Multi-state Taxpayers in South Carolina, Take Note

by Nexsen Pruet, PLLC
Contact

[authors: Rick Reames & Jim Rourke] 

Businesses operating as multi-state taxpayers in South Carolina should take note of a recent ruling by the state’s Court of Appeals.

In CarMax Auto Superstores West Coast, Inc. v. South Carolina Department of Revenue, Op. No. 4953 (filed March 14, 2012), the court reversed an Administrative Law Court (“ALC”) decision. The appeals court ruled that a party seeking to use an alternative apportionment method must show by a preponderance of the evidence that both (1)  the statutory apportionment method is improper and (2)  the alternative method more accurately reflects the taxpayer’s business activity within the state.

During the period of time in question, CarMax, Inc. operated as a holding company with two subsidiaries: CarMax West and CarMax East.  CarMax West owned substantially all of the businesses’ intellectual property.  In 2004, CarMax reorganized its corporate structure to include CarMax Business Services (“CBS”) as a disregarded entity owned by both subsidiaries.  CBS was created to house the business’s financing operations, to provide shared services to CarMax East and CarMax West, and to shift ownership of intellectual property outside the state.  CBS charged both entities a per-vehicle management services fee, which included an IP royalty component. 

CarMax West filed corporate income tax returns from 2002-2007 using the standard apportionment formula for multi-state taxpayers under S.C. Code Ann, § 12-6-2250 (repealed for years after 2010), which calculates taxable income using a ratio of the taxpayer’s total property, payroll and sales. After audit, the Department determined that the taxpayer’s returns did not fairly reflect the extent of its business activity in South Carolina.  It then modified the apportionment formula used by CarMax West and issued an assessment for $829,490.  This alternative formula bifurcated CarMax’s business operations by separating royalty and financing income from income attributable to retail sales; it then calculated CarMax West’s income based only on the elevated royalty and financing income ratio.  In response, CarMax West filed amended returns using the gross receipts method.  In upholding its determination, the Department concluded that neither the standard formula nor the gross receipts formula fairly represented the extent of CarMax West’s business in South Carolina.

In an order dated April 22, 2010, the ALC upheld the Department’s use of an alternative apportionment method.  It found that because the taxpayer requested the contested case hearing to challenge the proposed assessment, the taxpayer bore the burden of proof.  The ALC concluded that the Department’s alternative method was reasonable and did not violate constitutional limitations.

Citing at least five cases in accord from other jurisdictions, CarMax West argued in its appeal that the ALC should have placed the burden of proof on the party seeking to deviate from the standard apportionment method to show by clear and convincing evidence why the standard method should not be used and why the alternative method is reasonable.  The Department argued that the case law cited was non-binding and that the “clear and convincing” standard of proof was unfounded in both statute and South Carolina Supreme Court jurisprudence. 

Reversing and remanding the ALC decision, the Court of Appeals found that although the “clear and convincing” standard was unsupported by either South Carolina authority or legislative intent, the Department should bear the burden of “proving its alternative accounting method is reasonable and more fairly represents [the taxpayer]’s business activity in South Carolina” by a preponderance of the evidence.

The court relied on both case law and legislative intent.  It noted that in Media General Communications, Inc. v. South Carolina Department of Revenue, 388 S.C. 138, 694 S.E.2d 525 (2010), a case where it was undisputed that the taxpayer’s alternative method fairly measured its business activity in South Carolina, the Supreme Court upheld the taxpayer’s alternative method because the Department had failed to establish that another method would be more appropriate.  According to the Court of Appeals, when determining the appropriateness of an alternative apportionment method, the Media General decision compels a finding not only that the alternative method chosen is appropriate, but also that it is more appropriate than any competing methods.

Additionally, the court noted that it was only logical that a party seeking to override a “legislatively determined apportionment method” should bear the burden of proving both that the legislative apportionment method is improper and that the alternative method “more accurately reflects the taxpayer’s business activity within the state.”  Thus, the court of appeals reversed the ALC and remanded for a reconsideration of all the issues.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Nexsen Pruet, PLLC | Attorney Advertising

Written by:

Nexsen Pruet, PLLC
Contact
more
less

Nexsen Pruet, PLLC on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!