State attempts to apply alternative apportionment formulas
Many state statutes grant administrative authority to departments of revenue to apply alternative apportionment formulas on taxpayers if it is determined that the standard formula does not fairly represent the taxpayer's activities in the state. The application of alternative formulas is most often seen in state audits and other controversy matters and can result in a substantially different tax liability
Taxpayers need to be aware of state attempts to apply alternative methods of apportionment to tax more income and be prepared to challenge the state in cases where an alternative method is used. In a recent case related to alternative state apportionment methods, the South Carolina Court of Appeals reversed and remanded a lower court's decision that a taxpayer had the burden of proving that an alternative apportionment method applied by the South Carolina Department of Revenue was unreasonable.
The Court of Appeals found that the lower court erred in finding that the taxpayer had the burden of proving the SCDOR's alternate apportionment method was not reasonable.The SCDOR must satisfy two burdens in asserting an alternative apportionment formula: (1) that the statutory apportionment method did not fairly represent the taxpayer's business activities in the state and (2) that the SCDOR's proposed alternative apportionment method is more reasonable than any competing method.The lower court's decision was reversed, and the matter was remanded for reconsideration of all issues.
Matt Arnold, manager, Raleigh, N.C.
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