Mastercard International Inc. v. SCDOR

THE STATE OF SOUTH CAROLINA In The Court of Appeals Mastercard International Incorporated, Appellant, v. South Carolina Department of Revenue, Respondent. Appellate Case No. 2024-001252 Appeal From The Administrative Law Court Milton G. Kimpson, Administrative Law Judge Deborah Brooks Durden, Administrative Law Judge Opinion No. 6167 Heard May 6, 2026 – Filed October 21, 2026 AFFIRMED John C. Von Lehe, Jr. and Bryson Moore Geer, both of Nelson Mullins Riley & Scarborough, LLP, of Charleston; Michael J. Kerman, of Washington, D.C.; and Leah Robinson, of New York, New York, all for Appellant. Robert Merrel Cook, II and Wayne Allen Myrick, Jr., of the South Carolina Department of Revenue, of Columbia; and Sean Gordon Ryan, of Camden, all for Respondent. VINSON, J.: In this appeal from the administrative law court (ALC), Mastercard International Inc. appeals the ALC's decision upholding the South Carolina Department of Revenue's assessment of corporate income taxes, license fees, penalties, and interest for tax years 2007 through 2016.1 Mastercard raises three issues on appeal. First, Mastercard argues the ALC erred in determining it had income-producing activity in this state. Specifically, Mastercard argues the ALC erred by disregarding its "final act" of delivering its processing services to its paying customers and instead identifying its income-producing activity as the provision of an overall network. Second, Mastercard argues the ALC erred by allowing the Department's proffered expert, Jim Hawkins, to testify and by relying on his testimony to support its decision. And third, Mastercard argues the ALC erred by upholding the Department's imposition of penalties for failure to file returns under section 12-54-43(C) of the South Carolina Code (2014). The central issue in this case is whether and to what extent Mastercard, as a corporate taxpayer, has income-producing activity in this state under section 12-6-2295(A)(5) of the South Carolina Code (2014 & Supp. 2025) and the holding of DIRECTV, Inc. & Subsidiaries v. South Carolina Department of Revenue, 421 S.C. 59, 804 S.E.2d 633 (Ct. App. 2017). Section 12-6-2295(A)(5) applies to taxpayers engaged in providing services and requires that in apportioning income earned from services for purposes of calculating corporate income tax, a multi-state corporation's "sales are attributable to this State to the extent the income-producing activity is performed within this State." This court interpreted section 12-6-2295 in DIRECTV. See 421 S.C. at 73, 804 S.E.2d at 640 ("Giving the statutory language its plain and ordinary meaning, we find section 12-6-2295(A)(5) establishes that if a corporation generates revenue or income from activity performed exclusively within South Carolina, then its gross receipts must include that income in the numerator of the gross receipts ratio. However, if a corporation, acting on a multistate level, derives its revenue from activities occurring both inside and outside of South Carolina, then the revenue generated from its services performed within South Carolina are its gross receipts from South Carolina, and thus, must be included in the numerator of the gross receipts ratio."). In that case, this court upheld the ALC's finding that DIRECTV's income-producing activity was its delivery of its signal to its customers nationwide and that therefore the delivery of its signal to South Carolina customers "represented by 100% of its South Carolina subscription receipts." Id. at 75, 804 S.E.2d at 641. 1 Administrative Law Judge Milton G. Kimpson heard and decided the case, but the case was reassigned to Judge Durden after Judge Kimpson's election to the circuit court bench. Here, the Department determined Mastercard has income-producing activity occurring in this state through its provision of a payment network that facilitates cashless transactions between cardholders and merchants at points of sale throughout the United States, including in South Carolina. Mastercard maintains it has no income-producing activity in this state because all of its payment processing and related services are performed outside of South Carolina and its customers are the respective financial institutions of the cardholders and merchants, rather than the cardholders and merchants themselves. Mastercard asserts that none of its gross receipts should be sourced to South Carolina. Alternatively, Mastercard offers that to the extent it has any income-producing activity in this state, such activity should be sourced only to the fees it earned from its South Carolina bank customers. We affirm the ALC's determination that Mastercard has income-producing activity in South Carolina through its provision of an overall network in this state because it generates income when a cardholder uses a Mastercard-branded card or device to