2022 SC BAR CONVENTION - Tax Law Section "The Times They are A-Changin'"
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2022 SC BAR CONVENTION
Tax Law Section
“The Times They are A-Changin’”
Saturday, January 22
SC Supreme Court Commission on CLE Course No. 220984
SC Bar-CLE publications and oral programs are intended to provide current and accurate information about the subject matter covered and are designed to help attorneys maintain their professional competence. Publications are distributed and oral programs presented with the understanding that the SC Bar-CLE does not render any legal, accounting or other professional service. Attorneys using SC Bar-CLE publications or orally conveyed information in dealing with a specific client's or their own legal matters should also research original sources of authority. ©2022 by the South Carolina Bar-Continuing Legal Education Division. All Rights Reserved THIS MATERIAL MAY NOT BE REPRODUCED IN WHOLE OR IN PART WITHOUT THE EXPRESS WRITTEN PERMISSION OF THE CLE DIVISION OF THE SC BAR. TAPING, RECORDING, OR PHOTOGRAPHING OF SC BAR-CLE SEMINARS OR OTHER LIVE, BROADCAST, OR PRE-RECORDED PRESENTATIONS IS PROHIBITED WITHOUT THE EXPRESS WRITTEN PERMISSION OF THE SC BAR - CLE DIVISION.
2022 SC BAR CONVENTION
Tax Law Section
Saturday, January 22
State and Local Tax Update
Jason P. Luther
State and Local Tax Case Law Update
SOUTH CAROLINA BAR CONVENTION – JANUARY 22, 2022
Jason P. Luther, Chief Legal Officer
Jason.Luther@dor.sc.gov
Disclaimer The opinions expressed in this presentation are the author’s alone and should not be attributed to the South Carolina Department of Revenue.
Outline • Sales and Use Tax • Gross proceeds; Exemptions; Who is Retailer? • Corporate Income Tax • Sourcing • Combined Reporting • Bank Tax • Property Tax • Miscellaneous
Sales & Use Tax
Sales & Use Tax - Refresher
• Section 12-36-910 – 5% tax on gross proceeds of sales of every person
engaged in the business of selling tangible personal property at retail in
South Carolina.
• Section 12-36-90 – gross proceeds of sales means the value proceeding or
accruing from the sale, lease, or rental of tangible personal property.
• Section 12-36-2120 – exemptions from sales tax (80+)
• FY21: Sales and Use Tax Revenues = $3.8 billion (36% of total revenues)
• Individual Income = $5.4 billion
• Corporate Income = $669 million
Sales & Use Tax: “Gross proceeds of sales”
Books-A-Million, Inc. v. S.C. Dep’t of Revenue, 430
S.C. 388, 844 S.E.2d 399 (Ct. App. 2020), reh’g
denied (July 14, 2020)
• Issue: Are the sales of
Membership Fees part of “gross
proceeds” and subject to sales tax?
• Court of Appeals: Yes.
• Supreme Court: Oral Argument on
November 8, 2021Books-A-Million, Inc. v. SCDOR
• Millionaire’s Club membership fee ($25); discounts, free shipping
• ALC: “the statute is broad and encompasses the total value of a sale, not simply the
amount paid for tangible personal property.”
• “Membership Fees are inextricably linked to, and incapable of being separated from, the sale of
tangible personal property.”
• Court of Appeals: “gross proceeds of sales includes all value that comes from or is a
direct result of the sale of tangible personal property. . . . Membership Fee is a direct result
of the sale . . . because BAM would not be able to sell Club Memberships but for BAM's
sale of tangible personal property.”Books-A-Million, Inc. v. SCDOR
Supreme Court – Oral Argument on November 8, 2021
• Is the membership an intangible?
• How is this different from a Sam’s Club or Costco
membership?
• How can something “proceed or accrue from” a sale
that may take place in the future?
• Isn’t this the same thing as the waiver in Rent-a-
Center?Lowe’s Home Center, LLC v. South Carolina Dep’t of
Revenue, Docket No. 14-ALJ-17-0552-CC (Dec. 11, 2020)
Issue: Is Lowes required to pay sales
tax on the retail price of the materials it
sells to installation contract customers?
ALC: Yes.
