By Charles Capouet and Timothy Gustafson

The South Carolina Administrative Law Court found that South Carolina does not source sales of services with a strict cost of performance method. The taxpayer, a broadcasting corporation, provides access to digital television entertainment via satellite dishes across the United States, including South Carolina. On audit, the South Carolina Department of Revenue disallowed the taxpayer’s use of “inconsistent” sourcing methods, including the cost of performance method, and asserted that instead the taxpayer should have calculated its South Carolina income tax liability using a “gross receipts” apportionment method and sourced its receipts from South Carolina subscribers to the state. The court found that South Carolina does not use strict cost of performance sourcing because the language of the state’s apportionment statute differs from that of section 17 of the Uniform Division of Income for Tax Purposes Act (UDITPA) in two major respects: (1) the South Carolina legislature did not include the phrase “cost of performance” in the statute; and (2) the statute “does not include language indicating the sourcing of receipts to South Carolina is all-or-nothing based on whether ‘a greater portion of the income-producing activity is performed in this state than in any other state.’” Instead, the applicable statute attributes sales to South Carolina to the extent the income-producing activity is performed within the state. Dish DBS Corp. v. South Carolina Dep’t of Revenue, No. 14-ALJ-17-0285-CC (S.C. Admin. Ct. Feb. 10, 2015).