Did an interstate motor carrier create South Carolina corporate income-tax nexus by regularly hauling freight into and across the state without a South Carolina terminal?

Plain-English summary

South Carolina Private Letter Ruling 89-13 held that an interstate motor carrier had substantial nexus with South Carolina and owed corporate income tax on the portion of its interstate earnings apportioned to the state.

The carrier had no terminal in South Carolina, but it regularly hauled freight into and across the state. Its trucks traveled approximately 1.71 million South Carolina miles in 1987 and 2.28 million miles in 1988. It also held a South Carolina Class F license authorizing freight deliveries into the state.

The Commission concluded that hauling freight on South Carolina highways was income-producing business activity within the state. The vehicle-mile apportionment formula limited the tax to the portion of income associated with South Carolina miles, while the state's highways, courts, police protection, and fire protection supplied benefits related to that activity.

The carrier's position

XYZ operated from an out-of-state terminal and hauled freight under contract for delivery to retail outlets in South Carolina and surrounding states. It did not own, lease, or rent terminal space in South Carolina.

After the Commission assessed penalties and interest for failing to file a South Carolina corporate income-tax return, XYZ argued that its exclusively interstate activity was not "doing business" in the state. It specifically challenged whether the tax had substantial nexus and whether it was fairly related to services South Carolina provided.

Why the Commission found nexus

Section 12-7-230 required a foreign corporation doing business or having income within South Carolina's jurisdiction to file and pay tax, including when its income arose from interstate commerce. The statute defined doing business to include activity in the state for financial profit or gain.

The ruling relied on the principle that common carriers for hire make highways their place of business. It also treated a unitary carrier's income as arising from a series of connected transactions: soliciting, picking up, hauling, delivering, and collecting for freight. Hauling was the transaction that primarily earned the income.

XYZ's millions of South Carolina highway miles were regular, continuous, and directly connected to earning freight income. Its Class F operating license also allowed deliveries into South Carolina and enhanced the business relationship producing a substantial source of its income. Those contacts supplied the required connection with the state.

Why the tax was fairly related to state services

The ruling said the constitutional test did not require the tax amount to equal the precise cost of services supplied to XYZ. The question was whether the tax measure reasonably related to the extent of the carrier's contact with the state.

South Carolina built, maintained, and repaired the highways used by XYZ's trucks. The state also supplied access to courts, fire protection, and police protection. Because motor carriers impose especially heavy wear on highways, the Commission found a substantial relationship between XYZ's in-state activity and the benefits South Carolina provided.

How the income was apportioned

Section 12-7-640(2) directed motor carriers of property to apportion net apportionable income using the ratio of vehicle miles inside South Carolina to total vehicle miles everywhere.

The Commission therefore described the assessment as taxing only the portion of XYZ's interstate income generated within South Carolina, rather than all of its interstate earnings.

What this means for you

Interstate motor carriers

Under this historical ruling, the absence of an in-state terminal did not prevent nexus when trucks regularly used South Carolina highways to earn freight income.

Businesses holding state operating authority

A state license supporting revenue-producing activity was an additional nexus fact. The Commission considered XYZ's Class F authority together with its highway activity.

Corporate tax and compliance teams

Separate the nexus question from the apportionment question. The ruling first found sufficient in-state business activity, then used a vehicle-mile ratio to identify the share of income taxable by South Carolina.

Readers applying the ruling today

PLR 89-13 applied statutes and constitutional authorities cited in 1989. Current filing duties and apportionment rules must be checked under current law rather than assumed from this historical document.

Common questions

Q: Did XYZ own or rent a South Carolina terminal?

A: No. Its in-state activity came from hauling freight into and across South Carolina on the state's highways.

Q: How many miles did its trucks travel in South Carolina?

A: The Highway Fuel Use Tax Quarterly Reports showed approximately 1.71 million miles in 1987 and 2.28 million miles in 1988.

Q: What operating authority did XYZ hold?

A: It filed for a Certificate of Public Convenience and Necessity and obtained a Class F license permitting freight delivery into South Carolina.

Q: Did South Carolina tax all of XYZ's interstate income?

A: No. The ruling applied a ratio of South Carolina vehicle miles to total vehicle miles to apportion net income.

Q: Can another carrier rely on PLR 89-13?

A: No. The ruling says it applied only to XYZ's facts, had no precedential value, and was not intended for general distribution.

