South Carolina Issues Draft Revenue Ruling And Procedure On Alternative Apportionment Methods Including Unitary Reporting

The South Carolina Department of Revenue has issued a draft revenue ruling and revenue procedure relating to alternative apportionment that may have significant application to taxpayers. The draft ruling outlines the Department's position with respect to alternative apportionment methods which may be requested by the taxpayer or required by the Department, and specifically discusses the applicability of unitary reporting as a method of alternative apportionment.1 The draft procedure details the steps necessary for a taxpayer seeking approval for an alternative apportionment method to submit an application with the Department.2

Draft Revenue Ruling #15-x

South Carolina has historically utilized separate entity reporting, requiring a taxpayer to compute and apportion its income to the state separately for each legal entity within an organizational structure.3 When either the taxpayer or the Department believes the statutory reporting method does not fairly represent the income earned in the state, the taxpayer may request, or the department may require, the use of a reasonable alternative apportionment method.4 In the ruling, the Department describes the subjectivity related to the determination as to whether a proposed alternative method is reasonable. There is no bright-line test for determining whether the statutory method is fair. The petitioning party must identify by a preponderance of the evidence the facts which cause the statutory method to be unfair. The petitioner must then propose a reasonable method that corrects the issue.

The draft ruling also describes the applicability of combined unitary reporting as an alternative method of apportioning income to the state. In Media General Communications, Inc. v. South Carolina Dept. of Revenue,5 the South Carolina Supreme Court held that the combined unitary reporting method is an appropriate method of alternative apportionment. The Department has required or approved alternative apportionment in situations involving purchasing companies, management companies and "east-west" organizational structures. Of note in the draft ruling, the Department indicates that transfer pricing studies supporting charges between related entities is not determinative of fair and representative apportionment.

The Department indicated in the draft that it will generally utilize a water's edge approach in determining the includable income of group members, including: domestic corporations, domestic...