Lowe’s filed appeal in January 2021Lowe’s Home Center, LLC v. South Carolina Dep’t of Revenue, Docket No. 14-ALJ-17-0552-CC (Dec. 11, 2020) • Similar to Home Depot case (2018) • Installation contracts • Lowe’s purchases all materials at wholesale using resale certificate • For installation contracts, Lowe’s remitted use tax on the wholesale price it paid for materials
Lowe’s Home Center, LLC v. South Carolina Dep’t of Revenue, Docket No. 14-ALJ-17-0552-CC (Dec. 11, 2020) S.C. Code Ann. § 12-36-90: Gross proceeds of sales include “the fair market value of tangible personal property previously purchased at wholesale which is withdrawn from the business or stock and used or consumed in connection with the business or used or consumed by any person withdrawing it.”
Lowe’s Home Center, LLC v. South Carolina Dep’t of Revenue, Docket No. 14-ALJ-17-0552-CC (Dec. 11, 2020) Reg. 117-309.17. Withdrawals From Stock, Merchants: • Value of goods purchased at wholesale and subsequently withdrawn for use is “the price at which these goods are offered for sale by the person withdrawing them.”
Lowe’s Home Center, LLC v. South Carolina Dep’t of Revenue, Docket No. 14-ALJ-17-0552-CC (Dec. 11, 2020) • ALC: taxable retail sale occurs when the installation contract customer purchases the materials to be installed. • No need to identify a “deemed sale” of the materials by Lowe’s to itself • ALC found “Lowe’s should have been aware that its tax liability for these transactions was not properly based upon its own wholesale acquisition cost for the materials,” (e.g. prior audit, Regulation) but did not uphold negligence penalties
Sales & Use Tax: Exemptions
McEntire Produce, Inc. v. Dept. of Revenue, 17-ALJ-
17-0060-CC
• Issue: Are items used in vegetable
processing business exempt from sales
tax under the Machine Exemption or the
Pollution Control Exemption?
• ALC: Yes.
• Department filed appeal in November
2019McEntire Produce, Inc. v. Dept. of Revenue, 17-ALJ-
17-0060-CC
Machines
• S.C. Code § 12-36-2120(17) exempts machines (and its parts) used in
manufacturing
• S.C. Code Ann. Regs. 117-302 – must be “integral and necessary” to the
manufacturing process (not just integral and necessary to manufacturer)
• Protective clothing worn by an employee working in the manufacturing area is not
exempt from tax
• Regulations re: not exempt machines:
• conveyances, chemicals, maintenance, storage, administrative itemsMcEntire Produce, Inc. v. Dept. of Revenue, 17-ALJ-
17-0060-CC
Pollution Control
• Section 12-36-2120(17) also exempts pollution control equipment /
machines
• To prevent/abate pollution of air, water, or noise
• Pollution of water/air v. contaminating food productsMcEntire Produce, Inc. v. Dept. of Revenue, 17-ALJ-
17-0060-CC
Exempt - Machines Exempt - Pollution Control Not Exempt
Squeegees
ALC
Coveralls
(insufficient evidence)
Drain covers Eyewear White boards
Cleaning machines and chemicals Aprons Brooms
Water storage tanks Gloves Warning signs/stickers
Protective clothing Hairnets
Bar code scanners
Aerosol ink cans
Computer stands
Stacking containers
Warehouse racks
Blower fans
Maintenance tools
Forklift parts
Hand trucks
Generator rentalJack’s Custom Cycles, Inc. v. Dept. of Revenue, 18-
ALJ-17-0393-CC
• Issue: Is an ATV/UTV a
“motor vehicle” for purposes
of the maximum motor
vehicle sales tax?
• ALC: Yes.
• Department filed appeal in
October 2019Jack’s Custom Cycles, Inc. v. Dept. of Revenue, 18- ALJ-17-0393-CC • “Max Tax” statute capped sales tax on “motor vehicles” at $300. • “Motor vehicle” is not defined in the max tax statute. • SCDOR issued guidance in 2008 and 2018 (in conjunction with DMV) that ATV/UTVs are not “motor vehicles.”
Jack’s Custom Cycles, Inc. v. Dept. of Revenue, 18- ALJ-17-0393-CC • “Max Tax” statute capped sales tax on “motor vehicles” at $300. • “Motor vehicle” is not defined in the max tax statute. • SCDOR issued guidance in 2008 and 2018 (in conjunction with DMV) that ATV/UTVs are not “motor vehicles.”
