Opinion ID: 1315460
Heading Depth: 2
Heading Rank: 2

Heading: Combined Entity Versus Single Entity Apportionment Methods

Text: The ALC observed that the states typically apply one of two apportionment methods for multistate businesses. The first is the separate entity apportionment method, which considers each entity having some nexus with the taxing state as a separate entity, even if it is part of a unitary business. The second method, known as the combined entity apportionment method, considers the entities that are part of the unitary business such that the numerator represents all of the unitary entities' gross receipts from within the taxing state and the denominator consists of all of the unitary entities' gross receipts from everywhere. The ALC compared the use of the separate entity apportionment method with the use of the combined entity apportionment method in calculating a corporation's income tax due in South Carolina: To determine the tax of a related entity of a multistate corporation in South Carolina using the separate entity apportionment method, each individual entity must determine a ratio to apply against its taxable income in South Carolina to arrive at a net taxable income. The ratio is determined by dividing each individual entity's gross receipts in this State or the sum of each individual entity's property, payroll and sales within this State, by each individual entity's gross receipts everywhere or the sum of each individual entity's property, payroll and sales everywhere. It then applies this ratio to the entity's taxable income in South Carolina to determine its net taxable income. The corporate tax rate (5%) is then applied to ascertain the tax owed this State. To determine the tax of a related entity or related entities of a multistate corporation in South Carolina by using the combined entity apportionment method, the individual entity or all related entities (if more than one taxpayer is transacting business in this state), must determine a ratio to apply against its/their taxable income to arrive at its/their net taxable income in South Carolina. The ratio is determined by dividing the gross receipts of all the related entities of the multistate corporation in South Carolina or all the related entities['] property, payroll, and sales from within South Carolina, by all the related entities['] gross receipts from everywhere or the related entities['] property, payroll, and sales from everywhere. The taxpayer (individual entity) then applies this ratio to the entity's taxable income in South Carolina to determine its net taxable income. The corporate tax rate (5%) is then applied to ascertain the tax owed this State. The parties have stipulated that South Carolina uses the separate entity apportionment method as its standard method to determine the taxable income related to intangible property of multistate businesses transacting or doing business in South Carolina. The parties have further stipulated that the standard apportionment formulas do not fairly represent the South Carolina income of Taxpayers; therefore, section 12-6-2320(A) is applicable and the only question is the interpretation of the statute and whether it permits the combined entity apportionment method that Taxpayers request here. The cardinal rule of statutory construction is to ascertain and effectuate the intent of the legislature. Charleston County Sch. Dist. v. State Budget & Control Bd., 313 S.C. 1, 5, 437 S.E.2d 6, 8 (1993). The determination of legislative intent is a matter of law. Eagle Container Co. v. County of Newberry, 379 S.C. 564, 568, 666 S.E.2d 892, 894 (2008) (quoting Charleston County Parks & Recreation Comm'n v. Somers, 319 S.C. 65, 67, 459 S.E.2d 841, 843 (1995)). Where the statute's language is plain and unambiguous, and conveys a clear and definite meaning, the rules of statutory interpretation are not needed and the court has no right to impose another meaning. Hodges v. Rainey, 341 S.C. 79, 85, 533 S.E.2d 578, 581 (2000). The best evidence of intent is in the statute itself: What a legislature says in the text of a statute is considered the best evidence of the legislative intent or will. Therefore, the courts are bound to give effect to the expressed intent of the legislature. Id. (quoting Norman J. Singer, Sutherland Statutory Construction § 46.03, at 94 (5th ed.1992)). If a statute's terms are clear and unambiguous, they must be taken and understood in their plain, ordinary and popular sense, unless it fairly appears from the context that the Legislature intended to use such terms in a technical or peculiar sense. Etiwan Fertilizer Co. v. South Carolina Tax Comm'n, 217 S.C. 354, 360, 60 S.E.2d 682, 684 (1950). The prime object, of course, in the construction of a statute is to ascertain and give effect to the legislative intent. Id. The ALC found section 12-6-2320(A)(4) was clear on its face and that the legislative intent expressed therein was to allow the use of any other method to apportion income where the standard statutory formulas resulted in an unfair apportionment of a taxpayer's business income in South Carolina. The Department disagrees and argues section 12-6-2320(A)(4) should not be construed to allow the combined entity apportionment method based on the legislative intent expressed in the corporate tax statutes requiring the filing of tax returns by a single entity. Specifically, the South Carolina Code defines taxpayer as including an individual, trust, estate, partnership, association, company, corporation, or any other entity subject to the tax imposed by this chapter or required to file a return. S.C.Code Ann. § 12-6-30(1) (2000) (emphasis added). The Department notes the definition refers to a single corporation as a taxpayer and thus to separate filing requirements for each entity. Consequently, this definition must be used for the meaning of taxpayer as it appears in section 12-6-2320(A) and it limits the statute's application to a separate entity. In Coca Cola Co. v. Department of Revenue, 271 Or. 517, 533 P.2d 788 (1975), the Supreme Court of Oregon rejected a similar argument, finding the use of taxpayer in the singular did not prevent the Department of Revenue from applying combined reporting. The court stated: While it is true, as plaintiff points out, that the statute speaks of taxpayer in the singular, this is no bar. We note that the prior statute also spoke in the singular. Yet in [ Zale-Salem, Inc. v. Tax