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

              REVENUE LAWS STUDY

COMMITTEE

REPORT TO THE 2005

GENERAL ASSEMBLY OF NORTH CAROLINA

2005 SESSION

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TABLE OF CONTENTS

Letter of Transmittal ....................................................................................................................... i

Revenue Laws Study Committee Membership.......................................................................... ii

Preface........................................................................................................................ ...................... 1

Committee Proceedings ................................................................................................................. 3

Committee Recommendations and Legislative Proposals........................................................ 14

1. AN ACT TO UPDATE THE REFERENCE TO THE INTERNAL

REVENUE CODE USED IN DEFINING AND DETERMINING

CERTAIN STATE TAX PROVISIONS................................................................................... 15

2. AN ACT TO AMEND THE SALES AND USE TAX STATUTES TO

CONFORM TO THE STREAMLINED SALES TAX AGREEMENT ................................. 35

3. AN ACT TO MODIFY THE TAXATION OF MOTOR FUELS.......................................... 46

4. AN ACT TO CLARIFY PRESENT- USE VALUE ELIGIBILITY AND TO

AMEND THE PERIOD FOR APPEAL OF A PRESENT- USE VALUE

DETERMINATION OR APPRAISAL.................................................................................... 63

5. AN ACT TO INCREASE THE PROPERTY TAX EXCLUSION FOR

THE RESIDENCE OF A DISABLED VETERAN.................................................................. 74

6. AN ACT TO MAKE TECHNICAL AND CLARIFYING CHANGES TO

THE REVENUE LAWS AND RELATED STATUTES......................................................... 81

Appendices

A. Authorizing Legislation, Article 12L of Chapter 120 of the General Statutes

B. Disposition of Committee’s Recommendations to the 2004 Session

C. State Budget Outlook

D. State Revenue Outlook

E. Streamlined Sales Tax Update by Charles Collins, Taxware

F. Streamlined Sales Tax Project Update by Andrew Sabol, Director of the Sales and

Use Tax Division, Department of Revenue

G. Summary of Estate Tax Issue prepared by Canaan Huie, Bill Drafting Division

H. Summary of the Limited case, prepared by Martha Walston, Fiscal Research

Division

I. Summary of the Cuno case and Recent Developments, prepared by Canaan Huie,

Bill Drafting Division

REVENUE LAWS STUDY COMMITTEE

State Legislative Building

Raleigh, North Carolina 27603

Senator John H. Kerr, III, Cochair Representative Paul Luebke, Cochair

Representative David Miner, Cochair

January 25, 2005

TO THE MEMBERS OF THE 2005 GENERAL ASSEMBLY:

The Revenue Laws Study Committee submits to you for your consideration its

report pursuant to G. S. 120- 70.106.

Respectfully Submitted,

_______________________________

Rep. Paul Luebke, Co- Chair

________________________________

Rep. David Miner, Co- Chair

_______________________________

Sen. John Kerr, Co- Chair

i

2003- 2004

REVENUE LAWS STUDY COMMITTEE

MEMBERSHIP

Senator John H. Kerr, III, Cochair Representative Paul Luebke, Cochair

Representative David Miner, Cochair

Senator Daniel Clodfelter Rep. Gordon Allen

Senator Walter H. Dalton Rep. Harold Brubaker

Senator Fletcher L. Hartsell, Jr. Rep. Dewey L. Hill

Senator David W. Hoyle Rep. William McGee

Mr. Leonard Jones Rep. William Wainwright

Mr. J. Micah Pate, III Rep. Steve Wood

Senator Hugh Webster

Staff:

Susan Phillips, Committee Clerk

Cindy Avrette, Staff Attorney

Rodney Bizzell, Fiscal Analyst

David Crotts, Fiscal Analyst

Trina Griffin, Staff Attorney

Y. Canaan Huie, Staff Attorney

Linda Millsaps, Fiscal Analyst

Martha Walston, Staff Attorney

ii

1

PREFACE

The Revenue Laws Study Committee is established in Article 12L of Chapter 120

of the General Statutes to serve as a permanent legislative commission to review issues

relating to taxation and finance. 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. Committee members may be legislators or

citizens. The co- chairs for 2003- 2004 are Senator John Kerr and Representatives Paul

Luebke and David Miner.

G. S. 120- 70.106 gives the Revenue Laws Study Committee's study of the revenue

laws 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. A

committee notebook containing the committee minutes and all information presented to

the committee is filed in the Legislative Library.

In 2002, the General Assembly established a permanent subcommittee under the

Revenue Laws Study Committee to study and examine the property tax system. 1 The

subcommittee consists of eight members, four appointed by the Senate chair of the

Revenue Laws Study Committee and four appointed by the House chair of the

Committee. The subcommittee may recommend changes in the property tax system to

the full Committee for its consideration in its final report to the General Assembly. The

1 S. L. 2002- 184, s. 8.

2

chairs to the Revenue Laws Study Committee appointed the following eight members

to the Property Tax Subcommittee: Co- Chairmen Senator Dan Clodfelter and

Representative Harold " Bru" Brubaker; Senators Walter Dalton and Fletcher Hartsell;

Representative Gordon Allen, Dewey Hill, and Bill McGee; and public member Leonard

Jones.

Before it was created as a permanent legislative commission, the Revenue Laws

Study Committee was a subcommittee of the Legislative Research Commission. It has

studied the revenue laws every year since 1977.

3

COMMITTEE PROCEEDINGS

The Revenue Laws Study Committee met twice after the 2004 Regular Session of

the 2003 General Assembly adjourned on July 18, 2004. The Committee considered 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.

REVIEW OF THE RECOMMENDATIONS MADE TO THE

2004 GENERAL ASSEMBLY

The 2004 General Assembly enacted seven of the Revenue Laws Study

Committee's eight legislative proposals in whole or in part. Appendix B lists the

Committee’s recommendations and the action taken on them in 2004. A document

entitled “ 2004 Finance Law Changes” summarizes all of the tax legislation enacted in

2004. It is available in the Legislative Library located in the Legislative Office Building.

BUDGET AND REVENUE OUTLOOK

At its first meeting on December 21, 2004, the Revenue Laws Study Committee

was briefed by David Crotts, Linda Millsaps, and Lynn Muchmore from the Fiscal

Research Division on the current budget situation and the revenue outlook for the

upcoming year.

The Committee was informed that although the national economy continues to

recover and revenues are coming in ahead of schedule, the General Assembly will be

facing a budget shortfall of approximately $ 1.3 billion in fiscal year 2005- 2006. The gap

is due to a combination of the carryover of a structural budget shortfall for 2004- 2005

4

( the use of one- time resources to pay for recurring expenditures), a sub par economic

recovery, and no relief from the high growth of health care costs. The presentation on

the State Budget Outlook may be found in Appendix C.

The Committee was also briefed on three issues facing the General Assembly that

will play a significant role in influencing the revenue outlook. The first issue is the

expiration of three temporary tax increases: ( 1) the ½ - cent State sales tax expires July 1,

2005 resulting in a decrease from 4.5% to 4%; ( 2) the 8.25% income tax rate on high

income expires January 1, 2006; and ( 3) federal tax action taken in 2001 has the effect of

eliminating the North Carolina estate tax base as of July 1, 2005. The General Assembly

will have to decide whether to extend any or all of these taxes, allow them to expire, or

make some other modification. Second, the decision whether to conform to the federal

Internal Revenue Code will present another budgetary challenge. Generally, the

General Assembly enacts legislation every year to update its reference to the Code to

track federal changes. This year, conforming to the changes made by the Working

Family Relief Act of 2004 and the American Jobs Creation Act of 2004 could result in a

loss to the General Fund of over $ 39 million in FY 05- 06. Finally, the General Assembly

will need to amend its sales and use tax statutes in order to conform to the Streamlined

Sales Tax Agreement. Conformity will require that North Carolina eliminate its

multiple sales tax rates. Items that are currently taxed at a preferential rate will either

need to be taxed at the general rate or exempted entirely. The presentation on the

State's revenue outlook is attached as Appendix D.

INCOME TAX

The Revenue Laws Study Committee spent considerable time reviewing one

income tax issue. North Carolina's tax law tracks many provisions of the federal

5

Internal Revenue Code by reference to the Code. 1 The General Assembly determines

each year whether to update its reference to the Internal Revenue Code. 2 Updating the

Internal Revenue Code reference makes recent amendments to the Code applicable to

the State to the extent that State law previously tracked federal law. Legislative

Proposal # 1, IRC Update, changes the statutory reference to the Code from May 1, 2004,

to January 1, 2005 and makes other conforming changes. Congress enacted two bills

between May 1, 2004, and January 1, 2005, that would affect State tax provisions. The

Working Families Tax Relief Act of 2004, P. L. 108- 311, enacted on October 4, 2004,

makes numerous changes to personal income tax provisions affecting families as well as

individual taxpayers and businesses. The American Jobs Creation Act of 2004, P. L. 108-

357, enacted on October 22, 2004, made extensive income changes for businesses and

individuals. In addition, in its first act of the new session, Congress allowed for

accelerated tax benefits for cash contributions made in January 2005 for tsunami relief

efforts.

SALES AND USE TAX

The Revenue Laws Study Committee has spent a considerable amount of time

over the past five to six years on the Streamlined Sales Tax Project. The Streamlined

Sales Tax Project is an effort by states, with input from local governments and the

private sector, to simplify and modernize sales and use tax collection and

1 North Carolina first began referencing the Internal Revenue Code in 1967, the year it changed its taxation of

corporate income to a percentage of federal taxable income.

2 The North Carolina Constitution imposes an obstacle to a statute that automatically adopts any changes in

federal tax law. Article V, Section 2( 1) of the Constitution provides in pertinent part that the “ power of

taxation … shall never be surrendered, suspended, or contracted away.” Relying on this provision, the North

Carolina court decisions on delegation of legislative power to administrative agencies, and an analysis of the

few federal cases on this issue, the Attorney General’s Office concluded in a memorandum issued in 1977 to

the Director of the Tax Research Division of the Department of Revenue that a “ statute which adopts by

reference future amendments to the Internal Revenue Code would … be invalidated as an unconstitutional

delegation of legislative power.”

6

administration. The Project began in March 2000 and has the goal of achieving sufficient

simplification and uniformity to encourage sellers without nexus in states to voluntarily

collect use tax in participating states.

In November 2002, the implementing states approved the Streamlined Sales and

Use Tax Agreement. The Agreement contains the uniformity and simplification

provisions developed by the Project. The Agreement becomes effective when at least 10

states representing 20% of the population of all states with a sales tax are in compliance

with the provisions of the Agreement. The Revenue Laws Study Committee has

recommended, and the General Assembly has enacted, changes to North Carolina’s

sales tax laws to bring it into compliance with the Agreement. As of January 1, 2005, 12

states representing 19.4% of the sales tax states’ population are believed to be in

compliance. It is anticipated that 15 states representing 24.1% of the applicable

population will be in compliance by July 1, 2005, and that 19 states representing 26.3%

of the population will be in compliance by January 1, 2006.