purchase goods or services from merchants in this state. FACTS A. Mastercard's Business Operations We begin our discussion as we did in the DIRECTV opinion by providing an overview of Mastercard's business operations. We will then detail the Department's determination and the proceedings before the ALC. Mastercard is incorporated in Delaware with its headquarters in Purchase, New York. The physical components of the Mastercard network, which include its two data centers located in Missouri and the Mastercard Interface Processors (MIPs)2 located at its customers' facilities or processing centers, are all located outside of South Carolina. In its annual reports,3 Mastercard described itself as a global payments and technology company that connects billions of consumers, thousands of financial institutions, 2 MIP is the branded name for a Mastercard server that runs Mastercard's proprietary software that facilitates transaction authorization. The primary function of the MIP is to send and receive transaction request and response messages. Mastercard owns the MIPs and leases them to its customers. 3 The record includes Mastercard's Annual Reports on Form 10-K for 2008 through 2016.  millions of merchants, governments and businesses worldwide, enabling them to use electronic forms of payment instead of cash and checks. . . . [Mastercard] use[s its] technology and expertise to make payments more convenient, secure and efficient to enable consumers to meet their needs and to provide value to all stakeholders in the payments system. Mastercard operates what it refers to as a "payment network" called the "Mastercard Worldwide Network" to "facilitate the processing of transactions." This payment network, which is referred to as a "'four-party' payment system," "involves four participants in addition to [Mastercard]: (1) the cardholder, (2) the merchant, (3) the merchant's financial institution (the 'acquirer'), and (4) the cardholder's financial institution (the 'issuer')."4 Mastercard illustrated this system using this diagram in each of its annual reports from 2008 to 2013: Mastercard does not issue cards, extend credit to cardholders, or determine any applicable interest rates or other fees charged to cardholders. Nor does it have direct contractual relationships with merchants or cardholders. Instead, Mastercard's customers are the financial institutions that act as issuers and acquirers in the four-party system. 4 Mastercard provided these descriptions in its annual reports. In the same annual reports, Mastercard has stated that "[its] gross revenue is generated by assessing [its] customers based primarily on the dollar volume of activity on the cards and other devices that carry [its] brands and from the fees that [it] charge[s its] customers for providing transaction processing and other payment-related products and services." Mastercard reported that its income is therefore "impacted both by the number of transactions that [it] process[es] and by the use of cards carrying [its] brands." It categorizes its income into five revenue streams5: (1) "domestic assessments," (2) "cross-border volume fees," (3) transaction processing, (4) "other fees," and (5) rebates and incentives.6 However, it stated that it "receives the overwhelming majority of its income from three revenue streams": (1) authorization, clearing, and settlement (collectively referred to as "switching");7 (2) network membership fees (referred to as "assessment fees"); and (3) other fees. Switching is part of Mastercard's transaction processing. The first step in the switching process (authorization) is the "approval or decline of a request for a payment transaction" that takes place when a cardholder uses a Mastercard-branded credit or debit card to purchase goods or services. Authorization occurs almost instantaneously: Mastercard reported an average network response time of 130 milliseconds in 2011. The second step (clearing) is the process through which Mastercard determines the net positions of the issuer and acquirer banks at the end of a cycle—in other words, the amount the issuer owes or is owed by the acquirer and vice versa. The final step of the switching process (settlement) is the process through which funds are exchanged between the issuers and acquirers based upon the clearing information after the transaction has been authorized and cleared. Mastercard computes final settlement amounts and sends transfer funds orders to its settlement bank. Mastercard facilitates the exchange of funds between the parties using a settlement bank of the customers' choosing (which Mastercard must also approve) and a settlement bank of Mastercard's choosing. Assessment fees consist of both domestic assessments and cross-border volume fees, but they are fees charged for the same services—the difference depends on 5 In 2016, Mastercard reported its total net revenue from these five sources was $10.7 billion, with a net income (after taxes) of $4 billion. 