Revenue Laws Study Committee : report to the ... General Assembly of North Carolina ... regular session.

              20LL-2AL2
REVENUE LAWS STUDY
COMMITTEE
REPORT TO THE 2OII-2012
GENERAL ASSEMBTY OF NORTH CAROLINA
2012 SESSION
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THE REPORT AND ALL MEETING MATERIALS ARE ALSO AVAILABLE ON-LINE
AT THE COMMITTEE'S WEBSITE:
http: / / www.ncleg.net/committees/revenuelaws
f
TABLE OF CONTENTS
Revenue Laws Study Committee Mernb'ership ....,.............ii
Preface ..............1'
Comrrittee Proceedingg .....................2
Committee Recom-ES:ndations and Legislative Proposals ...............36
1.. AN ACT TO REQUIRE THE SECRETARY OF REVENUE'S
INTERPRETATION OF THE LAW CONCERNING THE
SECRETARY'S AUTF{QRITY TO ADTUST NET JNCOME OR
REQUIRE A
-COMBINED
RETURN BE MADE THROUGH
RULEMAKING AND TO PROVIDE AN EXPEDITED PROCESS K)R
RULEMAKING ON THIS ISSUE ..,.,.....,,..,37
2, AN ACT TO MAKE qHANGES TO THE UNEMPLOYMENT
TNSURAITCE LAWS ..................47
3. AN ACT TO EXTEND THE SUNSET OF CERTAIN TAX PROVISIONS
AS PROPOSED BY THE REVENUE LAWS STUDY TOMMITTEE ...........62
4. AN ACT 'IO REQUIRE THE NORTH CAII.OLINA APPRAISAL
BOARD TO REPORT' THE RECORDS OF APPRAISAL
MANAGEMENT COMPANIES TO THE NORTH CAROLINA
DEPARTMENT OF REVENUE ,..,...,,....,,...71,
5. AN ACT TO MAKE TECHNICAL, CLARIFYING. AND
ADMINISTRATIVE CHANGES TO THE TAX AND RELATED LAWS.,.....,..........,..76
Appendices.
A. . Authorizing Lqgislatisn, Article L2L of Chapter 120 of the GeneralSlatutes
B. Dispoqilion of Revenue Laws Study Conlrlittee Recommendations
C. Meeting Aggt&rs
D. Letter to the Revenue Lar,ys gtudy Comqlltee Regarding Validity-of
Ex egrti!'qOrder 1 1 3 sxtending Ungmglolzment Benef itg
-All
of the meeting handouts, including Power Point presentations, may be accessed online in PDF format
at the Revenue Laws Sfudy Committee website: http://www.ncleg.net/committees/revenuelaws
Rrraryur Laws Sruov Camtwrrnn
S t at e L e gis I atio e Buil iling
Raleigh, North Carolina 27643
Senator Bob Rucho, Co-Chair Representatiue lulia C. Howard, Co-Chair
Repres entatia e D aniel F. McC omas, Co-Chair
May 2,2012
TO THE MEMBERS OF TH'E2O\2 GENERAL ASSEMBLY:
The Revenue Laws Study Committee submits to you for your consideration its
report pursuant to G.S. 120-70.106.
M
Sen. Bob Rucho, Co-Chair
Respectfully 9gbmitted,
2011.-2012
REVENUE LAWS STUDY COMMITTEE
MEMBERSHIP
Senator Bob Rucho, Co-Chair
Senator Dan Blue
Senator Peter S. Brunstetter
Senator Daniel G. Clodfelter
Senator Kathy Harrington
Senator Fletcher L. Hartsell, Jr.
Senator Floyd B. McKissick, Jr.
Senator Bill Rabon
Senator David Rouzer
Senator Richard Stevens
Rep. Daniel F. McComas, Co-Chair
Rep. Julia Craven Howard, Co-Chair
Rep. Kelly M. Alexander, Jr.
Rep. John M. Blust
Rep. Harold J. Brubaker
Rep. Becky Carney
Rep. Dewey L. Hill
Rep. David R. Lewis
Rep. Tim Moffitt
Rep. Edgar V. Starnes
Staff:
DeAnne Mangum, Committee Assistant
Cindy Avrette, Staff Attorney
Rodney BizzelI, Fiscal Analyst
Ryan Blackledge, Staff Attorney
Barry Boardman, Economist
Judy Collier, Research Assistant
Dan Ettefagh, Staff Attorney
Heather Fennell, Staff Attorney
Trina Griffin, Staff Attorney
Sandra Johnsory Fiscal Analyst
Greg Roney, Staff Attorney
Brian Slivka, Fiscal Analyst
Jonathan Tart, Fiscal Analyst
PREFACE
The Revenue Laws Study Committee is established in Article 12L oI Chapter 120
of the General Statutes to serve as a permanent legislative commission to review issues
relating to taxation and finance. Before it was created as a Permanent legislative
commission in 1997, the Revenue Laws Study Committee was a subcommittee of the
Legislative Research Commission. It has studied the revenue laws every year since
1,977. The Committee consists of sixteen members, eight appointed by the President Pro
Tempore of the Senate and eight appointed by the Speaker of the House of
Representatives.l Committee members may be legislators or citizens. The co-chairs for
2011,-2012 are Senator Bob Rucho and Representatives Julia Howard and Daniel
McComas.
In its study of the revenue laws, G.S. 120-70.106 gives the Committee a very
broad scope, stating that the Committee "may review the State's revenue laws to
determine which laws need clarification, technical amendment, repeal, or other change
to make the laws concise, intelligible, easy to administer, and equitable." A copy of
Article 12L of Chapter '120 of the General Statutes is included in Appendix A.2 A
committee notebook containing the Committee minutes and all information presented
to the Committee is filed in the Legislative Library and may also be accessed online at
the Committee's website: http:/ /wv,rw.ncleg.net/committees/revenuelaws.
1 The Speaker of the House of Representatives appointed a ninth legislative member, a non-voting
advisory member in2007, and again in 2009.
' The General Assembly established a permanent subcommittee under the Revenue Laws Study Committee to study
and examine the properfy tax system in S.L. 2002-184, s. 8. However, subcommittee members were not appointed
and the subcommittee did not function from 2004 through 2010. In S.L.20ll-266, s.l.15, the General Assembly
repealed the subcommittee. The full Committee continues to review the prope(ry tax system and recommend
changes to it.
I
COMMITTEE PROCEEDINGS
The 2011 General Assembly enacted the Revenue Laws Study Committee's three
legislative proposals in whole or in part. Appendix B lists the Committee's
recorunendations to the 2011 General Assembly and the action it took on them. A
document entitled "2077 Finance Law Changes" summarizes all of the tax legislation
enacted in 2011. It is available in the Legislative Library located in the Legislative Office
Building. It may also be viewed on the Legislative Library's website3 and the Revenue
Laws Study Committee's website.a
The Revenue Laws Study Committee met eight times after the adjournment of
the 2011 Regular Session of the 2011 General Assembly on June 18, 2011'. Appendix C
contains a copy of the Committee's agenda for each meeting. All of the materials
distributed at the meetings may be viewed on the Committee's website. The Committee
considered a number of issues, but it ultimately recommended five pieces of legislation.
The Committee considers all proposed tax changes in light of general principles of tax
policy and as part of an examination of the existing tax structure as a whole.
PROPERTY TAX
Questions involving the property tax system, the appeals process for property
tax valuations, and the reappraisal methodology have received gteater attention
recently, and the Committee looked at property tax issues at both the October 5,2012,
and the February 'J-.,2012, meeting dates. The Committee heard nine presentations from
Committee stafif, the Department of Revenue, the School of Government, and other
t http:1 lwww.ncleg.net /LegLibrary under'Publications,"Tax and Finance Law Changes'
a http:/ / www.ncleg.net/ committees/ revenuelaws
.,
interested taxpayers and businesses relating to the basics of the Machinery Act and how
property tax liability is calculated thereunder, the mechanics of reappraisals by
counties, property tax relief programs, valuation of business personal property, and the
process by which property tax liability and valuations can be appealed.
In the wake of decreasing home and land values over the past quadrennium, the
issue of whether property tax values properly reflect market values of properties has
arisen. Property taxes generate $7.8 billion in revenue and account for a significant
portion of local revenue. By virtue of the Constitution of this State, the General
Assembly classifies property for taxation and must tax uniformly in every unit of local
government.s The imposition of the property tax involves four activities: listing,
assessing, collecting, and enforcing. The standard used to value property is true value
or market value as of January L of the year of reappraisal. A reappraisal functions to
equalize the tax burden between property owners and different property classes. Real
property is reappiaised no less than once every eight years. \A/hile counties have the
authority to advance this octennial cycle, the majority of counties choose not to, which
can lead to the assessed value as of the listing date diverging from the current market
value.6 Although market value is the default valuation for property tax liability, the
General Assembly has enacted a number of property tax relief programs for property
meeting certain ownership and use requirements.T Where a taxpayer disagrees with the
property tax value assigned, he or she may appeal informally to the assessor, then to the
s Uniformity requires that exemptions must be the same throughout the State, that the valuation Process
must be the same for each class of property throughout the Statg and that there must be one tax rate for
all property within a taxing unit.
6 Changes in property tax values between reappraisals are permitted, but only for certain grounds. The
value can change between reappraisals, e.g,, as a result of a physical change (additions, construction,
destruction) but not, e.9., as a result of change in the economy or market.
7 Notable examples include the exclusion for permanent residences of elderly or disabled taxpayers and
veteransl present use valuation for farmlandsi and property tax exemptions for property that serves the
public interest (such as charitablg literary, educational, scientific, etc.).
J
Board of Equalization and Review, then to the Property Tax Commission, and finally to
the Court of Appeals and Supreme Court of the State. The number of appeals increases
in revaluation years and, generclly, has increased sharply since 2007; however, more
than 95% of appeals are settled or withdrawn prior to reaching the Property Tax
Commission. Costs associated with appeals are low, and taxpayers may rePresent
themselves throughout the process, receiving procedural guidance from the Property
Tax Division.
The valuation of certain establishments' business personal property received
attention regarding the methodology of appraisal. Generally/ personal property is
reappraised annually at its true value in money using the cost approach, the sales
approach, or the income approach. Representatives of a business presented to the
Committee that current Department recommendations were incorrect regarding use of
historical cost of business personal property for valuation when the property had been
purchased from another owner in an arm's length transaction. The Department
presented that business personal property commonly is valued using the cost approach,
which takes into consideration original, or historical, cost; current replacement cost
new; useful economic life; and depreciation. Using those factors and trending data, the
historical cost is used to reach the cost of the asset in present dollars.
The Committee's review of the property tax valuation methodologies and
processes resulted in no recommended changes or legislation.
SURPLUS LINES INSURANCE
Surplus lines insurance is a line of insurance provided by insurers who are
authorized to do business in this State, but who are not licensed in this State, referred
to as "nonadmitted insurers." There is a 5% tax on the gross premiums charged for
surplus lines insurance.s S.L. 2011-L20 changed the law governing surplus lines
insurers to conform to the federal Nonadmitted and Reinsurance Reform Act of 20L0
(NRRA). The federal changes are intended to make the regulation of the surplus lines
market more efficient and more uniform on a national basis.e However, the
Department of Insurance, which is the agency charged with collecting the tax, was
concerned before the law took effect that the changes might result in a reduction of
surplus lines tax revenues because North Carolina has fewer domiciled companies
with multistate exposures compared to many other states. The federal law gives states
the option of either keeping 1.00% of all surplus lines tax collected from premiums
paid by domestic companies or sharing tax revenues via a multistate compact. S.L.
2011,-120 changed the law, effective July 21, 2011., so that North Carolina now collects
1,00% of the surplus lines revenue on multistate risks in which North Carolina is
considered to be the home state. S.L. 2011-1,20 also directed the Revenue Laws Study
Committee, in cooperation with the Commissioner of Insurance, to sfudy the potential
impact of entering into a nonadmitted insurance multistate agreement for the purpose
of carrying out the NRRA. Specifically, the Committee was tasked with determining
whether entering into a compact would result in retention of surplus lines tax revenue
for the State and, if so, which compact or agreement would result in the most retention
of surplus lines tax revenue and the most cost-efficient method of administering the
collection and distribution of tax revenues.
At its November 5, 2012, meeting, the Committee heard a presentation on this
issue from Rose Vaughn-Williams, Legislative Counsel for the Department of
t c.s. ss-zt-gs.
n Prior to July 2l,2}ll, surplus lines brokers paid surplus lines taxes to each state where the insured company had
covered property in addition to the insured's home state based on the insurance premiums generated in each state.
Beginning July 21,2011, surplus lines brokers are required to pay the home state of the insured all of the surplus
lines tax from all of the business that the surplus lines company does around the country,
)
Insurance. The presentation was informational so that the members would be prepared
to address any policy options that might be recommended by the Department at a later
time. Prior to the final meeting, however, the Department reported to committee staff
that there is no compact that is currently operational and, therefore, any decision about
joining one would be premature. The National Association of Professional Surplus
Lines office reports that 28 states have no current plans for participating in tax-sharing
arrangements, including states that account for the largest amount of surplus lines tax
revenue.lo The Department further reported that the data currently shows no
significant loss to North Carolina on collection of the surplus lines tax from domestic
insurers that can be directly attributed to the enactment of the NRRA, which became
effective on July 2'1,,2011. Consequently, the Department recommends that the State
take no action at this time. The Department will continue to monitor the tax revenues
and will report to the Committee if there is a change.
COMBINED REPORTING AND INTERPRETATION OF TAX LAWS
For more than a decade, the General Assembly has grappled with the laws
concerning the taxation of a multistate corporation's income. In North Carolina, a
corporation with subsidiaries files a tax return for each subsidiary; this form of
reporting is known as separate entity reporting. Under separate entity reporting, a
corporation with subsidiaries determines its State net income as if a separate return had
been filed for each subsidiary for federal income tax purposes. Separate entity filing
gives corporations with subsidiaries in multiple states the ability to devise ways to shift
income from a high effective tax rate state to a low effective tax rate state, often through
inter-company transactions. The General Assembly has enacted several changes to the
to New York. California. and Texas.
