The following information was provided by our lobbyist, and is the latest North Carolina General Assembly state budget update. This Alert summarizes and compares the most important provisions of the House and Senate tax bills.
ALERT
May 17, 2019
2019 North Carolina Tax Bills Advance in House and Senate
A previous Alert summarized the North Carolina Senate’s original tax plan for 2019 as set forth in the first edition of Senate Bill 622. Since then, the House passed its version of the 2019 appropriates bill (H966), which included the House’s 2019 tax plan. This week, the Senate passed an amended version of S622. The tax provisions of S622 and H966 will need to be reconciled through conference as part of the budget process.
Personal Income Tax Changes
The House and Senate tax bills include two identical personal income tax changes. First. The bills would increase the standard deduction for the 2021 and later tax years. The standard deduction would increase from $20,000 to $20,750 for joint filers, from $15,000 to $15,563 for heads of households and from $10,000 to $10,375 for single filers and married couples filing separately.
Second, the bills would conform to federal tax rules regarding qualified charitable distributions from an IRA by taxpayers over age 70 ½. Under federal law, a taxpayer who is at least 70 ½ may exclude from income up to $100,000 in IRA charitable distributions. North Carolina currently decouples from this provision. As a result, a taxpayer claiming the federal exclusion must include the distribution in North Carolina income and may then claim a charitable contribution deduction as part of the taxpayer’s North Carolina itemized deduction. Both bills bill would unwind this decoupling and conform to the federal law (income exclusion/no deduction), effective for the 2019 and later tax years.
Franchise Tax Changes
The House and Senate bills also contain identical changes to the franchise tax. The bills would reduce the rate of tax on each $1,000 of tax base from $1.50 to $1.30 in 2020 and to $1.00 in 2021. Electric power companies and their affiliates would remain subject to the $1.50 rate until 2027 at which time they would be taxed at the same rate imposed on other corporations (i.e., $1.00 under the bills).
The bills would also eliminate one of the two alternative franchise tax bases. Under current law, the tax is computed on the higher of the following bases: apportioned balance sheet net worth, actual investment in tangible property in the state and 55% of the appraised value of the taxpayer’s property as determined for property tax purposes. The bills would eliminate the 55% of appraised value base, effective in 2020 (i.e., effective for the franchise tax paid on the 2019 corporate income tax return).
Market-Based Sourcing and Special Apportionment Rules for Pipeline Companies
Both the House and the Senate bills would enact market-based sourcing for receipts from services and intangibles effective in 2020. The bills differ, however, in several particulars.
Both bill contain special market-based sourcing rules for banks, electric power companies and broadcasters. Both bills include the same, detailed special rules for banks. Similarly, both bills provide that electric power companies would be able to source their sales based not on the market for their services but on the ratio of their in-state real and tangible personal property to their real and tangible personal property everywhere. However, the House bill, unlike the Senate bill, would repeal the special rules for electric power companies effective in 2026. Thus, under the Senate bill electric power companies would have to begin sourcing their receipts based on where their services are received at the same time they become eligible for the reduced franchise tax rate.
The bills provide differing rules for sourcing the receipts of broadcasters. Under the House bill, broadcasters would source their receipts based on where their actual advertising and licensing customers are located. Under the Senate bill, broadcasters would be required to source their receipts based on where the viewers of their content are located or are deemed to be located, even where these viewers are not customers of the broadcasters.
While market-based sourcing generally provides a tax benefit to a company that has a significant in-state presence and a significant out-of-state market, it has the opposite effect if the company is operating at a loss, since a smaller portion of the loss will be apportioned to the state. To mitigate the impact of market-based sourcing on loss corporations, the Senate bill would permit a corporation with a state net loss at the end of 2019 to elect to continue to source its receipts under the income producing activities test of current law until its losses are used up or expire. The election would apply only for income tax purposes, and the franchise tax net worth base would be apportioned as if the election had not been made. The House bill does not have a similar provision.
The Senate bill would make the proposed market-based sourcing rules the Department issued in 2017 effective beginning in 2020. The House bill would require the Department to revise the proposed rules to make them consistent with the provisions of the bill.
Under current law, petroleum pipeline companies apportion their income using a fraction based on the ratio of the petroleum they transport within North Carolina to the petroleum they transport everywhere, taking into account both the quantity of petroleum transported and the distance transported. The Senate bill, but not the House bill, would apply the same apportionment formula to natural gas transportation or transmission companies.