Citations and references

• S.C. Code section 12-7-230 (Law. Co-op. Supp. 1988) — corporate return and income-tax requirement
• S.C. Code section 12-7-640(2) (1976) — motor-carrier vehicle-mile apportionment
• S.C. Code section 12-3-170 and SC Revenue Procedure 87-3 — PLR authority
• Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) — four-part Commerce Clause test
• Moorman Manufacturing Co. v. Bair, 437 U.S. 267 (1978) — due-process connection and rational-relation requirements
• Mobil Oil Corp. v. Commissioner, 445 U.S. 425 (1980), and Wisconsin v. J.C. Penney Co., 311 U.S. 435 (1940) — privilege of doing business and state-benefit principles
• Aero Mayflower Transit Co. v. Board of Railroad Commissioners, 322 U.S. 495 (1947) — common carriers' use of highways
• Mercury Motor Express v. South Carolina Tax Commission, 244 S.C. 134, 135 S.E.2d 756 (1964) — interstate motor-carrier income earned through South Carolina hauling
• Commonwealth Edison Co. v. Montana, 453 U.S. 609 (1981) — fair-relation analysis

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR89-13.pdf

Original ruling text

SC PRIVATE LETTER RULING #89-13

TO:

XYZ

SUBJECT:

Corporate Income Tax

DATE:

July 19, 1989

REFERENCE:

S.C. Code Ann. Section 12-7-230 (Law. Co-Op. Supp. 1988)
S.C. Code Ann. Section 12-7-640(2) (1976)

AUTHORITY:

S.C. Code Section 12-3-170
SC Revenue Procedure #87-3

SCOPE:

A Private Letter Ruling is a temporary document issued to a taxpayer, upon
request, and it applies only to the specific facts or circumstances related in the
request. Private Letter Rulings have no precedential value and are not
intended for general distribution.

Question:
Do the activities of XYZ constitute a substantial nexus with South Carolina to justify the
Commission's imposition of an income tax on XYZ's interstate earnings derived from the hauling
of freight into and across South Carolina?
Facts:
XYZ is an interstate motor carrier of freight under contract with X. From it’s out of state
terminal, XZZ hauls and delivers freight to X retail outlets located in South Carolina and other
surrounding states. XYZ does not own, lease nor rent terminal space in South Carolina. XYZ's
in-state activities stem from their use of South Carolina's highways to haul freight into and across
South Carolina.
The Commission issued a Notice of Assessment to XYZ, imposing penalties and interest for
their failure to file a South Carolina corporate income tax return as required by S.C. Code
Section 12-7-230. XYZ opposes this assessment stating that since they are engaged exclusively
in interstate commerce and, therefore, not "doing business" within South Carolina, they are
immune from South Carolina's corporate income tax. XYZ further asserts that the tax:

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(1)

is not applied to an activity having a substantial nexus with South Carolina, and

(2)

is not fairly related to the services provided by South Carolina.

Discussion:
S.C. Code Section 12-7-230 provides in part:
...every corporation organized under the laws of this State, doing or transacting business
partly within and partly without this State, shall make a return and 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, and except as otherwise provided, every foreign
corporation transacting, conducting, doing business, or having an income within the
jurisdiction of this State, whether or not the corporation is engaged in or the income
derived from intrastate, interstate, or foreign commerce, shall make a return and 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. The term "transacting", "conducting", or
"doing business", as used in this section shall include includes the engaging in or the
transacting of any activity in this State for the purpose of financial profit or gain.
S.C. Code Section 12-7-640(2) establishes the method for apportioning interstate income
generated by motor carriers:
(2)

Motor carriers of property and passengers. - Motor carriers of property shall
apportion their net apportionable income to South Carolina by the use of the ratio of
vehicle miles within South Carolina to total vehicle miles everywhere.

Thus, the Commission seeks only to tax that portion of XYZ's interstate income generated within
the borders of South Carolina.
South Carolina's jurisdiction to impose tax on interstate motor carriers is subject to the Federal
constitutional limitations of the Commerce Clause and Due Process Clause. It is well settled that
"interstate commerce is not immunized from carrying its fair share of the costs of the state
government in return for the benefits it derives from within the state." Northwestern States
Portland Cement Co. v. Minnesota, 358 U.S. 450, 461-62 (1959).
In Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) the U.S. Supreme Court developed
a four prong test to determine whether a state tax is constitutional:
(1)

Is the tax applied to an activity with a substantial nexus with the state,

(2)

Is the tax fairly apportioned,

(3)

Does the tax discriminate against interstate commerce, and

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(4)

Is the tax fairly related to the services provided by the taxing state.

Unlike the Commerce Clause, which is a grant of authority to Congress to regulate interstate
commerce, the Due Process Clause specifically limits the state's power to impose taxes. Before a
state can exercise its power to tax income derived from the activities of interstate commerce, the
tax must first pass Due Process scrutiny:
(1)

"no tax may be imposed unless there is some minimal connection (nexus) between
those activities and the taxing state, and

(2)

"the income attributed to the state for tax purposes must be rationally related to the
values connected with the taxing state. Moorman Mfg. Co. v. Bair, 437 U.S. 267,
272-73 (1978).

The taxpayer has questioned (1) whether its' activities within South Carolina create a "substantial
nexus" and (2) whether the tax is "fairly related to the services provided" by South Carolina. An
analysis of these requirements follows:
1.