6 Rebates and incentives are contra-revenue, meaning they are deducted from revenue. 7 We will refer to this process as "authorization, clearing, and settlement" and "switching" interchangeably in this opinion. whether the financial institutions are both located in the United States or if one is in a different country. These fees are charged to member financial institutions for the (1) maintenance of the safety and integrity of the "physical network" or infrastructure and development of software to enhance the network; (2) enforcement of Mastercard's rules; (3) marketing and advertising; and (4) detection and prevention of fraud and cyberattacks.8 Other fees consist of "other payment-related products and services," including "safety and security services fees" for the prevention, detection, and response to fraud to ensure the safety of the transactions made on Mastercard products and "loyalty and rewards solutions fees" charged to issuers for benefits provided to consumers with Mastercard-branded cards. Mastercard describes the other fees category as "the smaller category of [its] revenue streams." As detailed in Mastercard's annual reporting, Mastercard charges fees for transaction processing (which includes switching) based primarily upon the number of transactions processed. It charges its customers assessment fees based primarily on the gross dollar volume of activity (i.e., the total dollar amount of a transaction) on cards and other devices that carry Mastercard's brands. Revenue from the other fees category is not incurred on a per-transaction basis. B. The Department's Assessment and the ALC Proceedings In December 2019, the Department issued a final agency determination assessing Mastercard $6,041,666 in income tax and $84,476 in license fees, plus penalties and interest9 for the 2007 to 2016 tax period. The Department identified Mastercard's income-producing activity as the provision of a payment network that provides the ability to complete transactions for goods and services without the use of cash or checks and determined this network produces income only when a cardholder uses a card to complete a transaction. The Department stated, "It is [the] accessing of the network by a cardholder—the income producing activity— 8 Mastercard's witnesses elaborated that before Mastercard became a for-profit company, it assessed these fees to member financial institutions for these costs, which it divided among the members according to their proportionate use of the network (based upon dollar volume). Assessment fees still cover the same costs, but now Mastercard structures the fees so that it also earns a profit. 9 As of January 2020, the amounts assessed for penalties and interest were $2,941,224 and $1,560,722, respectively. [that] produces the revenue generated when merchants accept [c]ards to complete transactions." Mastercard requested a contested case hearing before the ALC to challenge the Department's determination. Mastercard argued that the primary services it provided to its customers were authorization, clearing, and settlement. It contended it had no income-producing activity in this state because all of the switching processes were performed elsewhere and thus the income-producing activity related to switching fees, assessment fees, and other fees occurred outside of South Carolina. The ALC heard the case March 8 through 11, 2022. The ALC admitted thirty-seven joint exhibits, including several versions of the Mastercard Rules, the Mastercard Authorization Manual, the Mastercard Settlement Manual, and Mastercard's Annual Reports on Form 10-K for 2008 through 2016.10 The ALC also admitted Petitioner's Exhibits 1 and 2, which were documents showing Mastercard's proposed alternate calculations of its South Carolina gross receipts and income tax liability based on its bank customers with South Carolina billing addresses, and Respondent's Exhibit 1, which was the Department's calculation of South Carolina gross receipts and income tax liability. During the hearing, Mastercard presented the testimony of three witnesses: Ruby Naskiewicz, Kenneth Cavallo, and Joe Buelher, all of whom were employees of Mastercard. The Department presented the testimony of its auditor, Orville Sharpe, and expert witnesses John Swain and—over Mastercard's objection—Jim Hawkins. Naskiewicz, vice president of federal tax for Mastercard, testified Mastercard's "primary business[] is transaction processing and related services," which "includes authorization, clearing[,] and settlement." Naskiewicz testified Mastercard's "network" refers to its relationships with the acquirer and issuer banks as well as its physical network, which includes its hardware, software, and data centers. She explained Mastercard's data