The South Carolina Court of Appeals ruled in favor of the South Carolina Department of Revenue (SCDOR) in a tax dispute involving U.S. Bank National Association. The court's decision, issued on October 21, 2026, affirms the assessment of additional bank tax, interest, and penalties on U.S. Bank's operations in the state from 2011 to 2016. This ruling could have significant implications for how banks operating in South Carolina report their income and pay taxes.

The case, identified as Appellate Case No. 2024-001577, centers around U.S. Bank's claims that the SCDOR misapplied state tax laws regarding the sourcing of income from its mortgage and credit card operations. U.S. Bank argued that the penalties imposed were unwarranted. The court ultimately upheld the assessment, affirming the Administrative Law Court's (ALC) findings.

Background

U.S. Bank, headquartered in Minnesota, operates a trust office in South Carolina but does not have any banking branches in the state. During the years in question, the bank employed between 40 and 54 individuals in South Carolina and filed approximately 1,500 property tax returns annually. The bank's operations include generating income from mortgage activities and credit card services, both of which are primarily managed outside South Carolina.

In 2018, after an audit by the SCDOR, U.S. Bank received a proposed notice of adjustment, which included all receipts related to its mortgage and credit card operations from South Carolina borrowers. The bank appealed this notice, but the SCDOR upheld it, leading to U.S. Bank's further appeal to the ALC. The ALC's initial order upheld the SCDOR's assessment but modified some penalties. U.S. Bank later amended its tax returns to reflect its market sourcing analysis.

The Ruling

The South Carolina Court of Appeals affirmed the ALC's decision, which required U.S. Bank to include various income streams in its gross receipts and apportion that income to South Carolina. The court specifically addressed the classification of U.S. Bank's mortgage servicing fees, interest income, and gains from the sale of mortgages as receipts from intangibles and services used within the state.

The court stated, "substantial evidence in the record supports the ALC's findings that U.S. Bank's income-producing activities performed for its mortgage and credit card receipts took place within South Carolina."

Furthermore, the court modified the ALC's classification of U.S. Bank's credit card interest and fees, determining that these should not be classified as receipts from intangibles. Instead, the court found that the income derived from credit card services is based on the services rendered within the state, aligning with the provisions of South Carolina tax law.

Impact

This ruling has significant implications for U.S. Bank and potentially other banks operating in South Carolina. The decision clarifies how income from mortgage and credit card operations should be reported and taxed, emphasizing that income-producing activities must be sourced to the location where they occur. The court's affirmation of the penalties also highlights the importance of compliance with state tax regulations and the consequences of failing to accurately report income.

By reinforcing the Department of Revenue's position, the ruling may lead to increased scrutiny of how banks and other financial institutions allocate their income across states. This could prompt banks to reassess their tax strategies and compliance practices to avoid similar disputes in the future.

What's Next

U.S. Bank has the option to appeal the decision to the South Carolina Supreme Court, although it is unclear if they will pursue this route. There are no related cases pending that could impact this ruling directly.