Jack’s Custom Cycles, Inc. v. Dept. of Revenue, 18- ALJ-17-0393-CC
Jack’s Custom Cycles, Inc. v. Dept. of Revenue, 18-
ALJ-17-0393-CC
ALC SCDOR
• ATV/UTVs are “motor vehicles” for purposes of the • ATV/UTVs are not “motor vehicles” for purposes
max tax. of the max tax
• Relied on definitions of “motorized vehicle” found in • Relied on definitions of “motor vehicle,” “vehicle,”
Title 50 (Fish, Game & Watercraft) and Title 39 and “highway” in Title 56 to conclude that
(Trade and Commerce) ATV/UTVs are not motor vehicles because they are
not designed to be driven on the highway.Jack’s Custom Cycles, Inc. v. Dept. of Revenue, 18-
ALJ-17-0393-CC
• Is an agency entitled to deference in interpreting statutory provisions
involving laws that agency does not specifically administer? (e.g. Title 56)
• How will court resolve question of agency deference and longstanding
administrative practice/interpretation?
• Georgia legislature passed SB 185 in March 2021
• Eliminated agency deference accorded GADOR’s interpretation of ambiguous
tax laws. Does not apply to formally promulgated regulations.
• AZ, AR, FL, MS, WISales & Use Tax
Orthofix, Inc. v. Dept. of Revenue
KCI USA, Inc. v. Dept. of Revenue
• Issue: Does the sales tax
exemption for durable
medical equipment contain an
unconstitutional “principal
place of business”
requirement?
• Circuit Court; ALCOrthofix, Inc. v. Dept. of Revenue
KCI USA, Inc. v. Dept. of Revenue
Section 12-36-2120(74) - sales tax exemption for durable medical
equipment and related supplies:
(c) sold by a provider who holds a South Carolina retail sales license
and whose principal place of business is located in this
State….Orthofix, Inc. v. Dept. of Revenue KCI USA, Inc. v. Dept. of Revenue • Taxpayers’ principal place of business is not located in South Carolina • Taxpayers contend the PPOB requirement impermissibly discriminates against interstate commerce in violation of the Commerce Clause. • See Complete Auto Transit v. Brady 430 U.S. 274 (1977) • Unconstitutional – facial, or as applied? • See Travelscape, LLC v. S.C. Dep’t of Revenue, 391 S.C. 89, 705 S.E.2d 28 (2011) • Declaratory Judgment – Circuit Court • Contested Case Hearing – ALC
Amazon Services, LLC v. Dept. of Revenue, 17-ALJ-
17-0238-CC
• Issue: Is Amazon Services the
retail seller of “third-party
Merchant” products on the
Amazon Marketplace?
• ALC: Yes
• Amazon filed appeal in
October 2019Amazon Services, LLC v. Dept. of Revenue, 17-ALJ- 17-0238-CC • Amazon – not a retailer. In the business of providing services that facilitate sales made by third-party sellers. • DOR – Amazon is a retailer b/c “in the business of selling tangible personal property at retail” that is “owned by the person or others” (Section 12-36-70). • ALC: Amazon is a retailer, must collect tax on sales of third-party Merchant products.
Amazon Services, LLC v. Dept. of Revenue, 17-ALJ-
17-0238-CC
• Three important, distinct but related events following commencement of Amazon
case
1. South Dakota v. Wayfair, Inc., 138 S.Ct. 2080 (2018)
• Out-of-state seller with no physical presence in state can be subject to sales tax, under certain
economic thresholds
2. SC Revenue Ruling #18-14: Retailers withoug a physical presence (remote sellers)
• Economic nexus = gross revenue exceeds $100,000 in previous or current calendar year
3. 2019 S.C. Act No. 21 – marketplace facilitator legislation
• Marketplace facilitator means a person engaged in the business of facilitating a retail sale of
tangible personal property.