Legislative Proposal # 2, Streamlined Sales Tax Changes, contains a few technical

and administrative changes necessary to bring North Carolina into compliance with the

Agreement, as amended in November 2003 and November 2004. Other, more

substantive changes will need to be made this session for North Carolina to remain in

compliance with the Agreement after January 1, 2006. These changes include the

preferential rate of tax on certain agricultural items and the rates of tax on

telecommunications services, direct- to- home satellite service, and spirituous liquor.

Appendices E and F contain a more detailed history of the Project and its status.

MOTOR FUELS TAX

Last year the Revenue Laws Study Committee recommended several changes to

the motor fuels tax laws. The General Assembly enacted one of the changes contained in

7

that recommendation, the authorization for law enforcement positions, in the final

hours of the 2004 session. Legislative Proposal # 3, Motor Fuel Tax Changes, contains

several of the provisions recommended last year and a few new ones.

ESTATE TAX

At its second meeting on January 25, 2005, the Committee was provided

an overview of the estate tax issue that will be facing the General Assembly in

the upcoming year.

Until 1999 North Carolina imposed an inheritance tax on property

transferred by a decedent. The amount of tax due depended on the relationship

of the person transferring the property ( the decedent) to the person receiving the

property ( the beneficiary). This was in contrast to federal law, which has a single

rate schedule for estates.

As part of the budget bill in 1998 ( S. L. 1998- 212) the General Assembly

repealed the inheritance tax for decedents dying on or after January 1, 1999, and

in its place enacted an estate tax. North Carolina's estate tax is what is

commonly known as a " pick- up tax". The amount of state estate tax due is the

maximum amount of the federal credit allowed under the Code for federal estate

tax purposes.

In 2001 Congress enacted several major changes to the federal estate tax

that could have a substantial impact on the North Carolina estate tax. First,

Congress gradually increased the amount of the estate that is excluded from

taxation. 3 Second, Congress repealed the estate tax effective in 2010.4 Third,

3 For 2001, the applicable exclusion amount was $ 675,000. That amount was increased to $ 1 million for

2002 and 2003, to $ 1.5 million for 2004, and 2005, to $ 2 million for 2006 through 2008, and to $ 3.5 million

for 2009.

8

Congress phased out the federal credit for state death taxes over four years. 5

The effect of this reduction and elimination of the state death taxes credit, if

conformed to, would be to eliminate the North Carolina estate tax as of January

1, 2005.

In 2002 and 2003, the General Assembly evaluated the changes contained

in the federal legislation and responded by partially conforming to the federal

changes. North Carolina conformed to the increased exclusion amounts and to

the 2010 repeal of the estate tax. Thus, as under previous law, an estate that is

not subject to the federal estate tax is not subject to the state estate tax. However,

North Carolina did not conform to the phase- out of the state death taxes credit.

Based on the 2002 legislation, as amended in 2003, for decedents dying before

July 1, 2005, the amount of the North Carolina estate tax is to be computed based

on the state death taxes credit without regard to the phase- out and elimination

of that credit. Without further legislative action, North Carolina will conform to

the elimination of the state death taxes credit as of July 1, 2005, and the North

Carolina estate tax will, for practical purposes, cease to exist for decedents dying

on or after that date.

North Carolina was not alone in facing this issue in 2002. At the time of

the federal changes in 2001, all 50 states and the District of Columbia had a state

estate or inheritance tax that relied on the federal credit to some degree. 6 Since

2001, a number of states have taken legislative action ( or declined to take action)

to offset the effects of the phase- out. Eleven states, including North Carolina,

4 However, without further Congressional action, the federal estate tax will be reinstituted automatically

in 2011.

5 The amount of the credit was reduced 25% for 2002, 50% for 2003, 75% for 2004, and eliminated in 2005.

6 Thirty- eight states, including North Carolina, had a straight pick- up tax. The other 13 states used the

state death tax credit as a supplemental tax or as an alternative minimum tax.

9

took affirmative steps to decouple from the phase- out of the federal credit. 7 An

additional six states and the District of Columbia decided not to update their

reference to the Code for purposes of the federal credit. At least one state has

created a stand- along estate tax and at least one state has affirmatively acted to

repeal its estate tax.

The Revenue Laws Study Committee acknowledges that the 2005 General

Assembly will need to address this issue and notes that North Carolina has

essentially four options in regard to the estate tax:

• North Carolina could extend or remove the sunset on the decoupling

from the phase- out of the federal credit. Under current law, North

Carolina will conform to the phase- out of the federal credit beginning on

July 1, 2005. The General Assembly could choose to permanently tie the

amount of the state estate tax to the amount of the federal credit that

existed in 2001. This would preserve state revenue in the near future, but

it would be more difficult administratively for taxpayers. This is only a

temporary solution since the federal estate tax is set to be repealed

altogether in 2010.

• North Carolina could take no action, thereby conforming to the phase- out

of the federal credit beginning on July 1, 2005. This option could lead to

lower state revenue as early as the 2005- 2006 fiscal year.

7 North Carolina decoupled from the federal legislation only temporarily. Under current law, North

Carolina is set to conform to the federal legislation as of January 1, 2004. The other ten states that actively

decoupled must take further legislative action to conform to the federal legislation.

10

• North Carolina could move away from the pick- up tax and establish a

stand- alone estate or inheritance tax. This tax could be structured to be

revenue neutral or to result in a revenue gain or a revenue loss.

• North Carolina could repeal the estate tax. This option could lead to

lower state revenues immediately.

The handout on this issue, which was distributed at the second meeting, is

attached as Appendix G.

PROPERTY TAX

The Revenue Laws Study Committee reviewed two proposals recommended by

the Department of Revenue relating to property tax. Legislative Proposal # 4, Present-

Use Value Clarification, makes clarifying changes to the statutes governing the present-use

value taxation of farmland ( agricultural land, horticultural land, and forestland).

Legislative Proposal # 5, Increase Disabled Vet Property Tax Exclusion, increases the

property tax exclusion for the residence of a disabled veteran receiving federal benefits

for a service- connected disability.

A. Present- Use Value Classification

This proposal has been endorsed by the North Carolina Farm Bureau and sets

out several changes to help the counties and the Department's Property Tax Division

administer the present- use value program. The Proposal clarifies the statutes relating to

present- use value tax eligibility and sets out a specific time period for a taxpayer to

appeal the tax appraiser's classification and appraisal of the taxpayer's property. In

2002, the Revenue Laws Study Committee proposed numerous amendments to the

present- use value statutes including an updated method for calculating the value of

farmland at its present- use value, clarification of the sound management requirement

11

for qualifying for use value taxation, and allowing land subject to a conservation

easement to continue to qualify for use value taxation. Most of these changes were

ratified in S. L. 2002- 184. The Department recommends the following clarifying changes

to the present- use value statutes.

Under current law, farmland must be part of a unit engaged in commercial

production to qualify for present- use value tax status. In 2002, the General Assembly

adopted the Revenue Laws Study Committee's proposed definition of a unit. The

definition requires that when a unit is composed of multiple tracts located within

different counties, the tracts must be within 50 miles of a tract that qualifies as farmland

and either share the same classification or use the same equipment and labor force. The

proposal deletes the characteristic that the multiple tracts may use the same equipment

or labor; thus requiring the multiple tracts to be of the same type classification and

within 50 miles of a tract that qualifies as farmland.

The proposal also codifies a procedure that the counties are currently following.

Under current law, an individual owner must live on the farmland or have owned the

farmland for four years in order for the land to qualify for present- use value

classification. An exception to this ownership requirement is allowed if the farmland is

transferred to a person who continues to use the land as farmland and the new owner

certifies that he or she will be liable for the deferred taxes owing on the land if the land

is later disqualified. Counties also allow an exception to the ownership requirement in

situations where no deferred taxes are due. This occurs when farmland, that is not

appraised and taxed at present- use value, passes to a new owner who already owns

farmland meeting the same classification as the newly transferred farmland. The new

owner must file an application for present- use value eligibility, but there are no

deferred taxes to assume.

12

The proposal next adds language setting a 60- day time limit for a taxpayer ( 1) to

appeal the assessor's decision regarding the qualification or appraisal of the taxpayer's

property as present- use value property or ( 2) to provide the assessor with additional

information after the taxpayer's property has been disqualified for present- use value

classification. Current law provides no time limit in the above situations.

B. Increase Disabled Vet Property Tax Exclusion

This proposal increases the property tax exclusion for specially adapted housing

used as a residence by a disabled veteran who receives federal grant money for a

service- connected disability. In response to an increase in the federal grant amount in

1989, the General Assembly increased the exclusion to the first $ 38,000 of the assessed

value of the house and land. The proposal increases the exclusion to $ 48,000 because of

another increase in the federal grant amount.

CASE LAW UPDATE

The Revenue Laws Study Committee continues to monitor several ongoing court

cases involving tax matters that have the potential to affect the State's budget and

revenue outlook. At its first meeting, the Committee heard an update on the A& F

Trademark, Inc. v. Tolson case, often referred to as the Limited case. On December 7,

2004, the North Carolina Court of Appeals upheld the State's position on the taxation of

royalty income received by an out- of- state investment company for the use of

trademarks in this State. The Court ruled that the out- of- state taxpayers, who hold the

trademarks used in North Carolina, were doing business in North Carolina and that the

assessment of corporate income and franchise taxes against the taxpayers was not a

constitutional violation. A more detailed summary of that case was distributed to the

Committee members and is attached as Appendix H.

13

At its second meeting, the Committee heard an overview of the Cuno v.

DaimlerChrysler case and was briefed on recent developments. In Cuno, the Sixth

Circuit Court of Appeals held that Ohio's investment tax credit violated the Commerce

Clause of the United States Constitution, but simultaneously found that a personal

property tax exemption did not violate the Commerce Clause. Shortly after the decision

was announced, the State of Ohio petitioned the Sixth Circuit Court of Appeals for a

rehearing en banc. On January 18, 2005, the Court denied that request. While this case

is not binding on North Carolina, the case is worth monitoring since North Carolina has

made extensive use of a variety of economic development incentive programs. A more

detailed summary of this case and its application to North Carolina is attached as

Appendix I.

14

COMMITTEE RECOMMENDATIONS

AND LEGISLATIVE PROPOSALS

The Revenue Laws Study Committee makes the following six

recommendations to the 2005 General Assembly. Each proposal is followed by an

explanation and, if it has a fiscal impact, a fiscal note or memorandum indicating

any anticipated revenue gain or loss resulting from the proposal.