center in Missouri contained many MIPs and MIPs were also located at the acquirers' and issuers' processing facilities. Naskiewicz testified Mastercard maintained that its income-producing activity takes place either in Missouri or New York because it "look[ed] to where the cost is incurred." She then clarified that "it's also where [the] MIPs are located." She 10 See 15 U.S.C. § 78m (requiring issuers of securities to file periodical reports with the U.S. Securities and Exchange Commission). noted that prior to 2014, if a bank customer did not request that Mastercard perform "value added services," "the transaction flow would go [only] between the acquirer MIP and the issuer MIP without having to go [through the] Missouri data center." She clarified that "beginning in 2014, all transactions have to go . . . [through] the data center in Missouri." Naskiewicz agreed 185 million Mastercard transactions occurred in South Carolina in 2016 alone. She explained the Mastercard Rules require acquirers to enforce rules over their customers (merchants) to ensure the parties involved in the payment transaction follow guidelines to help prevent fraudulent acts, thus benefiting all the parties involved in the transaction. Cavallo, senior operations engineer with Mastercard, described authorization as "the process of taking a transaction request all the way from the point of sale to the issuing bank," generating an authorization request and response, and "delivering that response back to the point of sale, so that the . . . transaction can either proceed or not proceed." He explained that from Mastercard's perspective, Mastercard's part in the process is "only a clear[ly] defined segment" of this process, which "begins at the acquirer MIP," routes to the issuing MIP, stops at the issuer system, restarts once the issuer MIP has received the transaction response, then proceeds to deliver the response back to the acquirer MIP, at which point Mastercard's part of the authorization is complete. In other words, its involvement did not include delivery of the transaction response directly to the merchant. Cavallo explained the MIPs are referred to as "endpoints," which are access points to a network "that allows a computer to connect to the network without actually being a part of the network." He stated Mastercard's network "extends as far as the MIPs" and that it "d[id] not extend into South Carolina whatsoever" because no MIPs are located within the state. Buehler, senior vice president of Mastercard technology risk, detailed the clearing and settlement processes. Buehler testified no clearing or settlement processes were triggered from a cardholder swipe and that he viewed clearing and settlement as "very distinct service[s] from authorization." Mastercard provided the chart below to illustrate its view of its role in the authorization process to support its contention that its network does not extend to the cardholder or merchant. It contended its involvement in a merchant-cardholder transaction using Mastercard-branded cards or devices is confined to steps six through ten. Sharpe, a foreign audit corporate supervisor with the Department, testified he was employed as an auditor in the Department's foreign income tax division when it audited Mastercard and was the lead auditor of the audit. Sharpe testified he applied the gross-receipts apportionment method in making the assessment. He explained that based upon Mastercard's Annual Reports on Form 10-K, he determined that a portion of Mastercard's income-producing activity occurred in South Carolina. He stated Mastercard generated income in South Carolina through fees based upon the gross dollar volume and number of transactions initiated in the state. Sharpe testified that Mastercard provided reports detailing the total Mastercard-branded transactions in South Carolina and the United States for the audit periods and a breakdown of the revenue it generated for its five revenue streams in the United States. He stated he used this information to determine the gross receipts that should have been sourced to South Carolina based upon what the Department considered to be Mastercard's income-producing activity in South Carolina. Sharpe detailed how he determined the ratio and amount of income tax Mastercard owed for each of the five streams of revenue. He testified Mastercard provided the data he used to make his calculations. This data is also included in the record and is separated into two tables for each of the audit years: one for signature (credit card) transactions and one for PIN (debit card) transactions. On appeal, Mastercard challenges only the Department's sourcing methodology and does not challenge the Department's computations.11 Sharpe stated "Mastercard's income-producing activity is the provision of a credit card network that allows the merchant and the consumer