By Elizabeth Cha and Timothy Gustafson
On October 26, 2016, the South Carolina Court of Appeals reversed a lower court ruling and determined the Department of Revenue (Department) failed to satisfy its burden of showing that the statutory apportionment formula did not fairly represent Rent-A-Center West Inc.’s (RAC) business activities in South Carolina. This case had been stayed pending a final decision in the CarMax Auto Superstores West Coast Inc. v. Dept. of Revenue, 397 S.C. 604 (2014) (see our prior coverage here), in which the South Carolina Supreme Court applied a two-prong test whereby the Department must show 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 in order to apply alternative apportionment.
RAC did not own or operate any stores in South Carolina, and thus its South Carolina revenue arose solely from the licensing of RAC intellectual property (IP) to RAC-affiliated companies for use in their stores in South Carolina. Accordingly, the numerator of RAC’s single receipts factor apportionment formula was comprised of the South Carolina licensing receipts and the denominator included all of RAC’s nationwide revenue from its retail stores and licensing activities. The Department argued that including the retail sales in the denominator diluted the gross receipts ratio and invoked alternative apportionment. However, the Department’s auditor did not offer any specific evidence to support its argument that the standard apportionment method did not fairly represent RAC’s business activities in the state. The court concluded that the Department presented the same level of evidence in this case as it did in CarMax, which was insufficient to meet the Department’s burden on the issue of whether the statutory formula fairly represented RAC’s business activity in South Carolina. Rent-A-Center West Inc. v. South Carolina Department of Revenue, No. 2012-208608 (S. Ct. App. Oct. 26, 2016).