South Carolina Senate Bill 298 (the Act) was signed into law by Gov. Henry McMaster on March 11, 2024. The Act amends South Carolina Code Annotated Section 12-6-2320 and provides the procedural requirements for the application of alternative apportionment for entities with intercompany transactions that are either not at fair market value or lack economic substance.
Background
As a separate reporting state, South Carolina’s default requirement is for affiliated businesses to file separate entity returns.1 However, the South Carolina Administrative Law Court (the ALC) recently issued a decision in Tractor Supply Company v. South Carolina Department of Revenue, which allowed the South Carolina Department of Revenue (the Department) to impose the alternative apportionment rules under §12-6-2320(A)(4) to force a unitary business to use combined reporting.2 It is worth noting that Senate Bill 298 was introduced prior to the ALC issuing the decision in Tractor Supply Company. However, the Act provides timely guidance regarding the procedural requirements under which combined reporting can be required by the Department.
Department Information Requests & Findings
If the Department believes that the taxpayer’s trade or business is conducted in a way that the transactions are not representative of the taxpayer’s South Carolina business activity, the Act allows the Department to require that taxpayers provide information related to the fair market value or economic substance of intercompany transactions.3 Taxpayers are required to provide the requested information within 90 days.4
If the Department makes a finding that the taxpayer’s state net income does not accurately reflect the taxpayer’s business activity in South Carolina, then the Department may require one of two options under its alternative apportionment power:
(1) Adjust the taxpayer’s intercompany transactions to accurately determine the taxpayer’s net income, or
(2) If intercompany transactions adjustments cannot accurately reflect the taxpayer’s business activity in South Carolina, then the Department may require the taxpayer to file a combined return.5
The Department may use and must consider “any reasonable method proposed by the taxpayer” when making such adjustments.6
The Act also allows the Department and the taxpayer to agree on a different filing methodology to fairly represent the taxpayer’s South Carolina net income—even without a finding by the Department that the taxpayer’s intercompany transactions lack economic substance and/or are not at fair market value.7
Economic Purpose
One of the key determinations made by the Department under the Act is whether a transaction has economic purpose.8 The Act states that a transaction will be considered to have economic purpose if the transaction has a reasonable business purpose and economic effects and provides some color around both terms.9 Both reasonable business purpose and economic effects are considered apart from any state tax benefits unless the state tax benefits are consistent with legislative intent.10 A financial accounting benefit related to state income tax will not be considered a reasonable business purpose.11 Economic effects can be shown by the material business activity of the entities.12 In addition, centralized cash management is not evidence of a lack of economic substance.13
Combined Returns Under the Act
If a finding is made by the Department that the taxpayer must submit a combined return, the taxpayer has 90 days from the finding to submit the return.14 The combined return will not be considered a tax return or an agreement by the taxpayer regarding the correctness of a related assessment.15 Either the Department or the taxpayer can propose that only a portion of the unitary group be included in the combined return; however, the taxpayer must consent to any combination that excludes members of its unitary group.16 The members of the unitary group are not required to be doing business in South Carolina in order to be included in the combined return.17
Under the Act, an “affiliated group” is defined as two or more entities (corporate or noncorporate) owned (directly or indirectly) by a common owner or one of the other member entities.18 In addition, certain exempt taxpayers may not be included in the affiliated group.19
Adjustments, Penalties, & Appeals
The Department is required to provide a statement of findings if an adjustment or combined return is determined to be required under the statute.20 In addition, the Department must issue a proposed assessment or refund if an adjustment or combined return is required.21
Under the Act, penalties are limited to those imposed for the late filing of combined returns required by the statute.22
Taxpayers may appeal final determinations by the Department to the South Carolina ALC.23 Such appeals will be reviewed de novo as to whether (1) the taxpayer’s separate returns fairly represent the taxpayer’s South Carolina business activity, (2) the Department’s method of determining the taxpayer’s South Carolina net income is appropriate, and (3) if the Department required a combined return, whether other adjustments would have been adequate for redetermining South Carolina net income.24
Requests for Written Advice From the Department
Taxpayers can request written advice addressing the potential application of the combined return rules or adjustments under §12-6-2320(B) and the Department has 120 days to respond.25
Extensions of Time
Any time limit provided in § 12-6-2320(B) can be extended by agreement between the taxpayer and the Department.26
Effective Date
The amendments provided in the Act took effect March 11, 2024.27 The provisions of the Act apply to any tax periods not otherwise barred by the statute of limitations or under judicial review as of March 11, 2024.28
Observations & Impact
Following the decision in Tractor Supply Company, the Act provides needed clarity to South Carolina’s application of alternative apportionment to mandate combined filing. Taxpayers that are members of an affiliated group should be aware of the procedure for the application of mandatory combined filing provided by the Act and its potential application to any open tax periods. Taxpayers with intercompany transactions should consider updates to any transfer pricing studies and the underlying substance for those transactions.