or cardholder to consummate purchases in South Carolina." He averred Mastercard's "fees are 11 Sharpe explained the calculations he used to determine the ratio for each revenue stream. He determined the ratio for domestic assessment fees by first determining the total dollar amount of Mastercard-branded transactions in South Carolina by adding the dollar amounts of signature-based and PIN transactions together. Sharpe then divided this total dollar amount of Mastercard-branded transactions that occurred in South Carolina by the dollar amount of all Mastercard-branded transactions that occurred in the United States for each year of the audit period. He then multiplied this percentage by the "total U.S. domestic assessment fees" to determine South Carolina gross receipts received from domestic assessment fees. Sharpe repeated this process to determine the percentage and calculate the South Carolina portion for the cross-border fees. He explained he used a different percentage for transaction fees because they are based on the number—instead of the volume—of transactions. In computing this percentage, Sharpe used the number of South Carolina Mastercard-branded transactions and divided it by the total number of U.S. Mastercard-branded transactions. He then used this percentage to multiply by the total amount of U.S. transaction processing fees that Mastercard earned. To calculate the South Carolina receipts for the other fees category, Sharpe first added the South Carolina dollar amount of Mastercard domestic assessment fees, cross-border fees, and transaction processing fees, and divided that number by the total dollar amount of U.S. Mastercard assessment fees, cross border fees, and transaction processing fees to determine a percentage. He then multiplied this percentage by the total amount of Mastercard's U.S. other revenue to determine South Carolina receipts. Sharpe testified he repeated these formulas for each revenue stream for every year of the audit period. Sharpe agreed that income from rebates and incentives are contra-receipts, which the Department subtracted from the rest of the calculations. To do this, Sharpe added the South Carolina dollar amount of South Carolina domestic assessment fees, cross-border fees, and transaction processing fees and divided this total by the U.S. dollar amount of such fees to produce a percentage. He then multiplied the percentage by the total U.S. rebates and incentives to determine the South Carolina gross receipts for rebates and incentives, which was a negative amount. earned and the income is produced when [a] . . . cardholder swipes their card at a merchant's location in South Carolina." Sharpe conceded that the sourcing method reflected in the Department's calculations uses Mastercard's "customer's customer's" location. He also acknowledged the Department had not provided any guidance, other than that contained in South Carolina case law, to help a taxpayer distinguish between income-anticipatory and income-producing activities. However, he stated that a taxpayer that does not know how to source its income to South Carolina could request guidance from the Department's policy division and Mastercard did not do so. Sharpe averred that even if Mastercard correctly interpreted DIRECTV to mean that its income-producing activity was its delivery of messages to its MIPs, it would still owe South Carolina income tax based on imbedded royalties that it charged the issuers and acquirers. Sharpe averred that Mastercard's interpretation was not reasonable because the transactions at issue are Mastercard-branded transactions and he believed Mastercard knew what its income-producing activity was and should have known to source its receipts to South Carolina based on where the income was produced. Professor John Swain testified as an expert in state and local tax policy. Swain explained that, historically, based upon the Uniform Division of Income for Tax Purposes Act (UDITPA), which was adopted in 1957, states determined corporate income tax by applying three factors: a property factor, a payroll factor, and a sales factor. He testified states recently began moving towards a "single sales factor apportionment and receipts attribution to that sales factor based on . . . the market that generated those receipts." Swain explained the purpose of a sales factor was "to reflect the contribution of the market state to the taxpayer's income." Swain clarified that he referred to this concept as both the "sales" factor and the "gross receipts" factor but that in discussing apportionment in South Carolina, he referred to the gross receipts factor. He explained that "in South Carolina, the sales factor [applies to the] sale of tangible personal property, while . . . we apply [the] gross receipts factor [to services]." Swain testified Mastercard's receipts consisted of the fees