How did South Carolina apportion a corporation's royalty income from licensing FCC intangibles?

Plain-English summary

ABC Licensee was a newly formed corporation whose South Carolina business consisted of licensing FCC licenses and receiving arm's-length royalties. The Department concluded that it was subject to South Carolina income tax and could apportion its multistate income.

Because the company dealt in intangibles rather than tangible personal property and was not in an industry with a special formula, it used the single-factor gross-receipts method under S.C. Code § 12-6-2290. The numerator was South Carolina gross receipts and the denominator was gross receipts everywhere.

The specified FCC licenses served markets in H, I, and J and generated no South Carolina royalties. Their royalty income was therefore apportioned outside South Carolina. The parent company's ownership of a separate single-member LLC operating in South Carolina did not affect the corporate subsidiary's apportionment factor.

What this means for you

Intangible-licensing businesses

The destination or market producing the royalty receipts mattered to the ruling's gross-receipts analysis. Incorporation or an office in South Carolina did not automatically put every royalty in the numerator.

Corporate groups

The ruling treated the subsidiary's factor separately from the parent's ownership of a disregarded South Carolina LLC.

Tax professionals

Confirm first whether income is allocated or apportioned, then select the statutory formula and identify which receipts arise within South Carolina.

Common questions

Q: Which formula applied?
A: The single-factor gross-receipts formula under S.C. Code § 12-6-2290.

Q: Were these FCC-license royalties sourced to South Carolina?
A: No. The stated licenses generated royalties from markets outside South Carolina.

Q: Did the parent's South Carolina LLC enter the subsidiary's factor?
A: No, under the specific corporate structure and facts presented.

Q: May another taxpayer rely on this result?
A: No. It is a fact-specific Private Letter Ruling issued to the requesting taxpayer.

Citations and references

• S.C. Code § 12-6-2290 — single-factor gross-receipts apportionment
• S.C. Code § 12-6-2210(B) — multistate taxable-income framework
• S.C. Code §§ 12-6-2220 and 12-6-2230 — directly allocated income classes
• Geoffrey v. South Carolina Tax Commission, 437 S.E.2d 13 (S.C. 1993) — intangible-property nexus and royalty apportionment discussed by the Department

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: PLR03-1.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214
Website Address: http://www.sctax.org

SC PRIVATE LETTER RULING #03-1

SUBJECT:

Allocation and Apportionment of ABC Licensee Income
(Income Tax)

REFERENCES: S. C. Code Ann. Section 12-6-2220 (Supp. 2000)
S. C. Code Ann. Section 12-6-2230 (Supp. 2000)
S. C. Code Ann. Section 12-6-2290 (Supp. 2000)
AUTHORITY:

S. C. Code Ann. Section 12-4-320 (Supp. 2000)
S. C. Code Ann. Section 1-23-10(4) (Supp. 2000)
SC Revenue Procedure #03-1

SCOPE:

A Private Letter Ruling is a written statement issued to a specific taxpayer by
the Department to apply principles of law to a specific set of facts or a
particular tax situation. A Private Letter Ruling is an advisory opinion; it does
not have the force and effect of law and is not binding on the person who
requested it or the public. It is, however, the Department’s opinion limited to
the specific facts set forth, and is binding on agency personnel only with
respect to the person to whom it was issued and only until superseded or
modified by a change in statute, regulation, court decision, or advisory
opinion, providing the representations made in the request reflect an accurate
statement of the material facts and the transaction was carried out as proposed.

Questions:

1. What South Carolina apportionment method should ABC Licensee, a newly formed corporation
   domiciled in South Carolina that is a subsidiary of ABC Company, use and where is its income
   related to the licensing of FCC licenses apportioned?
2. Does ABC Company’s ownership in W-TV, a single member limited liability company operating
   solely in South Carolina and treated as a division of ABC Company, affect ABC Licensee’s South
   Carolina apportionment factor?
   Conclusions:
3. ABC Licensee’s income related to the licensing of intangibles is apportioned using the single factor
   gross receipts apportionment method under Code Section 12-6-2290. ABC Licensee’s income
   related to the licensing of the FCC licenses is apportioned outside of South Carolina since the use
   of the X-TV and NewsChannel * FCC licenses do not generate royalties from South Carolina, but
   generate royalties from H, I, and J.

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2. ABC Company’s (i.e., the parent corporation’s) ownership in W-TV, a single member limited
liability company operating solely in South Carolina and treated as a division of ABC Company,
does not affect ABC Licensee’s (i.e., a corporate subsidiary’s) South Carolina apportionment
factor.
Facts:
ABC Company is a Delaware corporation that is headquartered in H. ABC Company owns and
operates network television broadcast properties. ABC Company operates in H, I, and J via X-TV (a
commercial television station that serves the H market) and, upon approval by the FCC, via
NewsChannel * (a 24 hour news and information service that provides content to H area cable
operators for distribution to cable broadcast facilities.)
ABC Company holds FCC licenses related to its X-TV operations and NewsChannel *’s fleet of
electronic and satellite news gathering vehicles. ABC Company is the single member in three limited
liability companies: W, LLC, operating solely in South Carolina; Y, LLC, operating solely in K; and Z,
LLC, operating solely in L. These three limited liability companies are disregarded for federal income
tax purposes and are treated as divisions of ABC Company. Each LLC holds and will continue to hold
a separate FCC license for broadcast operations conducted in its respective state.
ABC Company recently formed ABC Licensee, a wholly owned C corporation subsidiary, for a
legitimate non-tax business purpose. ABC Licensee is an operating corporation, not a sham
corporation, incorporated in Delaware and having its principal place of business in South Carolina.
Effective October 1, 2002, ABC transferred its FCC licenses related to X and NewsChannel * to ABC
Licensee. ABC Licensee will charge ABC Company an arm’s length royalty for the use of these FCC
licenses; its only business in South Carolina will be the licensing of intangibles and the receipt of
royalty income from those intangibles.
Discussion:
Code Section 12-6-530 imposes a corporate income tax on the South Carolina taxable income of every
corporation, other than those otherwise described in Code Sections 12-6-540 and 12-6-550, transacting,
conducting, or doing business within South Carolina or having income within South Carolina,
regardless of whether these activities are carried on in intrastate, interstate, or foreign commerce. The
terms “transacting,” “conducting,” or “doing business” include transacting or engaging in any activity
for the purpose of financial profit or gain.
In Geoffrey v South Carolina Tax Comm., 437 S.E. 2nd 13 (S.C. 1993), cert. denied, 114 S.Ct.550
(1993), the South Carolina Supreme Court concluded that in order for a corporation to be taxed in
South Carolina the corporation must be “transacting, conducting, doing business, or having an income
within this state.” The court construed this language as extending South Carolina’s authority to tax
foreign corporations to the limits of the Constitution. In Geoffrey, the South Carolina Supreme Court
determined that the licensing of trademarks and trade names to a South Carolina retailer and the
maintaining of accounts receivable in South Carolina by a nonresident taxpayer create nexus for South
Carolina income tax purposes even though the taxpayer lacked physical presence in South Carolina.