1. IRC Update

2. Streamlined Sales Tax Changes

3. Motor Fuels Tax Changes

4. Present Use Value Clarification

5. Increase Disabled Vet Property Tax Exclusion

6. Revenue Laws Technical Changes

15

LEGISLATIVE PROPOSAL # 1

IRC UPDATE

16

LEGISLATIVE PROPOSAL # 1:

A RECOMMENDATION OF THE REVENUE LAWS STUDY COMMITTEE

TO THE 2005 GENERAL ASSEMBLY

AN ACT TO UPDATE THE REFERENCE TO THE INTERNAL

REVENUE CODE USED IN DEFINING AND DETERMINING

CERTAIN STATE TAX PROVISIONS.

SHORT TITLE: IRC Update

SPONSORS: Kerr; Dalton, Hartsell, Hoyle, Webster

BRIEF OVERVIEW: This bill would update to January 1, 2005, the reference to the

Internal Revenue Code used in defining and determining certain State tax

provisions. This bill would be effective when it becomes law.

FISCAL IMPACT: This bill would result in a loss to the General Fund of

approximately $ 39 million in FY 05- 06 and over $ 56 million in FY 06- 07.

EFFECTIVE DATE: This bill would become effective when it becomes law, except

for the provision allowing a deduction for state and local taxes in lieu of a

deduction for State income taxes, which would become effective for taxable years

beginning on or after January 1, 2005.

A copy of the proposed legislation, bill analysis, and fiscal analysis begin on the next page

17

GENERAL ASSEMBLY OF NORTH CAROLINA

SESSION 2005

U D

BILL DRAFT 2005- LYxz- 13A [ v. 2] ( 12/ 2)

( THIS IS A DRAFT AND IS NOT READY FOR INTRODUCTION)

1/ 19/ 2005 2: 58: 52 PM

Short Title: IRC Update. ( Public)

Sponsors: Senators Kerr; Dalton, Hartsell, Hoyle, and Webster.

Referred to:

1 A BILL TO BE ENTITLED

2 AN ACT TO UPDATE THE REFERENCE TO THE INTERNAL REVENUE

3 CODE USED IN DEFINING AND DETERMINING CERTAIN STATE TAX

4 PROVISIONS.

5 The General Assembly of North Carolina enacts:

6 SECTION 1. G. S. 105- 228.90( b)( 1b) reads as rewritten:

7 "( b) Definitions. – The following definitions apply in this Article:

8 …

9 ( 1b) Code. – The Internal Revenue Code as enacted as of May 1,

10 2004, January 1, 2005, including any provisions enacted as of that

11 date which become effective either before or after that date. date, but

12 not including the amendments made to Section 164 of the Code by

13 Section 501 of P. L. 108- 357."

14 SECTION 2. G. S. 105- 130.5( a) reads as rewritten:

15 "( a) The following additions to federal taxable income shall be made in

16 determining State net income:

17 …

18 ( 16) The amount excluded from gross income under Subchapter R of

19 Chapter 1 of the Code."

20 SECTION 3. Notwithstanding Section 1 of this act, any amendments to

21 the Internal Revenue Code enacted after May 1, 2004, that increase North Carolina

22 taxable income for the 2004 taxable year become effective for taxable years

23 beginning on or after January 1, 2005.

18

1 SECTION 4. G. S. 105- 228.90( b), as amended by Section 1 of this act,

2 reads as rewritten:

3 "( b) Definitions. – The following definitions apply in this Article:

4 …

5 ( 1b) Code. – The Internal Revenue Code as enacted as of January 1,

6 2005, including any provisions enacted as of that date which

7 become effective either before or after that date, but not including

8 the amendments made to Section 164 of the Code by Section 501 of

9 P. L. 108- 357. date."

10 SECTION 5. G. S. 105- 134.6( c) reads as rewritten:

11 ( c) Additions. – The following additions to taxable income shall be made in

12 calculating North Carolina taxable income, to the extent each item is not included in

13 taxable income:

14 …

15 ( 3) Any amount deducted from gross income under section 164 of the

16 Code as state, local, or foreign income tax or as state or local

17 general sales tax to the extent that the taxpayer's total itemized

18 deductions deducted under the Code for the taxable year exceed the

19 standard deduction allowable to the taxpayer under the Code

20 reduced by the amount the taxpayer is required to add to taxable

21 income under subdivision ( 4) of this subsection.

22 …"

23 SECTION 6. Notwithstanding any other provision of law, a taxpayer

24 whose federal taxable income for 2004 is reduced due to a charitable contribution of

25 cash made in January 2005 for Indian Ocean tsunami relief efforts in accordance with

26 P. L. 109- 1 is not required to add back the amount of the deduction related to that

27 contribution in determining North Carolina taxable income for 2004.

28 SECTION 7. Sections 4 and 5 of this act become effective for taxable

29 years beginning on or after January 1, 2005. The remainder of this act is effective

30 when it becomes law.

19

BILL ANALYSIS OF LEGISLATIVE PROPOSAL # 1:

IRC UPDATE

BY: Y. CANAAN HUIE, BILL DRAFTING DIVISION

SUMMARY: This bill updates the reference to the Internal Revenue Code used in

determining and defining certain State tax provisions. The bill would become

effective when it becomes law.

CURRENT LAW: North Carolina's tax law tracks many provisions of the federal

Internal Revenue Code, by reference to the Code. 1 The General Assembly

determines each year whether to update its reference to the Internal Revenue

Code. 2 Updating the Internal Revenue Code reference makes recent amendments to

the Code applicable to the State to the extent that State law tracks federal law. The

General Assembly's decision whether to conform to federal changes is based on the

fiscal, practical, and policy implications of the federal changes and is normally

enacted in the following year, rather than in the same year the federal changes are

made. Under current law, the reference date to the Code is May 1, 2004.

BILL ANALYSIS:

This bill would change the reference date to January 1, 2005. Changing the reference

date to January 1, 2005, would incorporate federal changes made in the Working

Families Tax Relief Act of 2004 ( P. L. 108- 311) and the American Jobs Creation Act of

2004 ( P. L. 108- 357). In addition, in early 2005 Congress enacted an act to enhance

the tax benefit for certain charitable contributions made in January 2005 for tsunami

relief ( P. L. 109- 1). That act did not amend the Code, but rather used uncodified

language to bring about that result. This bill would conform to that legislation as

well.

Working Families Tax Relief Act ( WFTRA) of 2004 ( P. L. 108- 311).

The Working Families Tax Relief Act of 2004 was signed into law by President Bush

on October 4, 2004. Despite its title, the act provides tax benefits for businesses as

1 North Carolina first began referencing the Internal Revenue Code in 1967, the year it changed its

taxation of corporate income to a percentage of federal taxable income.

2 The North Carolina Constitution imposes an obstacle to a statute that automatically adopts any

changes in federal tax law. Article V, Section 2( 1) of the Constitution provides in pertinent part that

the “ power of taxation … shall never be surrendered, suspended, or contracted away.” Relying on

this provision, the North Carolina court decisions on delegation of legislative power to

administrative agencies, and an analysis of the few federal cases on this issue, the Attorney General’s

Office concluded in a memorandum issued in 1977 to the Director of the Tax Research Division of

the Department of Revenue that a “ statute which adopts by reference future amendments to the

Internal Revenue Code would … be invalidated as an unconstitutional delegation of legislative

power.”

20

well as individuals and families. The following features of the act are important for

State tax purposes:

• Creation of a more uniform definition of " child" throughout the Code starting with

the 2005 taxable year. At the federal level, the definition of " child" is

important in five areas: the dependency exemption, the child credit, the

earned income credit, the dependent care credit, and head of household

filing status. WFTRA creates a uniform definition of " child" that applies to

each of these areas. Under the new definition, a child is a qualifying child if

the child satisfies three separate conditions. First, the child must have the

same principal place of abode as the taxpayer for more than one half the tax

year ( residency test). Temporary absences due to special circumstances are

not included. Second, the child must be the child, stepchild, sibling,

stepsibling, or a descendant of any of these relations of the taxpayer

( relationship test). Third, the child must satisfy an age condition to be

deemed a qualifying child. In general, a child must be under age 19, or

under age 24 if a full- time student, to be a qualifying child. However, lower

age limits were retained for the dependent care credit ( under 13 years of age

unless disabled) and the child tax credit ( under 17 years of age). For State tax

purposes, the changes are important in so far as they relate to the

dependency exemption, the child tax credit, and head of household filing

status. The new definition of qualifying child for the dependency exemption

may result in a change of status of some children – where the new law has a

residency test, the old law had a support test ( the one claiming the child had

to provide at least 50% of the child's support). For the federal child tax

credit, some taxpayers may become eligible to claim the credit due to the

elimination of some restrictions related to foster children. This is important

because eligibility for the State child tax credit is dependent on the taxpayer's

eligibility for the federal credit. In general, the uniform definition should not

affect head of household filing status.

• Extension of the above- the- line deduction for educators. Under previous law, an

eligible educator was allowed an above- the- line deduction of up to $ 250 for

amounts paid by the teacher for books or supplies used in the classroom.

This provision was set to expire with the 2003 taxable year. WFTRA

extended this provision for the 2004 and 2005 taxable years.

• Extension of elective expensing of qualified environmental remediation expenditures.

Under previous law, a taxpayer could elect to treat qualified environmental

remediation expenditures that would normally be charged to a capital

account and depreciated over time as deductible in the current year. To be

deductible currently, the expenditure must be paid or incurred with the

abatement or control of hazardous substances at a qualified contaminated

21

site. This provision would have expired with the 2003 tax year. WFTRA

extended this provision for the 2004 and 2005 taxable years.

• Extension of enhanced deduction for qualified computer contributions. Under

previous law, corporations were allowed an enhanced charitable

contribution deduction for contributions of computer technology or

equipment to schools or public libraries that would use the computer

equipment for educational purposes. This provision would have expired

with the 2003 tax year. WFTRA extended this provision for the 2004 and

2005 taxable years.

• Elimination of the phase down of the deduction for qualified clean fuel property.

Under previous law, a taxpayer was allowed a specified deduction for clean

fuel vehicles or refueling property placed into service before January 1, 2007.

The amount of that deduction was to be reduced by 25% in 2004, 50% in

2005, and 75% in 2006, and was to be completely phased out in 2007.

WFTRA eliminated the phase down in the 2004 and 2005 taxable years.

Without further action, the phase down will resume at 75% in 2006.

