United States

South Carolina: Department of Revenue Did Not Prove Alternative Apportionment Was Required

Oct 31, 2016
From KPMG TaxWatch

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The South Carolina Court of Appeals recently addressed whether, in light of the South Carolina Supreme Court’s holding in the CarMax case, a taxpayer was required use an alternative apportionment formula. Under South Carolina law, an alternative apportionment method can be applied if the standard apportionment method does not fairly reflect a taxpayer’s income. The taxpayer at issue, a retailer whose retail stores were primarily in Western area states, derived royalties from licensing intangible property to an affiliate operating retail stores in South Carolina.  Following an audit, the Department applied an alternative method that excluded the taxpayer’s retail receipts attributed to its western retail operations from its apportionment factor. Thus, the Department’s proposed alternative method was based solely on the taxpayer’s royalty receipts. After the Administrative Law Commission held that the standard statutory apportionment formula did not fairly represent the taxpayer’s business activities in South Carolina, the taxpayer appealed.

Under South Carolina law, the proponent of an alternative formula bears the burden of proving by a preponderance of the evidence that: (1) the statutory formula does not fairly represent the taxpayer's business activity in South Carolina and (2) its alternative accounting method is reasonable. Applying this rule, the court held that the Department failed to prove the first prong of the test. Notably, in the court’s view, the Department applied the same level of evidence in this case as in CarMax, and, as in CarMax, the evidence presented was insufficient. Notably, the auditor did not point to any specific evidence that the standard apportionment method did not fairly represent the taxpayer’s business activities. In addition, the court seemed to find the taxpayer’s expert convincing, as he had made the point that the taxpayer’s apportionment worked as it should for a taxpayer that was primarily engaged in retail operations, but that also earned a smaller amount of revenues from licensing intangibles. Having determined that the Department did not meet its burden, the court declined to address whether the Department’s alternative method was reasonable. Please contact Jeana Parker at 919-664-7143 with questions on Rent-A-Center West, Inc. 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.