Corporate Close-Up: Latest South Carolina Alternative Apportionment Case Leaves Taxpayers Searching for Clues

The South Carolina Department of Revenue failed to meet the burden of proof required to impose an alternative apportionment method, the South Carolina Court of Appeals ruled Oct. 26 in Rent-A-Center West, Inc. v. Dept. of Rev. While this case marks a victory for the taxpayer, it offers little guidance on when the imposition of an alternative apportionment method is warranted.

Relying on the decision in Carmax Auto Superstores West Coast, Inc. v. Dept. of Rev., the Court of Appeals overturned the administrative law court’s decision and held that the DOR failed to meet the burden of proof required for the imposition of an alternative apportionment method. Under Carmax, the party seeking to use an alternative apportionment method “bears the burden of proving 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.”

“[T]he burden is not met by simply showing the alternative method produces a higher South Carolina business activity than the statutory method,” Ray N. Stevens, Partner at Parker Poe Adams & Bernstein LLP, in Columbia, S.C., told Bloomberg BNA on Oct. 31. “That level of proof is insufficient,” he said.

Unfortunately, taxpayers hoping that Rent-A Center would shed more light on determining if the statutory method accurately represents in-state business activities are out of luck. In deciding Rent-A-Center, the court reasoned that the DOR presented the same level of evidence as it had in Carmax to support its contention that the statutory method did not fairly represent RAC West’s South Carolina business activities. Because the level of evidence was insufficient to meet the burden of proof in Carmax, it was likewise insufficient to meet the same burden of proof in Rent-A-Center. The court did not provide taxpayers with any additional guidance on when the use of an alternative apportionment formula is a proper representation of business activities in South Carolina.

“The problem is no real guidance tells us what factors properly measure the taxpayer’s business activities in South Carolina,” said Stevens. “In the absence of legislation, we’ll have to discover those factors on a case-by-case examination.”

Under Rent-A-Center, taxpayers and the DOR must continue to examine individual facts and circumstances to determine whether business activities in South Carolina are more accurately reflected using the standard apportionment formula or an alternative formula. Whether the party proposing an alternative apportionment method is able to meet the burden of proof remains unique to each determination.

Continue the discussion on LinkedIn: What factors should be considered when measuring a taxpayer’s business activities in a certain jurisdiction? Further, in choosing those factors, does it make a difference if the state relies upon a single apportionment factor based on sales?

For more information about state tax issues, sign up for a free trial on Bloomberg BNA’s Premier State Tax Library.