• Extension of Archer Medical Savings Accounts ( MSAs). Archer MSAs were

designed to give small employers, their employees, and self- employed

individuals a way of creating tax- deferred savings to offset qualifying

medical expenses. The program was designed to be limited in scope: no

new Archer MSAs could be set up after a certain threshold had been met or

after the end of 2003. WFTRA extends the period in which new Archer

MSAs may be created until the end of 2005.

American Jobs Creation Act ( AJCA) of 2004 ( P. L. 108- 357).

The American Jobs Creation Act of 2004 was signed into law by President Bush on

October 22, 2004. The bill makes many substantial changes in many different areas

of tax law. The more significant changes for State tax purposes are listed below.

• Repeal of the exclusion for extraterritorial income ( ETI)/ deduction for qualified

domestic production income. Under previous law, U. S. exporters were eligible

for an exclusion from gross income for qualifying extraterritorial income. In

2000, the World Trade Organization declared this exclusion an illegal trade

subsidy. Congress did not take action regarding this finding until the

European Union began placing sanctions on U. S. exports. At the time

Congress acted those sanctions were at 12% and were rising by one

percentage point per month. This exclusion will be phased out over several

years. The ETI exclusion will be reduced by 20% in 2005 and by 40% in 2006.

The ETI exclusion will be eliminated altogether beginning in 2007. Based on

Congress's enactment of this law, the EU has indicated it will drop sanctions

on U. S. imports beginning January 1, 2005.

22

In part to replace the ETI exclusion, Congress created a new deduction for

domestic production activities. " Domestic production activities" is defined

fairly broadly and includes a) the sale, lease, or license of property

manufactured or produced by the taxpayer in significant part in the United

States, b) the sale, lease, or license of United States produced motion pictures

and video tapes, c) the sale of electricity, natural gas, or potable water within

the United States, d) construction activities performed in the United States, e)

engineering or architectural services performed in the United States for

construction projects occurring in the United States. For taxable years

beginning in 2009, the amount of the deduction is equal to nine percent ( 9%)

of the lesser of the domestic production activities income of the taxpayer or

taxable income without regard to the deduction. This deduction will be

phased in over several years beginning in 2005. For the 2005 and 2006

taxable years the deduction will be limited to three percent ( 3%): this amount

will grow to six percent ( 6%) for the 2007 and 2008 taxable years.

• Extension of 179 expensing limit increase/ revisions regarding SUVs. Section 179

of the Code allows a taxpayer to treat the cost of certain property as an

expense which is not chargeable to a capital account. This allows the

taxpayer to take a deduction for the property in the year in which it is placed

into service rather than depreciating the property over a number of years. In

2003, Congress increased the amount that could be expensed under Section

179 of the Code from twenty- five thousand dollars ($ 25,000) to one hundred

thousand dollars ($ 100,000). 3 The federal change was originally set to expire

after the 2005 taxable year. The AJCA extends this provision through the

2007 taxable year.

One frequent complaint about the federal provision was that it allowed

expensing of costs associated with the purchase of a sports utility vehicle by

a small business. General rules relating to the depreciation of motor vehicles

did not apply to many large SUVs because those rules applied only to

vehicles weighing 6,000 pounds or less. The effect of this provision was to

allow an immediate write- off for the purchase price of a large SUV, but to

require more gradual depreciation for the purchase of most other passenger

vehicles. Taxpayers thus had a greater incentive to purchase a large SUV.

The AJCA limits the amount of that may be expensed under Section 179 with

respect to a vehicle weighing less than 14,000 pounds to twenty- five

3 The General Assembly conformed to this federal change as part of the 2003 Budget Act ( S. L. 2003-

284).

23

thousand dollars ($ 25,000) 4. The federal legislation made this change

effective when it become law, October 22, 2004.

• Establishment of 15- year straight line cost recovery for qualified leasehold

improvements and qualified restaurant property. The AJCA provides for 15- year

straight- line depreciation for qualified leasehold improvements to

nonresidential real property placed into service after the date of enactment

( October 22, 2004) and prior to January 1, 2006. A qualified leasehold

improvement is an improvement made to the interior of a building by either

the lessor or lessee and placed in service more than three years after the

building is placed in service. Under prior law, a qualified leasehold

improvement was depreciated using straight- line depreciation over a 39- year

period – the same period as for depreciation of nonresidential property in

general.

A similar depreciation schedule is put into place for qualified restaurant

property placed into service after the date of enactment ( October 22, 2004)

and prior to January 1, 2006. In order to qualify as " qualified restaurant

property", the property must be a building improvement placed in service

more than three years after the building is placed in service and the

restaurant must use more than half of the square footage of the building.

If the leasehold improvement or restaurant property contains tangible

personal property that may be segregated from the cost of other

improvements and that tangible personal property has a shorter depreciation

period, then the taxpayer may depreciate that property separately using the

shorter period.

• Modification of deduction for charitable contribution of used motor vehicles. The

AJCA limits the amount of the deduction for contributions of motor vehicles

to charity. Vehicle donation programs have become popular in recent years.

Generally, the taxpayer who has donated the motor vehicle has claimed a

deduction for the full " blue book" value of the vehicle. The new law will

limit the amount of the deduction based on how the donee organization uses

the vehicle. If the charitable organization sells the vehicle without using it in

any significant way, the amount of the deduction cannot exceed the gross

proceeds of the sale. If the charity retains the vehicle for its own use, the

taxpayer must receive an acknowledgment from the charity as to the value of

the vehicle. The deduction may not exceed the acknowledged value of the

4 There are some exceptions to this rule for certain vehicles. These exceptions were put in place to

ensure that the legislation would apply only to SUV and not other types of heavy motor vehicles ( such as

delivery trucks) that have a weight greater than 6,000 pounds but less than 14,000 pounds.

24

vehicle to the charity. These changes become effective with the 2005 taxable

year.

• Establishment of an above- the- line deduction for certain attorney fees and court

costs. The AJCA allows an individual taxpayer an above- the- line deduction

( i. e. from gross income) for attorney fees and court costs associated with

certain civil rights actions, claims against the government, and Medicare

fraud claims. Under previous law, these costs were deductible only as an

itemized deduction, meaning that they were deductible only if the taxpayer

itemized deductions and only to the extent aggregate itemized deductions

exceeded 2% of the taxpayer's adjusted gross income. This provision became

effective when the legislation became law, October 22, 2004.

• Modification of deduction for automobile expenses of United States Postal Service

employees. The AJCA allows United States Postal Service employees who

deliver and collect mail on rural routes and receive qualified reimbursements

of automobile expenses involving these duties to deduct their actual

automobile expenses that exceed the reimbursement amount. This is an

itemized deduction and therefore may be claimed only to the extent

aggregate deductions exceed 2% of the taxpayer's adjusted gross income.

Under previous law, the deduction could not exceed the amount of the

qualified reimbursements, regardless of actual expenditures. As under

previous law, reimbursements in excess of the amount of actual expenditures

do not have to be included in gross income.

• Exclusion of National Health Service Corps Loan Program repayments from gross

income and from employment taxes. The National Health Service Corps is an

agency housed within the U. S. Department of Health and Human Services

and has as its mission improving the health of the nation's underserved

populations. Under the National Health Service Corps Loan Repayment

Program, participants in the program may receive up to $ 25,000 per year for

two years to pay off qualified educational loans. The loan repayment is in

addition to any salary the participant receives from the employing

community site. Under previous law, the amount of loan repayment was

included in taxable income and was also subject to employment taxes ( i. e.

FICA). Under the AJCA, these loan repayments are to be excluded from

both gross income and from employment taxes. This provision became

effective with the 2004 taxable year.

• Creation of a deduction for start- up costs and amendments to the expensing schedule

for such costs. Under the AJCA, a taxpayer may take a deduction of up to

$ 5,000 for start- up and organization expenses. However, the amount of the

deduction is reduced by the amount by which those expenses exceed

$ 50,000. Any expenses in excess of $ 5,000 must be amortized over a 15- year

25

period. Under previous law, no current expensing was allowed, the full

amount of the start- up and organizational expenses would be amortized

over 5 years. This provision is effective for expenses that occur on or after

the date the legislation became effective, October 22, 2004.

• Modification regarding the treatment of gain on the sale of a principal residence

when the residence was acquired in a like- kind exchange. Under current law, a

taxpayer is allowed to exclude up to $ 250,000 of gain from the sale of a

residence ($ 500,000 if a married couple filing jointly) if the taxpayer owned

and used the residence as a principal residence for at least 2 of the last 5

years. The AJCA makes a change to this provision when the home was

acquired as part of a like- kind exchange. 5 Under the AJCA, a residence

received in a like- kind exchange must be owned by the taxpayer for at least

five years and must be used as a principal residence of the taxpayer for at

least two of the last five years in order to qualify for the exclusion from gross

income of the gain on the sale of the residence. This provision became

effective for residences sold on or after the date the legislation was enacted,

October 22, 2004.

• Creation of a tonnage tax in lieu of an income tax on qualifying shipping activities.

The AJCA provides that a corporation can elect to be subject to a tonnage tax

rather than an income tax on its qualified shipping activities. The tonnage

tax is based on the taxpayer's " notional shipping income." Notional shipping

income is determined by reference to a monetary rate per ton shipped. The

rate is 40 cents per 100 tons per day for the first 25,000 tons shipped per

vessel and 20 cents per 100 tons per day for the amount shipped in excess of

25,000 tons per vessel. Once notional shipping income has been determined,

tax is computed on that amount at the rate of 35%. In exchange for electing

to be subject to the tonnage tax, the taxpayer may exclude from its gross

income any amount resulting from its qualifying shipping activities.

Conforming to this exclusion would result in income from shipping activities

being excluded from taxation in North Carolina. In effect, it would result in

a loss of tax revenues at the State level without a corresponding loss at the

federal level. In order to maintain this revenue source, North Carolina could

follow one of two paths. First, North Carolina could adopt a tonnage tax as

has been done at the federal level. This would require the State to develop

an apportionment formula to ensure that the State taxes only an appropriate

share of the tonnage. Alternatively, the State could require the taxpayer to

add back the amounts deducted from gross income because of this new

5 A like- kind exchange is an exchange of property held for productive use in a trade or business or for

investment for similar property. Unless cash is received as part of the trade, the exchange is not a

taxable event.

26

provision. For discussion purposes, this draft includes Section 2, which

would require the taxpayer to add back to taxable income any amount

deducted because of this new federal provision.

• Establishment of deduction of State sales and use taxes in lieu of deduction for State

income taxes. The AJCA allows taxpayers to deduct state and local sales taxes

in lieu of deducting state and local income taxes. This provision became

effective with the 2004 taxable year and is set to expire for taxes beginning in

2006 and thereafter. Taxpayers that elect to deduct state and local sales taxes

instead of state and local income taxes will have two options for determining

the deductible amount: a) they may accumulate receipts for the actual

amount of sales and use tax paid, or b) they may refer to tables prepared by

the Secretary of the Treasury which estimate the amount of taxes paid based

on average consumption and other factors.