Statets corporate income tax laws to address the shifting of income between states by
multistate corporations.tt Although several sfudy committeeer2, including the Revenue
Laws Study Committeel3, recommended the General Assembly consider changing how
a corporation determines its net income for corporate income tax purposes from single-entity
reporting to mandatory combined repottingla, the General Assembly never
considered the change.
The State has also grappled with the administration of the laws concerning the
taxation of a multistate corporation's income. Beginning in the mid-L990s, the
Department of Revenue began to more aggressively audit multistate corporations and
require them to file a consolidated return when the Department believed the
corporation's net income attributable to this State was not accurately reflected on its
separate entity return. This action by the Department is referred to as f.orced
combination. The Department has used forced combinations fior a number of years and
collected more than $200 million in taxes.
Taxpayers, seeking clarity on the law, filed lawsuits contesting the Department's
authority to use force combinations. Taxpayers contended that the statutes the
Department relied upon to force combinations were vague and that the absence of any
guidance from the Department left taxpayers uncertain as to when a combined report
was required, who was required to be included in the combined report, or how the
combination was to be accomplished. In 2008, the trial court affirmed the Departmentrs
assessment based on forced combination of Wal-Mart and several affiliates. The North
It S.L. 2001-327; Section 30G.1 of S.L.2002-126; Section 244.3 of S.L.2006-66.
tz 2002 Govemor's Commission to Modernize State Finances; 2008 State and Local Fiscal Modernization
Commission.
" 2OO7 Session, House Bill 462 and Senate Bill244.
to Under mandatory combined reporting, a corporation that is part of an affiliated group engaged in a single trade or
business would file a combined report.
j
Carolina Court of Appeals affirmed the trial court's decision in 200915 and Wal-Mart
chose to settle the case, abandoning its appeal to the Supreme Court.
In 2009, under the auspices of the Wal-Mart decision, the Department began a
collection effort known as the "Resolution Initiative." As part of that initiative, the
Department imposed significant penaltiesl6 when a corporation failed to file a combined
returry even though G.S. 105-130.14 prohibited a corporation from filing a consolidated
or combined return in North Carolina unless specifically directed to do so by the
Secretary of Revenue. The Department entered into agreements with at least 130
corporate taxpayers. It appeared some of those taxpayers settled with the Department
in order to have the costly penalties waived. In response to this Departmental practice,
the General Assembly enacted legislationtz providing that the Department could not
assess penalties for failure to file a combined return unless the Secretary adopted
permanent rules describing the specific facts and circumstances under which the
Secretary would require a corporation to file a consolidated or combined refurn.l8
Following the legislative action in the surruner of 2010, the Business Court struck down
the penalties imposed by the Department on Delhaize,le finding that the penalties had
"significant coercive power" which in these circumstances "violated due process" and
exceeded the Secretaryr s statutory autho rity .20
In the Delhaize case, the Business Court found that the Department worked
actively to conceal the standards its decision makers were using when exercising its
ts Wal-Mart Stores East, Inc. v. Hinton, 197 N.C. App. 30 (2009).
t6 G.S. 105-236 includes a failure to file penalty of 5% to 25Yo, a failure to pay penalty of l0o/o, a negligence penalty
of l0%o, and a large understatement penalty of 25o/o.
17 Section 31.10 of S.L.2010-31. G,S. 105-236(a)(5) and l}5-262(b).
18 The Department of Revenue never adopted rules on this issue.
te Delhqize America Inc. v. Lay,06 CVS 08416 (Wake County Superior Court, Jan. 12,2011).
20 Section 31.10(g) of S.L. 2010-3l specified that the law did not apply to pending cases. In Delhaize, the Court
found that it would be unjust to impose a penalty on Delhaize when the penalty structure had been amended in 2010
to require the issuance of rules before penalties could be imposed.
8
authority to combine returns. In response to this issue, the General Assembly repealed
the stafutes2r that allowed the Secretary to re-determine the net income of a corporation
if the Secretary found that a report by the corporation did not reflect its true earnings
from its business carried on in this State. In its place, the General Assembly provided
that the Secretary may only make this redetermination if- the Secretary finds the
corporation fails to accurately report its State net income through the use of transactions
that lack economic substance or are not at fair market value.n The more restricted
interpretation became effective for taxable years beginning on or after January 1.,2012.
The legislation23 directed the Revenue Laws Study Committee to recommend whether
the law should be made applicable retroactively.
The Revenue Laws Study Committee discussed the issue of retroactivity at its
meeting on November 2, 2011.. The Committee considered the issues a retroactive
effective date may raise: To whom would it apply? What would be its impact on current
agreements? Would it result in treating similar taxpayers differently? Would there be
un-foreseen legal consequences? The Committee chose not to make any
recommendation on the retroactive application of G.S. 105-130.5A.
The Department of Revenue issued the first Corporate Tax Directive2a it has
issued since 2008 on the Secretary's authority to require a corporation to file a combined
return. The Department divided the 19-page directive into two parts. The first part
concerns tax years beginning prior to Januar y 1,, 2012. This part of the directive
discusses the Department's interpretation of the law as it applied to taxpayers under
G.S. 105-130.6, 105-130.15, and 105-130.16 and appears to set forth the Departmentrs
2t G.S. 105-130.6, 105-130. I 5, and 105-130. 16.
22 c.s. l05-130.54.
" S.L.20l l-390, as amended by S.L. 2011-411.
2a Corporate lncome Tax Directives Table of Contents
9
application of the law as upheld by the North Carolina Courts.2s The second part of the
directive sets forth how the Department plans to apply the new law, effective for
assessments proposed for taxable years beginning on or after January 1,, 2012. The
Department described the Directive to the Committee at its November 2, 2011., meeting
and presented the Directive to it at the Committee's December 7, 2011,, meeting.26
Representatives on behalf of the North Carolina Chamber of Commerce, the North
Carolina Retail Merchants Association, and the Council on State Taxation appeared
before the Committee on March 7,2012, and expressed concern that the Directive issued
by the Department did not provide clarity to the law, exceeded the Departmentrs
statutory authority, and did not undergo the formal rule-making process.2T
Throughout the hearings, the Committee expressed strong concerns on the need
for the Department to provide clarity on the law for taxpayers and to execute the law as
enacted. The Committee began examining the way the Secretary of Revenue interprets
the law at its meeting on March 7,2A12. The tax laws in Chapter 105 of the General
Statutes contain two statutes that appear to give the Department two different
pathways of interpreting the law.
Under G.S. 1"05-264, the Secretary may interpret a law by adopting a rule or by
publishing a bulletin or directiue on the law. The Department has interpreted tax law
through the issuance of bulletins2s or directives2e since at least 1955. This process does
2s l4/ql-Mart Stores East v. Hinton,IgT N.C. App. 30 (2009); Delhaize America, Inc., Plaintiff, v. Kenneth R. Loy,
201I NCBC 2:2011NCBC LEXIS 9 (201l).
26 The Department of Revenue later revised its directive and separated it into two directives, published April 19,
2012. CD-12-01 and CD-12-02. See footnote 14 for a link to the bulletins.
27 North Carolina General Assembly - Revenue Laws > Meeting Documents > 20ll-2012 Meeting Documents >
March 7
28 Bulletins present the Department of Revenue's administrative interpretation and application of tax laws. The
Department has'Corporate, Excise, and Insurance Tax Bulletins', 'Individual Income Tax Bulletins', and 'Sales and
Use Tax Bulletins'. The Department tlpically updates the bulletins annually to reflect changes in the law or
administrative interpretation. However, the Department has not updated the bulletins in the last three or four years.
2e Directives are issued by the Department of Revenue on an as-needed basis to interpret a tax law, explain the
application of law to stated facts, or to clarif, an issue on which the Department has received numerous questions.
l0
not involve public notice and comment or approval by any outside authority. Bulletins
and directives may be issued immediately. A directive or bulletin is not considered a
binding interpretation on the courts.
Under G.S. 105-262, the Secretary may adopt rules under Chapter 1508. The
Department is exempt from the notice and hearing provisions of Paft 2 of Article 2A of
Chapter 1508. Although the rule-making process does not provide an opportunity for
public notice and hearing for rules adopted by the Department, it does provide a review
of the rules by the Rules Review Commission. The Commission reviews rules to ensure
they do not exceed an agency's statutory authority. A rule is considered a binding
interpretation on the courts. The definition of a rule in G.S. 1508-1 specifically states
that a rule does not include nonbinding interpretative statements that merely define,
interpret, or explain the meaning of a statute or rule and that a rule does not include
statements that set forth criteria or guidelines to be used by the staff of an agency in
performing audits, investigations, or inspections.
The Committee expressed a strong desire for the Department to provide
guidance through the rulemaking process, especially on the issue of forced
combinations. The Department voiced strong concerns about its ability to effectively
and efficiently administer the tax laws if it had to undertake rulemaking for all of the
guidance it provided. In the debate, the Committee identified three goals:
. The need for taxpayer certainty about the tax laws.
. The need for an outside determination as to whether the Department has
exceeded its statutory authority in its interpretation of the law.
Directives are not updated to reflect changes in the law or administrative interpretation. The contents of a directive
may be included in an updated bulletin.
ll
. The opportunity for public notice and comment on the Department's interpretation
of the law.
Legislative Proposal #1 seeks to balance these three goals. It requires the
Secretary to adopt rules providing guidance to taxpayers on its administration of G.S.
105-130.54, the newly enacted law regarding the Secretary's ability to re-determine a
corporation's State net taxable income by adjustment or by forced combination. The
Committee plans to give further consideration during the next interim as to whether the
Secretary must adopt rules providing guidance on its administration in other tax areas.
To expedite the rulemaking process, Legislative Proposal #1 does the following:
. It provides the rulemaking procedure will be the quicker timetable allowed for
temporary rulemaking. This process allows 15 days for notice and comment from
outside parties. Anyone may object to a proposed or adopted rule by requesting
review by the Rules Review Commission. If no one requests review by the Rules
Review Commission, the adopted rule may be delivered to the Codifier of Rules and
entered into the Code. If the Department receives written objections to the rule and
requests that the rule be reviewed, then the Rules Review Commission must review
the rule within L5 days. The Commission may not extend the period of time for
review.
o It changes the fiscal note requirement to allow the Department to prepare its
own fiscal note.3o It will not need to submit the fiscal note to Office of State
Budget and Management. The fiscal note must be submitted with the
proposed rule to the Codifier of Rules and posted on the Internet. A person
30 A fiscal note must be prepared if the rule has a substantial economic impact. Prior to 2011, the term
'substantial economic impact' meant a cumulative impact of $3,000,000. In 2011, this amount was reduced
to $500,000.
t2
may comment on the fiscal note in the same manner a person may comment
on a proposed ru1e.31
o It exempts the Department from the delayed effective date provisions that
apply whenever the Commission receives 10 or more objections to a rule
requesting review by the legislature.
Appendix D contains a chart that summarizes the procedure outlined in
Legislative Proposal #1.
NORTH CAROLINA ESTATE TAX
In 2001, all 50 states and the District of Columbia imposed an estate tax when an
individual died on the value of the individual's accumulated assets.32 ln 2012, North
Carolina, 2L other states, and the District of Columbia impose an estate tax. The
Committee heard presentations by groups seeking the repeal of NC's estate tax and
groups supporting the estate tax during meetings held january 4,2012, and March 7,
20\2.
For decedents dying in 2012, North Carolina imposes an estate tax on the value
of the estate over $5 million. The tax rate is graduated from 08% to a maximum rate of
'J.6% for taxable estates over $10,040,000. Among the states imposing an estate tax, North
Carolina allows the largest exemption at $5 million. For the 2009-2010 fiscal year, the
NC estate tax represented 0.39'/, of General Fund tax revenue.33
31 The proposal provides that the Department does not need to provide a fiscal note for a proposed rule it
publishes before December 31.,2012. See Section 4 of the proposal.
3z The State's largest tax schedules are based on income taxed on a yearly basis (i.e., individual income tax
and corporate income tax) and consumption taxed at the time of sale or use (i.e., sales and use tax). The
estate tax is a tax on past economic achvity, and the larger tax schedules are taxes based on ongoing
economic activity.
33 The NC estate tax collected over $100 million in General Fund tax revenue in fiscal years 2001-2009.
North Carolina followed federal law and did not impose an estate tax in the calendar year 2010.
Collections from the NC estate tax are projected to return to $92 million during the 2012-2013 fiscal year,
as collections recover from the lapse of the estate tax in 2010.
13
The federal estate tax dates to 1797 and was historically imposed by the federal
government to fund wars. In modern times, the NC estate tax has followed the federal
estate tax in exemption amounts and definition of the tax base. The federal estate tax
laws have changed yearly since 2001.
In 200'J' the federal estate tax was designed as a revenue sharing system where
the federal estate tax gave estates a 100% credit for state estate tax.3a Because estates
received a full credit for state estate tax imposed, the estates did not pay any additional
estate tax if state estate tax also applied.
In 2012, the federal estate tax allows only a deduction for state estate tax.3s
Because the deduction did not relieve estates of the financial loss of paying state estate
tax, estates do pay additional estate tax if state estate tax applies. The federal estate tax
is scheduled to return to the 20011aw with a $1 million federal exemption for decedents
dying after December 3'1.,2012. In 201.3 and later years, federal law again allows the
100% credit for state estate tax.
Assuming that federal law does not change, repealing the NC estate tax would
not benefit NC estates in 2013 and later years because the credit for state estate tax
offsets federal estate tax - resulting in the same total estate tax due with or without a
state estate tax.
The Committee did not make any legislative recorrunendations related to this
topic.
