How did South Carolina source an engineering firm's service receipts when employees and contractors worked in multiple states?

Plain-English summary

The South Carolina Department of Revenue ruled that an engineering consulting firm had to source its service receipts based on where the engineering work was performed.

The firm worked in multiple states, had one employee working from a South Carolina home, and also hired independent engineers who performed services in South Carolina and elsewhere. Because the firm's principal income came from services, it used a gross-receipts apportionment factor: South Carolina receipts in the numerator and total receipts everywhere in the denominator.

Engineering work performed in South Carolina counted toward the South Carolina numerator whether an employee or an independent contractor did the work. The Department reasoned that both groups performed the firm's income-producing activity for its customers.

The apportionment rule applied

Section 12-6-2210 subjected a multistate business to South Carolina income tax on the portion of business carried on in the state. Section 12-6-2290 required a taxpayer whose principal income came from services to apportion using gross receipts.

Under § 12-6-2295(5), when income-producing activity occurred partly inside and partly outside South Carolina, receipts were attributable to South Carolina to the extent that activity was performed in the state.

For this engineering firm, the income-producing activity was the engineering expertise and time supplied to clients—not the customer's location, billing address, or place where a finished design was ultimately used.

Employees and payroll

The ruling relied on Lockwood Greene Engineers, Inc. v. South Carolina Tax Commission. That decision treated the services rendered by an engineering firm's personnel as the activity that measured where the firm's business was carried on.

For an engineering firm using only employees, the ruling described a payroll comparison: South Carolina payroll for services divided by payroll for services everywhere, multiplied by total business receipts, could determine South Carolina service receipts.

Independent contractors

The cited court decision did not involve independent contractors, but this taxpayer did. The Department concluded that contractor-performed engineering work also had to be considered because it measured the firm's activity in South Carolina.

The ruling says contractor amounts should be considered in apportioning the firm's income, but it does not prescribe a detailed contractor-allocation worksheet. A business applying this reasoning should preserve records showing where each contractor performed the engineering services.

What this means for similar firms

Engineering and technical consulting firms

Track the work location of both employees and contractors. A remote employee or contractor working in South Carolina can affect the state's receipts numerator even when the firm has no traditional South Carolina office.

Accountants and tax teams

Do not omit contractor activity from the sourcing analysis merely because contractors are not on payroll. The holding focuses on who performed the income-producing engineering work and where that work occurred.

Common questions

Q: Were receipts sourced to the customer's location?

A: Not under this ruling. They were sourced based on where the engineering services were performed.

Q: Did a South Carolina home-based employee count?

A: Yes. The ruling treated engineering services performed in South Carolina as South Carolina activity.

Q: Did independent-contractor work count too?

A: Yes. Contractor services performed in South Carolina had to be considered in the South Carolina receipts calculation.

Q: Can another engineering firm rely on this PLR?

A: No. It binds the Department only for the requesting taxpayer and accurate facts presented.

Citations and references

• S.C. Code Ann. § 12-6-2210 — taxation of business conducted partly within and partly outside South Carolina
• S.C. Code Ann. § 12-6-2290 — gross-receipts apportionment for a service business
• S.C. Code Ann. § 12-6-2295(5) — sourcing when service activity occurs partly within and partly outside the state
• Lockwood Greene Engineers, Inc. v. South Carolina Tax Commission, 361 S.E.2d 346 (S.C. Ct. App. 1987) — engineering-service apportionment authority discussed by the ruling

Subject

Apportionment of Engineering Service Income

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR13-3.pdf

Original ruling text

State of South Carolina

Department of Revenue
300A Outlet Pointe Blvd., Columbia, South Carolina 29210
P.O. Box 125, Columbia, South Carolina 29214

SC PRIVATE LETTER RULING #13-3

SUBJECT:

Apportionment of Engineering Service Income
(Income Tax)

REFERENCES:

