Could South Carolina use a nonresident servicemember's exempt military pay to reduce deductions against taxable nonmilitary income?

Plain-English summary

South Carolina Revenue Ruling 06-1 says the state could not use a nonresident servicemember's military compensation that was not taxable in South Carolina to increase tax on other income earned by the servicemember or spouse.

Before this ruling, Schedule NR included the military pay in total adjusted gross income but excluded it from South Carolina adjusted gross income. Because deductions and personal exemptions were prorated using those figures, the exempt military pay could lower the allowable share of deductions and exemptions and raise the South Carolina tax on nonmilitary income.

The Department concluded that the federal Servicemembers Civil Relief Act prohibited that result. It instructed affected nonresident servicemembers not to include military income that South Carolina could not tax on the specified Schedule NR line.

The ruling also described a historical refund procedure for 2003 and 2004. It said potentially affected servicemembers should file Form SC 1040X and Schedule NR for each refund year and mark the returns "Nonresident Servicemember."

What this means for you

Nonresident servicemembers

Military compensation exempt from South Carolina tax could not be used indirectly to raise the tax on South Carolina nonmilitary income through the state's proration formula.

Spouses filing jointly

The protection also covered a spouse's South Carolina nonmilitary income on a joint nonresident return because the servicemember's exempt military compensation could not increase the liability imposed on that other income.

South Carolina resident servicemembers

The ruling expressly said resident servicemembers were not affected. It addressed servicemembers whose legal residence was outside South Carolina.

Common questions

Q: Did South Carolina tax the nonresident servicemember's military pay directly?
A: No. The problem addressed was the indirect use of exempt military compensation in a formula that could reduce prorated deductions and exemptions.

Q: What federal rule controlled?
A: Section 511(d) of the Servicemembers Civil Relief Act barred a taxing jurisdiction from using a nonresident servicemember's military compensation to increase tax on other income of the servicemember or spouse.

Q: Who might have qualified for the historical refunds?
A: The ruling identified nonresident servicemembers with South Carolina nonmilitary income and joint filers whose spouses earned South Carolina nonmilitary income for 2003 or 2004.

Citations and references

• Servicemembers Civil Relief Act § 511(d) — prohibition on using nonresident military compensation to increase tax on other income
• S.C. Code Ann. § 12-6-1720 — South Carolina nonresident proration formula discussed in the ruling
• Title 12, Chapter 6 of the South Carolina Code — state income-tax provisions

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: RR06-1.pdf

Original ruling text

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

SC REVENUE RULING 06-1

SUBJECT:

Nonresident Military Servicemembers
(Income Tax)

EFFECTIVE DATE: For individual tax returns filed for tax years 2003 and thereafter.
SUPERSEDES:

All previous advisory opinions and any oral directives in conflict
herewith.

REFERENCES:

Title 12, Chapter 6 of S.C. Code of Laws

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (2000)
S.C. Code Ann. Section 1-23-10(4) (2005)
S.C. Revenue Procedure #05-2

SCOPE:

The purpose of a Revenue Ruling is to provide guidance to the public and
to Department personnel. It is an advisory opinion issued to apply
principles of tax law to a set of facts or general category of taxpayers. It is
the Department’s position until superseded or modified by a change in
statute, regulation, court decision, or another Departmental advisory
opinion.

Introduction
Due to changes in federal law, nonresident military servicemembers 1 may qualify for a refund of
some South Carolina income taxes paid for years 2003 or 2004 in either of the following
circumstances:

1. The nonresident servicemember and spouse filed a joint South
   Carolina income tax return for tax years 2003 or 2004 as nonresidents
   and the spouse earned non-military income in South Carolina for that
   period; or
2. The nonresident servicemember filed a South Carolina income tax
   return for tax year 2003 or 2004 as a nonresident and earned
   nonmilitary income in South Carolina (such as from a second,
   nonmilitary job) for that period.
   These potential refunds are a result of a change in federal law that affects how personal
   exemptions and deductions against state income tax are computed for certain nonresident
   servicemembers. Servicemembers who are residents of South Carolina are not affected.
   1

Nonresident military servicemembers are those servicemembers whose state of legal residence is a state other than
South Carolina. Servicemembers whose state of legal residence is South Carolina are taxed on military income
earned in South Carolina to the extent that income is taxable under Federal law.

