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The South Carolina Court of Appeals has upheld an assessment of more than $8.5 million against DirecTV in income taxes, fees, and penalties, as well as a previous levy that the company sought to reduce by almost $6 million.
In its Aug. 30 ruling, the state appeals court sided with the South Carolina Department of Revenue and an administrative law judge in finding that the California-based satellite television company’s income-producing activity was the delivery of its signal to customers ( DIRECTV Inc. v S.C. Dep’t of Revenue , S.C. Ct. App., No. Op. 5513, 8/30/17 ).
In challenging the assessment, the company argued that its income was primarily derived from content development, marketing, broadcast operations, and customer service, which should result in a different approach to apportioning its income for tax purposes.
“This is a case of first impression,” said Burnet R. Maybank III, an attorney with Nexsen Pruet LLC in Columbia, S.C., who also served as the South Carolina Department of Revenue director from 1995-99 and 2003-05. He , told Bloomberg BNA Aug. 30 that the ruling is important as it sets South Carolina’s approach to sourcing income from non-personal service providers. State law is silent on the issue.
Twenty-one states have a statute that specifies that income from television or satellite producers is apportioned based on where the market or audience is, Maybank said. The South Carolina ruling also is unique in that it is the first appellate-level ruling “that held we are a market- or audience-based state without a statute,” he said.
The 1987 South Carolina Supreme Court ruling in Lockwood Greene Eng’rs Inc. established that income from personal service providers such as doctors, lawyers, engineers, and accountants is allocated based on a cost-of-performance method, a determination that is essentially opposite from the DirecTV ruling covering nonpersonal services providers, Maybank said.
The “winners” in the ruling are domestic South Carolina nonpersonal service providers whose customers are in other states, Maybank told Bloomberg BNA. Those companies won’t have to pay South Carolina income tax earned from customers residing outside the state, he said.
Maybank told Bloomberg BNA that he “is not a disinterested party” as he is representing Dish Network Corp. in a similar income sourcing method that is before the state appeals court. The DirecTV ruling “is not helpful to us,” he said, but added certain different arguments were made in the two cases.
At issue in the recent ruling are South Carolina tax returns submitted by DirecTV for the 2006-11 tax years.
For the 2006-08 tax years, DirecTV initially sourced all of its subscription and rental receipts from South Carolina subscribers to the numerator of the gross receipts ratio. That approach resulted in about 2 percent of the company’s net income being apportioned to South Carolina.
However, DirecTV subsequently filed amended corporate income tax returns removing the sourcing of customer subscription receipts to the state. As a result, the revenue apportioned to South Carolina dropped significantly.
“The originally filed return incorrectly apportioned satellite television subscription receipts to South Carolina using market-based sourcing, rather than the cost of performance sourcing that is prescribed by statute,” the company said in filing its amended returns. The state DOR rejected the change, through which DirecTV had sought to reduce its tax and license fee liability by about $5.98 million for tax years 2006-08.
An administrative law judge upheld the DOR’s determination and held DirecTV liable for about $6.65 million in tax and license fees, $653,425 in interest, and almost $1.25 million in penalties stemming from its 2009-11 returns in which it had used the reduced sourcing approach. The company sought judicial review.
Upon its consideration, the South Carolina Court of Appeals found that DirecTV’s income-producing activity was the delivery of the signal to its customers and DOR and the administrative law judge was correct in determining the larger tax assessment. The court also affirmed the assessment of underpayment penalties in the case.
“We are in the process of reviewing the decision and considering our options,” a spokesman for AT&T told Bloomberg BNA in an Aug. 30 email. DirecTV was acquired by AT&T in 2015.
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Text of the ruling is at http://src.bna.com/r6X.
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