Comm'n, 237 Or. 261, 391 P.2d 601 (1964)] we approved combined reporting. Id. at 793. The court observed that the fact that the Uniform Act does not specifically require (the combined method of reporting for a multicorporate business) constitutes no barrier to its adoption by the Multistate Tax Commission and the various member states. Id. at 793 n. 4 (alteration in original) (citation omitted). The Department also contends the combined entity apportionment method should not be allowed because it is not expressly provided for in section 12-6-2320 and the Department has never applied the combined entity apportionment method. The Department contends the ALC erred in failing to give deference to the agency's own interpretation. The Department further contends that use of the method is contrary to existing South Carolina law. The ALC acknowledged that a court generally gives deference to an administrative agency's interpretation of an applicable statute or regulation. However, the ALC found the Department's interpretation was contrary to the plain language of the statute and was not entitled to deference. An agency's long-standing interpretation of a statute is usually entitled to be given deference and should not be overruled by a reviewing court in the absence of cogent reasons, but the interpretation will not be sustained if it contradicts a statute's plain language. Etiwan Fertilizer Co., 217 S.C. at 359, 60 S.E.2d at 684. We find the ALC was not required to defer to the Department's interpretation in this instance because it was contrary to the plain language of the statute. See Brown v. Bi-Lo, Inc., 354 S.C. 436, 440, 581 S.E.2d 836, 838 (2003) (We recognize the Court generally gives deference to an administrative agency's interpretation of an applicable statute or its own regulation. Nevertheless, where, as here, the plain language of the statute is contrary to the agency's interpretation, the Court will reject the agency's interpretation. (citation omitted)). The Department also asserts the ALC's ruling ignored existing South Carolina case law. The Department cites to NCR Corp. v. South Carolina Tax Commission, 304 S.C. 1, 402 S.E.2d 666 (1991) ( NCR I ) and to NCR Corp. v. South Carolina Tax Commission, 312 S.C. 52, 439 S.E.2d 254 (1993) ( NCR II ), arguing these cases remain good [law] for the proposition that South Carolina is a separate entity taxing state. In NCR I, we noted that [e]ach of the statutory sections defining the ratios of property, payroll, and sales use the singular word `taxpayer.' NCR I, 304 S.C. at 5, 402 S.E.2d at 669. We held that subsidiary payroll, sales, and property ... should generally not be considered under our statutory scheme. Id. at 6, 402 S.E.2d at 669. In NCR II, NCR contend[ed] the royalties and interest income paid by all of its forty-four foreign subsidiaries should be combined and then divided by the combined income of all the subsidiaries to determine the proportionate contribution of sales, property, and payroll by foreign subsidiaries. NCR II, 312 S.C. at 56, 439 S.E.2d at 256. Under this calculation, the gains of the various subsidiaries would be offset by the losses of others. Id. In contrast, the Tax Commission asserted the trial court correctly made the calculation separately for each subsidiary and added each separate amount to the denominator of the apportionment formula. Id. This Court stated that [s]ubsidiaries are treated as separate entities for tax purposes, and held the Tax Commission's method of calculation is the better approach since it is consistent with general tax principles. Id. The ALC found these cases were not controlling as they were decided prior to the enactment of section 12-6-2320, which clearly and specifically allows for the use of any other method to fairly represent a taxpayer's income when the standard apportionment formulas provided by statute do not fairly represent the taxpayer's business activity in South Carolina. The ALC determined this was a relief provision enacted by the South Carolina General Assembly that authorizes the use of the combined entity apportionment method. The ALC concluded [t]he Department's interpretation would thwart legislative intent clearly expressed in the general allocation and apportionment statutes, would deny Taxpayers the equitable relief intended by the legislature when it enacted § 12-6-2320(A), and would leave Taxpayers with an unreasonable and arbitrary apportionment of their taxable income in this state. The Department acknowledges that the standard apportionment statutes result in statutory distortion of Taxpayers' incomes and taxes. However, the Department asserts that other methods, such as changing the factors to be considered in the apportionment ratios, may be used to correct the problems caused by application of the standard apportionment statutes. Despite its argument, to date the Department has not recalculated Taxpayers' income and taxes using any alternative method that it believes would fairly apportion Taxpayers' income from business activities in South Carolina. We agree with the ALC that the legislature enacted section 12-6-2320 as a relief mechanism, and hold that the plain language of subsection (A)(4) clearly authorizes the Department to use any other method to effectuate an equitable apportionment of the taxpayer's income, including the combined entity apportionment method. The authority cited by the Department predates the legislative enactment and therefore is not controlling on this issue. We emphasize that, as a general rule, the Department need not automatically use the method requested by a taxpayer, as it has the discretion to select an alternative method that fairly measures the taxpayer's income in South Carolina. In this case, however, the Department never recalculated Taxpayers' incomes using any other alternative method, and the Department stipulated that use of the combined entity apportionment method proposed by Taxpayers does result in a fair computing of Taxpayers' business activities in South Carolina. Accordingly, we uphold the ALC's determination that the combined entity apportionment method should be utilized by the Department for the tax period in question. The combined entity apportionment method is merely a mechanism for approximating the income attributable to the corporations that comprise a unified business, but this does not change the fact that the entities will be reporting the taxes due for each entity.