Y Atax credit offsets a tax liability dollar for dollar (i.e., by the same amount). For example, a $1 credit
relieves a taxpayer of $1 in tax making a tax credit worth the same dollar amount as the credit.
35 A tax deduction offsets income subject to tax (i.e., reduces the amount of income multiplied by a tax
rate). For example, assuming a'1,6o/o tax rate, a $1 deduction relieves a taxpayer of $0.16 in tax making a
tax deduction worth the tax rate multiplied by the dollar amount of the deduction.
t4
UNEMPLOYMENT INSURANCE PROGRAM
The State Unemployment Trust Fund (Trust Fund) provides benefits to people
who have lost their jobs through no fault of their own. The revenues for the Fund come
from the imposition of payroll taxes, commonly called contribution, ort employers.
North Carolina's unemployment tax (SUTA) rate varies from 0% to 6.84% based uPon
the employer's experience rating and is imposed on wages up to $20,400se for the 2012
taxable year. The contributions paid by employers to the Trust Fund may only be used
to pay claimant benefits. In addition to the payroll tax, the State imposes a tax on
contributions at the rate of 20% of the contributions due in any calendar year when the
Employment Security Reserve Fund does not equal or exceed fi163,349.000.37 The
revenue from this tax is credited to the Reserve Fund and its use is not restricted.
In addition to the SUTA, employers pay a federal unemployment tax (FUTA).
The FUTA tax rate is 6% and is imposed on wages up to $7,000 a year. Federal law
provides a credit against the tax liability of up to 5.4% to employers who pay state taxes
timely under an approved state unemployment insurance program. The credit against
the federal tax may be reduced if the state has an outstanding loan amount. When states
lack the funds to pay unemployment insurance benefits, they may obtain a loarL or an
adaance, from the federal governrnent. To assure the loans are repaid, federal law
provides that when a state has an outstanding loan balance on january 1. for two
consecutive years, the full amount of the loan must be repaid before November L0 of the
second year or the credit available to employers will be reduced 0.3% a year until the
loan is repaid.
e6 This amount is indexed annually.
37 G.S. 96-9(bX3). The Reserve Fund has fallen below this amount since the 2005 calendar year.
l5
North Carolina received its first advance from the federal treasury to finance the
benefits payable from the Trust Fund in February 2009.ss Interest did not begin accruing
on the loan until January 1.,201L, because Congress waived interest payments due from
states on any advances through December 3'1, 2010.3e North Carolina paid its first
interest payment of $78.8 million on an outstanding loan amount of $2.5 billion in
September 2011.. The State made the interest payment from funds available in the
Employment Security Reserve Fund. The State needed to repay the loan amount by
November 201'1, to avoid a FUTA credit reduction of. 0.3%, which it was unable to do.
The effective FUTA tax rate for North Carolina employers for the 20'!,2 calendar year
increased from 0.6% to 0.9%. The increase equals approximately $21 per employee for a
FUTA tax rate of approximately $63 per errtployee.
The choice North Carolina will have to make is not whether the unemployment
insurance tax rate employers pay will increase but rather what is the optimal way to
address the State's unemployment insurance issues while minimizing the impact on job
growth and unemployed workers. The General Assembly enacted Senate Bill 99 this
past session.ao Senate Bill 99 directed the Department of Commerce to contract with an
independent consulting firm specializing in unemployment insurance and employment
security reform. The purpose of the contract is to obtain reconunendations on what tax
structure changes would be fair to employers and how these revenues and other
financial options might be used in servicing and liquidating the State debt incurred to
pay unemployment insurance benefits. The act exempted Commerce from the purchase
and contract requirements in regards to this consulting contract in an attempt to
38 As of March 29,2012, North Carolina has an outstanding loan balance of $2.8 billion. Thirty states have
an outstanding loan from the Federal Unemployment Account. Only three states have a larger loan
balance than North Carolina: California, New York, and Pennsylvania.
3e American Recovery and Reinvestment Act of 2009,P. L. 11L-5, approved February 17,2009.
40 s.L. 2011-10.
t6
expedite the study. Although Senate 8il1 99 became law on March 25,2011', the contract
had not been let by December 201'1..
The Revenue Laws Study Committee asked the Department of Commerce to
appear before it and give a status report on both the consulting contract and the merger
of the Employment Security Commission with the Department of Commerce.al Dale
Carroll, the Deputy Secretary oI Commerce, appeared before the Committee on
December 7, 20!!, and discussed the merger objectives and implementation. He also
explained that the RFP bidding process was complete for the unemployment insurance
tax reform consulting contract and the Department was reviewing the bids and the
process. The Committee again looked at these issues on January 4,2012.It subpoenaed
Lynn Holmes, the former Commissioner of the Employment Security Commission and
the Assistant Secretary of the Employment Security Division of the Department of
Commerce42, to appear before the Committee at its January meeting. A transcript of her
testimony before the Committee is available on the Committee's website.a3
After the adjournment of the 2011 Session of the General Assembly, events
continued to unfold in the area of unemployment insurance law that will require action
by the 2012 Session of the General Assembly. The actions iequired by the General
Assembly in this area do not fall within the matters that may be considered as stand-alone
bills introduced in the 2012 Session, as outlined in Section 4.2 oI Resolution 2011,-
L2.44 Although some of the issues that need to be addressed in the 2012 Session fall
41 S.L. 2011,-1,45 (House Bill 200), Section 14.5 and Section 74.5C, and S.L. 2011.-401 (Senate Bill 532),
transferred ESC to the Departrrrent of Commerce and directed the Department to enter into a contract
related to employment security organizational reform.
a2 Lynn Holmes resigned as the Assistant Secretary of the Division of Employment Security, effective
April L5, 20'1.2.The Governor named Dempsey Benton as the new Assistant Secretary.
rs North Carolina General Assembly - Revenue Laws > Meeting Documents > 2011-2012 Meeting
Documents > Ianuarlz 4
a http:/ /ncleg.net/Sessions/ 2011 /Bills/Senate/ PDF/ S793v2.pdf
t7
outside the usual parameters of the Revenue Laws Study Committee, this study
committee appears to be the only joint legislative committee that has the necessary
background to consider the issues and make a possible reconunendation on these issues
to the 20L2 General Assembly.
The issues the General Assembly may wish to consider in the 2012 Session in the
area of unemployment insurance law fall largely into three categories:
r The extension of the three-year look-back period from January '1., 2012, to
January I,2013.
o The resolution of outstanding issues from Senate BLII532, S.L. 2011-401.
. The statutory changes to the unemployment insurance laws required by the
Trade Adjustment Assistance Extension Act of 20\1..45
Extended Benefits. - There are two permanent benefit programs required by
federal law: regular unemployment benefits and extended benefits.+6 Regular
unemployment benefits are fully funded by the State through its State Unemployment
Insurance Trust Fund and claimants in North Carolina are eligible to receive benefits for
up to 26 weeks under it. Extended benefits are available in a state when the state is
experiencing high levels of unemployment.az The program is funded 50% by state
contributions and 50% by the federal government. However, the federal government
has paid '1,00y, of the extended benefit claims since February 22, 2009.48 Under the
Middle Class Tax Relief and Job Creation Act of 2012ae, the federal government will
continue to pay 100% of the extended benefits through December 31,,2012.
4s P.L. 112-40, approved October 21.,201'1..
a5 Congress enacted Emergency Unemployment Compensation in 2008, known as EUC08. These benefits
are fully payable by the federal treasury.
+7 In North Carolina, a claimant may receive up to 20 weeks of extended benefits.
48 P.L, 111-5, Sec. 2005, approved February 19, 2009, American Recwery and Reinaestment Act of 2009. The
provision has been extended several times in other federal legislation.
4e P.L. 112-96, approved February 22,2012.
18
Extended benefits are triggered in a state when the unemployment rate is at least
6.5% and at least 10% fugher than it was at the same time in either of the past two
calendar years; this two-year window is known as the truo-year look-back. In the Tax
Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 201'ff0,
Congress allowed states to amend their laws to temporarily increase the two-year look-back
period to a three-year look-back period. This measure enabled more states to offer
extended benefits. Under the 2010 legislation, the temporary measure ended December
31, 2011. However, Congress extended the temporary measure twice.sl The full federal
funding of the extended benefits will expire December 3'1,2012.
North Carolina changed the law to permit a three-year look-back in 5.L.201'1,-
145, Section 6.1.6. This provision expired January '1., 2012. Legislative Proposal #2 would
extend the sunset from January '1., 2012, until Janu ary '!., 201g. In North Carolina,
extended benefits will not be allowed for claim weeks later than May '1,2, 20'1.2, because
the State's unemployment rate has fallen below the trigger. However, it is possible the
extended benefits may trigger back "on" before the end of the year.
The Governor ordered the Employment Security Commission to use the three-year
look-back in Executive Order 93, dated |une 3, 2011,. The Governor ordered the
Division of Employment Security to use the three-year look-back in Executive Order
113, dated January 11., 2012. Although the Executive Orders purport to give the
Governor the authority to make this change, the federal law clearly states that a "State
may by law" provide for the temporary look-back extension.S2In a letter to the Revenue
Laws Study Committee, Gerry Cohery Director of Bill Drafting, Legislative Services,
50 P.L.11.1-312, approved December 17,2010.
s1 P.L. 112-78, approved December 23, 2A11, Temporary Payroll Tax Cut Continuation Act of 201.1. P.L. 1.12-
96, approved February 22,2012, The Middle Class Tax Relief and lob Creation Act of 2012.
52 P. L. 1'1.-312, approved December 2010, Sec. 5A2, Tax Relief, Unemployment Insurance Reauthorization, and
lob Creation Act of 201.0.
t9
NCGA, acknowledged that USDOL recognized the validity of Executive Order 93 and
began the benefits extension prior to approval of the General Assembly, but opined that
such actions were not authorized by either federal law or the laws of our State.s3 A copy
of his letter may be found in Appendix E. Legislative Proposal #2 finds that the
Governor did not have the authority under federal law, the North Carolina
Constitution, or Chapter 96 oI the North Carolina General Statutes to change the look-back
period.
Outstanding lssues Re: S.L. 2011-401.. - The General Assembly enacted Senate Bill
532 onluly 26,2012. Senate Bil|532 had four operative parts:
o It created the Division of Employment Security within the Department of
Commerce and transferred the functions of the Employment Security
Commission to that Division.
o It made the Division subject to rulemaking under Article 2A of chapter 1508
of the General Statutes.
o It made substantive changes to the employment security laws.
o It made conforming changes to the employment security laws.
On June 30,2011., the Governor vetoed the bill. In the Governor's Objections and
Veto Messageil, she stated the U.S. Department of Labor informed the administration
that a lack of conformity between the bill and federal law could result in a loss of
money for the State's unemployment insurance program and a reduction in the FUTA
tax credit. A state's law must conform to the provisions of the federal unemployment
compensation laws in order for employers in a state to be eligible for a credit against the
53 Cohen letter.
1l Qs*:{:rn$'J:ls" V e ta. Mesidsu
20
FUTA tax and for the state to be eligible to receive an administrative grant to operate its
unemployment compensation programs.
The General Assembly overrode the Governot's veto on july 26, 2011'. After
passage of the bill, the Employment Security Commission in-formed the General
Assembly by a letter dated October 12,2011., of its intention to suspend the provisions
of the bill determined by the U.S. Department of Labor to be noncompliant with federal
law. G.S. 96-19(b) gives the Division of Employment Security the authority to suspend
enforcement of a provision upon receiving notification from the U.S. Department of
Labor that the provision is noncompliant with the requirements of federal law. The
suspension may be in effect until the Legislature next has an opporfunity to reconsider
the provisions purported to be noncompliant with federal law.
Legislative Proposal #2 addresses the areas of concern noted by the U.S.
Department of Labor:
. The legislation expanded the time for an employer to provide information
required to protest a claim from 10 days to 30 days. The U.S. Department of
Labor noted that the extension of time would make it virtually impossible for
the agency to make timely determinations under the standards set by federal
regulations.5s
o An individual is totally disqualified from receiving benefits if the Division of
Employment Security determines the individual was discharged for
misconduct connected with the work. The legislation expanded the definition
of "misconduct connected with the work" to include both of the following:
ss For most intrastate claims, federal regulatioru require that a state pay at leastST% of its claims within
14 days of the end of the first compensable week, or 21 days for states that do not have a waiting week
requirement, and93% of such claims within 35 days.
2l
o Arrest for or conviction of certain offenses. The U.S. Department of
Labor noted that the new definition did not require that the criminal
conduct be connected with the individual's work.
o Failure to adequately perform employment duties after being warned.
The U.S. Department of Labor noted that, in order to be the basis for a
disqualification to receive unemployment benefits, unsatisfactory job
performance must be the result of intentional behavior or gross
negligence, and must be egregious.
o The legislation allowed the parties to tender stipulation of the ultimate issues
in cases pending on appeal to the agency. The U.S. Department of Labor
noted that while a stipulation of facts might be acceptable, a stipulation of the
issues vitiates the agency's federally-mandated responsibility to apply the
unemployment law to specific facts. The Department also recommended that
any procedure or process by which an appeals referee or hearing officer
accepts a stipulation of fact should be recorded.
Senate BiIl 532 created a Board of Reviews6 to determine appeals policies and
procedures and to hear appeals arising from the decisions and determinations of the
Employment Security Section and the Employment Insurance Section. The annual
salaries of the three-person board are to be set by the General Assembly in the current
Operations Appropriations Act. The Current Operations and Capital Improvements
Appropriations Act of 2011 did not set the salaries for the members of the Board of
Review. Legislative Proposal #2 provides that the current Operations Appropriations
Act of 2012 must provide for the annual salaries of the Board of Review, as provided in
G.s. e6-4(b).
tu c.s. 96-4(b).
