities in South Carolina.

The Supreme Court noted that in this case, the burden was on the DOR to show the statutory formula did not fairly represent the taxpayer’s business activity in South Carolina because the DOR was the party seeking to deviate from the standard statutory formula. The court concluded that the DOR failed to meet its burden. The DOR auditor was not able to point to any specific evidence that the standard apportionment method did not fairly represent the taxpayer’s business activities.

Because the DOR failed to meet its burden in proving the threshold issue of whether the statutory formula fairly represented the taxpayer’s business activities in the state, the court did not need to decide whether the ALC erred in finding the DOR’s alternative method was reasonable. The ALC’s decision was reversed.

Rent-A-Center West Inc. v. South Carolina Department of Revenue, South Carolina Supreme Court, No. 5447, October 26, 2016, ¶400-834

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