it earned from processing credit card transactions. Swain explained that in terms of taxation, market-based sourcing is "a set of rules" and that many states had adopted express market-based sourcing rules for receipts from services. He testified that "South Carolina['s] rule . . . is [to tax based upon] where the income producing activity occurs." Swain stated that in this case, the South Carolina rule reached the same result as a pure market-based sourcing rule would and he believed this reflected good tax policy. Swain testified he believed the Department's determination was good tax policy for four reasons. First, "it attribute[d] Mastercard's receipts to the state that provide[d] the demand for Mastercard services, the market for Mastercard services," and "the purpose of the gross receipts factor [was] to reflect the market state's contribution to a taxpayer's income." He explained that South Carolina created the demand for South Carolina-based credit card transactions. Second, "[it was] consistent with the manner in which South Carolina attributes the receipts from the sales of tangible personal property and intangibles, which is on a destination basis and where . . . the product is used" and there was "no principle[d] reason why the . . . rule should be different for services, as opposed to tangible or intangible property." Third, it was consistent with the legislative intent and policy to solely tax the market for the taxpayer's services by attributing receipts to South Carolina based only on the gross receipts or sales factor, rather than payroll and property investments in the state, which would discourage people from locating property and payroll in this state. Fourth, it discouraged tax planning and other tax avoidance behaviors. Swain testified he would describe Mastercard as a "remote" service provider because, like the taxpayer in DIRECTV, although Mastercard's infrastructure was located out of state and its income-anticipatory activities occurred out of state, it delivered services within the state. Swain averred this case did not involve "look through" sourcing because the "customer's customers" (cardholders and merchants) and the "customers" (the acquirers and issuers) were in the same place because "the issuing bank is extending credit in South Carolina" and "the acquiring bank is in a sense agreeing to buy the merchant's receivable in South Carolina at the point of sale." He explained the issuers and acquirers were thus banking in South Carolina and therefore the customers were in South Carolina. The Department also sought to admit Professor Jim Hawkins as an expert witness in consumer credit markets. Mastercard objected to Hawkins testifying as an expert regarding credit card networks, arguing that he was not qualified because he defined consumer credit markets to mean businesses that extend credit to consumers and Mastercard was not in the business of extending credit. The ALC allowed Hawkins to offer expert testimony in the area of "consumer credit markets" over Mastercard's objection. Mastercard asked Hawkins to identify "the topics that [he] believe[d] f[e]ll within [his] area of expertise in consumer credit markets." Hawkins testified, "[I]t's a broad term that includes businesses lending to people and related activities. And so, one related activity, of course, is operation of payment networks that facilitate businesses lending to people." Hawkins stated he believed that "facilitating payment transactions, especially where credit cards are involved, is something like extending credit to people." He further testified, There's no one I know who's an academic, who thinks that credit card networks are unrelated to extending credit to people. And I understand Mastercard, their technical function is not to directly extend credit to individuals, but the idea that they're not -- that they're somehow outside . . . what everyone calls a credit card company, has nothing to do with credit, it -- to me, it's just an unrealistic view of what these terms mean. Hawkins ultimately acknowledged Mastercard does not "extend credit" in the literal sense but maintained that it "facilitate[s] the parties in this credit card business." Hawkins testified he had formed three opinions in this matter: (1) "Mastercard generates revenue by providing a network for cardholders and merchants to transact" through its actions of "licensing logos, advertising to merchants and cardholders," "creating and enforcing rules" that the parties using the system must obey, and "transmitting information and funds . . . between parties"; (2) Mastercard "solved the problem of . . . a two-sided market by creating the network"; and (3) "Mastercard generates revenue because a cardholder uses a card at a merchant." Hawkins testified Mastercard's rules penalize acquirers for noncompliance if they do not force their merchants to