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SALT To Taste: Don't Put The Cart Before The Horse
Geoffrey J. Christian, James S. Helms
January 30, 2012
The oral arguments in CarMax Auto Superstore West Coast, Inc. v. South Carolina Dep’t of Revenue[1] before the South Carolina Court of Appeals were heard on January 26, 2012. While many issues such as sourcing of receipts, bifurcation of unitary activities, and alternative apportionment methods are seemingly at the heart of this case, the discussion which most interested the judges was “who bears the burden of proof?”
The Court asked both sides to initially spend a brief amount of time explaining how taxes were computed under their respective methods. However, the judges quickly turned to a line of questioning regarding which party bore the burden of proof in establishing the necessity to use an alternative apportionment method. While all parties involved acknowledged that the Administrative Law Court had determined that the party seeking a judiciary remedy bore the burden of proving that its apportionment method was reasonable (i.e., the taxpayer in this case), the judges sought clarification from both parties as to whether the Department of Revenue had unfettered authority to utilize an alternative apportionment method at its discretion, thereby automatically shifting the burden of proof to the taxpayer.
Counsel for the Department of Revenue stated that the Department has the authority to make a determination that an alternative method is necessary to clearly reflect income and, after such determination is made, the burden of proof falls to the taxpayer to prove that the Department’s method is unreasonable. It is the opinion of many that such a position skips the necessary statutory safeguards that must be met when a party seeks to use an alternative apportionment method. These safeguards include proving that the standard method does not reasonably reflect a taxpayer’s income attributable to such taxing jurisdiction and that the alternative method does. In the current case, the position put forth by the Department of Revenue and the decision of the Administrative Law Court fail to uphold these statutory safeguards. While not bound by decisions in other jurisdictions, the judges inquired as to whether any other decisions had applied the burden of proof standard to a party other than the one seeking to use the alternative apportionment method (i.e., the Department of Revenue in this case).[2] Both counsels agreed that no such decision existed.
As the audit activity in South Carolina increases and more assessments are being made on the basis of alternative apportionment (i.e., forced combinations and bifurcation of activities), one must not forget that the standard apportionment method carries a legislative presumption of reasonableness. Accordingly, any party seeking to deviate from such standard method must first prove it is unreasonable.
The Court of Appeals will now be faced with deciding whether the Administrative Law Court properly determined that the taxpayer, and not the Department of Revenue, bore the burden of proof. If the Court determines that the Administrative Law Court was incorrect in its conclusion, it will then need to decide whether the Department of Revenue met its burden of proof in the previous proceedings or whether further analysis is necessary. However, if the Department of Revenue is never called upon to prove that the standard legislative apportionment method does not reasonably reflect a taxpayer’s activities within South Carolina, then taxpayers will have no assurance of complying with the taxing statutes of South Carolina, thereby creating an environment of uncertainty.
If you have any questions regarding this article or the CarMax case, please contact Jimmy Helms at (864) 241-0598 or Geoff Christian at (864) 241-2009. Jimmy and Geoff were members of the multi-firm team which represented Media General, Inc. at both the Administrative Law Court[3] and South Carolina Supreme Court[4] levels and represent other taxpayers with similar East/West structures.
[1] Docket No. 18827 (Jan. 26, 2012).
[2] While other tax cases do agree that the party seeking the use of an alternative apportionment method must meet its burden of proof, those decisions do not agree as to what evidentiary standard should apply – “preponderance of the evidence” or “clear and convincing evidence.”
This publication is prepared by Dow Lohnes Price Tax Consulting Group LLC as an information source for clients and other interested parties. For further information on the matters addressed in this issue, please contact the professionals listed on our website. The content of this publication is general information and does not constitute tax or legal advice or create any sort of attorney-client relationship. Readers should not act upon information presented herein without professional tax and/or legal counsel, addressing the facts and circumstances specific to them. Pursuant to §10.35(B)(4) of IRS Circular 230 and State/Local Equivalents, this communication is not intended to be used, and cannot be used, by you for the purpose of avoiding any U.S. and/or state and local tax penalties that may be imposed on you.