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The Court determined that Geoffrey purposely directed it activities toward South Carolina, and that
Geoffrey owned and used business intangible property in South Carolina. Each of these activities was
held to be sufficient to satisfy the nexus requirements of the Due Process Clause and the Commerce
Clause.
Based upon the facts presented above, ABC Licensee is conducting business in South Carolina and,
therefore, is subject to South Carolina income tax.
Next, it must be determined how ABC Licensee will allocate and apportion its income for South
Carolina tax purposes. Code Section 12-6-2210 provides for the determination of taxable income of a
corporation. Code Section 12-6-2210(B) provides that if a taxpayer is transacting or conducting
business partly within and partly outside of South Carolina, then South Carolina income tax is imposed
upon a base which reasonably represents the proportion of the trade or business carried on within this
State. South Carolina taxable income for a multistate taxpayer is determined by combining income
allocated to South Carolina with income apportioned to South Carolina. After allocation, South
Carolina apportions remaining business income. Based upon the facts, ABC Licensee is conducting
business partly within and partly outside South Carolina; it would be subject to a net income tax in
other taxing jurisdictions if South Carolina’s net income tax laws were in effect in such jurisdictions.
Accordingly, ABC Licensee may apportion its income. See Code Section 12-6-2210(B).
Code Sections 12-6-2220 and 12-6-2230 provide that certain classes of income less related expenses
are allocated. Items directly allocated include dividends, nonbusiness interest, and nonbusiness gains
and losses from sales of intangible property. Based upon the facts, ABC Licensee income from the
licensing of intangibles is not allocable; it is apportionable.
In accordance with Code Section 12-6-2240, South Carolina generally requires the use of one of the
following apportionment methods:

1. A “three factor” apportionment method (based on property, payroll, and double weighted sales) for
   taxpayers whose principal business in South Carolina is dealing in tangible personal property. Code
   Section 12-6-2250.
2. A “gross receipts” apportionment method for taxpayers not dealing in tangible personal property,
   such as financial and service businesses. Code Section 12-6-2290.
3. A “special” apportionment factor provided in Code Section 12-6-2310 for certain companies, such
   as railroad or telephone companies.
   Based upon the facts presented, ABC Licensee will apportion income using a single factor formula
   based upon “gross receipts” since they are not dealing in tangible personal property and they are not
   one of the particular types of industries required to use a special formula. The gross receipts formula in
   Code Section 12-6-2290 provides that the taxpayer apportion its income using a fraction in which the
   numerator is gross receipts from within South Carolina during the taxable year and the denominator is
   total gross receipts from everywhere during the taxable year.

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In Geoffrey, the taxpayer earned its income by licensing trademarks and trade names for a percentage
of sales made by its retail licensees. The South Carolina Supreme Court determined that it was proper
for South Carolina to tax its apportioned share of the royalty income. The court held that intangibles
and their income could be taxed at their business situs and that the real source of Geoffrey’s income
was South Carolina’s customers. Geoffrey’s South Carolina apportioned income was determined under
the single factor, gross receipts, apportionment formula; i.e., gross receipts from royalty payments from
South Carolina sales divided by gross receipts from everywhere.
Based upon the above discussion and Geoffrey, ABC Licensee’s income related to the licensing of the
FCC licenses is apportioned outside of South Carolina since the use of the X-TV and NewsChannel *
FCC licenses do not generate royalties from South Carolina, but generate royalties from H, I, and J.
Note: ABC Company’s (i.e., the parent corporation) ownership in W-TV, a single member limited
liability company operating solely in South Carolina and treated as a division of ABC Company, does
not affect ABC Licensee’s (i.e., a corporate subsidiary’s) South Carolina apportionment factor.
CAVEAT: This advisory opinion is issued to the taxpayer requesting it on the assumption that the
taxpayer’s facts and circumstances, as stated, are correct. If the facts and circumstances given are not
correct, or if they change, then the taxpayer requesting the advisory opinion may not rely on it. If the
taxpayer relies on this advisory opinion, and the Department discovers, upon examination, that the
facts and circumstances are different in any material respect from the facts and circumstances given in
this advisory opinion, then the advisory opinion will not afford the taxpayer any protection. It should
be noted that subsequent to the publication of this advisory opinion, changes in a statute, a regulation,
or case law could void the advisory opinion.
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Burnet R. Maybank III
Burnet R. Maybank III, Director

March 10
, 2003
Columbia, South Carolina

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