United States: 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 international sales corporations (DISCs), export trade corporations, controlled foreign corporations (CFCs) and any affiliated member earning more than 20 percent of its income from intangible property or services which are deducted from the income of other group members. The water's edge method of reporting is common by default or election in most unitary reporting states, though the Department's conception of the water's edge group is relatively broad. However, it is possible to utilize a group other than water's edge when agreed by both parties.

The Department intends to apply a Finnigan approach in computing the South Carolina sales factor.6 Under this approach, the numerator will include South Carolina sourced revenue for all members of the group, regardless of whether each member has nexus. The Department will then allocate the apportioned income among those group members with nexus in South Carolina based upon each member's relative share of the cumulative South Carolina revenue.

Credits and net operating loss carryforwards may be shared among members of the unitary group. Eligibility for and calculation of credit amounts will be determined at the separate entity level. However, the utilization of a credit is allowed against the group's South Carolina income. When the unitary group generates a net loss for the year, the loss will be allocated to each group member based on each separate loss relative to the total of the separate losses of the group for that year.

The statute of limitations in South Carolina is generally 36 months but may be extended to 72 months for substantial understatement (20 percent or more) of the total tax required to be shown on a return.7 The Department generally will not apply the 72-month statute when alternative apportionment is required as the result of an audit. However, the Department will apply the 72-month statute when the taxpayer failed to utilize an alternative method previously agreed to by the Department which results in a substantial understatement. Additionally, the Department will not apply the 25 percent substantial understatement penalty8 when an alternative apportionment method is required for a previously filed tax year through audit or settlement. The Department will apply the penalty when a taxpayer fails to utilize a previously agreed upon method without permission by the Department to change methods and the result is a substantial understatement.

Draft Revenue Procedure #15-x

The Department's draft revenue procedure describes the application process and requirements for a taxpayer seeking approval for an alternative apportionment method.9 The Department requires that applicants address sixteen specific questions, including providing details regarding similar requests by the taxpayer in other jurisdictions and a projection of South Carolina tax liabilities for the current and three future years under both the statutory and proposed methods.

Taxpayers must continue to utilize the statutory or previously agreed alternative method until written approval for a new method is received. The procedure stipulates that approval of an alternative method is applicable only to the periods stipulated in the agreement and amended returns for prior periods not covered by the agreement will not be allowed.

The taxpayer and Department may mutually agree to terminate the alternative apportionment agreement. If the Department believes that the agreed upon alternative no longer fairly apportions income to the state or that the statutory formula more fairly represents South Carolina income, the Department may revoke permission. Taxpayers under an alternative method must notify the Department of all material changes in facts and must receive permission in order to change to the statutory method or any other alternative method. Should the taxpayer disagree with the Department's determination, the taxpayer may appeal in accordance with the procedures established for a proposed assessment.


The issue of alternative apportionment has received considerable attention in recent years in several southeast states including Mississippi, South Carolina and Tennessee.10 The South Carolina Department of Revenue has been utilizing unitary reporting and other forms of alternative apportionment through the audit process for several years and appears to be memorializing their policies. With the short turnaround between issuance of these drafts and the end of the public comment period that expired on May 14, the documents could become final in the near future.

There are several interesting items to note regarding the draft ruling and procedure. First, the identification of specific transactions and the disregard of transfer pricing studies appear targeted, and somewhat contradictory. The Department provides several examples of facts that may indicate unfair apportionment including non-arm's length terms of related-party transactions, yet the presence of transfer pricing typically intended to create arm's length terms in related-party transactions is not determinative.

Second, the application of Finnigan reporting and the Department's overarching view that a unitary group may be treated in the absence of legislation as a single taxpayer in a historic separate filing state, is a dramatic departure from the historic posture of the state. While the utilization of credits and loss attributes is computed with the view that a unitary group is a single taxpayer, the generation and carryforward of the attributes still adopts a separate entity view. Further, the state also allows elective post-apportioned consolidated reports under current law which more closely resembles a Joyce approach, and allows the sharing of attributes among the elective consolidated group members.

Third, the Department has provided some relief in not applying the 72-month statute of limitations when application of an alternative method resulted in substantial underpayments, an approach that had previously been applied in several audits. The Department will also waive the 25 percent understatement penalty, which had generally not been applied through audit, provided the taxpayer has adhered to the statutory method or a previously agreed upon alternative if applicable. Taxpayers should also be aware of changes in facts such as changes to organizational structure, acquisitions, divestitures or changes in business models which may require notification and open the door for the Department to terminate an existing agreement.

Lastly, there are several procedural issues which may raise some eyebrows among taxpayers and practitioners. Taxpayers must model the tax benefit or detriment anticipated for the current and three preceding years in their application which may serve to remove any estimation by the Department and reduce the decision to simple economics. The Department also seeks to preclude taxpayers from applying an agreed-upon alternative method retroactively to periods prior to the agreement, although the language in the statute allows a taxpayer to petition for a reasonable alternative whenever the statutory method is not fairly representative. The presence of a prospective filing agreement should not impact the taxpayer's statutory ability to seek proper apportionment with respect to previously filed years still in statute. Finally, while the taxpayer and the Department may mutually agree to terminate the agreement at any time, the Department may unilaterally terminate the agreement in certain circumstances.


1 S.C. Rev. Rul. #15-x, April 21, 2015.

2 S.C. Rev. Proc. #15-x, April 21, 2015.

3 See S.C. CODE ANN. §§ 12-6-2252; 12-6-2290.

4 S.C. CODE ANN. § 12-6-2320(A).

5 694 S.E. 2d 525 (S.C. 2010).

6 The Joyce and Finnigan methods are named after cases decided by the California Board of Equalization. Appeal of Joyce Inc., No. 66-SBE-069, California Board of Equalization, Nov. 23, 1966; Appeal of Finnigan, No. 88-SBE-022, California Board of Equalization, Aug. 28, 1988. California has used both approaches in the past, but currently is using the Finnigan method.

7 S.C. CODE ANN. § 12-54-85(A), (C)(3).

8 S.C. CODE ANN. § 12-54-155.

9 See S.C. CODE ANN. § 12-6-2320(A).

10 See Equifax, Inc. v. Mississippi Department of Revenue, 125 So. 3d 36 (Miss. 2013); CarMax Auto Superstores West Coast, Inc. v. South Carolina Department of Revenue, 767 S.E.2d 195 (S.C. 2014); Vodafone Americas Holdings, Inc. v. Roberts, Tennessee Court of Appeals, No. M2013-00947-COA-R3-CV, June 23, 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions