South Carolina Court of Appeals Upholds Market-Based Sourcing

On October 21, 2026, the South Carolina Court of Appeals ruled that Mastercard International’s income-producing activity was the overall operation of a payment network to facilitate cashless transactions. The court ruled that amounts attributable to sales made in South Carolina should be deemed in-state receipts for sourcing purposes.¹ The court disregarded the fact that Mastercard’s actual activity in processing these transactions occurred out of state and that it did not receive fees from in-state merchants and cardholders. In effect, the court looked to Mastercard’s customer’s customer and applied a market-based sourcing standard despite the fact that S.C. Code § 12-6-2295(A)(5) states: “receipts from services if the entire income-producing activity is within this State. If the income-producing activity is performed partly within and partly without this State, sales are attributable to this State to the extent the income-producing activity is performed within this State.”  

Mastercard International is based outside of South Carolina. It processed multiparty credit card transactions outside of South Carolina. Mastercard did not receive fees from the cardholders. The income at issue was received from the financial institutions that were participants in these multiparty transactions. Mastercard processed all these transactions from facilities that were located outside of South Carolina. Applying the state’s sourcing provisions, based on the location of the income-producing activity, Mastercard sourced none of its receipts to South Carolina. On audit, the Department of Revenue (“Department”) concluded that the income-producing activity was the provision of a payment network that enables cashless transactions. On appeal of the resulting assessment, the South Carolina Administrative Law Court (ALC) upheld the Department’s determination and concluded that, in part, some of the income-producing activity occurred in the state. Mastercard appealed.  

Under state law, 1) when an income-producing activity is performed both in and out of the state, the sales are attributable to the state to the extent such activity is performed in the state (S.C. Code Ann. § 12-6-2290), and 2) when a corporation derives revenue from activities occurring both in and out of the state, the revenue generated from its services performed within the state is its gross receipts from the state.  

The court and the ALC before that took note of the Court of Appeals’ 2017 decision in DIRECTV, Inc.,² in which it upheld the finding that the taxpayer’s income-producing activity was its delivery of its signal to its customers nationwide and that the delivery of its signal to South Carolina customers was “represented by 100% of its South Carolina subscription receipts.” Mastercard argued that its income-producing activity occurs when it delivers an authorization message to its interface processors—none of which are located in the state—and said that this was akin to DIRECTV’s delivery of its signals. The court disagreed. 

Acknowledging that Mastercard did not receive fees from cardholders or merchants but from their financial institutions, the court said that neither that law nor DIRECTV mandated that the activity be based solely on who pays for the service. Moreover, DIRECTV did not refer to a final act to define an income-producing activity. The court considered all the evidence presented and agreed with the ALC that Mastercard’s income-producing activity was the provision of a payment network that connects cardholders and merchants with their banks to facilitate cashless transactions. “The ALC did not err in determining the fees generated by Mastercard’s processing of transactions that occur in South Carolina is income attributable to South Carolina, even though the technical processing occurs elsewhere,” said the court. 

Ryan’s Take and Action Steps 

This decision marks another example of a state revenue department replacing the mandated income-producing activity sourcing standard with a market-based approach when it does not like the result produced by the statutory method—for taxpayers not based in the taxing state. The Florida Department of Revenue has done this for years. Moreover, there is no statutory support for looking through a taxpayer’s customer to the customer’s customer.  

Setting that aside, multistate companies with actual operations in South Carolina should examine the Department’s reasoning to see whether there is an opportunity to favorably employ the approach advanced by the Department of Revenue and upheld judicially. All service providers apportioning their income to South Carolina should carefully examine this decision to determine whether they need to reconsider their sourcing. For questions about South Carolina apportionment, please reach out to a technical expert. 

¹ Mastercard International Incorporated v. South Carolina Department of Revenue, Case No. 2024-001252 (October 21, 2026). 

² DIRECTV, Inc. & Subsidiaries v. South Carolina Department of Revenue, 421 S.C. 59 (Ct. App. 2017).

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