"The requisite 'nexus' is supplied if the corporation avails itself of the 'substantial
privilege of carrying on business' within the taxing state." Mobil Oil Corp. v.
Commissioner, 445 U.S. 425, 436-37 (1980), quoting Wisconsin v. J.C. Penny Co., 311
U.S. 435, 444-45 (1940). It is well settled that common carriers for hire make the
highways their place of business. Aero Mayflower Transit Co. v. Board of R.R. Comm'rs
of State of Montana, 322 U.S. 495, 503 (1947). Thus, XYZ's argument that mere use of
South Carolina's highways to haul freight into and across South Carolina on an interstate
basis does not constitute doing business within South Carolina is without merit.
XYZ's argument that they do not generate income while hauling freight into and across
South Carolina is also without merit. The U.S. Supreme Court has held that the income
of a unitary business is derived from a series of transactions, each of which contributes
toward the production of the income. Underwood Typewriter Co. v. Chamberlain, 254
U.S. 113, 120-21 (1920); Bass v. State Tax Comm., 266 U.S. 271, 282 (1924). In
Mercury Motor Exp. v. South Carolina Tax Commission, the South Carolina Supreme
Court cited with approval the Court's "series of transactions" analysis and upheld an
income tax levied against an interstate motor carrier transporting property along South
Carolina's highways. 244 S.C. 134, 135 S.E.2d 756, 759 (1964).
In upholding the income tax, the court reasoned:
"The appellant (Mercury Motor) operates a unitary business and its gross income
and, therefore, its net income, is derived from a series of transactions. Here the
series of transactions consists of the solicitation of freight, the picking up of freight,
the hauling of freight, the delivery of the same and the collection of charges therefor.
Each transaction in the series contributes to the earnings and net income of the
appellant, and, while each transaction is necessarily incidental to the production of

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its income, the transaction which primarily earns the income is the hauling of the
freight. It seems to us to follow that as the trucks of the appellant move along,
through and over the highways of the State of South Carolina, the appellant is
engaged in income producing activity actually done and performed within the
borders of the State of South Carolina." Id. (emphasis added).
A review of the Highway Fuel Use Tax Quarterly Reports for the years 1987 and 1988
indicates that XYZ's trucks traveled approximately 1.71 and 2.28 million miles,
respectively, across South Carolina's highways. As the South Carolina Supreme Court
reasoned, each of these miles contributes toward XYZ's production of income.
XYZ also filed a Certificate of Public Convenience and Necessity for the Operation of
Motor Vehicle Carriers with South Carolina's Public Service Commission to obtain a
Class F license which permits XYZ to deliver freight into South Carolina. The privileges
associated with this license unquestionably enhances XYZ's business relationship with X;
the contract of which comprises a substantial source of XYZ's income.
Since XYZ is a common carrier for hire whose regular and continuous use of South
Carolina's highways constitutes "doing business" within South Carolina and since XYZ's
primary income producing transaction is the hauling of freight, XYZ's use of South
Carolina's highways to haul freight into and across South Carolina adequately provides
the requisite minimal connection between XYZ's in-state activities and South Carolina.
2.

The second requirement is satisfied under the "benefits of civilization test" which
provides:
"A tax is not an assessment of benefits. It is a means of distributing the burden of
the cost of government. The only benefit to which the taxpayer is constitutionally
entitled is that derived from his enjoyment of the privileges of living in an organized
society, established and safeguarded by the devotion of taxes to public purposes."
Commonwealth Edison Co. v. Montana, 453 U.S. 609, 622-23 (1981).

The test is not a comparison of the amount of tax assessed and the cost to the State of the benefits
it conveys to the taxpayer, but rather, that the measure of the tax reasonably relates to the extent
of the contact. Id., at 625-26.
"The simple but controlling question is whether the state has given anything for which it can ask
return." Wisconsin v. J.C. Penny Co., 311 U.S. 435, 444 (1940). South Carolina provides XYZ
with fire and police protection, access to this state's courts and use of our highways for pecuniary
benefit. South Carolina builds and maintains these highways. "Motor carriers for hire make
especially arduous use of roadways, entailing wear and tear much beyond that resulting from
general indiscriminate public use." Aero Mayflower Transit Co., 332 U.S. at 503. Thus, South
Carolina's continuous repair and maintenance of these roads conveys a substantial benefit upon
XYZ; a benefit which no other state can provide.

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Conclusion:
Because XYZ is a common carrier for hire authorized to haul and deliver freight into and across
South Carolina, their use of South Carolina's highways results in their "doing business" within
South Carolina, thereby, establishing substantial nexus with South Carolina. Because the use of
our highways is crucial to the successful operation of XYZ's business, South Carolina's
continuous repair and maintenance of our highways conveys a substantial benefit to XYZ.
Furthermore, South Carolina extends to XYZ the use of South Carolina's courts, fire and police
protection and, in general, the benefits of an orderly, civilized society.
Therefore, both Constitutional requirements raised by XYZ have been satisfied and the income
derived by XYZ as its trucks haul freight along our highways is subject to South Carolina's
corporate income tax.

SOUTH CAROLINA TAX COMMISSION

s/S. Hunter Howard Jr.
S. Hunter Howard, Jr., Chairman

s/A. Crawford Clarkson Jr.
A. Crawford Clarkson, Jr., Commissioner

Columbia, South Carolina
July 19
, 1989

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