Heard November 18, 2015
Appeal from the Administrative Law Court. Ralph King Anderson, III, Administrative Law Judge. Appellate Case No. 2014-002736.
Burnet Rhett Maybank, III, of Nexsen Pruet, LLC, of Columbia; Jeffrey A. Friedman, of Washington, D.C., Eric S. Tresh and Maria M. Todorova, of Atlanta, Georgia, all of Sutherland, Asbill & Brennan, LLP, all for Petitioner Duke Energy Corporation.
John Marion S. Hoefer, Tracey Colton Green, and John William Roberts, all of Willoughby & Hoefer, PA, of Columbia; and Milton Gary Kimpson, of Columbia, all for Respondent South Carolina Department of Revenue.
CHIEF JUSTICE PLEICONES. HEARN, J., and Acting Justices James E. Moore, Robert E. Hood and G. Thomas Cooper, Jr., concur.
ON WRIT OF CERTIORARI TO THE COURT OF APPEALS
PLEICONES, CHIEF JUSTICE
We granted certiorari to review the Court of Appeals' decision affirming the administrative law judge's finding that the principal recovered from the sale of short-term securities was not includible in the sales factor of the multi-factor apportionment formula, and, therefore, Duke Energy was not entitled to a tax refund. See Duke Energy Corp. v. S.C. Dep't of Revenue, 410 S.C. 415, 764 S.E.2d 712 (Ct.App. 2014). We affirm as modified.
The controversy in this case arises from the South Carolina Department of Revenue's (" SCDOR" ) computation of Duke Energy's taxable income.
Duke Energy generates and sells electricity. Because Duke Energy does business in both North Carolina and South Carolina, it must apportion its income to determine its income tax liability in South Carolina. See S.C. Code Ann. § 12-6-2210(B) (2014) (" If a taxpayer is transacting or conducting business partly within and partly without this State, the South Carolina income tax is imposed upon a base which reasonably represents the proportion of the trade or business carried on within this State." ).
Duke Energy has a treasury department responsible for purchasing and selling securities, such as commercial paper, corporate bonds, United States Treasury bills and notes, United States money market preferred securities, loan repurchase agreements, and municipal bonds. In 2002, Duke Energy filed amended corporate tax returns with the SCDOR for the income tax years of 1978 to 2001, seeking a total refund of $126,240,645 plus interest. In the amended returns, Duke Energy sought to include the principal recovered from the sale of short-term securities from 1978 to 1999 in the sales factor of the multi-factor apportionment formula. In its original returns, Duke Energy included only the interest or gain from those transactions.
The SCDOR denied the refund request. Duke Energy appealed the decision to the SCDOR's Office of Appeals. The Office of Appeals denied Duke Energy's refund request, finding, inter alia, that including recovered principal in the apportionment formula: was contrary to the SCDOR's long-standing administrative policy, would lead to an absurd result, and would misrepresent the amount of business Duke Energy does in South Carolina.
Duke Energy filed a contested case in the Administrative Law Court (" ALC" ). The ALC was asked to determine whether Duke Energy, in its amended returns, properly included the principal recovered from the sale of short-term securities in the sales factor of the multi-factor apportionment formula. The parties filed cross-motions for summary judgment. Duke Energy claimed it was required by S.C. Code Ann. § 12-6-2280 (1995) to include all monies recovered from any sales in the " total sales" computation of the apportionment calculation, including the principal recovered from the sale of short-term securities. The SCDOR disagreed, and the ALC granted summary judgment to the SCDOR on this issue. Specifically, the ALC found this issue is novel in South Carolina, and adopted the reasoning of states that have found including the principal recovered from the sale of short-term investments in an apportionment formula would lead to " absurd results" by greatly distorting the calculation, and by defeating the intent and purpose of the applicable statutes.
The Court of Appeals affirmed, albeit applying a different analysis.
We granted Duke Energy's petition for a writ of certiorari to review the ...