22
Conformity to the Trade Adjustment Assistance Extension Act o.f 2011. - In 2002, the
United States General Accounting Office issued a report on the unemployment
insurance program and the need for an increased focus on program integrity. The focus
of President Obama's Executive Order 13520, issued November 23, 2009, was the
reduction of improper payments in major programs administered by the federal
goverrunent, including the unemployment insurance program. In response to the level
of improper payments in the unemployment insurance program, the U.S. Department
of Labor developed a strategic plan to address the root causes of improper payments.
The plan involves new performance measures for the states; increased funding of new
tools and technology; and a focus on the root causes leading to improper Payments. The
three identified root causes leading to improper payments are:
o Claimants continuing to claim benefits after returning to work.
o Untimely and insufficient separation information from employers and third
parry administrators.
o A gap in employment service registration.
As part of the increased focus on program integrity, the U.S. Department of
Labor reconunended legislative language to Congress in ]une of 2011,. In October 2011,,
three key integrity provisions recommended by the Department were enacted as part of
the Trade Adjustment Assistance Extension Act oI 2A11,. Legislative Proposal #2
includes the statutory change the State must make to be in conformity with federal law
this year. The proposal does not include the other two changes because they do not
need to be in place before October 21,,2013. The three program integrity provisions are
as follows:
o New Hire Directory. - To address the gap in employment service registratiory
the federal law requires states to expand the definition of a "newly hired
23
employee" to include a rehired employee who was separated for at least 60
days. It also requires employers to enter the start date of employment when
the employer submits the information to the New Hire Directory. The New
Hire Directory was created years ago to assist states with the collection of
child support payments. The Directory is administered by the Department of
Health and Human Services. The directory is also a valuable tool for
unemployment insurance programs because it allows the agency to cross-check
claimants with new hires. This information assists the agency with the
detection of overpayments being made to individuals who have refurned to
work. States are required to make the necessary statutory changes to its New
Hire Directory within two months after the latest legislative session ends.
Legislative Proposal #2 includes the necessary changes.
Prohibition on Non-Charging of Employer Accounts. - To address the
untimely and insufficient separation information provided by employers and
third party administrators to the agencies, the federal law requires states to
enact a provision prohibiting the non-charging of an employer's
unemployment insurance account when an improper payment is made
because of the employer's failure to respond timely or adequately to a written
request for separation information. In most states, an employer's state
unemployment tax rate is based upon an experience rating whereby
employers that have more claims or charges against their unemployment
insurance account have a higher tax rate. Under current law, benefits paid to
a claimant erroneously may not be charged to the employer's account. This
provision points to a trend whereby employers are expected to improve the
quality of information provided to state employment agencies at the front
24
end of the UI claim process, rather than waiting until a hearing to provide
details. Although a state may impose a stricter standard, it must impose the
minimal federal standard by October 2'1.,2013. Legislative Proposal #2 does
not include this change because it is not required to be made until October
2013.
o Monetary Penalty Assessment. - To address claimants who fraudulently
continue to accept unemployment benefits after refurning to work, the federal
law requires states to impose a penalty on the claimant equal ta'1,5% of the
amount of erroneous overpayment iI the agency determines that the
overpayment is due to fraud. Under G.S. 96-18(u), u fraudulent overpayment
is one that results from a person's false statement or representation knotaing it
to be false or from a person knowingly failing to disclose a material fact to
obtain or increase a benefit received. The money collected from the penalty is
payable to the State Unemployment Trust Fund and its use is limited to the
payment of unemployment compensation benefits. States may enact a larger
penalty amount and may use the additional amount for whatever purpose it
desires. The L5% federally mandatory penalty must be in place by October 21,
20t3. Legislative Proposal #2 does not include this change because it is not
required to be made until October 2013.
PRIVILEGE TAX
At its February '1.2, 2012, meeting, Christopher Mclaughlin, Assistant Professor
of Public Law and Government at the UNC School of Government, provided the
Committee with an overview of the local privilege license tax system and an analysis of
its deficiencies. The issues associated with the privilege license tax are not new to this
25
Committee. The Committee previously studied this system of taxation in 2004s7 and
2008,ss but it has yet to make any reconunendations. Historically, this system of
taxation has been considered an outmoded, inefficient, and arbitrary method of raising
revenue largely because it places a tax burden on a limited number of businesses. It
was for these reasons that the vast majority of State privilege license taxes were
repealed in'1997. At the time, the prevailing thought was that changes to the local
privilege tax system would soon follow, but the General Assembly has not been able to
reach any consensus about what changes should be made.
Through Mr. Mclaughlin's presentation, the Committee heard once again how
the system is archaic, inconsistent, and arbitrary. The system is archaic because it is
based on references to repealed statutes, which are essentially "trapped in time" and
cannot be changed. Specifically, the repealed statutes refer to monetary caps that have
never been adjusted for inflation and to businesses that sell items like record players,
tape cartridges, andbagatelle tables. The Committee heard that the law is often applied
inconsistently because local business license officers have different, yet valid,
interpretations of how to apply the repealed statutes. The system is arbitrary because
there is no rationale for exempting some businesses altogether, subjecting some to caps,
and subjecting others to an unlimited amount of tax. Given these characteristics, the
administration of privilege license taxes frequently proves to be a source of confusion
for local goverrunents and taxpayers alike.
\Atrhen this Committee last looked at privilege license taxes, the specific concern
raised by taxpayers at the time had to do with double taxation. This year, a number of
businesses have raised a concern about the absence of a statutory restriction on the
57 February 3,2004.
58 November 19,2008.
26
amount of tax that a city may levy, particularly in those cities that have opted to levy a
privilege license tax based on a business' gross receipts. Other than the types of
businesses that are subject to a flat rate or cap under the repealed Schedule B, there is no
statutory limitation on the amount of tax that a city may levy upon a business. In
Durham, for example, the tax is $50 for retailers with up to $L5,000 in gross receipts,
then $0.50 per each additional $1,000 in gross receipts with no maximum. A Durham
business with $50 million in gross receipts would pay a privilege tax of $25,000. The
City of Charlotte has a cap on its tax, but it was recently raised from $2,000 to $10,000.
In fact, Charlotte is among the highest in terms of annual revenue generated by this tax,
bringing in close to $25 million in FY 2009-2010. With regard to the amount of tax, Mr.
Mclaughlin pointed out that the North Carolina Constitution provides that taxes must
be "fair and equitable" but, generally speaking, the courts have given taxing authorities
broad discretion in this area.Se He also discussed apportionment problems that exist
for businesses operating in multiple cities. That is, it can be difficult for a business to
determine its gross receipts derived from a particular city for purposes of paying the
privilege tax when that business may be headquartered in one city but provides
services to customers in another city or multiple cities.
With regatd to public remarks on this subject, the Committee heard from Andy
Ellen with the Retail Merchants Association, Jim Ahler with the North Carolina
Association of CPAs (Association), and Kelli Kukura with the League of Municipalities.
Mr. Ellen agreed with the concerns illustrated in Mr. Mclaughlin's presentation.
Specifically, he provided the Committee with an example of an independent grocery
5s In late Februaty, the North Carolina Court of Appeals ruled in fiavor of the City of Lumberton
regarding its authority to levy substantial privilege license taxes on internet sweepstakes businesses. In
that case, four sweepstakes operators sued the city for taxing each business $5,000 per location and $2,500
per terminal. This case may be heard by the North Carolina Supreme Court and the door is still open for
a ruling on the amount of taxes that may be levied,
27
store owner whose privilege license tax went from $50 in 2009 to nearly $6,000 in 2010
because the city adopted a gross receipts schedule. Mr, Ellen also voiced the taxpayer's
concern that the gross receipts method of taxation disproportionately impacts a
business operating on a low profit margin.
Mr. Ahler provided the Committee with information related to efforts by the City
of Charlotte to impose a local privilege license tax on CPA firms licensed by the State
Board of Certified Public Accountant Examiners (Board) based upon its assertion that
some consulting services offered by licensed CPA firms do not constifute accounting
services and, therefore, are a separate, taxable activity. Mr. Ahler relayed that the
Association does not share the City's view about the liability of CPA firms for local
privilege license taxes. The Association's position, rather, is that the State's authority to
levy a State privilege tax on the accounting profession is exclusive, and, therefore, the
City exceeded its authority in levying the local tax.
Under G.S. 105-41, the State imposes a flat privilege license tax on persons
engaged in the public practice of accounting and prohibits counties or cities from
levying a license tax on this profession. Mr. Ahler pointed out that there is no mention
of "separate activities" under the State statute and that consulting clearly falls within the
purview of public accountancy as defined and regulated by the Board. In a subsequent
communication to the Association from the City, Assistant City Attorney Thomas
Powers stated that as long as a business is a CPA firm, is registered with the NC State
Board of CPA Examiners as a CPA firm, and is registered with the Secretary of State as
an accounting or consulting services type of business, the business is exempt from local
privilege tax. These requirements do not, however, appear in G.S. 105-41. As of the
date of this report, it is the Committee's understanding that the City of Charlotte is not
currently pursuing licensed CPA firms that are registered with the Board for local
28
privilege license tax, but acknowledges the interpretational issues raised by the
Association.
Finally, the Committee heard remarks from Kelli Kukura with the North
Carolina League of Municipalities. Ms. Kukura informed the Committee that one of the
primary benefits of the privilege tax system is that it provides a gateway for businesses.
Since all businesses must obtain a license, contact with a local business license office
serves as a centralized source to inform owners of the various legal requirements and
other general information related to their business. However, Ms. Kukura
acknowledged that the system is flawed and was in general agreement with the
comments expressed at the meeting. To that end, she conveyed the League's position
that it will support legislation to modernize the privilege license tax by L) eliminating
exemptions and caps for specific categories of businesses; 2) specifying the appropriate
bases for the tax;3) requiring municipalities to adopt a rate schedule that applies to all
types of businesses within a municipality;4) limiting the amount of taxes paid by
businesses that have business activity within a municipality but no business location
within iU and 5) capping the amount of tax that can be imposed on any single business
location.
The Committee concluded that the system needs to be improved in the areas of
transparenc|, consistency, and simplicity, but it did not recofiunend specific changes.
However, to the extent that a number of references have been made this interim to
anticipated efforts at broad modernization of the overall tax structure in 2013, it is
possible that changes to the local privilege tax system could be a component of that
modernization effort.
29
TAXATION OF SOLAR ELECTRICITY EQUIPMENT
Advances in solar energy equipment manufacturing combined with State and
federal tax incentives for the equipment have allowed the production of solar energy to
be cost effective and have increased demand for solar energy equipment. Due to this
growing interest in solar energy, the Department of Revenue has received many
questions regarding the tax treatment of solar energy equipment. The Department
provided an overview of this issue at the March 7,2012, Revenue Laws meeting.
Sales of personal property are generally subject to the sales and use tax.
However, purchases of personal property for manufacturing are subject to a privilege
tax under Article 5F of Chapter 105 of the General Statutes. The rate of the privilege tax
is 1% of the sales price of the property, with a cap of $80. Questions have arisen as to
whether solar energy equipment should be subject to the sales tax, or the privilege tax
on manufacturing property.
The Department has issued a Sales and Use Tax Bulletin that provides sales of
tangible personal property by "firms engaged in generating, producing or processing
electric power to be distributed to consumers" are subject to the privilege tax on
manufacturing equipment, and therefore, not subject to the sales tax. The tax treatment
of the solar energy equipment depends on whether the purchaser of the equipment is
engaged in generating electric power, and whether the electricity generated is
distributed to customers. Differences in how the equipment is connected to the electric
grid can lead to a significant difference in tax liability for identical solar energy
equipment.
Legislation could be proposed to clarify the issue, either providing all solar
energy equipment should be subject to the privilege tax on manufacturing equipment,
or providing that only solar energy equipment sold to electric power companies directly
30
engaged in sales of electricity to consumers is subject to the privilege tax on
manufacturing equipment. The Committee did not recommend any changes at this
time.
SALES TAX AND PERFORMANCE CONTRACTORS
At its March 7,2012, meeting, the Committee heard a presentation from Canaan
Huie, General Counsel for the Department of Revenue, regarding the sales and use tax
treatment of performance contracts. This is a complex area of sales tax law that has
created confusion for many years. The issue centers on how to determine whether a
certain transaction is a retail sale plus installation or a performance contract for
purposes of applying the sales and use tax. Under current law, retailers are required to
collect and remit sales tax on retail sales of tangible personal property, but sales tax is
not collected from a customer who enters into a performance contract. Under a
performance contract, the contractor agtees to furnish the necessary materials, labor,
and expertise to accomplish the job; it is not a contract for the sale of specific items.
Contractors are deemed to be the consumers or end-users of the tangible personal
property they use in fulfilling performance contracts and, as such, are liable for
payment of the applicable tax. The tax may not be added to the agreed-upon contract
price as a separate charge on the invoice, but it must be included in the computation of
the cost of the materials necessary to perform the contract.
While these rules may seem straightforward, there are a number of. gray areas to
the extent a transaction involves the provision of both tangible personal property and
services. Specifically, a retailer may sell tangible personal property and also offer
installation of that property, such as major appliances or high-end entertainment
equipment. Generally speaking, retailers must collect sales tax on the property, but the
installation services are exempt from sales tax as long as those services are separately
31
stated on the invoice at the time of sale. Conversely, a customer who enters into a
performance contract does not owe sales tax on the property used to fulfill that contract,
but rather the contractor owes sales or use tax on those items. A clear example of a
performance contract would be a contract for the painting of a house or for cleaning
services. The customer would not pay sales tax on the paint or the cleaning products
used to complete those services.
The interpretation problems most often arise with "retailer-contractors," like the
major home improvement stores, that perform the installation of major fixtures, such as
cabinetry and carpeting. Over time, the Department has developed guidance through
its technical bulletins, and the tax treatment is ultimately determined by looking at a
number of factors, such as whether an item is sold with an installation agreement, the
tenor of the agreement, if there is one, whether an item is pre-fabricated, whether an
item is built on-site, and whether a specific quantity is stated in the agreement.