S. C. Code Ann. Section 12-6-2210 (2012)
S. C. Code Ann. Section 12-6-2290 (2012)
S. C. Code Ann. Section 12-6-2295 (2012)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (2005)
SC Revenue Procedure #09-3

SCOPE:

A Private Letter Ruling is an advisory opinion issued to a specific
taxpayer by the Department to apply principles of law to a specific set of
facts or a particular tax situation. It is 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 another
Departmental 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. How is income of ABC Consulting, Inc., an engineering service business, apportioned for
   South Carolina income taxes?
2. Are engineering services performed in South Carolina by independent contractors for ABC
   Consulting, Inc.’s customers used in determining what gross receipts from engineering services
   are sourced to South Carolina?
   Conclusions:
3. ABC Consulting , Inc. apportions its income using gross receipts based on where the
   engineering services are performed.

2. Engineering services performed by independent contractors, as well as employees, in South
Carolina should be considered in determining ABC Consulting, Inc.’s gross receipts sourced to
South Carolina for apportionment purposes.
Facts:
ABC Consulting, Inc. (“ABC”) provides engineering consulting services for the development of
product designs for the automotive and consumer electronic market. ABC has approximately
fifteen employees. One of the employees lives in South Carolina and works out of his home.
ABC also hires engineers as independent contractors that perform services in South Carolina as
well as other states.
Discussion:
A taxpayer conducting business partly within and partly outside of South Carolina is subject to
income tax based on the portion of business carried on in South Carolina. Code Section 12-62210. The portion of income subject to South Carolina tax is determined through
apportionment. 1 ABC does business in South Carolina, as well as other states, and has requested
guidance on apportioning income from its engineering business conducted in South Carolina.
If a taxpayer’s principal profits or income are derived from providing services, the taxpayer
apportions its income based on gross receipts. Code Section 12-6-2290. Income subject to
apportionment is multiplied by the gross receipts factor to determine income subject to tax in
South Carolina. The numerator of the gross receipts factor is gross receipts from within this State
during the taxable year and the denominator is total gross receipts from everywhere during the
taxable year. Code Section 12-6-2290.
In connection with services, Code Section 12-6-2295(5) provides that if the income-producing
activity is performed partly within and partly without this State, gross receipts are attributable to
this State to the extent the income-producing activity is performed within this State.
In Lockwood Greene Engineers, Inc. v. South Carolina Tax Commission, 293 S.C. 447, 361
S.E.2d 346 (1987), the South Carolina Court of Appeals considered the issue of apportioning
income from an engineering firm. In describing Lockwood Greene’s business, the court found:
Lockwood provides services to its clients through highly trained engineers and
personnel in its various offices. A client pays an engineering firm for the expertise
and time of its employees. Therefore, an engineering firm’s business carried on in
a state is reasonably measured by the services rendered by its personnel in this
State.

1

Allocation of certain income may be required before apportioning the remaining income; however, allocation is not
an issue in this private letter ruling..

The court concluded that when apportioning income for personal service providers such as
engineering firms, the income producing activity is the engineering services provided to clients.
As a result, the state where those engineering services are performed is where gross receipts from
its services should be sourced.
The Court further upheld the Department of Revenue’s 2 position that gross receipts from
services within the state and the total gross receipts from services may be calculated by
comparing the firm’s South Carolina payroll to its total payroll. In other words for an
engineering service firm that only uses employees to perform its services, payroll for services
performed in South Carolina over payroll for services performed everywhere should be
multiplied by gross receipts of the business to obtain gross receipts from within South Carolina.
Lockwood Greene Engineers, Inc. did not involve independent contractors; however, in order to
measure the activity of ABC performed in the State, the work of independent contractors they
hire must be considered. To the extent ABC uses independent contractors to perform engineering
services, these amounts should be considered in apportioning income to the South Carolina.

SOUTH CAROLINA DEPARTMENT OF REVENUE

s/William M. Blume, Jr.
William M. Blume, Jr., Director
August 7
, 2013
Columbia, South Carolina

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.

2

Formerly named the Tax Commission.