By Stephen Burroughs and Open Weaver Banks
The South Carolina Department of Revenue requested public comment on a draft Revenue Ruling and a draft Revenue Procedure that detail how it will prospectively apply alternative apportionment to multistate taxpayers. This represents the Department’s second attempt at drafting alternative apportionment guidance (previous coverage). The Ruling describes when and how the Department will use alternative apportionment while the Procedure provides specific steps a taxpayer must follow to apply for alternative apportionment. Noteworthy points from the draft guidance include:
- The Ruling quotes Carmax Auto Superstores for the requirement that the party invoking alternative apportionment must prove by a preponderance of the evidence that: “(1) the statutory formula does not fairly represent the taxpayer’s business activity in South Carolina and (2) its alternative accounting method is reasonable.”
- The Procedure requires a taxpayer petitioning for alternative apportionment to explain “why the alternative apportionment method will more fairly represent the taxpayer’s business activity in the State.” This language appears to be a holdover from the draft guidance that the Department abandoned in 2014, which was based on the portion of the Court of Appeals’ Carmax decision that was overturned by the Supreme Court in December 2014 (above).
- The Department will not limit its use of alternative apportionment to unique or nonrecurring factual situations.
- The Ruling provides a list of factors the Department will consider when determining whether the statutory formula fairly represents the business activity of a taxpayer that is part of a unitary group. Several of these factors relate to whether the taxpayer’s intercompany transactions are at arm’s length. The Ruling specifies that a taxpayer’s transfer pricing study will not be determinative of whether the statutory formula fairly represents its business activity in South Carolina.
- The Ruling also details the Department’s general unitary combined reporting methodology. The Department will apply the unitary business principle to its constitutional limits and generally employ a water’s edge reporting method. The Department will use the Finnigan method for calculating the group’s sales factor, and will treat a unitary group as a single taxpayer for purposes of sharing tax attributes within the group.
- If the Department’s alternative apportionment method results in a substantial understatement of tax, the Department will not: (1) extend the statute of limitations to six years; or (2) impose South Carolina’s 25% understatement penalty.
The Department will accept public comment on both the draft Ruling and the draft Procedure through May 14, 2015. While the Department’s draft guidance represents a good start in clarifying South Carolina’s future use of alternative apportionment, it also raises significant questions regarding its specific application and the Department’s authority for requiring it. S.C. Rev. Proc. #15-X (Draft – 4/21/2015); S.C. Rev. Rul. #15-X (Draft – 4/21/2015).