Determining the tax consequences involves a complex and fact-specific analysis.
This issue drew particular attention in 2009 when newspaper reports revealed a
long-running dispute between Lowe's and the Department of Revenue on the
application of the law in this area. The report indicated that Lowe's was not collecting
sales tax when it sold and subsequently installed items such as cabinets, flooring, and
countertops. The Department's position is that these transactions are retail sales plus
installation and that Lowe's should be collecting sales tax on the purchases but not the
installation charges as long as those charges are separately stated on the customer's
invoice. Lowe's position is that the transaction is a performance contract and, therefore,
they are only required to pay the use tax because they are the user or consumer of that
property and then that cost is factored into the "contract price" ultimately paid by the
customer, but it is not a separately stated cost. While this particular taxpayer dispute
32
was not discussed at the meeting, largely because of taxpayer confidentiality, many
members are aware that the need for clarification is due, in part, because of this dispute.
While the Department identified several possible options for the Committee to
consider, including subjecting all or most services to sales and use tax, it did not have a
specific recofiunendation. It would, however, like to see clarification in this area,
especially with regard to the types of transactions that are the most problematic. The
Committee did not make a recofiunendation on this issue, but noted that expansion of
the sales tax base to include services, which would address this problem, may be
discussed in the near future in the context of broader tax modernization efforts.
EXTENSION OF CERTAIN TAX PROVISIONS
At the April 1'1.,2012 meeting, the Committee considered a list of tax provisions
that are set to expire in the next three years. The Committee anticipates comprehensive
tax modernization in the 2013 session of the General Assembly. In anticipation of
potential tax modernization, the Committee chose to maintain the current state of the
tax code through 201,4. To maintain the current state of the tax code, Legislative
Proposal #3 would extend the tier one designation for seafood industrial parks and the
following income tax credits and sales tax refunds:
Income Tax Credits:
. Work opportunity tax credit.
. Tax credit for conslructing renewable fuel facilities.
. Tax credit for biodiesel producers.
. Article 3J tax credits.
. Tax credit for qualified business ventures.
. Tax credit for recycling oyster shells.
. Tax credit for premiums paid on long-term care insurance.
aa
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. Refundable earned income tax credit.
. Tax credit for adoption expenses.
Sales Tax Refunds:
. Passenger air carriers.
. Machinery and equipment placed in a tier one county.
. Aviation fuel of motorsports team or sanctioning body.
Analytical services business.
. Certain industrial facilities.
REAL ESTATE APPRAISAL MANAGEMENT COMPANIES
At its April 1'J-., 2012, meeting, the Committee considered whether out-of'state
real estate appraisal management companies operating in the State are properly filing
North Carolina tax refurns. These appraisal management companies supervise a
network of licensed appraisers who are independent contractors. Federal regulations
adopted in response to the housing crisis led to the growth of appraisal management
companies. The appraisal management companies are intended to increase the quality
and reliability of appraisals to prevent another housing crisis.
The State began to regulate appraisal management companies in S.L. 2010-1.41.
enacting Article 2 in Chapter 93E. This Article authorizes the North Carolina Appraisal
Board (Board) to regulate appraisal management companies and requires the
companies to register with the Board.
The Board has approximately 1"40 registered appraisal management companies.
O.ly six of the 140 are North Carolina companies. The out-of-state companies owe State
income tax on the appraisal work conducted within the State. The current registration
form requires appraisal management companies to disclose information that would
34
allow the Department of Revenue to determine whether the companies are properly
filing State income tax returns.
Legislative Proposal #4 would require the Board to report annually to the
Department the following information about registered appraisal management
companies: name, address, process agent if. any, type of entity, employer identification
number or social security number, and North Carolina Secretary of State identification
number if any. The information required by the Legislative Proposal is currently
disclosed when an appraisal management company registers. The Department could
use the information from the Board to check the filing status of registered appraisal
management companies.
REVENUE LAWS TECHNICAL, CLARIFYING, AND ADMINISTRATIVE
CHANGES
The Revenue Laws Study Committee recommends Legislative Proposal #5,
Revenue Laws Technical, Administrative, and Clarifying Changes. This proposal
makes several technical and clarifying changes to the revenue laws and related stafutes.
Many of the changes were recommendations of the Department of Revenue, including
several changes related to the combined motor vehicle registration and property tax
system which goes into effect JuIy 7,2013.
35
COMMITTEE RECOMMENDATIONS
AND LEGISLATIVE PROPOSALS
The Revenue Laws Study Committee makes the following five recorrunendations
to the 2012 General Assembly. Each proposal is followed by an explanation and, if it
has a fiscal impact, a fiscal memorandum, indicating any anticipated revenue gain or
loss resulting from the proposal.
L. Expedited Rulemaking for Forced Combination
2. Unemployment Insurance Changes
3. Extend Tax Provisions
4. Appraisal Management Companies Reported to Department of Revenue
5. Revenue Laws Technical, Clarifying, and Administrative Changes
36
LEGISLATIVE PROPOSAL #I
EXPEDITED RULEMAKING FOR FORCED
COMBINATION
SI{ORT TITLE: Expedited Rulemaking for Forced Combination.
PRIMARY SPONSORS.'
BRIEF OWRWEW: This Legislative Proposal would require the Department of
Revenue to adopt rules regarding its interpretation of G.S. 105-130.54, the Secretary's
authority to re-determine the State net income of a corporation properly attributable to
its business carried on in the State by adjusting its net income or requiring it to file a
combined refurn. The proposal provides an expedited rule-making process for these
rules.
FISCAL IMPACT:
EFFECTIWDATE: This proposal would become effective when it becomes law.
A copy of the proposed legislation and a bill analysis begin on the next page.
38
S D
GENERAL ASSEMBLY OF NORTH CAROLINA
SESSION 2011
SENATE DRS85240-RBz-18A (03/31)
Short Title: Expedited Rule Making for Forced Combination. (Public)
Sponsors: Senators Rucho, Hartsell (Primary Sponsors), Blue, Brunstetter,
Clodfelter, Harrington, McKissick, Rabon, Rouzer, and Stevens.
Referred to:
A BILL TO BE ENTITLED
AN ACT TO REQUIRE THE SECRETARY OF REVENUE'S INTERPRETATION
OF THE LAW CONCERNING THE SECRETARY'S AUTHORITY TO ADJUST
NET INCOME OR REQUIRE A COMBINED RETURN BE MADE THROUGH
RULE MAKING AND TO PROVIDE AN EXPEDITED PROCESS FOR RULE
MAKING ON THIS ISSUE.
The General Assembly of North Carolina enacts:
SECTION 1. G.S. 105-262(b) is repealed.
SECTION 2. Article 9 of Chapter 105 of the General Statutes is amended by
adding a new section to read:
tt
(a) Purpose and Ss$p-$. - I-t- i.s -$rs--ppli!):-pljhs $lsfa*!a--Ar-Q-\ji"d-q"-usls$d1y-guidance
on a timelii basis to corporate tiixpa*veri:sub.iect. under G.S. 105-130.5A to
have their net incorne adLrsled or to be requirecl to lIle a cornbined relLrrn. l':xcept lbr a
y*ciluntary rcdetermililtion as allc!_Upcl uncler""G.S. 105:!3"0.5A(c). the Siecretary may not
fgdef -c:,)tp0{Ati0n
-Ihe State under G.S. 105-130.5A unril a rule adepted by the Secretary in
ac--iisrda&ga sj$h*ilus-*rsc-tism"-lr-p-qj).$J$l-p-fibcgyilhjl-$s-cliqn providpt- zu1*gxpglited
prc!-e-$lufs ti.rr*:l:r-adapilan--sr[--rulp$--]ls"eclad to adm r.-G.S. I05-I30.5A' 'l'he
Secretarlz rna,v nol. ipt.erpret G.S. 105-130.54 in the lbrrn of abulletin or directive under
G.S. r 0s-26*..
flte-"$scretary is gxsmlrt"{rom G.S. l50I}-21.1 through GS. J"5013-21.4 of'llarl 2 o1'
Article 2A..eif Chapter: l50I] -p[ the fieneral Statutes_but i$ suliect to""the expedit9d
procedure- {trr the*ad$ption o1'rules as e$ll.ablished hy this"$gptjon. Tllqjfecrqt-?,ry ifl
exeryp-[_"ftgn L'a$ l*qfArtlqlp-?A-qfeh er-builssuhiesl
to the expi:di:efJ "r_qviqlypf{rced pn.
ilil De{inition. *"I'he delinitions in G.S. 1508-2 appl}, in this section.
{d Fiscal Note. *'l'he Secr:etary; lnust preptrq a tcal n
rule or a prope"fgd_changs to a rul$ that has a substanti4l ecelornic illpact. Thc {iscal
nple rlust be sub,milted with the proposed rule rvhen the rule"i$ rpbmittgd Lo"the Codifier
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quhs Internet. "fh-g*"rte-_Qretarli musl accept.A\]Iitjgn comment r:n the fisc?l note in the
,:-s.me*ulaltJt-4r""-ths ""$-er:r=qlgry*-aggspl$ *wrtJ}pn-"-p-Qm$gnL:*-91-lhs prs,!a$d rule. 'l'he
$-es.rstary-ls-nati:*jlst "l:r^tbs* Ii$pa,l mls*rqqullunc$ -uidcr*G.s.-lQ54"62lal.-Ilx
purposes o{'this section. a "substantial economic inpact" has the sarne meaning ag
definecl in G.S. l50ll-21.4(bl).
(!) Adoption. - The Secretary may adopt a rule under this section by using the
procedure for adoption of a temporary rule set forth in G.S. 1508-21.1(a3). Ihe
Secr$-tary nrust provide elect$)nic rrptiflcation o{ the adoption"g[a rule to persons on the
m*l li r:elst--tnsr nldtned-iL "apsadiup-"s -ua!}.r.G. sJ5QlL?1fi$-sM
parties".*inglflql$g thc,se origin iM
provided comrnenl. on the rule. If the Secretary receives written comment objecting to
the rule and_Jequesting revier.v b), the Cornmission" the rule rqust be reviewed in
accordance with subsections (c) through (.il.of this section. A persen .na-v obiect to the
rule *nd lqg$_g"tt-revielv b)' tLQ egqn"rj$$ion trt an_v-.point prilll to the adctptioq cllthe rulg
igldlyjln__B.Iv[^."_on-lhc third business dq):*ltrllowing clectrq,nic nell.ificatirxr liorn the
Secleta,ly' gj- IhA_ d-qpli-A$*Al-_A*rule. If the Secretary receives no written comment
objectingtotherulea'$$l-""$sgp$1"tng".r.q::i.*rhy-1"h"p*-Llp.n]I
deliver the rule to the Codifier of Rules. The Codifier of Rules rnust enter the rule into
the North Carolina Administrative Code upon receipt of the rule.
ft) Review. - If the Secretary receives written comm$nt obj-g)ting to the rule and.
rcqucsting rqvisyl brv thc Conrniission. the Secretary must submit the rule !tl--the
Cornrnjssiol {rlr revipr,v. The Commission may not consider questions relating to the
oualitv or efficacv of the rule but must restrict its review to a detennination of rvhether "J
$:rrulg rlssg 11}l ef""tne fonowing crit
(Q It is within the authority delegated to the agency by the General
Assembly.
Q It is clear and unambiguous.
(3) It is reasonably necessary_to implement or interpret an enactment of
the General Assembl]'" or ofl Congress" or a regulation of a federal
agency. The Commission must consider the cumulative effect of all
rules adopted by the agency related to the specific purpose for which
the rule is proposed.
g_) It was adopted in accordance with this section.
CI Manner of Review. - Wlren the-"_(,!:nrnrission revier,r,s_a rule unclef-""this
sp_gXjqr, thg time lirnits in"_U"rbsection$*(h)"ilncl (.bJ)"_o['G.S. l50B:21.i airply. ]'he
Commi$$"ilrn "$Ulst revier,v the rr.rle to cleternrine rvhether the""nil_q,,nlerts thR,,,
gubs_qjjp"nJeJ."gf this section,_-j,he Qorlrnissi g-"rn_grnber of ilula$-:yJp*n
gs- attomey licensqd__te_prssliss- larv jn*Mjlr--f,lilsLr:i!-1p*rpytsullw*rsls--lhc*$!4tr
rnemlrer must make a recornmenclation to tlre Cormnission eir its designee. 'l'he
Corrrrlissio$'s clesignee must be a panel of'at least thr$e members ol'the Commission.
'fhs sta{l rnqllnbcr. Cornmi"$Siplr's de$ignse, or the Comrnissi{j}L may also request
teclir:ical clranges-A$-"- gllorvr;c!-in G.S. l50B-21.10. In revier.vinLjbc rule. th-e
Comrlris$ion.,nsgy cor:sider an)' infbr:rnation suhrnilted by the _Secretary or another
p*9ls0!1,
(g) Objection. - J.f_ th,qllinl$1i$sl$lt_{ir-i!"$_i,lpsjgrre_e*-finds thal, th-qi:uls-dae.:-ns!
meet the standards in subsection (e) oi' this*-section ancl obiecls to the rule. the
40
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Cgmgli$sierl-or its
andjhsrsssan fiu ttrpshj"eplian-wtthi:rsl9*bsrinp-r'r-{a:il'hslstrctary must take one of
the fiillrrr'llil.t g_altjatrs :
lU Change the rule to satisl), the _Commission's obje-ctioq and subrnit the
revised rule 1.o the Commissipn.
ia Submit a-.ivritten _response to thp". Comnjssion indiq3ting that thQ
Secr$tar)' has decidecl not to charrge the rule.
ild Change$-""= Wllgn the Secretary $,hirngg"$- a {qlg-jn rssporrsp- tp an "objection hy
$;1e C om$ i ssitllr--the elM$runs":lbslhstlhs-shengs- sati sfies the
ep:n,ulirglads obj.s-p}Lo;,r-- If- i!--dt:p,r*"lhp er*urlrnisrjpr."ms$l -appravslhg-rd9.-lf-tl fugs
not, ilre Commission rnust sencl the Secretar-y a writ{en statement oll the Comrnission's
continuecl clhjection and theJeasorl ibr the continued objecl.ion.
