On March 14, 2012, the South Carolina Court of Appeals issued its decision in CarMax Auto Superstores West Coast, Inc. v. South Carolina Department of Revenue, No. 4953 (S.C. App. Ct. 2012), holding that the South Carolina Department of Revenue (Department) 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 Department’s proposed alternative apportionment method was more reasonable than any competing method.

Background

CarMax Auto Superstores West Coast, Inc. (CarMax West) operated a network of car dealerships, which sold used vehicles in the western United States. It also licensed intangibles to an affiliated entity, which sold used vehicles in the eastern United States and performed some financial functions for itself and its affiliate.

On audit, the Department determined that the South Carolina standard statutory apportionment formula did not fairly represent the extent of CarMax West’s business activity in the state. The Department invoked its authority to apply an alternative apportionment method by apportioning CarMax West’s income from royalties and financing separately from its income from retail operations. The bifurcation approach used by the Department produced a significantly higher South Carolina apportionment ratio than the statutory apportionment formula used by CarMax West.

The Administrative Law Court (ALC) initially held that the Department met its burden that the statutory method did not fairly represent the taxpayer’s South Carolina business activities and that the taxpayer had the burden of proving that the alternative apportionment formula used by the Department was not reasonable.

Court of Appeals Decision

On appeal, the South Carolina Court of Appeals reversed the ALC and held that the Department, as the party seeking to deviate from the standard statutory formula, had to satisfy two burdens...