Law and Discussion
The federal Servicemembers Civil Relief Act (SCRA) 2 , which became law December 19, 2003,
updates and revises the Soldiers’ and Sailors’ Civil Relief Act of 1940. 3 The SCRA states that
“a tax jurisdiction may not use the military compensation of a nonresident servicemember to
increase the tax liability imposed on other income earned by the nonresident servicemember or
spouse that is subject to tax by the jurisdiction.” In other words, “a nonresident servicemember’s
military compensation cannot be used to increase the tax liability for other income of the
servicemember or spouse. . . .” 4
The SCRA was designed to negate a specific method of computation, “the so-called ‘Kansas
Rule’ [or ‘California Rule’] that permitted a state to tax the non-military income at a higher
rate.” 5
In certain states with graduated income tax rates, the income tax
rate which is applied to the off-base pay may be based on the
servicemembers’ total income, including military pay, and not the
off-base pay only. Including military pay in the calculation can
push the off-base pay into a higher tax bracket. That method of
calculating state income tax is, sometimes called the “California
Method” (although as many as 18 or more other states also use it). 6
Although the relevant SCRA provision was drafted to address the specific Kansas method above,
the SCRA’s language is broad enough to prohibit other means of computing tax liability,
including South Carolina’s method of prorating personal exemptions and deductions against total
income when applied to nonresident servicemembers with in-state non-military income or
nonresident servicemembers with spouses having in-state income and filing jointly. 7
Prior to the enactment of the Servicemembers Civil Relief Act, nonresident servicemembers
included military income in their entire adjusted gross income (AGI ) (“Income As Shown On
Federal Return”) in Column A of Schedule NR, but did not include military income in their
South Carolina AGI (“South Carolina Income”) in Column B of Schedule NR. This exempted
such military income from South Carolina income taxes; however, it also reduced the
servicemembers’ prorated personal deductions and exemptions (and those of the
servicemember’s spouse if married and filing jointly). Since, under this formula, the AGI
included the military compensation of the nonresident servicemember, the ratio used to prorate
the exemptions and deductions could be lower than if the military income was not included in the
2

Section 511(d) of the Servicemembers Civil Relief Act (SCRA), Pub. L. No. 108-189, 117 Stat. 2835, codified as
amended at 50 App. U.S.C. § 571(d).
3
See Terry M. Jarrett, The Servicemembers Civil Relief Act: Important New Protections For Those in Uniform, J.
Mo. B. 174, 178 (July/Aug. 2004).
4
H.R. REP. 108-81, 42-43, 2004 U.S.C.C.A.N. 2367, 2386.
5
Terry M. Jarrett, The Servicemembers Civil Relief Act: Important New Protections for Those in Uniform, J. Mo.
B. 174, 178 (July/Aug. 2004), citing United States v. State of Kansas, 580 F. Supp. 512 (D. Kan. 1984), aff'd, 810
F.2d 935 (10th Cir. 1987).
6
H.R. REP. 108-81, 55-56, 2004 U.S.C.C.A.N. 2367, 2397.
7
The proration formula is required by S.C. Code § 12-6-1720 (2000 and Supp. 2005).

AGI. As such, applying the lower ratio against the exemptions and deductions could have
caused an increase in South Carolina tax liability for nonmilitary income of the nonresident
servicemember or spouse.
Conclusion
In accordance with the Servicemembers Civil Relief Act, a nonresident servicemember is no
longer required to include any military income not taxable in South Carolina on Line 1, Columns
A and B, on Schedule NR (“Nonresident Schedule”) to SC Form 1040.
Note: Nonresident servicemembers due a refund for 2003 and 2004 should file an amended
individual income tax return, Form SC 1040X and Schedule NR, for each year a refund is due
and write “Nonresident Servicemember” across the top of the face of each return and Schedule
NR.

SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Ray N. Stevens
Ray N. Stevens, Director

March 28
, 2006
Columbia, South Carolina