State Tax Audit Assessments: Who Has Burden of Proof? | AccountingWEB

State Tax Audit Assessments: Who Has Burden of Proof?

Two recent court cases in Indiana, and one in South Carolina make you pause and ask - who has the burden of proof?

The Indiana Tax Court ruled in AE Outfitters Retail Co. v. Indiana Department of State Revenue (No. 49T10610126TA66, October 2011) and in Rent-A-Center East, Inc. v. Indiana Department of State Revenue (952 N.E. 2d 387) that Indiana could not force a taxpayer to file a combined return until it has determined that other, less drastic departures from "standard" separate return and apportionment methodologies will not provide an equitable allocation and apportionment of a taxpayer's income.

In both of the Indiana cases listed above, the taxpayer filed a separate return as required by Indiana law.  Upon audit, Indiana attempted to force the taxpayer to file a combined return.  The taxpayers protested and ended up in Indiana's Tax Court.  The Tax Court in both cases stated the burden of proof that the standard separate return and apportionment is invalid rests on the party that is deviating from the standard method.  Hence, the burden of proof was ruled to be on the state of Indiana. 

The state of Indiana has appealed the Rent-A-Center East, Inc. case to the Indiana Supreme Court.

In South Carolina, the Administrative Law Court recently ruled in Carmax Auto Superstores West Coast, Inc. vs. South Carolina Department of Revenue (Ct. of Appeals, Case No. 09-ALJ-17-0160-CC), that the alternative method proposed and assessed by South Carolina was reasonable.  In this case, the taxpayer filed its original return using the standard apportionment formula.  Upon audit, South Carolina deviated from the standard apportionment formula.  The Court said the taxpayer had the burden of proof to show that South Carolina's alternative method was not reasonable or that the standard method was reasonable. 

This case is currently in South Carolina's Court of Appeals.  Oral arguments in the Court of Appeals focused on who had the burden of proof.  Normally, when a taxpayer receives an audit assessment, the taxpayer has the burden to challenge it.  However, the burden of proof can also relate to specific issues.  For example, in the case of whether an affiliated group of companies is unitary, generally, the taxpayer is presumed to be unitary and the burden of proof is on the taxpayer.  In regards to business vs. nonbusiness income, generally, all income is presumed to be business income.  The burden rests on the taxpayer to prove that income is nonbusiness income.

Now, in regards to alternative apportionment, most state statutes say the burden of proof to prove that distortion exists rests with the party that requests to deviate from the standard apportionment formula. 

What do you think?  What will happen in Indiana's Supreme Court and South Carolina's Court of Appeals?  How does this impact your company's or client's filing positions?  When can a taxpayer request alternative apportionment or combined reporting?  Is combined reporting an alternative apportionment option? Must the state consider ALL other reasonable options before forcing a taxpayer to file a combined return?

This blog

Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States.  He also writes a weekly column in Tax Analysts State Tax Notes entitled, "The SALT Effect."  For more info, visit his website:

You can reach Brian at

Connect with Brian on LinkedIn. Follow Brian on Twitter. Join the Leverage | SALT LinkedIn Group, connect and contribute with your colleagues!  

Because state and local taxes are deceptively simple and endlessly complicated.

More from this blog

Bloggers crew

Steve Knowles has spent 25 years in business and practice in the UK, but he also worked in the states and the years haven't dulled his way of seeing an alternative view to everyone else, and every day is a new adventure.


Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies.


Allan Boress, CPA, with over 25 years as a practitioner and consultant to the accounting profession. Mr. Boress is the author of 12 published books in 6 different languages, including a best-seller, The "I-Hate-Selling" Book.


Larry Perry, CPA, CPA Firm Support Services, LLC, is the author of accounting and auditing manuals, author and presenter of live staff training seminars, and author of webcast and self-study CPE programs. He blogs about small audits, reviews, and compilations.

Sandra Wiley, COO and Shareholder, is ranked by Accounting Today as one of the 100 Most Influential People in Accounting as a result of her prominent role as an industry expert on HR and training as well as influence as a management and planning consultant. She is also a founding member of The CPA Consultant's Alliance. Sandra is a certified Kolbe™ trainer who advises firms on building balanced teams, managing employee conflict and hiring staff.

Maria Calabrese, CIR, Human Resources manager for Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC in Cranford, New Jersey, Maria's topics revolve around the world of: Mentoring, Performance management, and The "Y Generation," a.k.a. "The whY generation".


William Brighenti is a CPA, Certified QuickBooks ProAdvisor, and Certified [Business] Valuation Analyst, operating an accounting, tax, and QuickBooks consulting firm in Hartford, Connecticut, Accountants CPA Hartford.


Ken Garen, CPA, is the co-founder and President of Universal Business Computing Company (, a software development firm of high-volume, high-productivity accounting and payroll technology.


Eva Rosenberg, MBA, EA, is the publisher of, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.


Amy Vetter, CPA, CITP is the CPA Programs Leader for Intacct Corporation responsible for leading the CPA/BPO Partners nationally.

Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State tax Notes entitled, "The SALT Effect." For more info, visit his website:
Scott H. Cytron, ABC, is president of Cytron and Company, known for helping companies and organizations improve their bottom line through a hybrid of strategic public relations, communications, marketing programs and top-notch client service. An accredited consultant, Scott works with companies, organizations and individuals in professional services (accounting, finance, medical, legal, engineering), high-tech and B2B/B2C product/service sales.

Rita Keller is a nationally known CPA firm management consultant, speaker, author, mentor and blogger. She has over 30 years hands-on experience in CPA firm management, marketing, technology and administrative operations.

Stacy Kildal is the mom of two fantastic kids, an Advanced Certified QuickBooks ProAdvisor, Certified Enterprise Solutions ProAdvisor, Sleeter Group Certified Consultant, a nationally recognized member of the Intuit Trainer and Writer Network, and co-host of RadioFree QuickBooks.
Michael Alter's blog specializes in providing practical advice to those who seek greater profitability and practice management tactics that enhance deeper client relationships.

Sally Glick, CMO, Principal, Marketer of the Year in 2003 and AAM Hall of Famer in 2007, leads a lively discussion of the constantly expanding roles of marketing and the professional marketers that drive this initiative in accounting firms of all sizes.


The IMA Young Professionals Blog features the insights of IMA’s Young Professionals Committee. Committee members share advice and experiences on careers, continuing education, work/life balance, and other issues affecting young accounting and finance professionals.


FEI Financial Reporting Blog provides highlights from SEC, PCAOB, FASB, IASB, and other regulatory news, including reporting under Sarbanes-Oxley Sect 404. It is written by Edith Orenstein, Director of Technical Policy Analysis at FEI.


Sue Anderson has 30 years of experience in continuing education for accountants. Currently she is the program director for online CPE provider CPE Link.


Jim Fahey is COO of Apple Growth Partners, a regional CPA firm in Ohio. His focus is on the effective and efficient use of technology within the firm by all team members.

Caleb Newquist is the Editor-in-Chief of Sift Media US, overseeing content for both AccountingWEB and Going Concern.

Leita Hart-Fanta, CPA, CGFM, and CGAP is the author of "The Yellow Book Interpreted" and owner of a website devoted to training for governmental auditors.


AccountingWEB is more than just a U.S. team of journalists and financial and technology experts - we have an international side, too! Members of our British team who publish share their ideas, insights, and perspectives from across the pond.