This federal provision is of particular benefit to taxpayers who reside in

states that do not impose a personal income tax. For most North Carolina

taxpayers, the greater benefit would come from deducting state income taxes

rather than from deducting state and local sales taxes. Some exceptions to

this general statement would include the following:

o Nonresidents or part- year residents who reside in a state that does not

impose an income tax and who have relatively low income tax

liability in North Carolina or other states.

o Taxpayers who may have a low tax liability due to eligibility for a

significant amount of tax credits.

o North Carolina residents for whom a large portion of income is not

subject to taxation. This class of taxpayers would include many

government retirees whose government pensions are not subject to

State income tax under the decisions in Bailey and the related cases

and whose Social Security payments are not subject to State income

tax under G. S. 105- 134.6.

North Carolina law currently requires taxpayers to add back the amount of

the deduction allowed under the Code for state, local, and foreign income

taxes. In order to treat the deduction for state and local sales taxes

equivalent to the deduction for state, local, and foreign income taxes, the

General Assembly should require the add back of the deduction for state and

local sales taxes if it decides to conform to the federal change. This is

problematic, however, given that the federal legislation is effective for the

2004 taxable year and the General Assembly cannot conform to the federal

legislation and require the add back unless it acts before the end of the year.

Although the practical effect of conforming to the change and requiring the

add back is the same as not conforming to the change at all, a court could

27

find that requiring an add back would in effect be a retroactive tax increase.

Therefore, for discussion purposes, this draft does not conform to the

change allowing a deduction of state and local sales taxes in the 2004

taxable year, but does conform to that change and require an add back

beginning with the 2005 taxable year. This can be seen in Sections 1, 4, and

5 of the bill.

An Act to accelerate the income tax benefits for charitable cash contributions

for the relief of victims of the Indian Ocean tsunami ( P. L. 109- 1).

On December 26, 2004, a large earthquake centered in the Indian Ocean

unleashed a catastrophic tsunami that resulted in widespread devastation in

11 countries in South Asia, Southeast Asia, and Africa. The disaster is

estimated to have caused billions of dollars in damages and produced a

death toll in excess of 160,000.

On January 6, 2005, the first act of the 109 Congress was to approve

accelerated tax benefits for charitable cash contributions for the relief of

victims of the Indian Ocean tsunami. President Bush signed the act into law

the following day. The act allows a taxpayer to treat a cash contribution for

tsunami relief efforts made in January 2005 to be treated as if it were made

on December 31, 2004. Thus, the taxpayer would be able to take a deduction

in the 2004 taxable year rather than the 2005 taxable year. In order to qualify

for the accelerated benefit, the contribution must be cash. Donations of

property or cash substitutes, such as marketable securities, are not eligible

for the accelerated benefits. In addition, the contribution must be specifically

designated to be for tsunami relief. A contribution that is made to charitable

organization that is assisting in relief efforts but that is not specifically

designated to relief efforts is not eligible for the accelerated benefits. For

example, a donation to the Red Cross would be eligible for the accelerated

benefit only if the donation were specifically designated for tsunami relief

efforts; a general donation to the Red Cross would not be eligible for the

accelerated benefit.

Section 6 of this bill contains special language to ensure that North Carolina

conforms to this federal act.

28

FISCAL ANALYSIS MEMORANDUM

[ This confidential fiscal memorandum is a fiscal analysis of a draft bill, amendment,

committee substitute, or conference committee report that has not been formally

introduced or adopted on the chamber floor or in committee. This is not an official

fiscal note. If upon introduction of the bill you determine that a formal fiscal note is

needed, please make a fiscal note request to the Fiscal Research Division, and one will

be provided under the rules of the House and the Senate.]

DATE: January 24, 2005

TO: Revenue Laws Study Committee

FROM: Linda Struyk Millsaps and David Crotts

Fiscal Research Division

RE: IRC Update

FISCAL IMPACT

( millions)

Yes ( X) No ( ) No Estimate Available ( )

FY 2005- 06 FY 2006- 07 FY 2007- 08 FY 2008- 09 FY 2009- 10

REVENUES:

General Fund ( 39.19) ( 56.36) ( 21.77) 12.48 ( 2.07)

EXPENDITURES:

POSITIONS

( cumulative):

PRINCIPAL DEPARTMENT( S) & PROGRAM( S) AFFECTED: North Carolina

Department of Revenue.

EFFECTIVE DATE: Sections 4 and 5 of this act become effective for taxable

years beginning on or after January 1, 2005. The remainder of this act is effective when it

becomes law.

BILL SUMMARY: This bill updates the statutory reference to the Federal Internal

Revenue Code used in defining and determining certain state income tax provisions. NOTE:

29

Because of the structure of the federal legislation, many of these provisions would be

retroactive.

ASSUMPTIONS AND METHODOLOGY: In 1989 the General Assembly decided to

link the State personal income tax directly to the federal income tax by adopts the federal

taxable income as the starting point for the calculation of state taxable income. In addition,

each year the state must proactively determine whether to update its reference to the Internal

Revenue Service code to continue this conformance. Under current North Carolina law the

reference date in the code is May 1, 2004. The legislation changes the reference date to

January 1, 2005. This would effectively incorporate the changes made by both the Working

Families Relief Act and the American Job Creation Act. In addition, in early January 2005

Congress enacted additional legislation to enhance the tax benefits associated with charitable

contributions made for tsunami relief. The legislation conforms to that change as well.

Working Families Tax Relief Act of 2004

There are six provisions of the code update that potentially affect state law and are a part of

this legislation.

1. Uniform Child Definition: The term “ child” is defined in numerous places in the federal

code. The legislation creates a uniform definition, with three separate conditions. First a

residency test that says the child must live with the taxpayer more than ½ the year.

Temporary absences due to special circumstances are not included. Second, a relationship

test requires the child to be a child, stepchild, sibling, stepsibling, or descendant of the

taxpayer. Finally, an age test. Generally a child must be under 19, or 24 if they are a full-time

student. However, lower age limits still apply to the dependent care credit and the

child tax credit. These changes may result in a change of status for some children in North

Carolina. They also potentially affect eligibility for the State child tax credit.

The staff of the Congressional Joint Committee on Taxation ( JTC) estimates that this

exclusion will cost the federal treasury $ 84 million in the first year, $ 206 million in the

second, and $ 209 in the third. The chart below shows the JCT estimate of the federal loss,

with adjustments made to apply the estimate to North Carolina.

( millions)

Child Definition

FY 05-

06

FY 06-

07

FY 07-

08

FY 08-

09 FY 09- 10

JTC Estimate of Federal Tax Loss ( 84.0) - 206 - 209 - 218 - 225

Divided by Average Federal Rate 21.9% 21.9% 21.9% 21.9% 21.9%

Estimated Loss of Federal Income ( 383.6) ( 940.6) ( 954.3) ( 995.4) ( 1,027.4)

NC Children as % of National 2.63% 2.63% 2.63% 2.63% 2.63%

Estimated Loss of NC Taxable Income ( 10.09) ( 24.74) ( 25.10) ( 26.18) ( 27.02)

Multiply by Average Tax Rate 6.80% 6.80% 6.80% 6.80% 6.80%

Estimated NC Loss ( 0.69) ( 1.68) ( 1.71) ( 1.78) ( 1.84)

30

2. Deduction for Educators: Previously educators could take an above the line deduction of

up to $ 250 to cover their out of pocket expenses related to the classroom, such as supplies,

books, computers, software, and equipment. This provision expired with the 2003 tax year.

The federal legislation extends the provision for the 2004 and 2005 tax years. The

Department of Public Instruction estimates, based on the requirements in the bill, 118,462

educators will likely qualify for the $ 250 credit in 2004. Because the credit can be reduced

or eliminated by other tax- free distributions, the fiscal memo assumes a 92% participation

rate, with each educator taking the full amount of the credit. This change will also impact

the current fiscal year.

Teacher Credit FY 05- 06 FY 06- 07 FY 07- 08 FY 08- 09 FY 09- 10

Estimated Affected

Educators 113462 115196 116463 117448 118417

Multiply by $ 250 credit $ 250 $ 250 $ 250 $ 250 $ 250

Estimated Loss of NC

Taxable Income

28,365,500

28,799,000

29,115,750

29,362,000

29,604,250

Multiply by Average Tax

Rate 6.80% 6.80% 6.80% 6.80% 6.80%

Estimated NC Loss 1,928,854 1,958,332 1,979,871 1,996,616 2,013,089

Loss After Adj. for

Participation Rate 1,774,546 1,801,665 1,821,481 1,836,886 1,852,042

3, 4, and 5. Brownfields, Computer Donations, and Clean Fuel Property: The Act includes

three additional changes, each with limited fiscal impact. First, it extends the previous

elective expensing of qualified environmental remediation expenditures. Since it is

unknown how many North Carolina taxpayers will take advantage of this expensing method

to cleanup the estimated 1,000 brownfield sites in the state, the memo uses 0.53% of the

federal estimate, as North Carolina corporate tax collections are that proportion of federal

corporate tax collections. Second, it enhances the deduction, by allowing a deduction in

excess of basis, for qualified computer donations by companies to schools and libraries.

North Carolina’s proportion of the corporate revenues is also used to determine North

Carolina’ potential loss. Finally, it delayed the planned phase- out of the deduction allowed

for the purchase of clean- fuel vehicles and refueling property. These items all extend

previous tax relief and primarily affect corporate taxes. The fiscal impact to the state is as

follows:

( millions)

Brownfields, Computers, and Clean

Fuel FY 05- 06 FY 06- 07 FY 07- 08 FY 08- 09 FY 09- 10

JTC Estimate of Federal Tax Loss - 726 - 171 57 54 51

NC Proportion of Federal Collections 0.53% 0.53% 0.53% 0.53% 0.53%

Estimated NC Loss ( 3.8) ( 0.9) 0.3 0.3 0.3

Estimated NC Loss after Fiscal Year Adj. ( 2.10) ( 1.0) 0.1 0.3 0.3

31

This loss applies primarily to corporate tax.

6. Archer Medical Savings Accounts: These savings accounts are similar to IRAs, but are

used to pay for qualifying medical expenses. It must be set up in conjunction with an IRS

qualified high deductible health plan ( HDHP). Previously no new Archer MSAs could be

created after the end of 2003. The federal legislation retroactively extends that period

through 2005. Currently several companies offer Archer accounts in North Carolina.