obey the rules. He stated the Mastercard Authorization Manual shows Mastercard's involvement in the entire system because it allocates risks among the participants in the network. Hawkins testified that Mastercard's rules also mandate what acquirers have to include in their agreements with merchants. He stated the rules require merchants to display acceptance marks at the point of interaction. Hawkins averred that Mastercard provides some direct services to cardholders and advertises to potential cardholders. He explained that Mastercard advertises to potential customers because the more cardholders that use their Mastercard-branded cards, the more money Mastercard earns. He stated Mastercard designed benefits that flow to the cardholder through the issuer. He testified these benefits include spending control, ATM locators, and "merchant data cleansing" (which makes data easier for cardholders to see on billing statements). He noted Mastercard also charges its customers "cardholder service fees." Hawkins averred that cardholders indirectly pay fees to Mastercard because merchants increase the costs of their goods and services to cover the fees the acquirer charges the merchant to cover the fees that Mastercard charges the acquirer. Hawkins opined that all four parties within the four-party model do in fact have a relationship with Mastercard. He stated Mastercard's fees are directly related to the relationship between the cardholder and merchant. After the hearing, Mastercard filed a motion to supplement the record with (1) a printed webpage taken from the law firm of Daniels & Tredennick PPLC's website, containing a short biography of Hawkins and identifying him as "of counsel" to the firm and (2) two printed posts from the firm's social media account about Hawkins. Both documents indicated Hawkins was employed with the law firm at the time he was deposed and during the hearing before the ALC. Mastercard asserted Hawkins failed to disclose this employment before or during trial and requested the ALC admit this exhibit so that it would have a complete record and consider Hawkins's omission of relevant employment from his curriculum vitae (CV) and updated CV in assessing his credibility and weighing his testimony. The Department opposed the motion but did not dispute that Hawkins was employed as of counsel with a private law firm or that this information was excluded from his CVs. The ALC found the Department "judicially admitted" to Hawkins's of-counsel employment but denied Mastercard's request to admit the documents into evidence. However, the ALC noted Hawkins's omission of this employment information may have some bearing on his credibility and potential for bias and allowed Mastercard to reference Hawkins's of-counsel position in its proposed order "for whatever purpose it believe[d] this information [wa]s useful." The ALC issued a final order on June 3, 2024, upholding the Department's determination regarding Mastercard's income-producing activity. The ALC found Mastercard's income is "generated by the transaction between the [m]erchant and [c]ardholder when they utilize the Mastercard Network." The ALC further found that Mastercard's income-producing activity consists of "providing [n]etwork access to [c]ardholders, [m]erchants, and banks" and that this "activity occurs, in part, in South Carolina" and Mastercard thus owed income taxes to the state under sections 12-6-229012 and 12-6-2295(A)(5). The ALC concluded Mastercard failed 12 S.C. Code Ann. § 12-6-2290 (2014) (requiring apportionment of "income using a fraction in which the numerator is gross receipts from within this State during the taxable year and the denominator is total gross receipts from everywhere during to meet its burden of proving by a preponderance of the evidence that the Department's calculation was incorrect. The ALC further held the preponderance of the evidence did not support Mastercard's claim that its network did not exist in South Carolina. The ALC rejected Mastercard's argument that its true income-producing activity is the delivery of approval and denial messages between the issuers' and acquirers' respective MIPs and that none of its income should be sourced to this state because none of the MIPs are located here. It also rejected Mastercard's alternative argument that any income attributable to South Carolina should be sourced based upon its customers with South Carolina billing addresses rather than the transactions occurring here. The ALC found "the overwhelming evidence in the [r]ecord" showed that the "actual source of Mastercard's fees and thus, its income, are the transactions between [m]erchants and [c]ardholders." The ALC concluded Mastercard generates revenue by charging fees based upon both the number and dollar amount of credit and debit transactions that use Mastercard-branded cards. The ALC found