The South Carolina Administrative Law Court upheld a bank tax assessment that was based on adjustments made by the Department of Revenue to a taxpayer’s sales factor and tax base.  The taxpayer, a national bank, offered a range of banking and trust services, and generated income by providing residential mortgages and other loans, and issuing credit cards.

Regarding the sales factor, the taxpayer asserted that its mortgages and mortgage servicing activities constituted services and should be sourced pursuant to the rule governing receipts from the provision of a service.  The Court, however, determined that mortgages are intangible property, and that the receipts generated by the mortgages, including interest and fees, must be sourced using the rule applicable to intangibles, which looks to the location where the intangible is used.  The Court reasoned that a mortgage is used at the location of the real property, and that the location of the borrower is a “reasonable proxy.”  Thus, the Court held that payments on mortgages and other kinds of loans should be sourced to South Carolina when paid by a borrower located in South Carolina.  In addition, the Court held that the taxpayer’s sales of its South Carolina mortgages to government sponsored entities should be sourced to South Carolina because the “mortgages are tied to real estate in South Carolina.”

The Court also determined that the taxpayer’s receipts from credit cards, including interest, late fees and annual fees, constituted receipts from intangibles that should be sourced to South Carolina when the amounts are paid by cardholders in South Carolina.  With respect to the taxpayer’s interchange fees, i.e., fees paid by a merchant to facilitate the routing of a credit card transaction, the Court determined that the fees are from the provision of a service and must be sourced under the rule for services.  However, the Court held that, to the extent the taxpayer’s merchants are located in South Carolina, the primary income-producing activity related to the merchant interchange fees occurs in South Carolina, and that the associated receipts must be sourced to South Carolina.

Finally, regarding the tax base, the Court held that the taxpayer’s sale of stock in a credit card company, which the taxpayer had used in swap agreement transactions, “was connected to its business” and, therefore, that the gains from the sale of the stock were apportionable to South Carolina.

U.S. Bank National Association v. South Carolina Department of Revenue, No. 20-ALJ-17-0168-CC (S.C. Admin. Law Ct. June 25, 2024).