Sales Taxation of Marketplace Facilitators
The Supreme Court’s decision in South Dakota v. Wayfair, Inc. permitted states to require remote sellers to collect sales and use taxes on sales to in-state customers. Shortly after the Wayfair decision was released, the Department of Revenue issued a directive announcing that it would begin requiring a remote seller to collect North Carolina sales tax if the remote seller had more than $100,000 in North Carolina sales or at least 200 separate sales transactions sourced to North Carolina. The General Assembly codified the directive in a technical corrections bill last month.
Most of the large online retailers were already collecting sales tax voluntarily or because they had physical nexus with the state, and it is believed that the states’ best option for collecting significant new sales tax revenues following Wayfair is to require online marketplace providers to collect tax on sales made over their platforms by small third party sellers who individually fall below the $100,000/200 transaction threshold. The General Assembly considered requiring marketplace providers to collect taxes on the sales they facilitate in 2017, but the bill was not enacted.
Both the House and Senate bills would extend sales tax collection responsibility to marketplace facilitators. Both bills would define a marketplace facilitator as a person who (1) owns or operates a physical or electronic platform or other marketplace on which the items of another person (the marketplace seller) are listed or made available for sale and (2) facilitates the sales of the marketplace seller’s items. Both bills provide that facilitation includes collecting or processing payment or making payment processing services available. The House bill also provides that facilitation includes transmitting an offer or acceptance. The Senate bill thus provides a somewhat narrower definition of marketplace facilitator.
Under both bills, a marketplace facilitator would be subject to collect sales tax on facilitated sales if it satisfied the $100,000/200 transaction threshold. Direct sales by the facilitator as well as sales by third party sellers using the facilitator’s platform (referred to as marketplace sellers) would be counted to determining whether this threshold was met. If the threshold is satisfied, the facilitator would be required to collect tax on all facilitated sales.
Under the House bill, the marketplace seller would be treated as a wholesaler with respect to sales made over the facilitator’s platform and so would not be required to collect tax on the sale. The purpose of this provision is to provide a reporting mechanism that would allow the Department to distinguish the marketplace seller’s direct sales from those from those made through a marketplace facilitator. Some marketplace facilitators were concerned that this provision could create a potential liability for them if they were treated as having purchased the marketplace seller’s items. The Senate bill thus excludes this provision.
Each bill would protect marketplace facilitators from class action lawsuits brought on behalf of customers alleging over-collection of tax by the facilitator on facilitated sales. In addition, under the House bill the Department would be authorized to compromise a marketplace facilitator’s sales tax liability if the failure to collect the correct amount was attributable to incorrect information supplied by the marketplace seller. The Senate bill, omits this relief provision, leaving the marketplace facilitator to seek protection from such liability by contractual arrangements with marketplace sellers.
These provisions would become effective September 1, 2019.
Sales Taxation of Accommodation Facilitators
Both the House and Senate bills would clarify the rules regarding the rental of accommodations through accommodation facilitators. Both bills would expand the definition of accommodation facilitator to cover persons who list accommodations for a fee as well as persons who accept payment or credit card information from renters. The term also would be amended to specifically include real estate brokers.
Under the House bill, only one part is considered the retailer required to collect the tax. The provider of the accommodation (rather than the facilitator) would be required to collect the tax if the provider collects payment when the reservation is made or when the accommodation is occupied. In addition, the provider would be responsible for collecting the tax if a facilitator makes the reservation and collects credit card information when the reservation is made but does not collect payment when the reservation is made. The facilitator would be required to collect the sales tax if the facilitator collects payment or a deposit when the reservation is made.
The Senate bill, by contrast, would provide that both the facilitator and the provider of the accommodation would be required to collect tax on that portion of the rental payment they collect. Thus, with respect to any given rental, either the provider, the facilitator or both may be considered the retailer. The Senate bill also includes a special provision (not found in the House bill) applicable to accommodation facilitators that are operated by or on behalf of a hotel owner, operator or franchisor and that facilitates rentals solely for the related hotels (e.g., Hilton.com). These facilitators are not considered retailers required to collect tax even if they collect all or a portion of the payment for the accommodation. Instead, as under current law, these facilitators send the tax due on the sales price they collect to the provider (i.e., the related hotel) for remittance to the Department.