these transactions are initiated when cardholders present cards to accepting merchants to pay for goods or services and that such transactions are possible only because Mastercard created a payment system that connects cardholders and merchants with their respective issuing and acquiring banks "so that the exchange of goods and services is acceptable to all parties without simultaneous payment by cash or check." The ALC concluded this payment system—the Mastercard network—is present and operating in South Carolina. It found that contrary to Cavallo's testimony, according to Mastercard's authorization manual, the Mastercard network extends to the point of interaction where the merchant and cardholder are located and the sale occurs. The ALC found Mastercard does business and generates revenue in this state "through the presence of its network and the transactional activity that its presence facilitates." The ALC rejected Mastercard's contention that cardholders and merchants were not also its customers. It acknowledged Mastercard does not contract directly with merchants and cardholders but found that "through the Mastercard [r]ules, Mastercard exercises its control and orchestrates every aspect of the Mastercard [n]etwork, to include the activities at the point of sale between [m]erchants and [c]ardholders." the taxable year" and that "[f]or purposes of this section, items included in gross receipts are as provided in Section 12-6-2295"). The ALC found Hawkins was qualified to testify as an expert in the field of consumer credit markets. The ALC noted that in preparing for his trial testimony, Hawkins reviewed Mastercard's submissions, including its annual reports. The ALC concluded that Mastercard's documents showed it operates within the consumer credit market and therefore Hawkins's expertise included "Mastercard's operations as a credit/debit card payment [n]etwork." The ALC noted this was "subject to some concerns going to the weight of his testimony." The ALC reaffirmed its decision to allow Hawkins to testify as an expert in consumer credit markets over Mastercard's objections but noted that given his "limited knowledge of Mastercard's operations prior to this case and the omission of his of[-]counsel employment," it would "pay particular attention to evidence in the record which supports his testimony and opinions." It further held that the record supported Hawkins's opinions. Finally, the ALC upheld the Department's imposition of penalties for Mastercard's failure to file corporate income tax returns and its failure to pay license fees. However, the ALC waived the penalties for Mastercard's failure to pay corporate income taxes due to its good faith belief that its income tax position was consistent with the holding in DIRECTV. Mastercard filed a motion to reconsider, which the ALC denied. This appeal followed. ISSUES ON APPEAL I. Did the ALC err by finding that under section 12-6-2295 and DIRECTV, Mastercard's income-producing activity was the provision of an overall network? II. Did the ALC abuse its discretion by allowing Hawkins to testify as an expert? III. Did the ALC err by upholding the Department's imposition of penalties for failure to file returns under section 12-54-43(C)? STANDARD OF REVIEW According to the Administrative Procedures Act (APA), which governs our review of the ALC's order, [Appellate] review of the [ALC's] order must be confined to the record. Th[is] court may not substitute its  judgment for the judgment of the [ALC] as to the weight of the evidence on questions of fact. [This court] may affirm the decision[,] . . . remand the case for further proceedings[,] or[] it may reverse or modify the decision if the substantive rights of the petitioner have been prejudiced because the finding, conclusion, or decision is: (a) in violation of constitutional or statutory provisions; (b) in excess of the statutory authority of the agency; (c) made upon unlawful procedure; (d) affected by other error of law; (e) clearly erroneous in view of the reliable, probative, and substantial evidence on the whole record; or (f) arbitrary or capricious or characterized by abuse of discretion or clearly unwarranted exercise of discretion. S.C. Code Ann. § 1-23-610(B) (Supp. 2025); see also DIRECTV, 421 S.C. at 68-69, 804 S.E.2d at 638. "[Q]uestions of statutory interpretation are questions of law, which [the appellate court is] free to decide without any deference to the court below." DIRECTV, 421 S.C. at 69, 804 S.E.2d at 638 (quoting Centex Int'l, Inc. v. S.C. Dep't of Revenue, 406 S.C. 132, 139, 750 S.E.2d 65, 69 (2013)). LAW AND ANALYSIS I. Corporate Income Tax Sourcing Mastercard argues the ALC adopted an impermissibly broad view of its income-producing activity in applying section 12-6-2295 and that its holding contradicts this court's decision in DIRECTV. Mastercard contends that und