May 30, 2016
From KPMG TaxWatch
Recently, a South Carolina Administrative Law Court addressed whether a Colorado-headquartered satellite television service provider’s receipts from providing television programming to South Carolina subscribers were included in the South Carolina sales factor numerator. The taxpayer originally filed its returns including only a portion of receipts from South Carolina customers in the numerator of the gross receipts factor. On audit, the Department included 100 percent of the taxpayer’s receipts from South Carolina subscribers in the gross receipts factor numerator. The taxpayer protested this adjustment and the matter went before the Administrative Law Court.
Before the court, the taxpayer and the Department disagreed over South Carolina’s methodology for sourcing service receipts. For the tax years at issue, service providers were required to source their gross receipts to South Carolina if the entire income producing activity occurred in the state. If the income-producing activity occurred both within and without South Carolina then receipts were apportioned to South Carolina to the extent that the income-producing activity occurred in the state. The taxpayer argued that service receipts should be sourced using a pro-rata “costs of performance method” whereby receipts were apportioned to South Carolina to the extent that the income-producing activities occurred in the state, based on costs of performance. The Department asserted that service receipts should be sourced to where a business' income-producing activity occurred without necessarily relying on costs of performance factors. The court concluded that South Carolina was not a strict costs of performance state or a pro-rata costs of performance state because the sourcing statute did not refer to costs of performance as a means of measuring the taxpayer’s income-producing activities. Rather, the court determined that “South Carolina's apportionment statute provides a flexible standard based upon the income-producing activity for a given industry.”
The court next addressed the Department’s position that the only income-producing activity associated with the taxpayer’s South Carolina receipts was the delivery of a signal into a subscriber’s home and onto his or her television screen. The taxpayer, however, asserted that it had eight different income-producing activities, including (1) the acquisition of programming/content; (2) the operation of satellites and uplink centers; (3) advertising; (4) providing subscriber equipment; (5) installation of equipment; (6) in-home repair; (7) the operation of call centers; and (8) general and administrative activities. After dismissing the advertising activities for lack of evidence as to how they contributed to South Carolina revenues, the court concluded that all the other activities were “preparatory” activities. While these activities were necessary for the taxpayer to ultimately broadcast its signal, none of these activities, in the court’s view, were sufficient to be categorized as income producing. After concluding that 100 percent of the taxpayer’s receipts from sales to South Carolina customers should be included in the receipts factor numerator, the court upheld the Department’s assessment of substantial understatement penalties. Please contact Jeana Parker at 919-664-7143 with questions on Dish DBS Corp. 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.