By Zachary Atkins and Prentiss Willson

The South Carolina Department of Revenue issued a draft revenue ruling that purports to clarify the use of alternative apportionment and combined reporting for corporate income tax purposes. Citing Carmax Auto Superstores West Coast, Inc. v. South Carolina Dep’t of Revenue, 397 S.C. 604, 725 S.E.2d 711 (Ct. App. 2012), cert. granted, (S.C. Aug. 29, 2013), the draft ruling provides that the party invoking alternative apportionment under S.C. Code Ann. § 12-6-2320(A) bears the burden of proving that the standard apportionment method does not fairly represent the taxpayer’s business activity in the state. Surprisingly, the draft ruling fails to mention the additional burden imposed on the party invoking alternative apportionment. As the South Carolina Court of Appeals held in Carmax, the party seeking to use an alternative apportionment method also must prove that its method is reasonable and more fairly represents the taxpayer’s business activity in the state. The draft ruling also explains that the Department may use forced unitary combined reporting as an alternative method of apportionment: “Situations in which the Department has determined that an integral function of the core business operations is performed in separate, but related, corporations requiring a combined unitary filing include the use of purchasing companies, management fee companies, and ‘east/west’ companies.” In such situations, the Department generally will follow a “water’s edge” approach and apply the Finnigan method for apportioning income. Comments and suggestions concerning the draft revenue ruling should be submitted to the Department’s Policy Section by March 21, 2014, and can be e-mailed to the Policy Section here. A public conference has been scheduled for March 26, 2014, at the Department’s Columbia office. The public conference will be held only if it is requested by March 21, 2014. South Carolina Dep’t of Revenue, Rev. Rul. 14-STAFF DRAFT (Feb. 28, 2014).