O Approval. - I{ 11rg-"""eeimmission" or its clesignee-lincls that the fule megts the
UlLantliu"ds in tub"tgction (.e) oll tl:ris section. tlie- Comnrission oJ its d$$ignec lnust approve
the rule and <leliver th-Qjplg to the Codifier.r:f"Rules. llle Cridi{ier of"&ules rrrust qnter
Ilgru]sll$lllre-]$ulh-Mt,.s-e-ada-up-p!t-rssslp!,.fo,vsthe corrrrrrissiotr
grrt* deslgn$e.
fi) I{eturn ol Rule. -- A rule to \,vhich the Commission has objected remains
under revierv b)' the Comrlission until the Secrel.ary decides nr:l to satisf-v the
Clornrnis;$ien's phjection iind makes a rvritten reque$t to tliri C
rule to t.he Secretary._Whsn the Commi$"sipn retllms a.{ule to the Secretary in
acpordance \.r,i th tltis" jiqcliur. "th e
" $gSISt*Iy in.t]' fl 1 9 ill
in"_-$ake Count), $np-prjrn -ezum"""pu"rruiill!-Jp"-,4$"ielg-"?$""sf-ehap1sr*l g[" the General
Statutes.
(k) Effective Date. - G.S. 150ts-?1.3 does not applf to a rule adoptecl undqr this
secl.irxl.* 4" rr"rle adopted uneler this section beconres el'lective on the last dar- ol the
month tlie Codilier ol''ll"ules entsrs the rule in the Neirlh Carolina Aclministrative Code."
SECTION 3. G.S. l50B-l(dx4) reads as rewritten:
"(d) Exemptions from Rule Making. - Article 2A of this Chapter does not apply to
the followine:
The Department of Revenue, with respect to the notice and hearing
requirements contained in Part 2 of Article 24. With respect to the
Seoretar-v ol ltevenue's authrlrit.v to redetef$iine the State nt:! laxable
in-ro$Q- ef a corpuration Ulder G.S. 105-130"54. thc Deparlment is
subject to thq:ule":ntgking requirepr-ents pf G.S. lQ5:2S2A.
SECUON +. On June 30, 2011, the Governor signed into law S.L.
20Il-390, House Bill 619, as passed by the General Assembly. The law repealed the
Secretary of Revenue's authority to adjust a corporation's net income or require a
combined return under G.S. 105-130.6, 105-130.15, and 105-130.16 and replaced it
with a new authority under G.S. 105'130.5,4.. The Fiscal Research Division of the North
Carolina General Assembly prepared a fiscal memo on House Bill 619. Therefore,
notwithstanding G.S. 105-262A(c), as enacted by Section 2 of this act, G.S. 105-262(c),
and Section 7 of the Budget Manual prepared by the Office of State Budget and
Management, the Secretary of Revenue shall not be required to prepare a fiscal note for
4l
('4)
I a proposed new rule submitted to the Codifier of Rules under G.S. 105-2624, as
2 enacted by this act, prior to December 31, 2012.
3 SECTION 5. On April 17, 2012, the Department of Revenue published a
4 directive pursuant to G.S. 105-264, CD-12-02, that explains the Secretary's authority
5 under G.S. 105-130.54 to redetermine a corporation's net income by adjusting the
6 corporation's intercompany transactions or requiring a corporation to file a combined
7 income tax return for tax years beginning on or after January l, 2012. This act
8 supersedes the Directive; however, a taxpayer who relied upon the interpretation in the
g Directive and whose North Carolina taxable income for the 2012 taxable year is less
l0 under the Directive's interpretation than under an interpretation of G.S. 105-130.54 by a
11 rule adopted pursuant to G.S. 105-262A, as enacted by this act, is entitled to rely on the
12 interpretation under the Directive for the 2012 taxable year.
13 SECTION 6. S.L. 20ll-390, as amended by S.L. 20ll-411, enacted
14 G.S. 105-130.5A, effective for taxable years beginning on or after January 1,2012. The
15 Secretary of Revenue's authority under G.S. 105-130.5A exists continuously for taxable
l6 years beginning on or after January 1,2012. G.S. 105-262A, as enacted by Section 2 of
17 this act, prevents the Secretary from exercising the authority granted under
18 G.S. 105-130.54. until a rule adopted in accordance with G.S. 105-2624 becomes
19 effective. After the rule becomes effective, the Secretary may issue a proposed denial of
20 a refund or a proposed assessment under the authority of G.S. 105-130.5A for any
2I taxable year beginning on or after January 1,2012, subject to the applicable statute of
22 limitations.
23 SECTION 7. This act is effective when it becomes law.
24
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Bitl Draft 20L1-RBz-18A:
Expedited Rulemaking for Forced Combination.
201 1-201 2 General Assemblv
Committee:
Introduced by:
Analysis of:
Revenue Laws Studv Committee
2011-RBz-18A
Date: May 1,2012
Prepared by: Cindy Awette
Committee Counsel
SUMMARY: This draft requires the Department of Revenue to adopt rules regarding its
interpretation of G.S. 105-130.5A, the Secretary's authority to redetermine the State net
income of a corporation properly attributable to its bwiness carried on in the State by
adjasting its net income or requiring it to.file a combined return. The draft provides an
expedited rule-making process for these rules.
CURRENT LAW: The tax laws in Chapter 105 of the General Statutes contain two statutes
that appear to give the Department of Revenue two different pathways of interpreting the law:
o G.S. 105-264 - It provides the Secretary may interpret a law by adopting a rule or by
publishing a bulletin or directive on the law. The Department has interpreted tax law
through tle issuance of bulletinsl or directives2 since at least 1955. This process does
not involve public notice and comment or approval by any outside authority. Bulletins
and directives may be issued immediately. A directive or bulletin is not considered a
binding interpretation on the courts.
. G.S. rc5-262 - It provides the Secretary may adopt rules under Chapter 1508. The
Department is exempt from the notice and hearing provisions of Part 2 of Anicle 2A of
Chapter 1508. Although the rule-making process does not provide an opportunity for
public notice and hearing for rules adopted by the Department, it does provide a review
of the rules by the Rules Review Commission (RCC). The RCC reviews rules to ensure
they do not exceed an agency's statutory authority. A rule is considered a binding
interpretation on the courts. The definition of a rule in G.S. 1508-1 specifically states
that a rule does not include nonbinding interpretative statements that merely define,
interpret, or explain the meaning of a statute or rule and that a rule does not include
statements that set forth criteria or guidelines to be used by the staff of an agency in
performing audits, investigations, or inspections.
BILL ANALYSIS: Legislative Proposal #/ would require
adopt rules before it could exercise the authority under G,S.
I Bulletins present the Department of Revenue's administrative interpretation and application of tax laws. The
Department has 'Corporate, Excise, and Insurance Tax Bulletins', 'Individual Income Tax Bulletins', and'Sales and
Use Tax Bulletins'. The Department typically updates the bulletins annually to reflect changes in the law or
administrative interpretation. However, the Department has not updated the bulletins in the last three or four years.
' Directives are issued by the Department of Revenue on an as-needed basis to interpret a tax law, explain the
application of law to stated facts, or to clari$r an issue on which the Department has received numerous questions.
Directives are not updated to reflect changes in the law or administrative interpretation. The contents of a directive
may be included in an updated bulletin.
' SI. Z0l l-390, as ,rcnded by S.L. 2011-411, repealed the stafutes that allowed the Secretary to redetermine the
net income ofa corporation ifthe Secretary found that a report by the corporation did not reflect its true earnings
43
the Department of Revenue to
105-130.5A' to redetermine the
State net income of a corporation properly attributable to its business carried on in the State by
adjusting its net income or requiring it to file a combined return. The proposal does not extend
the rulemaking requirement to all interpretations of the tax laws by the agency because there
did not appear time to address the issues a larger proposal would entail:
o A clear understanding of what interpretations would require a rule. The current
definition of a rule does not include nonbinding interpretative statements or
statements that set forth criteria or guidelines to be used by the staff of an agency in
performing audits. Arguably, the Department's bulletins would fall within these
exceptions to the definition of a rule in Chapter 150B.
o A clear understanding of the status of the bulletins and directives that currently
exist. Would they all have to be adopted through the rulemaking process? Would
they be grandfathered into effectiveness? Do they meet the definition of a rule? Do
they need to be published in the North Carolina Administrative Code (Code)?
Throughout the course of the Revenue Laws Study Committee meetings on the implementation
of G.S. 105-130.54, the members expressed strong concerns on the need for the Department to
provide clarity on the law for taxpayers and to execute the law as enacted. In response to the
change in the law and the legislative concern on the interpretation of the law, the Department
issued the first Corporate Tax Directivea it has issued since 2008. Representatives on behalf of
the North Carolina Chamber of Commerce, the North Carolina Retail Merchants Association,
and the Council on State Taxation appeared before the Committee on March 7, 2012, and
expressed concern that the directive issued by the Department did not provide clarity to the law,
exceeded the Department's statutory authority, and did not undergo the formal rule-making
process.s The Department of Revenue expressed concern about the length of the rule-making
process.
This proposal seeks to balance the following three goals:
o The need for taxpayer certainty about the tax laws.
o The need for an outside determination as to whether the Department of Revenue has
exceeded its statutory authority in its interpretation of the law.
o The opportunity for public notice and comment on the Department's interpretation of
the law.
The proposal provides the rulemaking procedure will be the quicker timetable allowed for
temporary rulemaking. This process may be completed in less than two months. This process
allows 15 days for notice and comment from outside parties. Anyone may object to a proposed
rule during the notice and comment period or within three business days of the adoption of the
rule by requesting review by the RRC. To ensure that all parties have knowledge of the
adoption of a rule, the proposal requires the Department to provide electronic notification of its
adoption of a rule to persons on the mailing list, those originally given notice of the
rulemaking, and those who provided comment on the rule. If no one requests review by the
RRC, the adopted rule may be delivered to the Codifier of Rules and entered into the Code. If
the Department receives written objections to the rule and requests that the rule be reviewed,
from its business carried on in this State. In their place, the General Assembly enacted a more restrictive
interpretation in G.S. 105-130.5A'. Effective for taxable years beginning on or after January 1,2012, the Secretary
must find that the corporation fails to accurately report its State net income through the use of transactions that
lack economic substance or are not at fair market value.
a Comorate Income Tax Directives Table of Contents
'North Carolina General Assembly - Revenue Laws > Meetils Documents > 20ll-2012 Meeting Documents >
March j
44
then the RRC must review the rule within 15 days. The RRC may not extend the period of time
for review. As provided in G.S. $AB-21.9, the RRC does not consider questions relating to the
quality or efficacy of the rule, but limits its review to the following:
o Is the rule within the authority delegated to the agency?
o Is it clear and unambiguous?
o Is it reasonably necessary to implement or interpret an act of the General Assembly or
ofCongress or ofa regulation ofa federal agency?
o Was it adopted in accordance with G.S. 105-262A?
The proposal changes the fiscal note requirement to allow Revenue to prepare its own fiscal
note.6 It will not need to submit the fiscal note to the Office of State Budget and Management.
The fiscal note must be submitted with the proposed rule to the Codifier of Rules and posted on
the Internet. A person may comment on the fiscal note in the same manner a person may
comment on a proposed rule. Section 4 of the bill provides that the Department does not need
to prepare a fiscal note for a proposed rule submitted to the Codifier of Rules prior to
December 31,2012. The reason for this waiver is that any rules submitted before the end of this
calendar year under the statute created by this act is limited to the Department's application of
G.S. 105-130.5A. The subject of the rule has been debated in the General Assembly during the
201I session, where the Fiscal Research Division prepared a fiscal memo, and it has been the
subject of four Revenue Laws Study Committee meetings in 2011 and 2012. The fiscal issues
surrounding this particular rule appear to be well known and understood by all the parties.
The proposal exempts the Department from the delayed effective date proyisions that apply
whenever the Commission receives l0 or more objections to a rule requesting review by the
legislature.
A rule becomes effective on the last day of the month the Codifier of Rules enters the rule in
the Code. This effective date provision differs from the general effective date provision in
Chapter 15087 and enables the rule to become effective a month earlier. Section 6 of the draft
clarifies that the Secretary's authority under G.S. 105-130.5A exists continuously for taxable
years beginning on or after January 1,2012. After a rule becomes effective, the Secretary may
issue a proposed denial of a refund or a proposed assessment under the authority of G.S. 105-
130.54 for any taxable year that beginning on or after January I,2012.
The proposal only applies to G.S. 105-130.54. It does not apply to the Secretary's
interpretations of the repealed statutes that continue to be applicable for taxable years
beginning before January l, 2012: G.S. 105-130.6, 105-130.15, and 105-130.16. The
Department has issued a directive offering guidance on its interpretation of those laws, CD-12-
01, and the directive appears to set forth the Department's application of the law as upheld by
the North Carolina Courts.o The Department has also issued a directive offering guidance on its
interpretation of the newly enacted law, G.S. 105-l30.54,inCD-12-02. Section 5 of the bill
provides that a taxpayer who relied upon the interpretation in that Directive and whose North
Carolina taxable income for the 2012 taxable year is less under the Directive's interpretation
than under an interpretation adopted through the rulemaking process may rely on the
interpretation under the Directive for the 2012 taxable year.
o A fiscal note must be prepared if the rule has a substantial economic impact. Prior to 201 I , the term 'substantial
economic impact' meant a cumulative impact of $3,000,000. In 20 I I , this amount was reduced to $500,000.