• Includes listing or advertising; collecting or processing payments from purchaserAmazon Services, LLC v. Dept. of Revenue, 17-ALJ-
17-0238-CC
• Since 2017, all sales tax imposing states have enacted marketplace
facilitator laws (46)
Sales Tax Revenues from Remote Sellers and Marketplace Facilitators
(in millions)
$500.0
$400.0
$300.0
$200.0
$100.0
$0.0
FY 2018-2019 FY 2019-2020 FY 2020-2021
Remote Sellers $44.2 $107.8 $157.3
Marketplace Facilitators $17.6 $157.7 $241.8
Total $61.8 $265.6 $399.2
Remote Sellers Marketplace Facilitators TotalAmazon Services, LLC v. Dept. of Revenue, 17-ALJ-
17-0238-CC
• Amicus on behalf of Amazon
• Council on State Taxation (COST); the Institute for Professionals in Taxation; Tax
Executives Institute; National Retail Federation; Chamber of Commerce of the United
States of America, Business Roundtable, Internet Association, South Carolina Chamber
of Commerce, and Greater Columbia Chamber of Commerce; South Carolina
Manufacturers Alliance
• Retroactive taxation
• Due Process
• Amicus by USC School of Law tax professors Tessa Davis and Clinton Wallace
• Amazon’s tax liability preexisted 2019 marketplace facilitator legislation
• Court should not reward Amazon with additional subsidy at the expense of local
businessesAmazon Services, LLC v. Dept. of Revenue, 17-ALJ-
17-0238-CC
• Amicus on behalf of Amazon
• Council on State Taxation (COST); the Institute for Professionals in Taxation; Tax
Executives Institute; National Retail Federation; Chamber of Commerce of the United
States of America, Business Roundtable, Internet Association, South Carolina Chamber
of Commerce, and Greater Columbia Chamber of Commerce; South Carolina
Manufacturers Alliance
• Retroactive taxation
• Due Process
• Amicus by USC School of Law tax professors Tessa Davis and Clinton Wallace
• Amazon’s tax liability preexisted 2019 marketplace facilitator legislation
• Court should not reward Amazon with additional subsidy at the expense of local
businessesCorporate Income Tax
Duke Energy Corp. v. South Carolina Dep’t of Revenue,
Docket No. 19-ALJ-17-0153-CC (Oct. 27, 2020)
• Issue: Is the $5 million limitation for
the capital investment tax credit under
section 12-14-60 an annual or lifetime
cap?
• ALC: Lifetime limitation.
• Duke filed appeal in November 2020Duke Energy Corp. v. South Carolina Dep’t of Revenue, Docket No. 19-ALJ-17-0153-CC (Oct. 27, 2020) S.C. Code Ann. § 12-14-60: (A)(1) There is allowed an economic impact zone investment tax credit against the tax imposed pursuant to Chapter 6 [Income Tax Act] of this title for any taxable year in which the taxpayer places in service economic impact zone qualified manufacturing and productive equipment property. (G) The credit allowed by this section for investments made after June 30, 1998, is limited to no more than five million dollars for an entity subject to the license tax as provided in Section 12-20-100.2
Duke Energy Corp. v. South Carolina Dep’t of Revenue, Docket No. 19-ALJ-17-0153-CC (Oct. 27, 2020) • ALC granted summary judgment in favor of DOR • 12-14-60(G) is ambiguous; ambiguity in credits resolved against Taxpayer • Department’s interpretation is reasonable in light of entire statute • ALC rejected arguments based on “inverse agency deference,” failed legislation, estoppel, unjust enrichment • Duke has appealed. • Companion case: SCANA Corp. v. SCDOR
Corporate Income Tax:
SourcingSourcing - Refresher
• Section 12-6-2210(B): if taxpayer is transacting business partly within and
without the State, SC “income tax is imposed upon a base which
reasonably represents the proportion of the trade or business carried on
within this State.”
• Section 12-6-2290: apportion income using this fraction for each taxable
year:
Gross receipts from within SC
Total gross receipts from everywhereSourcing - Refresher
• What is included in gross receipts for service providers?
• Section 12-6-2295(A)(5):
• “receipts from services if the entire income-producing activity is within this
State. If the income-producing activity is performed partly within and partly
without this State, sales are attributable to this State to the extent the income-
producing activity is performed within this State.”
• What is the income producing activity?Sourcing - Refresher
• Market v. Cost of Performance
• DIRECTV, Inc. & Subsidiaries v. South Carolina Dept. of Revenue, 421 S.C. 59, 804 S.E.2d 633
(Ct. App. 2017); Dish DBS Corp. v. S.C. Dep't of Revenue, 2018 WL 5733487 (Ct. App. 2018)
(unpublished opinion)
• IPA (income producing activity)
• DirecTV – 4 value drivers are the IPA
• DOR – delivery of signal is the IPA
• Court rejected cost of performance method. Preparatory (“income anticipatory”) activities
are not IPA
• Customer is paying for the delivery of the signal into homes and businesses and onto
television sets of its customers.
• Numerator should include 100% of DIRECTV’s South Carolina subscription receipts.Mastercard International Inc. v. South Carolina Dep’t of
Revenue, Docket No. 20-ALJ-17-0008-CC
• Issue: Should Taxpayer’s gross
receipts from transactions originating
with merchants in South Carolina be
sourced to this State?
