United States

South Carolina: State Supreme Court Addresses Inclusion of Receipts from Short-Term Investments

Feb 22, 2016
From KPMG TaxWatch

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Recently, the South Carolina Supreme Court addressed whether gross receipts from short-term investments could be included in the taxpayer’s sales factor. The taxpayer, a generator and seller of electricity, had a treasury department that regularly purchased and sold short-term securities. On its originally filed South Carolina corporate income tax returns, the taxpayer included only the interest and net gain from the sales of short term securities in its sales factor. The taxpayer subsequently filed amended returns including the total amounts from these transactions in the sales factor, including amounts that represented the recovery of principal. This reduced the taxpayer’s overall apportionment and resulted in refunds. After the Department denied the refunds, the South Carolina Administrative Law Court and Court of Appeals both ruled in the Department’s favor. The South Carolina Supreme Court subsequently granted review.

Under the South Carolina three-factor apportionment statute, the numerator of the sales factor includes the taxpayer’s total sales in South Carolina and the denominator includes its total sales everywhere. Although the appeals court had ruled that amounts representing the recovery of principal could not be included in the sales factor, the South Carolina Supreme Court disagreed with its analysis. Specifically, the appeals court focused on the term “receipts,” which is used in the single-sales factor statute applicable to certain taxpayers. However, the taxpayer was required to use the three-factor apportionment formula, which addresses “total sales.” Nevertheless, the court, agreeing with other state courts holding that principal recovered from the sale of short-term securities could not be included in the apportionment formula, ruled in favor of the Department once again. In the court’s view, including such amounts would lead to absurd results by distorting the sales factor and defeating the legislative intent of the apportionment statutes. The court also observed that a taxpayer could manipulate the sales factor by making a series of securities purchases using the same funds. Please contact Jeana Parker at 919-664-7143 with questions on Duke Energy v. South Carolina Dep’t of Revenue.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.