South Carolina issues draft nexus ruling
Provides extensive list of nexus creating activities
TAX ALERT |
UPDATE (8/1/2016): On July 27, 2016, the South Carolina Department of Revenue (DOR) issued Revenue Ruling #16-11, providing a ‘yes or no’ checklist of activities that create nexus for income tax purposes. The ruling states that each activity on its own is assumed to be the sole activity of the business and that the activities are not considered ‘de minimis’ unless specifically addressed by the question.
The final ruling’s nexus questions and decisions remains largely unchanged from the draft. Two of the questions in draft form included a specific threshold number of days or times that the activity would create nexus regarding consulting services and the rental of mobile property. Those thresholds were removed in the final version. Minor changes were made to DOR “notes” throughout the ruling and several decisions were removed entirely from the financial transactions category due to the nexus conclusions requiring a further analysis of the taxpayer’s facts.
Taxpayers should be aware that certain activities are afforded the protection of P.L. 86-272 for income tax purposes. Out-of-state taxpayers conducting any of the activities addressed by the ruling should review their nexus profile in the state.
ORIGINAL (5/12/2016): The South Carolina Department of Revenue has circulated for public comment a draft ruling regarding the department’s formal policy on what activities create nexus for income tax purposes.
The draft ruling, which is as of yet unnumbered, provides a ‘yes’ or ‘no’ checklist of activities that the state believes may be relevant in determining whether an out-of-state business has nexus with South Carolina for the purposes of imposing the state’s income tax. The ruling addresses activities in the following categories:
- General activities
- Registration with state agencies/departments
- Ownership/leasing of in-state property
- Ownership interest of in-state pass-through entities
- Licensing intangibles
- Employee activities–sales related
- Employee activities–non-sales related
- Activities of unrelated parties
- Distribution and delivery
- Financial activities/transactions
- Transactions with South Carolina printers
- Cloud computing or Software as a Service (SaaS) transactions
- Internet-based activities
Although many of the positions taken in the draft ruling follow long-standing South Carolina precedent and are not controversial, there are some positions that are aggressive and may not survive litigation. In particular, the department has taken the position that a passive, non-managing, limited liability interest in a flow-through entity that does business in the state is sufficient to establish nexus for the owner, which runs contrary to the trend in decisions in other state courts (see e.g., BIS LP, Inc., v. Director, Division of Taxation out of New Jersey). Additionally, the department has taken the position that financial institutions have nexus if they issue credit cards to in-state residents, purchase loans with in-state debtors on the secondary market, and foreclose on property located within the state. Lastly, the department has taken the position that a business’ sales of cloud computing services to in-state customers are sufficient to establish nexus if either the number of customers or the revenue derived therefrom is substantial.
Non-South Carolina businesses that have some activities within the state should review the draft ruling, determine its potential impact on their nexus profile, and consider submitting commentary to the department. Commentary is due by June 1, 2016, and a conference, if requested, will be held on June 7.