Statutory Apportionment and Burdens of Proof: CarMax West

In March, the Court of Appeals of South Carolina decided an interesting case involving a corporation's use of South Carolina's statutory standard apportionment formula in calculating the corporation's taxable state income. [See CarMax Auto Superstores West Coast, Inc. v. S.C. Dep't of Revenue, 2012 S.C. App. LEXIS 66 (S.C. Ct. App. Mar. 14, 2012)]. In the case, CarMax Auto Superstores West Coast ("CarMax West"), the large used car and truck retailer, had used the state's standard apportionment formula for multi-state taxpayers in S.C. Code Ann. § 12-6-2250 (2000)* in preparing the corporation's income tax returns for 2002 to 2007. As noted by the court, the standard apportionment formula "calculates a taxpayer's taxable income in South Carolina by computing a ratio of the taxpayer's total property, payroll, and sales." [2012 S.C. App. LEXIS 66]. 

After an audit, the Department of Revenue adjusted the formula used by CarMax West and issued a proposed assessment. The Department subsequently upheld the proposed assessment, finding that neither the standard formula nor the gross receipts formula fairly represented the extent of CarMax West's business in the state, and applied an alternative method to calculate CarMax West's taxable state income. CarMax West then filed amended tax returns, using the gross receipts method to calculate its income taxable in South Carolina. Upon appeal, the Administrative Law Court upheld the Department's use of the alternate method. CarMax West appealed the Administrative Law Court's decision, raising five issues. The Court of Appeals reversed and held that the Administrative Law Court had erred in finding that CarMax West had the burden of proving that the Department's alternative accounting method was not reasonable.

The court noted that there were two burdens of proof that had to be met in the case. The court stated that the first burden was the burden of proving that the gross receipts formula did not fairly represent CarMax West's business activity in the state. The court noted that both the Department and CarMax agreed that the Department bore this burden. The court stated that the second burden was the Department's burden of proving that its alternative accounting method was reasonable and more fairly represented CarMax's business activity in the state.

Citing the rule of Media Gen. Communs., Inc. v. S.C. Dep't of Revenue, 388 S.C. 138, 146 (S.C. 2010), the court held that "the Department, as the proponent of an alternative apportionment method, must establish that its alternative method is not only appropriate, but more appropriate than any competing methods." [2012 S.C. App. LEXIS 66]

The court further found that although the statutes did not provide a standard of proof, they "evidence[d] intent by the General Assembly to require proponents of alternate apportionment methods to prove their method fairly represents the extent of the taxpayer's business activity in South Carolina". The court concluded that it was "only logical that a party seeking to override the legislatively determined apportionment method bears the burden of proving that method is not appropriate and an alternative method more accurately reflects the taxpayer's business activity within the state." [2012 S.C. App. LEXIS 66]

The court, however, rejected CarMax West's argument that the standard of proof was clear and convincing evidence. CarMax had cited to several out-of-state decisions in arguing for the clear and convincing evidence standard. The court noted that CarMax West did not cite to any South Carolina authority in support of that argument, and the court found that the statutes did not indicate a legislative intent to apply the clear and convincing standard. The court concluded that the proper standard of proof to be applied was the preponderance of the evidence and remanded the case for reconsideration of all the issues.

In addition to the South Carolina State Chamber of Commerce, the Council on State Taxation filed amicus curiae briefs in the appeal, and beyond the impact of the decision in South Carolina, the decision provides an interesting look at some of the arguments and issues raised in cases involving statutory apportionment methods established by states and the burdens of proof in these cases.

*Note that S.C. Code Ann. § 12-6-2250 was repealed for tax years after 2010 by the South Carolina Legislature in 2007 S.C. Acts 110, Section 55.D and 2007 S.C. Acts 116, Section 60.D. The change from the statutory apportionment method in S.C. Code Ann. § 12-6-2250 to the single sales factor apportionment method was phased-in for years 2007 to 2010, and for 2011 and following tax years, the single sales factor apportionment method outlined in S.C. Code Ann. § 12-6-2252 applies. [See South Carolina Revenue Ruling #09-15, available at the South Carolina Department of Revenue's website at http://www.sctax.org/NR/rdonlyres/8F954396-54E2-4C1B-B182-C3E59F1FC847/0/RR0915.pdf]. S.C. Code Ann. § 12-6-2252(A) provides that a taxpayer whose principal business in South Carolina is (1) manufacturing or a form of collecting, buying, assembling, or processing goods and materials within South Carolina, or (2) selling, distributing, or dealing in tangible personal property within South Carolina, is to make returns and pay annually an income tax that includes its income apportioned to South Carolina. S.C. Code Ann. § 12-6-2252(A) provides further that the taxpayer's income apportioned to South Carolina is determined by multiplying the net income remaining after allocation pursuant to S.C. Code Ann. § 12-6-2220 and S.C. Code Ann. § 12-6-2230 by the sales factor defined in S.C. Code Ann. § 12-6-2280S.C. Code Ann. § 12-6-2252(B) provides that if a sales factor does not exist, the remaining net income is apportioned to the business's principal place of business.

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RELATED LINKS: For the Court of Appeals' full opinion in the case, please see:

For additional analysis of state corporate taxation principles in general, please see:

For additional analysis of state taxation issues in South Carolina, please see:

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