Lifetime or Annual that is the question

And we have an answer

South Carolina’s investment tax credit is limited to $5 million per entity. That fact is undisputed. The dispute comes into play when a timeframe is presumed. The taxpayer (Duke Energy) said that the limitation is an annual limitation – it could only receive a tax credit of up to $5M each year for the past 15 years. The South Carolina Department of Revenue said it was a lifetime limitation. No matter how many years it took, the taxpayer was always limited to $5M in credit. The SC Court of Appeals had to weigh in on this fight, coming to a decision only recently.

Photo by Markus Winkler.

The tax credit

The investment tax credit is for qualified manufacturing and productive equipment placed in service. The amount of the credit varies based on the useful life of the property, ranging from 0.5% up to 2.5%. The credit is established in Section 12-14-60 of the South Carolina code, with § 12-14-60(A) establishing that the credit is allowed each year eligible equipment is placed in service. It is not until § 12-14-60(G) that the $5M limitation is introduced without reference to a timeline.

Duke Energy has been claiming the credit since at least 1996, but it was not until the 2011 through 2014 tax years that the SC Department of Revenue started disallowing credits based on the limitation. Almost $20M in tax credits were disallowed for those four years.

The fight

Duke Energy appealed the disallowance but lost the appeal. It appealed again to an Administrative Law Court but lost there as well. The ALC found the statute ambiguous, specifically whether the limitation was annual or lifetime. That ambiguity was resolved in favor of the Department of Revenue (this was decided before the Loper Bright decision, but it is unclear if that decision would have changed the state’s ruling, especially given the Appeal Court’s ruling), effectively making it a lifetime limitation.

That decision was then appealed to the SC Court of Appeals.

The decision

The Court of Appeals found that while the statute was ambiguous, the Department of Revenue and ALC were wrong for the following reasons.

First, the limitation was on an annual credit against an annual cap. Therefore, the limitation must also be annual.

Second, as a tax credit, it was meant to incentivize capital investment, and limiting such investment would contradict the statute’s intent.

Third, there is a carry-forward provision in the statute. This provision “further supports that the statutory cap is an annual limit.”

The decision ultimately favored Duke Energy, which left with the entire $20M in tax credits. The ruling is on the books, and the credit will be limited annually going forward (unless the SC legislature steps in).

But the decision itself was poorly written. The first argument is the strongest, but not by much. If you read the entire statute together, there is a good argument for the limitation to be an annual one. But if that were the case, there would be no ambiguity to argue over, and both the ALC and the Appeals Court found it ambiguous. The limitation was found at the far end of the code section, as far as you could get from the introduction of it being an annual credit. The fact that it is applied against an annual tax is just a red herring, as that would strip the legislature of its ability to invoke a lifetime limitation on any income tax credit.

The second argument is not internally consistent. The same argument could be applied to an annual limitation just as much as a lifetime limitation, so claiming it supports one but not the other is nonsense.

Finally, the carry-forward provision has nothing to do with the limitation, either structurally or mechanically. Again, this could have been used to argue that any limitation is invalid.

Did the Appeals Court get to the right decision? Maybe, but their opinion detracts from the decision far more than it adds to it. For taxpayers, this is a win (well, at least one taxpayer), and the limitation should be treated as annual for now.

Wrap-up

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The content of this article is for informational purposes only and should not be taken as tax, legal, benefits, financial, or HR advice. I am a lawyer, but receiving this newsletter does not mean I am your lawyer. Since rules and regulations change over time and can vary by location, consult a lawyer or HR expert for specific guidance.