The South Carolina Court of Appeals held that the South Carolina Department of Revenue properly required a retailer and its subsidiaries to file on a combined basis. In 2001, the retailer was restructured to create two affiliated subsidiaries. One of the subsidiaries engaged in inventory procurement for the other entities. Only the parent retailer entity was a South Carolina taxpayer. In 2019, the Department concluded that the entities operated a unitary group and that their separate entity reporting and standard apportionment formula “did not fairly represent the extent of [the parent’s] business activity in South Carolina.” It ultimately concluded that combined unitary reporting was a “reasonable alternative apportionment method.” The Administrative Law Court subsequently found in favor of the Department.
On review, the South Carolina Court of Appeals first affirmed the ALC’s ruling that the standard apportionment formula did not fairly represent the entities’ South Carolina business activity. In contrast with the Carmax case (411 S.C. 79 (2014)), the court found that the Department had “presented substantial evidence supporting its use of an alternate formula.” The ALC had concluded that the entities used intercompany transactions to “artificially shift” the parent’s South Carolina income to a sister company. Plus, the ALC found convincing an expert that testified that the markup charged by the affiliate to the other entities for inventory procurement “did not meet the arm’s length standard and resulted in a distortion of [the parent’s] income.”
The court also affirmed that combined unitary reporting was a permissible alternative formula. The court rejected the taxpayer’s argument that the Department should have instead revised the markup percentage on its intercompany sales. The court concluded that the Department had discretion to choose the alternative apportionment method, so long as that method was reasonable.