CarMax and South Carolina Settle $2.6 Million Transfer Pricing Dispute: What It Means For Your Business

Used car retailer CarMax and the South Carolina tax authority settled a transfer pricing dispute representing an estimated $2.6 million in taxes and penalties, Bloomberg Tax reported last week.

The settlement ends CarMax’s appeal to the South Carolina Court of Appeals over an administrative court’s decision that would’ve required CarMax to file a combined South Carolina tax return for its western and eastern subsidiaries. The terms of the settlement have not been disclosed, but the case serves as a reminder of taxing authorities’ ability to force combined reporting when they believe that entities are using transfer pricing rules to avoid tax.

CarMax v. South Carolina: Case Background 

CarMax had three subsidiaries: CarMax East, CarMax West, and Glen Allen Insurance. In 2004, the parent company decided to restructure its business, resulting in a significant increase in CarMax West’s income and a significant reduction in CarMax East’s income, and in turn, its South Carolina tax base.

Upon examination, the South Carolina Department of Revenue found that CarMax’s separate-entity reporting did not fairly represent CarMax East’s business activity in the state and that combined reporting was a reasonable alternative. State-imposed combined reporting would shift more taxable income into South Carolina, resulting in a larger state income tax liability.

An administrative law judge upheld the department’s position in 2024, affirming a $2.6 million assessment of additional tax and interest. CarMax appealed, arguing the lower court used the wrong legal standard. But before the appeals court ruled, the parties settled.

CarMax v. South Carolina: Takeaways for Multistate Businesses 

South Carolina is far from the only state to pursue cases like CarMax. States often invoke their authority to require combined filing when multi-entity businesses appear to artificially shift taxable income from higher-tax states into lower-tax states through transfer pricing arrangements.

States generally bear the burden to prove that a company distorted its taxable income through intercompany transactions or allocation arrangements. Still, businesses with intercompany pricing arrangements, shared-services subsidiaries, or entities operating in multiple states should make sure they can support their separate reporting position and intercompany transactions.

In general, contemporaneous documentation and defensible transfer pricing studies remain the best protection against a forced combination argument. When prepared before a tax authority’s inquiry, these resources can show the reasonableness of intercompany transactions and their compliance with federal and state law.

Smith + Howard: Your Partners in Transfer Pricing Compliance

Smith + Howard’s Specialty Tax Services helps multi-entity businesses comply with federal and state transfer pricing rules. Contact Brad Pittman to learn more about your business’s exposure to a combined reporting requirement and the best ways to defend your transfer pricing positions, whether across state or country lines.