If you have any questions or need assistance, please reach out to a professional at FORVIS.
- 1South Carolina Code Annotated § 12-6-50(15). See also South Carolina Code Annotated §12-6-5020. Note that South Carolina does allow affiliated businesses to file a post-apportioned nexus combined return or a pre-apportioned unitary combined return.
- 2No. 19-ALJ-17-0416-CC (South Carolina Administrative Law Court, Aug. 8, 2023). See also Tractor Supply Company v. South Carolina Department of Revenue, No. 19-ALJ-17-0416-CC (South Carolina Administrative Law Court, January 1, 2024) (Order Denying Section Motion for Reconsideration).
- 3South Carolina Senate Bill 298, Section 1 (Act No. 113) (amending South Carolina Code Annotated §12-6-2320(B)(1)).
- 4Id.
- 5S.C. Senate Bill 298, §1 (Act No. 113) (amending South Carolina Code Annotated §12-6-2320(B)(2)).
- 6Id.
- 7South Carolina Senate Bill 298, §1 (Act No. 113) (amending South Carolina Code Annotated §12-6-2320(B)(3)).
- 8South Carolina Senate Bill 298, §1 (Act No. 113) (codified at South Carolina Code Annotated §12-6-2320(B)(7)).
- 9Id.
- 10South Carolina Senate Bill 298, §1 (Act No. 113) (codified at South Carolina Code Annotated §12-6-2320(B)(7)(c)).
- 11South Carolina Senate Bill 298, §1 (Act No. 113) (codified at South Carolina Code Annotated §12-6-2320(B)(7)(e)).
- 12South Carolina Senate Bill 298, §1 (Act No. 113) (codified at South Carolina Code Annotated. §12-6-2320(B)(7)(b)).
- 13South Carolina Senate Bill 298, §1 (Act No. 113) (codified at South Carolina Code Annotated §12-6-2320(B)(7)(d)).
- 14South Carolina Senate Bill 298, §1 (Act No. 113) (amending South Carolina Code Annotated §12-6-2320(B)(4)).
- 15Id.
- 16Id.
- 17South Carolina Senate Bill 298, §1 (Act No. 113) (codified at South Carolina Code Annotated §12-6-2320(B)(6)).
- 18South Carolina Senate Bill 298, §1 (Act No. 113) (codified at South Carolina Code Annotated §12-6-2320(B)(10)).
- 19Id.
- 20South Carolina Senate Bill 298, §1 (Act No. 113) (codified at South Carolina Code Annotated §12-6-2320(B)(5)).
- 21South Carolina Senate Bill 298, §1 (Act No. 113) (codified at South Carolina Code Annotated §12-6-2320(B)(11)).
- 22South Carolina Senate Bill 298, §1 (Act No. 113) (codified at South Carolina Code Annotated §12-6-2320(B)(12)).
- 23South Carolina Senate Bill 298, §1 (Act No. 113) (codified at South Carolina Code Annotated §12-6-2320(B)(16)).
- 24Id.
- 25South Carolina Senate Bill 298, §1 (Act No. 113) (codified at South Carolina Code Annotated §12-6-2320(B)(13)).
- 26South Carolina Senate Bill 298, §1 (Act No. 113) (codified at South Carolina Code Annotated § 12-6-2320(B)(14)).
- 27S.C. Senate Bill 298, Section 2 (Act No. 113).
- 28Id.