South Carolina adopts law addressing alternative apportionment

On March 11, 2024, South Carolina Gov. Henry McMaster signed Senate Bill 298, amending the state’s alternative apportionment statute. The primary objective of the amendment is to provide clear guidance as to when the South Carolina Department of Revenue may require a taxpayer to file a corporate income tax return on a combined reporting basis. Specifically, Senate Bill 298 provides guidance for when the department may 1) adjust a taxpayer’s net income based on a review of intercompany transactions and/or 2) require a taxpayer to file a combined return. The amendment identifies circumstances as to how and when the department must provide notice to a taxpayer regarding adjustments or forced combinations, and also sets forth protest procedures so a taxpayer can appeal the department’s decisions. The legislation was unanimously approved by both chambers of the state legislature and is effective immediately for all open tax periods, except for assessments currently under judicial review. 

South Carolina Code Section 12-6-2320(A) provides that if application of the statutory apportionment method did not fairly represent a taxpayer’s business activities in the state, the department could require, or the taxpayer could petition for, the use of an alternative apportionment method. There were no clear guidelines for circumstances in which the department could require the use of an alternative method and the statute also did not provide procedures for contesting the department’s decision to require the use of an alternative method. In practice, the department often relied on section 12-6-2320(A) to assert forced combination on taxpayers as opposed to separate company reporting that is the default filing methodology in the state.  

Senate Bill 298 amends section 12-6-2320(B) of the alternative apportionment statute to include general principles for when the department may require the use of an alternative apportionment method. While the department may continue to use alternative apportionment to make adjustments to taxpayers’ taxable income, the amended law provides standards for determining when such adjustments are appropriate, and also requires the department to meet a burden of proof in order to require an alternative apportionment method.

Intercompany transactions

The department may require additional information regarding intercompany transactions it believes do not have economic substance or are not at fair market value (FMV) to support that the taxpayer has accurately calculated business income attributable to South Carolina. Once the taxpayer provides the requested information, the department will analyze whether the intercompany transactions have economic substance under specific rules provided by the bill or are measured at FMV under IRC section 482. If the department concludes that the transactions lack economic substance or were not measured at FMV, it may require the taxpayer to add back or eliminate the transactions from the taxpayer’s South Carolina net income.

Forced combination

The department may require the taxpayer to file a combined return including its affiliated members to the extent it finds that adjustments to intercompany transactions are not sufficient to fairly represent the taxpayer’s activities in the state. The department can require the combined return even if the affiliated members do not have business connections to South Carolina. However, the taxpayer or the department may propose that only certain affiliated members be included with the consent of the taxpayer.

The statute explicitly excludes certain entities from the filing of a combined return, such as: 1) certain insurance companies; 2) taxpayers who do not file a federal return; 3) entities exempt under IRC section 501; 4) foreign taxpayers; 5) taxpayers who derive at least 80% of their gross income from foreign business income under IRC section 861(c)(1)(B); and 6) entities not taxable under section 12-6-530 (the state’s corporate income tax). Taxpayers and any affiliated members included in the combined return must apportion their state net income by use of an apportionment formula that fairly represents the extent of the taxpayer’s business activity in South Carolina.

Administration

The department must send written notice to the taxpayer when requesting information regarding intercompany transactions or determines a combined return is required. The taxpayer has 90 days from the date of the notice to provide the information or file the combined return. If the department ultimately makes an adjustment to net income or requires combined reporting under this subsection, it must provide a written statement, including facts and rationale, supporting its determination that  the taxpayer’s business activities were not accurately represented by use of the statutory method. The taxpayer may appeal the department’s determination to the South Carolina Administrative Law Court.

Senate Bill 298 is a significant change to the state’s alternative apportionment procedures providing both clearer guidance and transparency regarding the department’s ability to require a taxpayer to use an alternative apportionment method.

The amended statute is effective immediately to all open years, including taxpayers currently under audit or under the department’s appeal process. However, the law does not apply to assessments currently under judicial review by a South Carolina court.

South Carolina taxpayers with questions about this new law should consult with their state and local tax advisers.