However, no information is available at this time concerning the number or value of

policies. In addition, the Joint Select Committee indicates, at the federal level, the revenue

impact is limited. Therefore, no fiscal estimate is possible on this portion of the bill.

American Job Creation Act of 2004

There are several provisions of this federal legislation that potentially affect state law and

are a part of this bill.

1. Repeal of the Exclusion for Extraterritorial Income ( ETI)/ Deduction for Qualified

Domestic Production Income: Under previous law, U. S. companies that export could

exclude from their gross income certain income earned outside the United States. In 2000

the World Trade Organization declared this to be an illegal subsidy. As a result, Congress is

phasing out the exclusion, with total elimination set for 2007. However, as a replacement

Congress passed a new deduction for domestic production activities. Qualifying activities

include 1) the sale, lease or licensing of property manufactured or produced primarily in the

U. S. 2) similar activities related to motion pictures and videos, 3) the sale of electricity,

natural gas, or potable water within the United States, 4) construction in the U. S. and 5)

engineering and architectural services related to U. S. construction. The deduction will be

phased in between 2005 and 2008.

The starting point for the North Carolina impact estimate of the Qualified Production

Activities Income deduction was the federal income tax amounts projected by the Joint

Committee on Taxation. These estimates were converted to tax year amounts by assuming

that 22.5% of the ultimately tax for the year is paid during each quarter of the tax year, with

the remainder being remitted in March of the following calendar year. The conversion took

into account the fact that the federal fiscal year ends September 30.

Next, the calendar year federal estimates were sensitized to North Carolina by relating the

manufacturing share of 2002 gross state product in North Carolina to the same share

computed for the nation ( Bureau of Economic Analysis, U. S. Department of Commerce).

This ratio turned out to be 5.1%.

Finally, the estimated calendar year impact was converted to state fiscal year using the same

quarterly payment assumption outlined in converting the federal fiscal year estimate back to

the appropriate tax year.

The estimate for the elimination of the export exclusion (“ FSC/ ETI repeal”) was similar to

the estimate for Qualified Production Activities ( see immediately preceding section) except

32

that the calculations took into account the phase in schedule for the change. That schedule

eliminates 20% of the benefits for the 2005 tax year, 40% for 2006, and 100% for 2007 and

later years.

( millions)

FY 05-

06

FY 06-

07

FY 07-

08

FY 08-

09

FY 09-

10

Qualified Production Activities

Deduction - 31.2 - 45.7 - 63.6 - 64.2 - 79.5

FSC/ ETI Repeal 14.8 35.7 55.3 57.9 60.6

This primarily affects corporate revenues.

2. Section 179 Expensing: In 2001 Congress raised the threshold for small business

expensing, often referred to as Section 179 expensing, from $ 25,000 to $ 100,000. ( The

benefit is reduced when the purchase exceeds $ 400,000). This legislation extends the

special treatment through 2007. The estimate of the impact of this provision was based on

the following analyses:

( 1) A review of the 2003 session estimates of the original Section 179 authorization,

compared to the state specific estimates of the Center for Budget Policies and Priorities

( CBPP).

( 2) A conversion of the new federal fiscal year estimates of the federal impact to the

relevant tax year. The federal fiscal year estimates were developed by the Joint Committee

on Taxation.

( 3) A simulation of the year- by- year impact of Section 179 expensing ( compared to

regular depreciation) for a $ 75,000 investment ( equals the increase the expensing limit).

This analysis used both 5- year and 7- year properties and assumed the taxpayer would use

the double declining balance method of depreciation.

( 4) An allocation of the U. S. total impact data to North Carolina by reviewing the ratio of

N. C. personal income to the U. S. and a comparison of North Carolina’s marginal tax rate of

6.9% to a federal rate of 34%.

( millions)

FY 05- 06 FY 06- 07 FY 07- 08 FY 08- 09 FY 09- 10

Sec. 179 - 20.1 - 45.6 - 13.8 18.8 16.6

3. Tonnage Tax: The federal legislation allows a corporation to elect to be subject to a

tonnage tax, rather than an income tax, on its qualifying shipping activities. Because North

Carolina does not currently levy a tonnage tax, the net effect of the federal change is a loss

of state tax revenues. This legislation requires a taxpayer who elects the tonnage tax at the

federal level to add back that deduction at the state level. As a result of the combination of

these two items, there is no Fiscal Impact to the state.

33

4. Deduction for State Sales and Use Taxes: Under previous law, taxpayers could deduct the

amount they paid in state income taxes on their federal return. In the new act, as an effort to

primarily aid individuals who live in states that do not levy a personal income tax, Congress

allows individual taxpayers to elect to deduct either their state income taxes or their state

sales taxes paid. Generally, this portion of the legislation will affect few taxpayers as the

vast majority pays more in personal income taxes than sales taxes. However, some

taxpayers with particularly low taxable income, such as Bailey recipients or others similarly

situated individuals, or those who make a substantial purchase, will take advantage of this

provision. Because of limited data, no fiscal estimate is possible at this time.

5. Tsunami Relief: Generally charitable donations must be made in a given calendar year to

be used to reduce that same year’s tax liability. However, this year Congress is allowing

donations made in January 2005 to apply to 2004 liabilities. This provision only applies if

the donation is made specifically for Tsunami relief and is notated as such. This state

legislation conforms to the federal change. Because of the lack of data currently available,

no estimate is possible on this portion of the bill.

6. Leasehold Improvements and Restaurant Property: The estimate for this change was

based on sensitizing the federal estimates of the Joint Committee on Taxation to North

Carolina. The adjustment was based on the state share of personal income and the state tax

rate, relative to federal. The estimate ignored a portion of the FY05 federal impact because

the Department of Revenue has advised taxpayers to use the new depreciation rule for the

2004 tax year. This means that the 2004 tax year impact will affect the General Fund

revenue estimates used for adopting the budget, but will not be a part of the fiscal estimate

for the bill.

Before estimating the N. C. impact, the federal numbers were adjusted to a tax year basis and

the fact for the 2004 tax year the federal estimates applied to a partial year.

( millions)

FY 05-

06

FY 06-

07

FY 07-

08

FY 08-

09

FY 09-

10

Leasehold Improvements - 1.2 - 1.5 - 1.5 - 1.4 - 1.3

Restaurants - 0.3 - 0.4 - 0.4 - 0.4 - 0.4

7. Other Provisions: There are numerous other provisions in the legislation that affect the tax

liability of North Carolina businesses, farmers, and individual taxpayers. These relate to

Section 179 expensing of sports utility vehicles ( SUV), the donation of automobiles to

charity, expensing of attorney’s fees and court costs, vehicle modification costs to postal

employees, National Health Service Corps Loan repayments, start- up cost deduction, gain

on a sale of a principal residents when acquired in a like- kind exchange, and farm losses due

to natural disasters. The estimate for this change was also based on sensitizing the federal

estimates of the Joint Committee on Taxation to North Carolina. The adjustment was based

on the state share of personal income and the state tax rate, relative to federal. The estimate

ignored a portion of the FY05 federal impact because the Department of Revenue has

34

advised taxpayers to use the new depreciation rule for the 2004 tax year. This means that

the 2004 tax year impact will affect the General Fund revenue estimates used for adopting

the budget, but will not be a part of the fiscal estimate for the bill.

FY 05-

06

FY 06-

07

FY 07-

08

FY 08-

09

FY 09-

10

Other Provisions 3.37 5.62 5.66 5.10 5.32

SOURCES OF DATA: North Carolina Department of Public Instruction, North Carolina

Department of Revenue, The Joint Committee on Taxation, Economy. com, U. S. Census

Bureau, and the Center for Budget and Policy Priorities.

TECHNICAL CONSIDERATIONS: None

35

LEGISLATIVE PROPOSAL # 2

STREAMLINED SALES TAX CHANGES

36

LEGISLATIVE PROPOSAL # 2:

A RECOMMENDATION OF THE REVENUE LAWS STUDY COMMITTEE

TO THE 2005 GENERAL ASSEMBLY

AN ACT TO AMEND THE SALES AND USE TAX STATUTES TO

CONFORM TO THE STREAMLINED SALES TAX AGREEMENT.

SHORT TITLE: Streamlined Sales Tax Changes

SPONSORS: Kerr; Clodfelter, Dalton, Hartsell, Hoyle, Webster

BRIEF OVERVIEW: This bill amends several of the sales and use tax statutes to

conform to the Streamlined Sales Tax Agreement.

FISCAL IMPACT: This proposal would result in an annual General Fund loss of

$ 500,000 and an annual loss of $ 278,000 for local governments beginning with FY

05- 06.

EFFECTIVE DATE: This act is effective when it becomes law.

A copy of the proposed legislation, bill analysis, and fiscal note begin on the next page

37

GENERAL ASSEMBLY OF NORTH CAROLINA

SESSION 2005

U D

BILL DRAFT 2005- RBxz- 6A [ v. 1] ( 1/ 20)

( THIS IS A DRAFT AND IS NOT READY FOR INTRODUCTION)

1/ 24/ 2005 5: 27: 20 PM

Short Title: Streamlined Sales Tax Changes. ( Public)

Sponsors: Senators Kerr; Clodfelter, Dalton, Hartsell, Hoyle, and Webster.

Referred to:

1 A BILL TO BE ENTITLED

2 AN ACT TO AMEND THE SALES AND USE TAX STATUTES TO CONFORM

3 TO THE STREAMLINED SALES TAX AGREEMENT.

4 The General Assembly of North Carolina enacts:

5 SECTION 3.( a) G. S. 105- 164.3 reads as rewritten:

6 " § 105- 164.3. Definitions.

7 The following definitions apply in this Article:

8 …

9 ( 4b) Computer supplies. – Items that are considered to be a ' school

10 computer supply' under the Streamlined Agreement.

11 …

12 ( 10) Food. – Substances that are sold for ingestion or chewing by

13 humans and are consumed for their taste or nutritional value. The

14 substances may be in liquid, concentrated, solid, frozen, dried, or

15 dehydrated form. The term does not include an alcoholic beverage,

16 as defined in G. S. 105- 113.68, or a tobacco products, product, as

17 defined in G. S. 105 113.4.

18 …

19 ( 37a) School supplies. – Items commonly used by students in the course

20 of their studies and that are considered to be a ' school supply', a

21 ' school art supply', or a ' school instructional material' under the

22 Streamlined Agreement.

23 …

38

1 ( 45a) Streamlined Agreement. – The Streamlined Sales and Use Tax

2 Agreement adopted November 12, 2002, as amended on November

3 19, 2003, and on November 16, 2004."

4 SECTION 2.( a) G. S. 105- 164.13B( a) reads as rewritten:

5 "( a) State Exemption. – Food is exempt from the taxes imposed by this Article

6 unless the food is included in one of the subdivisions in this subsection. The

7 following food items are subject to tax:

8 ( 1) Alcoholic beverages, as defined in G. S. 105- 113.68.