' G.S. l50B-21.3 provides that a rule becomes effective on the first day of the month following the month the rule
is approved.
8 Wal-Mart Stores Eqst v. Hinton,lgT N,C. App. 30 (2009); Delhaize America, Inc., Plaintffi v. Kenneth R. Lay,
201 I NCBC 2:2011NCBC LEXIS 9 (201 l).
45
EFFECTIVE DATE: The proposal would become effective when it becomes law.
20 1 1 -RBz- 1 8A-SMRB- I I 6 v I
LEGISLATIVE PROPOSAL #2
UNEMPLOYMENT INSURANCE CHANGES
SIIORT TITLE: Unemployment Insurance Changes
PRIMARY SPONSORS;
BRIEF OWRWEW: This Legislative Proposal includes several changes to the
unemployment laws that fall within these three categories: . The extension of the three-year look-back period from January 1.,2012, to January
1.,2013. . The resolution of outstanding issues associated with S.L. 2011-40L, Senate Bill
532. . The statutory changes required to comply with the federal Trade Adjustment
Assistance Extension Act of 2011..
FISCALIMPACT:
EFFECTIWDATE:
becomes law.
Except as otherwise provided, this act becomes effective when it
A copy of the proposed legislation and a bill analysis begin on the next page.
48
U
GENERAL ASSEMBLY OF NORTH CAROLINA
SESSION 2011
D
BILL DRAFT 2011-RBz-20 [v.9] (03/31)
(THIS IS A DRAFT AND IS NOT READY FOR INTRODUCTION)
5lll20l2 12:56:28 PM
Short Title: Unemployment Insurance Changes. (Public)
Sponsors:
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Referred to:
A BILL TO BE ENTITLED
AN ACT TO MAKE CHANGES TO THE UNEMPLOYMENT INSURANCE LAWS.
The General Assemblv of North Carolina enacts:
PART I. CHANGE THE LAW TO CONTINUE THE THREE-YEAR LOOK.
BACK TRIGGER FOR EXTENDED BENEFITS
SECTION 1.(a) The General Assembly finds that the Governor's Executive
Order No. 93, entitled "Extend Unemployment Benefits to Protect the Safety, Health,
and Welfare of North Carolina's Long-Term Unemployed", was the purported basis for
action by the then Employment Security Commission to provide for the extension of
unemployment benefits to thousands of North Carolinians. The extension of
unemployment benefits was grounded upon amendments to Section 203 of the Federal-
State Extended Unemployment Compensation Act of 1970 (the "1970 Act"), as
amended by Section 502(b) of the Tax Relief, Unemployment Insurance
Reauthorization and Job Creation Act of 2010 (the "2010 Act").
SECTION 1.(b) The General Assembly finds that the Governor's Executive
Order 113, entitled "Further Extend Unemployment Benef,rts to Protect the Safety,
Health, and Welfare of North Carolina's Long-Term Unemployed" was the purported
basis for action by the then Employment Security Commission to provide for the
extension of unemployment benefits to thousands of North Carolinians nearing the end
of a two-month, federal extension of unemployment benefits under Section 201 of the
Temporary Payroll Tax Cut Continuation Act of 2011. That extension, authorized
through February 29, 2012, was grounded upon amendments to Section 203 of the
Federal-State Extended Unemployment Compensation Act of 1970 (the "1970 Act"), as
amended by Section 502(b) of the Tax Relief, Unemployment Insurance
Reauthorizatian and Job Creation Act of 2010 (the "Tax Relief Act of 2010").
SECTION 1.(c) The General Assembly finds that Section 502(b) of the Tax
Relief Act of 2010 specifies that the extension of benefits is to be made only as "the
State may by law provide." Section 205(t) of the underlying 1970 Act defines "State
law" as the "unemployment compensation law of the State, approved by the [U.S.
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Secretary of Labor]." In North Carolina, that law is Chapter 96 of the General Statutes,
the "Employment Security Law." Nothing in Chapter 96 of the General Statutes, then
or now, authorizes the Governor to extend unemployment benefits by Executive Order,
nor does Executive Order 93 or Executive Order No. 113, or any other such order,
constitute a "State law" within the meaning of the 1970 Act or the North Carolina
Constitution. Article II Section 1 of our State Constitution provides that "The legislative
power of the State shall be vested in the General Assembly. Further, Article I, Section 6
of our State Constitution provides that the legisl ative and executive powers are
"...separate and distinct... "
SECTION 1.(d). The General Assembly finds that the people of this State
entrusted the creation of laws to the General Assembly, not to the executive branch, and
that Executive Order No. 93 and Executive Order No. 113 were issued and acted upon
by the executive branch in a manner contrary to the rule of law.
SECTION 1.(e) Further, the General Assembly finds that it enacted Section
6.16 of Session Law 20ll-145 and in so doing validated the effects of the Governor's
Executive Order No. 113, with the stated intent to allow extended benefits to be paid
under the Tax Relief Act of 2010 so long as payment of the extended benefits did not
hinder the State's ability to reduce its debt owed to the federal government for
unemployment benefits.
SECTION 1.(e) It is deemed, therefore, to be in the best interest of the
people of this State that the General Assembly now ratiff and hereby validate the effects
of the Governor's Executive Order No. I13.
SECTION 1.(f) To maintain the rule of law with respect to State and federal
relations pertaining to employment security laws in North Carolina, any executive order
issued by the Governor that purports to extend unemployment insurance benefits,
whether those benefits will be paid from federal or State funds, is void ab initio, unless
the executive order is issued upon authority that is conferred expressly by an act enacted
by the General Assembly.or granted specifically to the Governor by the Congress of the
United States.
SECTION 1.(g) Section 6.16(d) of S.L. 20ll-145 reads as rewritten:
"SECTION 6.16.(d) This section becomes effective April 16,2011, and expires
tt
SECTION 1.(h) G.S. 96-12.01(al)(a)c.3. reads as rewritten:
"3. This section applies as provided under the Tax Relief,
Unemployment Insurance Reauthorization, and Job
Creation Act of 2010 (P.L. lll-312) as it existed on
December 17, 2010, and is applicable to compensation
for weeks of unemployment beginning after December
17,2010, and ending on or before W
Decernber 3 l. 2012. provided that:
I. The average rate of (i) insured unemployment, not
seasonally adjusted, equaled or exceeded one
hundred twenty percent (120%) of the average of
such rates for the coffesponding l3-week period
ending in all of the preceding three calendar years
and equaled or exceeded five percent (5%) or (ii)
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total unemployment, seasonally adjusted, as
determined by the United States Secretary of
Labor, for the period consisting of the most recent
three months for which data for all states are
published before the close of the week equals or
exceeds six and one-half percent (6,5%); and
II. The average rate of total unemployment in this
State, seasonally adjusted, as determined by the
United States Secretary of Labor, for the
three-month period referred to in this subsection,
equals or exceeds one hundred ten percent (l l0%)
of the average for any of the corresponding
three-month periods ending in the three preceding
calendar years."
SECTION 1.(D G.S. 96-12.01(alXa)e. reads as rewritten:
"(4) There is an "on indicator" for this State for a week if the Commission
determines, in accordance with the regulations of the United States
Secretary of Labor, that for the period consisting of such week and the
immediate preceding 12 weeks, the rate of insured unemployment (not
seasonally adjusted) under this Chapter:
;. Total extended benefit amount.
3. This subdivision applies as provided under the Tax
Relief, Unemployment Insurance Reauthorization, and
Job Creation Act of 2010 (P.L. I ll-312) as it existed on
December 17, 2010, and is applicable to compensation
for weeks of unemployment beginning after December
17,2010, and ending on or before W
LJpsp-$r-t)_e-r 31. 2012^ provided that:
I. The average rate of total unemployment,
seasonally adjusted, as determined by the United
States Secretary of Labor, for the period
consisting of the most recent three months for
which data for all states are published before the
close of the week equals or exceeds eight percent
(8%); and
The average rate of total unemployment in this
State, seasonally adjusted, as determined by the
United States Secretary of Labor, for the
three-month period referred to in this subdivision
equals or exceeds one hundred ten percent (l l0%)
of the average for any of the corresponding
three-month periods ending in the three preceding
calendar years."
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SECTION l.CI) This section is effective when it becomes law and applies
retroactively to January 1,2012.
PART II. RESOLUTION OF OUTSTANDING ISSUES FROM S.L. 2011.401
SECTION 2.(a) The Current Operations Appropriations Act for the
2012-2013 fiscal year shall provide for the annual salaries of the Board of Review, as
provided in G.S. 96-4(b).
SECTION 2.(b) G.S.96-14(2) reads as rewritten:
"$ 96-14. Disqualification for benefits.
An individual shall be disqualified for benefits:
(;)
Clonviction by a court of competent jurisdiction for
manufacturing, selling, or distribution of a controlled substance
punishable under G.S. 90-95(aXl) or G.S. 90-95(a)(2) while in
theemployof saidM
npjffg terminated or suspended from employment after arrest or
conviction for an offense involving violence, sex crimes, or
illegal
witlr an emplo.t-ee'slvork |:r an emploltef qf is in v
reasonable rvork rule e{Jrolicy.
An), physical violence whatsoever related to an employee's
work for an employer, including, but not limited to, physical
violence directed at supervisors, subordinates, coworkers,
vendors, customers, or the general publ@
For the duration of the individual's unemployment beginning with the
first day of the first week after the disqualiffing act occurs with
respect to which week an individual files a claim for benefits if it is
determined by the Division that such individual is, at the time such
claim is filed, unemployed because he or she was discharged for
misconduct connected with the work. Misconduct connected with the
work is defined as intentional acts or omissions evincing disregard of
an employer's interest or standards of behavior which the employer has
a right to expect or has explained orally or in writing to an employee
or evincing carelessness or negligence of such degree as to manifest
equal disregard.
"Discharge for misconduct pglngglgd-with the work" as used in
this section is defined to include but not be limited to "aty-ptq-gungrc
ofllhe Jbllowing acts or conduct:
a. @initiated by an employer for violating the
employer's written alcohol or illegal drug etti€yi
rep*rti*gpolicy.
b. Bgfffii$g to work significantly impaired by alcohol or illegal
dru*s$$ns*ll+ir*g{j1ug s .
9.-. -Clmsuring alcohol or illegal drugs on employer's frrcn*i*e*i @
d.
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t.
Inappropriate comments or behavior towards supervisors,
subordinates, coworkers, vendors, customers, or to the general
public relating to any federally protected characteristic which
creates a hostile work
'l'hell in connection with the
l"erglng or falsiffing any document or data related to
employment, including a previously submitted application for
Violation of an employer's written absenteeism p"li*)t
refbsingp_rtli"r..1):.
I{elirsir:g to perform reasonably assigned work taslsc-*n**e
le*-.il{t
@
Intentional acts or omissions evincing clisregard o!- the
elnplo-\'er's ir,lterest clr standards of behavior llhich the emplo)/er
has a riglrt to expect orMlX-M
-qmnl"$jsg pI gyjnp"ut&-erelg";-t-gr gegligence r:dSgg,lr degree aS
to manifust equal disregard. Iior - purposes of this
sub-$ubclivision. evidence that an ernplo,vee has received no
fewer than three written reprimands sslsrliv{d-in the 12 months
that*" immediately @e employee's
Mr:k.--thi{i
lh.q*phrase ll-ditshargp-for rnisconduct con$"e,clgt1:ry$hlltg:uod<" does
not include the *discharge or arl employer-initiated separation of a
severely disabled veteran, as defined in G.S. 96-8, for any act or
omission of the veteran that the Division determines are attributed to a
disability incurred or aggravated in the line of duty during active
military service, or to the veteran's absence from work to obtain care
and treatment of a disability incurred or aggravated in the line of duty
during active military service."
SECTION 2.(c) G.S. 96-15(bX2) reads as rewritten:
'(2) Adjudication. - When a protest is made by the claimant to the initial or
monetary determination, or a question or issue is raised or presented as
to the eligibility of a claimant under G.S.96-13, or whether any
disqualiflrcation should be imposed under G.S.96-14, or benefits
denied or adjusted pursuant to G.S. 96-18, the matter shall be referred
to an adjudicator. The adjudicator may consider any matter, document
or statement deemed to be pertinent to the issues, including telephone
conversations, and after such consideration shall render a conclusion
as to the claimant's benefit entitlements. The adjudicator shall noti$
the claimant and all other interested parties of the conclusion reached.
The conclusion of the adjudicator shall be deemed the final decision of
the Division unless within 30 days after the date of notification or
mailing of the conclusion, whichever is earlier, a written appeal is filed
pursuant to rules adopted by the Division. The Division shall be
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deemed an interested party for such purposes and may remove to itself
or transfer to an appeals referee the proceedings involving any claim
pending before an adjudicator.
Provided, any interested employer shall be allowed 3019 days from
the earliereFrn*iting-(,)r-*delivery of the notice of the filing of a claim
against the employer's account to protest the claim and have the claim
referred to an adjudicator for a decision on the question or issue raised.
A copy of the notice of the filing shall be sent contemporaneously to
the employer by telefacsimile transmission if a fax number is on file.
Provided further, no question or issue may be raised or presented by
the Division as to the eligibility of a claimant under G.S.96-13, or
whether any disqualification should be imposed under G.S.96-14,
after 45 days from the first day of the first week after the question or
issue occurs with respect to which week an individual filed a claim for
benefits. None of the provisions of this subsection shall have the force
and effect nor shall the same be construed or interested as repealing
any other provisions of G.S. 96-18.
An employer shall receive written notice of the employer's appeal
rights and any forms that are required to allow the employer to protest
the claim. The forms shall include a section referencing the appropriate
rules pertaining to appeals and the instructions on how to appeal."