• ALC: trial in February 2022Mastercard International Inc. v. South Carolina Dep’t of
Revenue, Docket No. 20-ALJ-17-0008-CC
• Mastercard – customers are banks, not merchants and cardholders
• Charge fees to customers for transaction processing and other services
• Mastercard payment processing network is operated out of Missouri
• IPA is transaction processing and maintenance of network, none of which takes place in
South Carolina
• DOR – Mastercard’s income is wholly dependent upon service that enables
cardholders and merchants to complete transactions in South Carolina
• IPA is best measured by the number of transactions (for transaction-based fees) and
dollar value of transactions (for volume-based fees) that originate in South Carolina
• Facilitated over $84 billion in credit card transactions in the State during audit period;
but zero receipts sourced to South Carolina
• Sourcing method does not reasonably represent its business activities in SCElavon Inc. v. South Carolina Dep’t of Revenue,
Docket No. 20-ALJ-17-0167-CC
• Issue: Should Taxpayer’s gross
receipts from transactions originating
with merchants in South Carolina be
sourced to this State?
• ALC: trial in June 2022Corporate Income Tax: Combined Reporting
Combined Reporting - Refresher • Allocation and apportionment seeks to impose income tax on a base that “reasonably represents the proportion of the trade or business carried on within this State.” See Section 12-6-2210(B). • If standard apportionment formula does not fairly represent taxpayer’s business activity in South Carolina, Department can require other methods “to effectuate an equitable allocation and apportionment of the taxpayer’s income.” See Section 12-6- 2320. • Carmax Auto Superstores West Coast, Inc. v. S.C. Dep’t of Rev., 411 S.C. 79 (2014) and Rent-A-Center West, Inc. v. S.C. Dep’t of Rev., 418 S.C. 320 (2016): • (1) the statutory formula does not fairly represent the taxpayer’s business activity in SC, and • (2) the alternative accounting method is reasonable
Combined Reporting - Refresher
• S.C. Rev. Ruling #15-5
• Facts the Department may examine
• Purchasing companies, management fee companies,
and “east/west” companies within a unitary groupCombined Reporting – Example
Classic corporate organization
structure:
Headquarter:
Top Manager
Department: Department: Department: Department:
Operations Marketing R&D SalesCombined Reporting – Example East/West organizational structure of a corporation and its subsidiaries
Combined Reporting - Example
• The Group files consolidated federal income tax returns.
• Stores is the only entity in The Group filing corporate income tax
returns and paying the corporate license fee in South Carolina.
• Stores’ taxable income in South Carolina is inconsistent with the
incomes of its unitary sister companies
Taxable Income Return on Income Taxable Income Return on Total Payroll
The Group 13.1003% The Group 42.1184%
Procurement 64.9260% Procurement 355.1363%
Stores -5.9332% Stores -18.1269%Combined Reporting - Example • Shifts income/profit from retail operation to Procurement, such that Stores operates at a loss in South Carolina every year. • No company could continue to operate or survive while paying these amounts to nonrelated entities. • Under intercompany agreement between Stores and Procurement, an increase in sales by Stores necessarily increases intercompany expenses; Stores will never earn more money in South Carolina.
Combined Reporting • Michaels Stores, Inc. v. SCDOR (dismissed Dec. 2020) • Tractor Supply Company v. SCDOR (trial scheduled for May 2022) • Ulta Salon, Cosemetics & Fragrance, Inc. v. SCDOR (trial scheduled for May 2022) • AutoZone Investment Corporation v. SCDOR (trial scheduled for Sept. 2022)
Bank Tax
Synovus Bank v. South Carolina Dep’t of Revenue, Docket
No. 17-ALJ-17-0418-CC (Jun. 22, 2020)
Issue: Can a bank deduct
NOL carryforwards when
calculating its South Carolina
bank tax liability?
ALC: No.
Synovus filed appeal in July
2020.Synovus Bank v. South Carolina Dep’t of Revenue, Docket No. 17-ALJ-17-0418-CC (Jun. 22, 2020) S.C. Code Ann. § 12-11-20: A tax is imposed upon every bank engaged in business in the State which shall be levied, collected and paid annually with respect to the entire net income of the taxpayer doing a banking business within this State or from the sales or rentals of property within this State, computed at the rate of four and one half per cent of the entire net income of such bank or taxpayer.