9 ( 2) Dietary supplements.

10 ( 3) Food sold through a vending machine.

11 ( 4) Prepared food.

12 ( 5) Soft drinks.

13 ( 6) ( Repealed effective January 1, 2004) Candy, unless the item is

14 purchased for home consumption and would be exempt if purchased

15 under the Federal Food Stamp Program, 7 U. S. C. § 51."

16 SECTION 2.( b) Subdivision ( b)( 5) of Section 5 of Part IV of Chapter 908

17 of the 1983 Session Laws, as amended by Chapter 821 of the 1989 Session Laws and

18 S. L. 2001- 347, reads as rewritten:

19 "( b) Definitions. The definitions in G. S. 105- 164.3 apply to this Part insofar as

20 they are not inconsistent with the provisions of this Part. In addition, the following

21 definitions apply in this Part:

22 …

23 ( 5) Prepared Food and Beverages. The term has the same meaning as

24 the term " prepared food" in G. S. 105- 164.3. includes the following:

25 a. Prepared food, as defined in G. S. 105- 164.3.

26 b. An alcoholic beverage, as defined in G. S. 18B- 101, that

27 meets at least one of the conditions of prepared food under

28 G. S. 105- 164.3."

29 SECTION 2.( c) Subdivision ( a)( 2) of Section 2 of Chapter 413 of the

30 1993 Session Laws, as amended by S. L. 2001- 347, reads as rewritten:

31 " Sec. 2. Definitions; Sales and Use Tax Statutes. – ( a) The definitions in

32 G. S. 105- 164.3 apply to this act to the extent they are not inconsistent with the

33 provisions of this act. In addition, the following definitions apply in this act:

34 …

35 ( 2) Prepared food and beverages. – The term has the same meaning as

36 the term " prepared food" in G. S. 105- 164.3. includes the following:

37 a. Prepared food, as defined in G. S. 105- 164.3.

38 b. An alcoholic beverage, as defined in G. S. 18B- 101, that

39 meets at least one of the conditions of prepared food under

40 G. S. 105- 164.3."

39

1 SECTION 2.( d) Section 2 of Chapter 449 of the 1985 Session Laws, as

2 amended by Chapter 826 of the 1985 Session Laws, Chapter 177 of the 1991 Session

3 Laws, and S. L. 2001- 347, reads as rewritten:

4 " Sec. 2. Definitions. The definitions in G. S. 105- 164.3 apply in this act. In

5 addition, the following definitions apply in this act.

6 ( 1) Net proceeds. Gross proceeds less the cost to the county of

7 administering and collecting the tax.

8 ( 2) Prepared food and beverages. The term has the same meaning as the

9 term " prepared food" in G. S. 105- 164.3. includes the following:

10 a. Prepared food, as defined in G. S. 105- 164.3.

11 b. An alcoholic beverage, as defined in G. S. 18B- 101, that

12 meets at least one of the conditions of prepared food under

13 G. S. 105- 164.3."

14 SECTION 2.( e) Subsection ( b) of Section 1 of Chapter 449 of the 1993

15 Session Laws, as amended by S. L. 2001- 347, reads as rewritten:

16 "( b) Definitions; Sales and Use Tax Statutes. – The definitions in

17 G. S. 105- 164.3 apply to this section to the extent they are not inconsistent with the

18 provisions of this section. The provisions of Article 5 and Article 9 of Chapter 105 of

19 the General Statutes apply to this section to the extent they are not inconsistent with

20 the provisions of this section. In addition, For the purposes of this section, the term

21 " prepared food and beverages" has the same meaning as the term " prepared food" in

22 G. S. 105- 164.3. includes the following:

23 ( 1) Prepared food, as defined in G. S. 105- 164.3.

24 ( 2) An alcoholic beverage, as defined in G. S. 18B- 101, that meets at

25 least one of the conditions of prepared food under G. S. 105- 164.3.

26 The provisions of Article 5 and Article 9 of Chapter 105 of the General Statutes

27 apply to this section to the extent they are not inconsistent with the provisions of this

28 section."

29 SECTION 2.( f) Subdivision ( 3) of Section 2 of Chapter 594 of the 1991

30 Session Laws, as amended by S. L. 2001- 347, reads as rewritten:

31 " Sec. 2. Definitions. The definitions in G. S. 105- 164.3 apply to this act to the

32 extent they are not inconsistent with the provisions of this act. The following

33 definitions also apply in this act:

34 …

35 ( 3) Prepared food and beverage. The term has the same meaning as the

36 term " prepared food" in G. S. 105- 164.3. includes the following:

37 a. Prepared food, as defined in G. S. 105- 164.3.

38 b. An alcoholic beverage, as defined in G. S. 18B- 101, that

39 meets at least one of the conditions of prepared food under

40 G. S. 105- 164.3."

41 SECTION 3. G. S. 105- 164.13C( a) reads as rewritten:

40

1 "( a) The taxes imposed by this Article do not apply to the following items of

2 tangible personal property if sold between 12: 01A. M. on the first Friday of August

3 and 11: 59 P. M. the following Sunday:

4 ( 1) Clothing with a sales price of one hundred dollars ($ 100.00) or less

5 per item.

6 ( 2) School supplies with a sales price of one hundred dollars ($ 100.00)

7 or less per item.

8 ( 3) Computers with a sales price of three thousand five hundred dollars

9 ($ 3,500) or less per item.

10 ( 4) Sport or recreational equipment with a sales price of fifty dollars

11 ($ 50.00) or less per item. Computer supplies with a sales price of

12 two hundred fifty dollars ($ 250.00) or less per item.

13 ( 5) Sport or recreational equipment with a sales price of fifty dollars

14 ($ 50.00) or less per item."

15 SECTION 4. G. S. 105- 164.28 reads as rewritten:

16 " § 105- 164.28. Certificate of resale.

17 ( a) Seller's Responsibility. – A seller who accepts a certificate of resale from a

18 purchaser of tangible personal property has the burden of proving that the sale was

19 not a retail sale unless all of the following conditions are met:

20 ( 1) For a sale made in person, the certificate is signed by the purchaser,

21 purchaser and states the purchaser's name, address, and registration

22 number, and type of business. describes the type of tangible

23 personal property generally sold by the purchaser in the regular

24 course of business.

25 ( 2) For a sale made in person, the purchaser is engaged in the business

26 of selling tangible personal property of the type sold. sold is

27 typically used in the type of business stated on the certificate.

28 ( 3) For a sale made over the Internet or by other remote means, the

29 sales tax registration number given by the purchaser matches the

30 number on the Department's registry.

31 ( b) Liabilities. Purchaser's Liability. – A purchaser who does not resell

32 property purchased under a certificate of resale is liable for any tax subsequently

33 determined to be due on the sale. A seller of property sold under a certificate of

34 resale is jointly liable with the purchaser of the property for any tax subsequently

35 determined to be due on the sale only if the Secretary proves that the sale was a retail

36 sale."

37 SECTION 5. G. S. 105- 164.42B( 1) reads as rewritten:

38 " § 105- 164.42B. Definitions.

39 The following definitions apply in this Part:

40 ( 1) Agreement. – The Streamlined Sales and Use Tax

41 Agreement. Agreement, as defined in G. S. 105- 164.3.

41

1 …"

2 SECTION 6. This act is effective when it becomes law.

42

Bill Analysis of Legislative Proposal # 2:

STREAMLINED SALES TAX CHANGES

BY: CINDY AVRETTE, RESEARCH DIVISION

SUMMARY: This bill draft makes several technical and administrative changes

to the sales and use tax laws to conform to the Streamlined Sales and Use Tax

Agreement, as amended in November 2004. The bill becomes effective when it

becomes law.

CURRENT LAW: Legislative Proposal 2 makes the following changes to the sales

and use tax laws to conform them to the Streamlined Sales and Use Tax Agreement,

as amended in November 2004.

Section Explanation

1, 2 Section 1 conforms the definition of food to the Streamlined

Agreement by removing ‘ alcoholic beverage’ from the definition of

food. Section 2( a) makes a conforming change to the exemption of

food from the State sales tax base. Sections 2( b) through ( ) make

conforming changes to the local meals tax statutes.

1, 3 States may allow sales tax holidays, but the items included in the

holiday must be defined terms under the Streamlined Agreement.

Section 1 defines the terms ‘ computer supplies’ and ‘ school supplies’

to conform to the defined terms in the Streamlined Agreement. The

proposal defines the term ‘ school supplies’ to mean the all- inclusive

list of items defined as ‘ school supplies’, ‘ school art supplies’, and

‘ school instructional material’ under the Streamlined Agreement. It

also defines the term ‘ Streamlined Agreement’ as the Streamlined

Sales and Use Tax Agreement, adopted November 12, 2002, as

amended November 16, 2003, and November 19, 2004.

Section 3 amends the sales tax holiday statute to include the defined

terms. The primary difference between the current law and the

proposed law is the inclusion of computer supplies in the sales tax

holiday. Computer supplies include computer storage media,

printers, printer supplies, hand- held electronic schedulers, and

personal digital assistants. The State’s sales tax holiday included

most of these items prior to August of 2004. The General Assembly

43

changed the law in 2003 to except these items from the holiday in

2004, in conformity with the Streamlined Agreement. This proposal,

based upon amendments to the Streamlined Agreement in

November of 2004, expands the holiday to include these items once

again so long as the sales price does not exceed $ 250 per item.

4 Conforms the statutory language to the information actually

requested on a certificate of resale.

To remain in compliance, other, more substantive changes involving multiple tax

rates will need to be made before January 1, 2006. The Streamlined Agreement

allows for one rate and prohibits the use of caps and thresholds. North Carolina

currently has multiple rates, such as the preferential rate on certain agricultural

items, and the differing rates on telecommunications services, direct- to- home

satellite service, and spirituous liquor.

44

FISCAL ANALYSIS MEMORANDUM

[ This confidential fiscal memorandum is a fiscal analysis of a draft bill, amendment,

committee substitute, or conference committee report that has not been formally

introduced or adopted on the chamber floor or in committee. This is not an official

fiscal note. If upon introduction of the bill you determine that a formal fiscal note is

needed, please make a fiscal note request to the Fiscal Research Division, and one will

be provided under the rules of the House and the Senate.]

