Income/Franchise:
South Carolina DOR Posts Draft Guidance on Sourcing Receipts from Services

Revenue Ruling #25-x: Sourcing Gross Receipts from Services (Income Tax) [Public Draft], S.C. Dept. of Rev. (3/10/25). The South Carolina Department of Revenue (Department) posted a draft revenue ruling “circulated for public comment” that addresses its current position on the “income-producing activity method” of sourcing gross receipts from services to South Carolina (i.e., including such receipts in the numerator of a taxpayer’s gross receipts factor) for state corporate income tax purposes. The draft guidance includes sections discussing:

1. Apportionment, generally;
2. South Carolina’s apportionment statutes;
3. Gross receipts;
4. The determination and sourcing of gross receipts from services, including income-producing activity, under South Carolina law; and
5. Considerations for characterizing certain transactions as services or the use of an intangible.

In doing so, the Department notes that “income-producing activity,” “costs of performance,” and “market sourcing” are distinct concepts, and that it is presently “a party to litigation” related to its sourcing methodology, and therefore, its position may be re-evaluated as that litigation is “resolved by the judicial system.”

According to the draft guidance, “income-producing activity” is the purpose or reason that participants pay to enter a transaction (or combination of transactions) which produces income for the service provider. That is, “income-producing activity is what participants in the transaction(s) providing the taxpayer’s income want in exchange for payment.” The draft guidance also explains that income-producing activity is determined by the substance rather than the form of the transaction(s) related to the activity, considering all relevant facts and circumstances. Moreover, the draft guidance states that if income-producing activity occurs in more than one place, state law “takes a proportional approach” where receipts are considered South Carolina receipts to the extent the income-producing activity is in South Carolina. The Department also explains that “where the taxpayer’s income is generated by transactions that may be plausibly viewed as either using intangibles or providing services, the income will often be sourced to the same state regardless of the characterization under which the facts are analyzed.” Comments on this draft guidance are due by April 8, 2025. Please contact us with any questions.