Synovus Bank v. South Carolina Dep’t of Revenue, Docket No. 17-ALJ-17-0418-CC (Jun. 22, 2020) ALC affirmed Department Determination • No statutory authority for banks to deduct NOL carryforward • Phrase “entire net income” does not inherently authorize NOL carryforward deductions • Reasonable for DOR to use “book income” as a proxy for “entire net income” • Book income generally computed in accordance with GAAP Note: March 2021, Supreme Court denied Synovus’ motion to certify the case
Property Tax
Cromey v. S.C. Dep’t of Revenue, -- S.E.2d ---, 2021 WL 3377568 (S.C. Ct. App. 2021) Issue: Is the spouse of a disabled veteran a “qualified surviving spouse” that can claim the property tax exemption if her husband (a disabled veteran) never owned or resided in a house in South Carolina. ALC: No Court of Appeals: No
Cromey v. S.C. Dep’t of Revenue, -- S.E.2d ---, 2021 WL
3377568 (S.C. Ct. App. 2021)
• Section 12-37-220(B)(1) allows disabled military veterans or their
surviving spouses to claim a property tax exemption for:
(a) the house owned by an eligible owner in fee or jointly with a
spouse; or
(b) the house owned by a qualified surviving spouse acquired
from the deceased spouse and a house subsequently acquired by
an eligible surviving spouse.
• “Qualified surviving spouse” means the surviving spouse of an
eligible owner while remaining unmarried, who resides in the house,
and who owns the house in fee or for life.Cromey v. S.C. Dep’t of Revenue, -- S.E.2d ---, 2021 WL 3377568 (S.C. Ct. App. 2021) • Court of Appeals: A surviving spouse’s eligibility for this exemption is derivative of the disabled veteran having been eligible for the exemption. • Because this disabled veteran was never eligible for the exemption (did not own property in South Carolina nor file the required certificate with the Department), the surviving spouse is not entitled to the exemption
Property Tax
Colonial Pipeline Company v. South Carolina Dep’t of
Revenue, Abbeville County et al, Docket No. 18-ALJ-17-
0443-CC (Dec. 1, 2020)
Issue: Is an underground pipeline an
“industrial plant” as used in the
pollution control exemption (Section
12-37-220(A)(8))?
ALC: Yes.
Department and Counties appealed in
February 2021Colonial Pipeline Company v. South Carolina Dep’t of Revenue, Abbeville County et al, Docket No. 18-ALJ-17- 0443-CC (Dec. 1, 2020) • S.C. Code Ann. § 12-37-220(A)(8) provides a property tax exemption for the facilities or equipment of industrial plants designed for the elimination, mitigation, prevention, treatment, abatement, or control of water, air, or noise pollution, both internal and external . . . • DOR may request DHEC to investigate property and determine the portion of the property that qualifies as pollution control property. • “Industrial plants” not defined in the statute
Colonial Pipeline Company v. South Carolina Dep’t of Revenue, Abbeville County et al, Docket No. 18-ALJ-17- 0443-CC (Dec. 1, 2020) • Transportation company; refined petroleum products • 515 miles of pipeline; tank farms; delivery facilities; booster stations • Pipeline cathodic protection; pipeline coatings; automatic shut- off valves
Colonial Pipeline Company v. South Carolina Dep’t of
Revenue, Abbeville County et al, Docket No. 18-ALJ-17-
0443-CC (Dec. 1, 2020)
ALC granted exemption to Colonial
• No duty to exhaust administrative remedies with DHEC
• Colonial’s operations as a whole constitute an “industrial plant”
• Engaged in “industry” and its operations are “industrial”
• “Plant” does not require output or production; but Transmix is
“processing”
• ALC initially applied dual purpose provision; after Reconsideration, found
dual purpose provision does not apply in this caseDuke Energy Carolinas v. South Carolina Dep’t of Revenue,
Docket No. 19-ALJ-17-0417-CC (Dec. 21, 2020)
Issue: Can a utility qualify for
the partial property tax
exemption granted for
manufacturing property under
S.C. Code Ann. § 12-37-
220(B)(52)(a)?
ALC: Yes.Duke Energy Carolinas v. South Carolina Dep’t of Revenue,
Docket No. 19-ALJ-17-0417-CC (Dec. 21, 2020)
• 2017 Act No. 40 (SC Infrastructure and Economic Development Reform
Act aka the “Roads Bill”) added Section 12-37-220(B)(52)(a):
• property tax exemption for “14.2857 percent of the property tax value of
manufacturing property assessed for property tax purposes pursuant to Section 12-
43-220(a)(1).”
