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March 11, 2024

South Carolina law creates parameters for Department's use of combined reporting as an alternative apportionment method

The South Carolina Department of Revenue will have clear parameters for requiring corporate taxpayers to employ combined reporting as an alternative apportionment method under legislation (SB 298) signed by the governor on March 11. The law takes immediate effect and applies to all open tax periods, except assessments currently under judicial review.1


Under current South Carolina Code Section 12-6-2320(A), the Department may require, or a taxpayer can petition for, the use of an alternative apportionment method if either believes the statutory method does not fairly represent business activities in the state when the standard allocation and apportionment provisions do not. Available alternative apportionment methods in South Carolina include: (1) separate accounting, (2) exclusion of one or more of the apportionment factors; (3) inclusion of one or more additional apportionment factors; or (4) employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income.

SB 298 amends the previous law by adding parameters for when the Department may require a taxpayer to file a combined return, when the Department must provide notice, and how taxpayers may appeal the Department's means of determining state net income.

Combined returns

SB 298 adds new South Carolina Code Section 12-6-2320(B), which lays out the circumstances under which the Department may require a taxpayer to file a combined return. Under the new subsection, the Department can, through written notice, require taxpayers to furnish information needed to accurately compute income attributable to their South Carolina business activities if the Department has reason to believe those activities were not accurately represented due to certain intercompany transactions. Taxpayers must respond within 90 days of the date on the notice requesting the information.

If, after reviewing the taxpayer's information, the Department determines the intercompany transactions lack economic substance or are not at fair market value (FMV), it may add back, eliminate, or adjust the intercompany transactions, or if these adjustments are insufficient, require the taxpayer to file a combined return with all members of its affiliated group comprising a unitary business. SB 298 requires the Department to consider the facts of each tax year separately.

SB 298 also requires the Department to consider, and authorizes it to use, any reasonable income redetermination method the taxpayer proposes. The Department can also agree to a taxpayer's proposed alternative filing method when it has reason to believe a separate return does not fairly represent the taxpayer's income from its South Carolina business activities due to intercompany transactions. In this instance, the Department does not have to find that the transaction lacked economic substance or was not at FMV.

If the Department determines adjustments to intercompany transactions are inadequate and a combined return is required, it can require a taxpayer to file a combined return within 90 days of the date on a written notice requesting the return.2 Either party can propose combining fewer than all members of a unitary group, but the Department cannot require that outcome without the taxpayer's consent. The Department can, however, require a combined return regardless of whether the affiliated group members do business in South Carolina.

Taxpayers and affiliated group members required to file a combined return must apportion their combined state net income using the apportionment formula that fairly represents the extent of their business activity in the State and fairly reflects the statutorily applicable apportionment formula.3

SB 298 excludes the following entities from a taxpayer's combined return: (1) insurance companies, other than captive insurance companies, subject to certain taxes; (2) taxpayers not required to file a federal income tax return; (3) entities exempt from tax under IRC Section 501; (4) foreign taxpayers (other than a domestic branch); (5) taxpayers that derive at least 80% of their gross income for the tax year from active foreign business income under the version of IRC Section 861(c)(1)(B) in effect as of July 1, 2021; and (6) entities not subject to tax under S.C. Code Section 12-6-530.

Economic substance, business purposes, FMV

A transaction has economic substance under South Carolina law if it, or the series of transactions of which it is part, has one or more reasonable business purposes other than state income tax benefits, and has economic effects beyond the creation of state income tax benefits. In other words, the transaction must have significant benefits apart from state income tax benefits. This can be satisfied by demonstrating the significant business activities of the entities involved in the transaction.

In addition, the following rules apply in determining economic substance or business purpose:

  • State income tax benefits that result from the transaction and are consistent with legislative intent must be considered in determining whether the transaction has economic substance and a business purpose.
  • Centralized cash management of an affiliated group is not evidence that a transaction lacks economic substance.
  • Financial accounting benefits will not be taken into account as a reasonable business purpose for entering into a transaction when the benefits' origin is a reduction of state income tax.

The Department must apply the standards in regulations adopted under IRC Section 482 when determining whether transactions between affiliated group members are not at FMV.

Other provisions

When adjusting intercompany transactions or requiring a taxpayer to file a combined return, the Department must provide the taxpayer with a statement within 90 days detailing the facts, circumstances, and reasons for why it found the taxpayer did not fairly represent its state net income attributable to its South Carolina business activity. The Department also must issue a proposed assessment or refund upon making any redetermination.

Taxpayers that do not timely submit a required combined return may be subject to penalties (otherwise penalties may not be imposed).

Taxpayers can request written advice from the Department as to whether a redetermination of their state net income or a combined return would be required under certain facts and circumstances. The Department's response is due within 120 days.

Taxpayers can appeal a final determination of the Department to the South Carolina Administrative Law Court.


These provisions, which are similar to those enacted by North Carolina in 2011,4 provide much-needed guidelines around the Department's use of forced combination as an alternative apportionment method. While these new rules apply to all open years, including for taxpayers currently under audit or within the Department's appeal process, they do not apply to assessments currently under judicial review by the South Carolina Administrative Law Court, Court of Appeals, or Supreme Court. It remains to be seen how SB 298 may affect the Department's approach to auditing taxpayers that are part of an affiliated business group.

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1 Specifically, the exclusion applies to assessments, which, as of the date of the Governor's approval of SB 298, are under judicial review by the South Carolina Administrative Law Court, Court of Appeals, or Supreme Court.

2 The submission of the combined return cannot be deemed to be a return or construed as an agreement by the taxpayer that an assessment based on the combined return is correct or that additional tax is due by the deadline for submitting such return.

3 See S.C. Code Section 12-6-2295.

4 N.C. Laws 2011, HB 619.

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Contact Information

For additional information concerning this Alert, please contact:

State and Local Taxation Group

Published by NTD’s Tax Technical Knowledge Services group; Chris DeZinno, legal editor