SECTION 2.(d) G.S. 96-15(0 reads as rewritten:
"(0 Procedure. - The manner in which disputed claims shall be presented, the
reports thereon required from the claimant and from employers, and the conduct of
hearings and appeals shall be in accordance with rules adopted by the Division for
determining the rights of the parties, whether or not such regulation*1glglconform to
common-law or statutory rules of evidence and other technical rules of procedure. All
testimony at any hearing before an appeals referee upon a disputed claim shall be
recorded unless the the-parties have waived the evidentiary hearing and entered into a
stipulation resolving the issues pending before the'appeals referee, hearing officer, or
other employee assigned to make the de
r:lll-rcer" r:r other empio.vee assigned to make the decisiq& may either a.ccept or reject the
stipul4tion-ll-the stipula.tion is rejecl.ed. the pa*ies maJ- appeal the decision to the Board
o{ Rsview. bu+*l{'tho tq$t!,ru{)$y eed not be transcribed unless the
disputed claim is further appealed and, one or more of the parties objects, under such
rules as the Division may adopt, to being provided a copy of the tape recording of the
hearing. Any other provisions of this Chapter notwithstanding, any individual receiving
the transcript shall pay to the Division such reasonable fee for the transcript as the
Division may by regulation provide. The fee so prescribed by the Division for a party
shall not exceed the lesser of sixty-five cents (65O per page or sixty-five dollars
($65.00) per transcript. The Division may by regulation provide for the fee to be waived
in such circumstances as it in its sole discretion deems appropriate but in the case of an
appeal in forma pauperis supported by such proofs as are required in G.S. I'110, the
Division shall waive the fee."
SECTION 2.(e) This section becomes effective November 1,2012.
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PART III. COMPLIANCE WITTI THE TRADE ADJUSTMENT ASSISTANCE
EXTENSION ACT OF 2011
SECTION 3.(a) G.S. ll0-129.2(c) reads as rewritten:
"(c) Report Contents. - Each report required by this section shall contain the
name, address, and*social security number of the ner.vly hired employee, the date
sen'igE$*{qL.r.olnuneration rvere tirst perlonned b}'the n{}\yl}'hired employee. and the
name and address of the employer and the employer's identiffing number assigned
under section 6109 of the Internal Revenue Code of 1986 and the employer's State
employer identification number. Reports shall be made on the W-4 form or, at the
option of the employer, an equivalent form, and may be transmitted magnetically,
electronically, or by first-class mail."
SECTION 3.(b) G.S. I 10-129.20 is amended by adding a new subdivision
to read:
"0) Definitions. - As used in this section, unless the context clearly requires
otherwise. the term:
i;) "Nervly,--h,ir$:gl grnpl0):$p'l $laans b alr*sgplo)'ee )vho h,as-lo1
prpvieusl.y been ernployed by the employer as rvell a.s an employee
rvlio rryas previousl.y ernplo),ec{ b}' the employer but has been separated
{rom such priur erlrpl$},mont 1{lr at least 60 consecutive days."
SECTION 3.(c) G.S.96-9(c)(2) is amending by adding a new
sub-subdivision to read:
'(2) Charging of benefit payments. *
'I'l!,e Division shall charge benefi(s to an elnplo)''er's accouut
rvhen il. cletennines drat an overpayment has been made to a
clairnant and it detQ.l'mines that both oi the following conditions
alrpi.v*:
l* The ovoryir):{ngnt oootl$ed becapse the employer failed
m :ssparuL-_tj p: pl y pr" adpg ualqly- la" - -4" "-$till-e-tr- r:e q u est o f
Illlr .ne IIUS1 r"igigr1 relating to*"_An
unemplo)'ment compensation claim.
2. 'I'he emplo):er exhibit.s a pattern o,[ &rilure to respond
timel)'-_"erjrclequatel), b,r, lailing trt respitnd tq-fvtitten
requestllioln the Division {trr inllrrmalioll rslil-ting to al
unemBlo,vment compensatioll ".glRim on trvo or mclre
p"ccasions. tf an g*g- thircl party agent to
Le,:np,nd- arr "its behalf_tg_tls iliyisian-lhs!-lhe actionslf
the agent must be considered rvhen determining a pattern
ol'failure to respond timely or adequately. A pattern is
esta,h-liqh$_il_"bgs-e_d on the.ag$nt'*s behaviclr overalI and not
only r,vith re$pect to ils behavior related to thc smplo_ver.
For purp.Qses of this sub-subdivisigg u:tilten notjfi"cation ma-v
include a request sent electronically. A:gspc,nse is conside
un$mdil{"it fuils*ls*bs"-ffir{e -sithirr the time allorved under
C.S. 96-15(rX2). A respcinse is considered inadequate if it lhils
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to nrrividc sufllcient {acts to enable the Division to make a
!Antl:-p-j- &l_oJlnhalign_Af_hgll9fi$=ffiowever, a rQspcilHA-mAy-UAI
be considpfge!*fnAdggp-0lg^t{-the Divis"ion fails to request the
necessar), inlbrlnatiolr.
"l'he prohibition on the noncharging o1'an ernployer's account
under this sutr-U"bdjyjsi{:n" applies to each \.veek of'
unelrlj?"-lll,vnrcnt oompensation that i$" itn .oyprl:alirrent rntil the
Di-r,isiorl mtej; a detenrrirtation tll-&-t the*clairnant is no longer
eligihte- __fix.-J119_ overpaicl arnoun:t-* agd stops making the
p..\'qmgym_Alfl*lf $f:- "e.lUm_*tf e- combined-r,vage ciaim. the
determination o{ noncharging for the cornbined-rvage claim
shall bp rnacle b,v the pa.v-ing state. If fire response liom the
<:mplo--vor cloes noJ rnerit the c,riteria established by the pay-ing
state llrr an adeqr"ralq_gr ti$rely-rqsponse, tlle pa)/ing stalo must
prornptlx lotify' the transf'erring state gf its determir]atiorl g[d
the.9sp|oygt-t:lul]L_be. appfeprialal)' d."".Lle Division may
n a_i:K "Ih g pr-olr.i !2-i !.i on fbr gtpcl c aus_e. "
SECTION 3.(d) Subsections (a) and (b) of this section become effective
July 1, 2012. Subsection (c) of this section becomes effective October 1,2013.
PART IV. EFFECTIVE DATES
SECTION 4. Except as otherwise provides, this act is effective when it
becomes law.
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Bill Draft 201 1-RBz-2Az
Unemployment Insurance Changes.
201 1-201 2 General Assemblv
Committee:
Introduced by:
Analysis of:
Revenue Laws Studv Committee
2011-RBz-20
Date: i|llay 1,2012
Prepared by: Cindy Avrette
Committee Counsel
SUMMARY: 2011-RBx-20 includes several changes to the unemployment laws that fall
within these three categories:
o The extension of the three-year look-back period from January I, 2012, to
January 1,2013.
o The resolution of outstanding issues associated with S. L. 2011-401, Senate Bill
532.
o The statutory changes required to comply with the federal Trade Adjustment
Assistance Extension Act of 2011,
CHANGE IN THE LAW TO CONTINUE THE THREE-YEAR LOOK.BACK
TRIGGER FOR EXTENDED BENEFIT
There are two permanent benefit programs required by federal law: regular unemployment
benefits and extended benefits.r Regular unemployment benefits are fully funded by the State
through its State Unemployment Insurance Trust Fund and claimants in North Carolina are
eligible to receive benefits for up to 26 weeks under it. Extended benefits are available in a
state when the state is experiencing high levels of unemployment.2 The program is funded 50%
by state contributions and 50% by the federal government. However, the federal govemment
has paid I00% of the extended benefit claims since February 22,2009.'
Extended benefits are triggered in a state when the unemployment rate is at least 6.5Yo and at
least 10% higher than it was at the same time in either of the past two calendar years; this two-year
window is known as the "two-year look-back". In the Tax Relief, Unemployment
Insurance Reauthorization, and Job Creation Act of 2010", Congress allowed states to amend
their laws to temporarily increase the two-year look-back period to a three-year look-back
period. This measure enabled more states to offer extended benefits. Under the 2010
legislation, the temporary measure ended December 31,2011. However, Congress extended the
temporary measure twice.s It is currently set to expire December 3I,2012.
t Congress enacted Emergency Unemployment Compensation in 2008, known as EUC08. These benefits are fully
payable by the federal treasury.
' In North Carolina, a claimant may receive up to 20 weeks of extended benefits.
3 P.L. lll-5, Sec. 2005, approved February 19,2009, American Recovery and Reinvestment Act of 2009. The
provision has been extended several times in other federal legislation. The current expiration date for federal
funding of extended benefits is December 31,2012.
' P.L. I ll-312, approved December 17, 2010,
'P.L. ll2-T8,approvedDecember23,20ll,TemporaryPayrollTmCutContinuationActof20ll.P.L.112-96,
approved February 22,2012, The Middle Clqss Tax Relief and Job Creation Act of 2012.
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North Carolina changed the law to permit a three-year look-back in S.L. 20ll-145, Section
6.16. This provision expired January l, 2012. Legislative Proposal #2 would extend the sunset
from January I,2012, until January l,2013.In North Carolina, extended benefits will not be
allowed for claim weeks later than May 12, 2012, because the Stale's unemployment rate has
fallen below the trigger. However, it is possible the extended benefits may trigger back "on"
before the end ofthe year.
The Governor ordered the Employment Security Commission to use the three-year look-back in
Executive Order 93, dated June 3, 2011. The Governor ordered the Division of Employment
Security to use the three-year look-back in Executive Order 113, dated January II,2012.
Although the Executive Orders purport to give the Governor the authority to make this change,
the federal law clearly states that a "State may by law" provide for the temporary look-back
extension.6 Legislative Proposal #2, finds that the Govemor did not have the authority under
federal law, the North Carolina Constitution, or Chapter 96 of the North Carolina General
Statutes to change the look-back period.
RESOLUTION OF OUTSTANDING ISSUES FROM S.L.2011-401, SENATE BILL 532
The General Assembly enacted Senate Bill 532 on July 26,2012. The Senate passed the bill on
June 2, 2011, by a vote of 43 to 5. The House passed the bill on June 15,2011, by a vote of 104
to 12. Senate Bill 532 had four operative parts:
o It created the Division of Employment Security within the Department of Commerce
and transferred the functions of the Employment Security Commission to that Division.
o It made the Division subject to rulemaking under Article 2A of chapter l50B of the
General Statutes.
o It made substantive changes to the employment security laws.
o It made conforming changes to the employment security laws.
On June 30, 2011, the Governor vetoed the bill. In the Governor's Objections and Veto
Message, she stated the U.S. Department of Labor informed the administration that a lack of
conformity between the bill and federal law could result in a loss of money for the State's
unemployment insurance program and a reduction in the FUTA tax credit.' A state's law must
conform to the provisions of the federal unemployment compensation laws in order for
employers in a state to be eligible for a credit against the FUTA tax and for the state to be
eligible to receive an administrative grant to operate its unemployment compensation programs.
The General Assembly overrode the Governor's veto on July 26,201 1.8 After passage of the
bill, the Employment Security Commission informed the General Assembly by a letter dated
October 12,2011, of its intention to suspend the provisions of the bill determined by the U.S.
Department of Labor to be noncompliant with federal law. G.S. 96-19(b) gives the Division of
Emplolnnent Security the authority to suspend enforcement of a provision upon receiving
notification from the U.S. Department of Labor that the provision is noncompliant with the
requirements of federal law. The suspension may be in effect until the Legislature next has an
opportunity to reconsider the provisions purported to be noncompliant with federal law.
u P. L. ll-312, approved December 2010, Sec. 502, Tax Relief, Unemployment Insurqnce Reauthorization, and
Job Creation Act of2010.
t The FUTA tax rate is 6Yo and is imposed on wages up to $7,000 ayear. Federal law provides a credit against the
tax liability of up to 5.4%o to employers who pay state taxes timely under an approved state unemployment
insurance program. The 2012 effective FUTA tax rate for NC employers is 0.9Yo, which is approximately $63 per
employee.
8 The Senate voted to ovenide the veto on July 73,2011, by a vote of 3l to 17. The House voted to override the
veto on July 26,2011,by avote of 72to 47.
58
Legislative Proposal #2 addresses the areas of concern noted by the U.S. Department of Labor:
o Senate Bill 532 expanded the time for an employer to provide information required to
protest a claim from 10 days to 30 days. The U.S. Department of Labor noted that the
extension of time would make it virtually impossible for the agency to make timely
determinations under the standards set by federal regulations.'
o An individual is totally disqualified from receiving benefits if the Division of
Employment Security determines the individual was discharged for misconduct
connected with the work. Senate Bill 532 expanded the definition of "misconduct
connected with the work" to include both of the following:
o Arrest for or conviction of certain offenses. The U.S. Department of Labor noted
that the new definition did not require that the criminal conduct be connected
with the individual's work.
o Failure to adequately perform employment duties after being warned. The U.S.
Department of Labor noted that, in order to be the basis for a disqualification to
receive unemployment benefits, unsatisfactory job performance must be the
result of intentional behavior or gross negligence, and must be egregious.
o Senate Bill 532 allowed the parties to tender stipulation of the ultimate issues in cases
pending on appeal to the agency. The U.S. Department of Labor noted that while a
stipulation of facts might be acceptable, a stipulation of the issues vitiates the agency's
federally-mandated responsibility to apply the unemployment law to specific facts. The
Department also recommended that any procedure or process by which an appeals
referee or hearing officer accepts a stipulation of fact should be recorded.
Senate Bill 532 created a Board of Reviewlo to detet-ine appeals policies and procedures and
to hear appeals arising from the decisions and determinations of the Employment Security
Section and the Employment Insurance Section. The annual salaries of the three-person board
are to be set by the General Assembly in the current Operations Appropriations Act. The
Current Operations and Capital Improvements Appropriations Act of 201I did not set the
salaries for the members of the Board of Review. Legislative Proposal #2 provides that the
current Operations Appropriations Act of 2012 must provide for the annua