• Section 12-43-220(a)(1) – 10.5% tax assessment on the real and personal
property of “manufacturers and utilities and used by the manufacturer or utility
in the conduct of the business”Duke Energy Carolinas v. South Carolina Dep’t of Revenue,
Docket No. 19-ALJ-17-0417-CC (Dec. 21, 2020)
• S.C. Revenue Ruling #18-13 – only manufacturers are eligible for the
partial exemption, not utilities.
• Legislative history: Fiscal impact statement; email from Senate Finance to
DOR that Legislature “ABSOLUTELY [did] NOT” intend utilities get the
exemption.
• ALC: Section 12-37-220(B)(52)(a) exempts “manufacturing property,
not the property of a manufacturer.”
• Duke classified as utility (unit valuation), but historically treated as
manufacturer for other tax purposes.
• Property used for manufacturing qualifies; property not used for
manufacture or generation of electricity does not qualify.Duke Energy Carolinas v. South Carolina Dep’t of Revenue,
Docket No. 19-ALJ-17-0417-CC (Dec. 21, 2020)
• ALC Order on Cross Motions for Summary Judgment (Dec. 21, 2020)
• 2021 Act No. 39, signed by Governor on May 6, 2021
• Act to amend Section 12-37-220 to clarify that manufacturing property owned or
leased by a public utility does not qualify for the exemption regardless of whether
property is used for manufacturing.
• Any refunds/credits must flow through to customers as a reduction in rates
• Awaiting hearing to determine how much of Duke’s property is “used
for manufacturing”Clarendon County v. Farmers Telephone Cooperative,
South Carolina Dep’t of Revenue, Docket No. 17-ALJ-17-
0237-CC (Jun. 10, 2020)
• Issue: Does Taxpayer’s property qualify for
the Rural Telephone Service Exemption?
• ALC: Yes, but only partially.
• Taxpayers, Department, and Counties all
filed appeals in July 2020.
• Nov. 2021 – parties filed joint motion to
certify and transfer to Supreme CourtClarendon County v. Farmers Telephone Cooperative, South Carolina Dep’t of Revenue, Docket No. 17-ALJ-17- 0237-CC (Jun. 10, 2020) S.C. Code Ann. § 12-37-220(B)(10): The property of telephone companies and rural telephone cooperatives operating in this State used in providing rural telephone service, which was exempt from property taxation as of December 31, 1973, shall be exempt from such property taxation . . .
Clarendon County v. Farmers Telephone Cooperative, South Carolina Dep’t of Revenue, Docket No. 17-ALJ-17- 0237-CC (Jun. 10, 2020) • ALC: “wireless” is a substitute for telephone service because it connects rural South Carolinians to each other by voice over the public switch telephone network • Relative use (bandwidth v. minutes of use?) • Voice-only network 25% cheaper; 75% of assets are exempt
Clarendon County v. Farmers Telephone Cooperative,
South Carolina Dep’t of Revenue, Docket No. 17-ALJ-17-
0237-CC (Jun. 10, 2020)
• Procedural issues: standing? proper application/claim?
retroactive refunds?
• Counties have standing to challenge
• Original returns did not apply/claim exemption; some – but
not all – amended returns were sufficient to apply/claim
• Lack of notice to Counties by June 1 does not make
Taxpayers ineligible for exemptionMiscellaneous
Miscellaneous – Upcoming Cases • Shirley Whitfield, Individually and as Personal Representative of the Estate of William Whitfield v. SCDOR, Appellate Case No. 2019-001748. • Filed untimely tax refund request in 2017/2018 for taxes paid in 2012/2013 • Denied; taxpayer did not file written protest within 90 days • Taxpayer appealed to ALC; dismissed for failure to exhaust administrative remedies • Issue: Is the RPA confusing? • Shipt, Inc. v. SCDOR, Civil Action No. 2021-CP-10-01318 • Virtual marketplace that facilitates on-demand delivery of purchased retail goods • Does South Carolina law prohibit alcohol delivery service?
