How did PLR 95-9 apportion trademark royalties earned by a South Carolina licensing subsidiary?

Plain-English summary

South Carolina Private Letter Ruling 95-9 required the addressed trademark subsidiary to use a destination-based gross-receipts apportionment ratio.

The subsidiary owned and protected trademarks and tradenames, licensed them to its parent, and earned 1.5% of net customer billings. It did not manufacture or sell tangible goods. Sales occurred where the licensee's customers received the products.

The South Carolina numerator therefore included royalties from sales delivered to customers in South Carolina, while the denominator included royalties from deliveries everywhere. The Department said use of the trademark in each destination state produced the royalty receipt. Any income specifically allocated to South Carolina was then added to the apportioned amount.

Common questions

Q: Did the subsidiary use the three-factor formula for manufacturers? No. Its principal business was licensing intangibles, not manufacturing or selling tangible property.

Q: What determined whether a royalty entered the South Carolina numerator? The destination of the licensee's customer sale.

Q: Did South Carolina property and payroll put all royalties in the numerator? No. The ruling used destination sales for the royalty receipts.

Q: Can another licensing company rely on PLR 95-9? No. The ruling states it has no precedential value and only the addressee may rely on it.

Citations and references

• S.C. Code Ann. §§ 12-7-230 and 12-7-250 (historical corporate tax and apportionment base)
• S.C. Code Ann. §§ 12-7-1120, 12-7-1140, and 12-7-1190 (allocation and apportionment)
• Geoffrey v. South Carolina Tax Commission, 437 S.E.2d 13 (1993)
• Lockwood Greene Engineers v. South Carolina Tax Commission, 361 S.E.2d 346 (1987)

Subject

Apportionment Factor

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR95-9.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214

SC PRIVATE LETTER RULING #95-9 (TAX)

TO:

XYZ

SUBJECT:

Apportionment Factor
(Income Tax)

DATE:

August 14, 1995

REFERENCE:

S. C. Code Ann. Section 12-7-230 (Supp. 1994)
S. C. Code Ann. Section 12-7-250 (Supp. 1994)
S. C. Code Ann. Section 12-7-1190 (1976)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (Supp. 1994)
SC Revenue Procedure #94-1

SCOPE:

A Private Letter Ruling is an official advisory opinion issued by the
Department of Revenue to a specific person.

NOTE:

A Private Letter Ruling may only be relied upon by the person to whom it is
issued and only for the transaction or transactions to which it relates. A Private
Letter Ruling has no precedential value.

Question:
Based upon the facts, what apportionment ratio should XYZ use in determining its South Carolina
income?
Conclusion:
XYZ should use the gross receipts formula provided in Code Section 12-7-1190 with the numerator
including royalties earned from sales that occur in South Carolina, and the denominator including
royalties earned from sales that occur everywhere. Since, under the facts of this case, sales occur at
the point of destination, the numerator of XYZ's gross receipts formula will include royalty receipts
earned from the licensees' sales delivered to customers in South Carolina, and the denominator will
include royalty receipts earned from licensees' sales delivered to customers everywhere.
Facts:
ABC is a Delaware corporation domiciled in South Carolina. ABC manufactures X products in
South Carolina and North Carolina. ABC, also, operates a loading dock in Texas.

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Once the X products are manufactured, the majority are shipped to ABC's loading dock in Texas
and then shipped to a subsidiary, DEF, for assembly. (A small percentage of the X products are
shipped directly to the customer.) DEF is a non U.S. corporation with manufacturing facilities in X
country. After assembly, the X products are shipped back to ABC's loading dock in Texas for
repackaging and distribution to customers.
ABC has set up a new subsidiary, XYZ, a Delaware corporation domiciled in South Carolina. XYZ
owns title and rights to trademarks and tradenames. The trademarks and tradenames are used by
ABC to generate sales of tangible personal property in numerous states, including South Carolina.
The activities that generate the sales occur in the marketing and distribution process as the ABC
name, mark, and reputation is presented to customers.
XYZ conducts its business in South Carolina, but does not engage in manufacturing or any form of
collecting, buying, assembling, or processing goods or materials, or selling or distributing or
dealing in tangible personal property. All of its property is located in South Carolina. All of its
payroll is paid to employees in South Carolina.
XYZ's only business is licensing and protecting the use of the trademarks and tradenames. Under
the terms of the contract, XYZ requires that ABC maintain quality specifications as instructed by
XYZ related to all products sold under the licensed intellectual property. Based upon a proposed
Royalty and Licensing Agreement, to be finalized and executed after this ruling is resolved, XYZ
will receive from ABC a royalty fee of 1.5% of the net customer billings (gross billings of
customers less related returns and sales credits) from the operations. Sales occur when and at the
place they are received by the licensee's customers.
Discussion:
Code Section 12-7-230 imposes an income tax on corporations transacting or conducting
business in South Carolina, and reads, in part:
...every corporation organized under the laws of this State, doing or transacting
business partly within and partly without this State...shall pay annually an income tax
equivalent to five percent of a proportion of its entire net income to be determined as
provided in this chapter..
Therefore, XYZ is subject to tax in South Carolina. Next, we must determine how much of its
income is subject to tax by South Carolina. XYZ is transacting business partly within and partly
without South Carolina. See Geoffrey v. South Carolina Tax Commission, 437 SE 2d 13 (1993).
Code Section 12-7-250 provides that "the income tax...is imposed upon a base which reasonably
represents the proportion of the trade or business carried on within this State". The base upon
which South Carolina imposes income tax is determined by an allocation and apportionment
process. The allocation process under Code Section 12-7-1120 is applied first, then any remaining
income is apportionable. To determine how much of XYZ's income is apportionable to South
Carolina, we must determine the correct apportionment factor to be used by XYZ.

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Code Section 12-7-1140 provides for the three-factor apportionment formula to apportion the
income of corporations whose principal business in South Carolina is manufacturing, selling,
distributing or dealing in tangible personal property within South Carolina. Based upon the facts
presented, this statute is inapplicable to XYZ. Therefore, XYZ must use the gross receipts method
of apportionment provided in Code Section 12-7-1190. Pursuant to this section, a taxpayer using
the gross receipts method shall:
...make returns and pay annually an income tax upon a proportion of its remaining net
income computed on the basis of the ratio of gross receipts from within this State
during the income year to the total gross receipts of such year within and without the
State.
Next, we must determine what is included in the numerator and the denominator of the gross
receipts factor used by XYZ. In Lockwood Greene Engineers v. South Carolina Tax Commission,
361 SE 2d 346 (1987), the court looked to the place where the income-producing activity occurred
in order to satisfy the statutory requirement of identifying the "gross receipts from within this
State". In Geoffrey, supra, the court determined that the activity that produced the royalty is the
sale in South Carolina. It is the use of the trademark in each state that produces the gross receipts.
Based on the facts presented and the above analysis of recent court decisions, the numerator of
XYZ's gross receipts ratio will include royalties earned from sales that occur in South Carolina, and
the denominator will include royalties earned from sales that occur everywhere. XYZ's South
Carolina apportioned income is then added to income specifically allocated to South Carolina, if
any, under Code Section 12-7-1120. This sum results in South Carolina taxable income.

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