By Dmitrii Gabrielov and Tim Gustafson
The South Carolina Court of Appeals held that all of DIRECTV’s South Carolina customer subscription receipts were properly sourced to the state for purposes of determining DIRECTV’s corporate income tax apportionment factor due to the location of its satellite signal delivery. South Carolina’s apportionment statute requires a taxpayer to source sales of services based on where the taxpayer performs “the income-producing activity.” DIRECTV argued that it generated income through content development, sales and marketing, broadcast operations, and customer service, which were activities it performed primarily outside of South Carolina. The Court of Appeals rejected this argument and found that DIRECTV’s sole income-producing activity related to its South Carolina customer subscription receipts was the delivery of its satellite signal to those customers. The Court of Appeals distinguished a prior decision, Lockwood Greene Eng’rs, Inc., in which it held that an engineering firm must source its receipts based on the engineers’ “place of activity.” The Court of Appeals acknowledged that DIRECTV employs highly-trained engineers and other employees to develop the company’s technology and obtain content, but found that DIRECTV’s customers purchase the end result of the employees’ work, which is the satellite signal delivery. In effect, the Court of Appeals reached a market-based result without explicitly applying a market-based sourcing methodology. DIRECTV, Inc. v. S.C. Dep’t of Revenue, No. 2015-001509 (S.C. Ct. App. Aug. 30, 2017).