Under the House bill, accommodation facilitators that are not required to collect tax on a rental must report information regarding the rental to the provider and to the Department. The Senate bill would require all accommodation facilitators to file these reports.
These provisions would become effective September 1, 2019.
Non-shareholder Contributions to Capital
The federal Tax Cuts and Jobs Act (TCJA) repealed a long-standing provision of the Internal Revenue Code excluding from the gross income of a corporation contributions to the capital of the corporation made by a government entity. Because of this change, government incentive grants, which were previously excluded from income, became taxable at the federal level. North Carolina did not decouple from this TCJA change and thus reduced the value of its own state and local government incentive grants.
Both the House and Senate bills would allow corporations to deduct grants from the state’s Job Maintenance and Capital Development Fund, Job Development and Investment Grant Program and the One North Carolina Fund in computing their state net income. A deduction for these grants would also be enacted for individual taxpayers. These changes would be effective for amounts received under an economic incentive agreement entered into after 2018.
Sunset Extensions
Both the House and Senate bills would extend the following provisions, currently scheduled to sunset on January 1, 2020, until January 1, 2024:
- The historic rehabilitation tax credits.
- The sales tax exemption for aviation gasoline and jet fuel sold to an interstate air business for use in commercial aircraft.
- The sales tax exemption for sales of engines, engine parts, service contracts and repair, maintenance and installation services and certain other items to a professional motorsports racing team or sanctioning body or to persons providing engines to a professional motorsports racing team.
- The refund for sales taxes paid by a professional motorsports racing team or sanctioning body on aviation gasoline and jet fuel.
- The refund for 50% of the sales taxes paid by a professional motorsports racing team on tangible personal property (other than tires or accessories) that comprise a part of a professional motorsports vehicle.
Taxation of Out-of-State Businesses and Workers Engaged in Disaster Relief
Both the Senate and House bills include a number of tax and other relief provisions for out-of-state businesses and their nonresident employees that enter the state temporarily to help restore critical infrastructure following a declared disaster at the request of a critical infrastructure company. A majority of the states have enacted similar relief provisions.
The relief provisions under both bills generally apply only to eligible businesses performing “disaster-related work” during a “disaster response period” at the request of a “critical infrastructure company.”
Although the language in the two bills is slightly different, an eligible business is one that was not required to file income or franchise tax returns in North Carolina for the three-year period before the disaster response period other than as a result of performing disaster-relief work.
Under both bills, “disaster-related work” is work repairing, installing, renovating, building or performing services on critical infrastructure (generally, communications and utility distribution and transmission systems) that has been damaged or destroyed by a disaster in an area covered by a disaster declaration. Similarly, both bill provide that the “disaster response period” begins ten days before the first day of a disaster declaration and ends 60 days after the disaster declaration’s expiration. Under the Senate bill, however, the disaster response period cannot last more than 180 days.
Both bills define a “critical infrastructure company” as a registered public communications provider or a registered public utility.
Under both bills, qualifying businesses would be relieved of the following tax obligations:
- The franchise tax.
- The corporate income tax.
- The S corporation income tax.
- The personal income tax.
- Income tax withholding (with respect to out-of-state employees performing disaster-related work during the disaster response period).
Under the House bill, these relief provisions would be effective January 1, 2019. Under the Senate bill they would be effective for disaster declarations on or after the date of enactment.
Property Tax Exemption for Antique Cars
The owner of a vehicle registered with the Division of Motor Vehicles as an “historic vehicle” and that meets certain other requirements is eligible for a maximum property tax valuation of $500. To be eligible for registration as an historic vehicle, the vehicle must be at least thirty-five years old. The House bill would lower the age requirement to twenty-five years, thus expanding the class of vehicles eligible for the property tax benefit. The Senate bill does not have a similar provision.
What’s Not Included
Neither bill includes several hoped for provisions, such as a state analogue to the federal Qualified Opportunity Zone provisions, a decoupling from the federal net interest expense limitation, or a provision to ameliorate the effects of the state’s decoupling from federal bonus depreciation.
In addition, an earlier version of the House bill included provisions that would have subjected rideshare service companies such as Uber and Lyft to a 7% privilege tax. These provisions were deleted from the version of the bill ultimately passed by the House, and no similar provisions are included in the Senate bill.