Jason P. Luther
Chief Legal Officer
Office of General Counsel
803-898-5785
dor.sc.gov jason.luther@dor.sc.gov
/dor.sc.gov
@scdor2022 SC BAR CONVENTION
Tax Law Section
Saturday, January 22
Using Irrevocable Life Insurance Trusts
(“ILITs”)
H. Hall Provence, IV12/22/2021
Using Irrevocable Life
Insurance Trusts
H. Hall Provence IV
601 E. McBee Ave., Suite 104, Greenville, SC 20601
864-271-2594
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IRC Section 2042
• Gross estate shall include the value of
• The amount receivable by the executor as insurance under policies on the life
of the decedent. IRC § 2042(1).
• The amount receivable by all other beneficiaries as insurance under policies
on the life of the decedent with respect to which the decedent possessed at
death any of the incidents of ownership, exercisable either alone or in
conjunction with any other person. IRC § 2042(2).
• “Incidents of ownership” includes the power to change the beneficiary,
surrender or cancel the policy, assign the policy, revoke an assignment, pledge
the policy for a loan, obtain from the insurer a loan against the surrender
value, etc. Treas. Reg. § 20.2042‐1(c)(2).
• “right of the insured or his estate to the economic benefits of the policy”. Treas. Reg. §
20.2042‐1(c)(2).
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112/22/2021
Gift Tax Consequences
• Annual exclusion and Crummey withdrawal rights
• Lapse of withdrawal rights
• Use of loans to fund the premium payments
• Gift splitting considerations
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Use of Annual Exclusion
• The annual exclusion amount has increased to $16,000 for 2022.
• Annual exclusion is based “per donee”.
• Must be a present interest in the property in order for the annual
exclusion to apply to the transfer.
• A transfer is a present interest in the property if there is an
unrestricted right to the immediate use, possession, enjoyment of
property, or the income from the property.
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212/22/2021
Crummey Withdrawal Right
• A gift to an irrevocable trust is a gift of a present interest to a
beneficiary if the beneficiary possesses a power to withdraw the
contribution for a limited period of time.
• Crummey v. Commissioner. The likelihood that the power to withdraw
will be exercised is not a factor in whether the transfer is of a present
interest. The power can also be for a limited period of time, typically
at least 30 days. See Estate of Cristofani v. Commissioner.
• The beneficiary needs to receive prompt notice of the transfer and
the beneficiary’s right to withdraw such contribution and have a
reasonable opportunity to exercise the right of withdrawal.
5
Lapse of Withdrawal Rights
• A Crummey withdrawal right is a general power of appointment.
• Accordingly, when the beneficiary fails to exercise his or her
withdrawal right, the beneficiary has released a general power of
appointment and a such release is a taxable transfer by the
beneficiary/power holder to the extent the value of withdrawal right
exceeds the greater of $5,000 or 5% of the value of the trust. Rev. Rul.
85‐88.
• Use of “hanging powers” that cause the withdrawal rights to lapse
only to the extent of $5,000 or 5% of the trust and the balance
continues into future years until the lapse will not be treated as a
taxable transfer.
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312/22/2021
Gift of an Existing Policy
• IRC § 2035 provides that life insurance proceeds are included in the
decedent’s gross estate if the decedent transfers an existing policy to
a trust within three years of the decedent’s date of death.
• If the grantor of the trust is married, consideration should be made to
the use of a QTIP trust in the event the grantor dies within three
years.
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Transfer For Value
• Income tax provision in IRC § 101(a)(2) that states that if an insurance
policy is transferred for valuable consideration then the policy’s
proceeds are includible in gross income, except for listed exceptions,
including a transfer “to the insured”.
• Rev. Rul. 2007‐13 rules that a transfer to a wholly‐grantor trust is
treated as a transfer “to the insured”.
• A transfer of the policy from one wholly‐grantor trust to another, both
of which are grantor trusts to the insured, also qualifies for this
exception.
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412/22/2021
Generation-Skipping Transfer Tax
Considerations
• A gift to an irrevocable life insurance trust that qualifies for the gift
tax annual exclusion does not necessarily qualify for the annual
exclusion for GST tax purposes.
• Automatic allocation rules were adopted in 2001, but in many cases it
may not be desirable for the grantor’s GST exemption to be allocated
to the trust. A gift tax return should be filed electing out of the
application of the automatic allocation rules with respect to all
transfers to the trust, including future years.
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Drafting Considerations
• Permit the grantor to vary Crummey withdrawal rights
• Use of special powers of appointment for the beneficiaries
• Ability to remove and replace the trustee
• Trust Protector
• Crummey letters
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52022 SC BAR CONVENTION
Tax Law Section
Saturday, January 22
Federal Legislative Update
S. Michael Pack, Jr.No Materials Available
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