DATE: January 26, 2005

TO: Revenue Laws

FROM: Linda Millsaps

Fiscal Research Division

RE: Streamlined Sales Tax Changes

FISCAL IMPACT

Yes ( X) No ( ) No Estimate Available ( )

FY 2005- 06 FY 2006- 07 FY 2007- 08 FY 2008- 09 FY 2009- 10

REVENUES:

General Fund

Local Government

( 500,000)

( 278,000)

( 500,000)

( 278,000)

( 500,000)

( 278,000)

( 500,000)

( 278,000)

( 500,000)

( 278,000)

EXPENDITURES:

POSITIONS

( cumulative):

PRINCIPAL DEPARTMENT( S) & PROGRAM( S) AFFECTED: North Carolina

Department of Revenue.

EFFECTIVE DATE: When it becomes law.

BILL SUMMARY: The bill makes several definitional changes to the state’s sales tax

statutes, particularly as they relate to alcoholic beverages and the sales tax holiday. These

changes are in response to compliance issues with the Streamlined Sales Tax Agreement.

45

ASSUMPTIONS AND METHODOLOGY: To meet the requirements of the Streamlined

Sales Tax Agreement, the legislation removes “ alcoholic beverage” from the definition of

food, and transfers it to the definition of prepared food. Because alcoholic beverages were

already set out as a special type of food that is subject to the general sales tax rate, and

prepared foods are also taxed at the general rate, there is no fiscal impact because of this

change. The bill makes a similar transfer in the local prepared meals tax statutes. No fiscal

impact is expected because of this change.

The legislation also makes changes that relate to the sales tax holiday. Under the agreement,

states can host a sales tax holiday, but must apply the holiday to only a specific set of

defined terms. The legislation alters several related North Carolina definitions to conform to

those in the agreement. While items shift between terms, the only items that actually change

tax status are “ computer supplies”. Under the agreement computer supplies are defined to

include computer storage media ( such as CDs and discs), printers, printer supplies, hand-held

electronic schedulers, and personal digital assistants. North Carolina’s sales tax

holiday applied to most of these items before August 2004. In 2003, the General Assembly

changed the law to exempt these items from the holiday, effective for the 2004 holiday.

This change was made to conform to Streamline. In November 2004 the Streamline

agreement was amended to allow state holidays to include these items, as long as the sales

price is less than $ 251. Therefore, the revenue loss associated with this portion of the bill is

the revenue associated with exempting “ computer supplies” from sales tax during the annual

sales tax holiday. Based on industry data and original estimates of the impact of the sales

tax holiday, the annual cost is expected to be less than $ 500,000.

TECHNICAL CONSIDERATIONS: None

46

LEGISLATIVE PROPOSAL # 3

MOTOR FUELS TAX CHANGES

47

LEGISLATIVE PROPOSAL # 3:

A RECOMMENDATION OF THE REVENUE LAWS STUDY COMMITTEE

TO THE 2005 GENERAL ASSEMBLY

AN ACT TO MODIFY THE TAXATION OF MOTOR FUELS.

SHORT TITLE: Motor Fuel Tax Changes

SPONSORS: Luebke; Brubaker, Hill, McGee, Wainwright

BRIEF OVERVIEW: This bill makes several changes to the motor fuels tax laws.

FISCAL IMPACT: No fiscal estimate available at this time.

EFFECTIVE DATE: Several provisions become effective January 1, 2006 and the

remainder becomes effective when it becomes law.

A copy of the proposed legislation and bill analysis begin on the next page.

48

GENERAL ASSEMBLY OF NORTH CAROLINA

SESSION 2005

U D

BILL DRAFT 2005- RBxfz- 2 [ v. 6] ( 12/ 8)

( THIS IS A DRAFT AND IS NOT READY FOR INTRODUCTION)

12/ 21/ 2004 11: 29: 28 AM

Short Title: Motor Fuel Tax Changes. ( Public)

Sponsors: Representatives Luebke; Brubaker, Hill, McGee, and Wainwright.

Referred to:

1 A BILL TO BE ENTITLED

2 AN ACT TO MODIFY THE TAXATION OF MOTOR FUELS.

3 The General Assembly of North Carolina enacts:

4 SECTION 1. G. S. 105- 236( 2) reads as rewritten:

5 " § 105- 236. Penalties.

6 Penalties assessed by the Secretary under this Subchapter are assessed as an

7 additional tax. Except as otherwise provided by law, and subject to the provisions of

8 G. S. 105- 237, the following penalties shall be applicable:

9 …

10 ( 2) Failure to Obtain a License. – For failure to obtain a license before

11 engaging in a business, trade or profession for which a license is

12 required, the Secretary shall assess a penalty equal to five percent

13 ( 5%) of the amount prescribed for the license per month or fraction

14 thereof until paid, not to exceed twenty- five percent ( 25%) of the

15 amount so prescribed, but in any event shall not be less than five

16 dollars ($ 5.00). In cases in which the taxpayer fails to obtain a

17 license as required under G. S. 105- 449.65 or G. S. 105- 449.131, the

18 Secretary may assess a penalty of one thousand dollars ($ 1,000)."

19 SECTION 2. G. S. 105- 449.39 reads as rewritten:

20 " § 105- 449.39. Credit for payment of motor fuel tax.

21 Every motor carrier subject to the tax levied by this Article is entitled to a credit

22 on its quarterly report for tax paid by the carrier on fuel purchased in the State. The

23 amount of the credit is determined using the flat cents- per- gallon rate plus the

24 variable cents- per- gallon rate of tax in effect during the quarter covered by the report.

49

1 To obtain a credit, the motor carrier must furnish evidence satisfactory to the

2 Secretary that the tax for which the credit is claimed has been paid.

3 If the amount of a credit to which a motor carrier is entitled for a quarter exceeds

4 the motor carrier's liability for that quarter, the Secretary must refund the excess to

5 the motor carrier. carrier in accordance with G. S. 105- 266( a)( 3)."

6 SECTION 3. G. S. 105- 449.44( a) reads as rewritten:

7 "( a) Calculation. – The amount of motor fuel or alternative fuel a motor carrier

8 uses in its operations in this State for a reporting period is the ratio of the number of

9 miles the motor carrier travels in this State during that period divided by the

10 calculated miles per gallon for the motor carrier for all qualified vehicles to the total

11 number of miles the motor carrier travels inside and outside this State during that

12 period, multiplied by the total amount of fuel the motor carrier uses in its operations

13 inside and outside the State during that period."

14 SECTION 4. G. S. 105- 449.46 reads as rewritten:

15 " § 105- 449.46. Inspection of books and records.

16 The Secretary and his authorized agents and representatives shall have the right at

17 any reasonable time to inspect the books and records of any motor carrier subject to

18 the tax imposed by this Article. Article or to the registration fee imposed by Article 3

19 of Chapter 20 of the General Statutes."

20 SECTION 5. G. S. 105- 449.47( a1) reads as rewritten:

21 "( a1) Registration and Identification Marker. – When the Secretary registers a

22 motor carrier, the Secretary must issue at least one identification marker for each

23 motor vehicle operated by the motor carrier. A motor carrier must keep records of

24 identification markers issued to it and must be able to account for all identification

25 markers it receives from the Secretary. Registrations and identification markers

26 issued by the Secretary are for a calendar year. All identification markers issued by

27 the Secretary remain the property of the State. The Secretary may withhold or revoke

28 a registration or an identification marker when a motor carrier fails to comply with

29 this Article, former Article 36 or 36A of this Subchapter, Article or Article 36C or

30 36D of this Subchapter.

31 A motor carrier must carry a copy of its registration in each motor vehicle

32 operated by the motor carrier when the vehicle is in this State. A motor vehicle must

33 clearly display an identification marker at all times. The identification marker must

34 be affixed to the vehicle for which it was issued in the place and manner designated

35 by the authority that issued it."

36 SECTION 6. Article 36B of Chapter 105 of the General Statutes is

37 amended by adding a new section to read:

38 " 105- 449.47A. Reasons why the Secretary can deny an application for a

39 registration and identification marker.

40 The Secretary may refuse to register and issue an identification marker to an

41 individual applicant that has done any of the following and may refuse to register and

50

1 issue an identification marker to an applicant that is a business entity if any principal

2 in the business has done any of the following:

3 ( 1) Had a registration issued under Chapter 105 or Chapter 119 of the

4 General Statutes cancelled by the Secretary for cause.

5 ( 2) Had a registration issued by another jurisdiction, pursuant to G. S.

6 105- 449.57, cancelled for cause.

7 ( 3) Been convicted of fraud or misrepresentation.

8 ( 4) Been convicted of any other offense that indicates that the applicant

9 may not comply with this Article if registered and issued an

10 identification marker.

11 ( 5) Failed to remit payment for a tax debt under Chapter 105 or Chapter

12 119 of the General Statutes. The term ' tax debt' has the same

13 meaning as defined in G. S. 105- 243.1.

14 ( 6) Failed to file a return due under Chapter 105 or Chapter 119 of the

15 General Statutes."

16 SECTION 7. G. S. 105- 449.51 reads as rewritten:

17 " § 105- 449.51. Violations declared to be misdemeanors.

18 Any person who operates or causes to be operated on a highway in this State a

19 motor vehicle that does not carry a registration card as required by this Article, does

20 not properly display an identification marker as required by this Article, or is not

21 registered in accordance with this Article is guilty of a Class 3 misdemeanor and,

22 upon conviction thereof, shall only be fined no less than ten dollars ($ 10.00) nor

23 more than two hundred dollars ($ 200.00). Each day's operation in violation of any

24 provision of this section shall constitute a separate offense."

25 SECTION 8. G. S. 105- 449.65( b) reads as rewritten:

26 "( b) Multiple Activity. – A person who is engaged in more than one activity for

27 which a license is required must have a separate license for each activity, unless this

28 subsection provides otherwise. A person who is licensed as a supplier is not required

29 to obtain a separate license for any other activity for which a license is required and

30 is considered to have a license as a distributor. A person who is licensed as an

31 occasional importer or a tank wagon importer is not required to obtain a separate

32 license as a distributor. distributor unless the importer is also purchasing motor fuel,

33 at the terminal rack, from an elective or permissive supplier who is authorized to

34 collect and remit the tax to the State. A person who is licensed as a distributor is not

35 required to obtain a separate license as an importer if the distributor acquires fuel for

36 import only from an elective supplier or a permissive supplier and is not required to

37 obtain a separate license as an exporter. A person who is licensed as a distributor or a

38 blender is not required to obtain a separate license as a motor fuel transporter if the

39 distributor or blender does not transport motor fuel for others for hire."

40 SECTION 9. G. S. 105- 449.69( b) reads as rewritten:

51

1 "( b) Most Licenses. – An applicant for a license as a refiner, a supplier, a

2 terminal operator, an importer, a blender, a bulk- end user of undyed diesel fuel, a

3 retailer of undyed diesel fuel, or a distributor must meet the following requirements:

4 ( 1) If the applicant is a corporation, the applicant must either be

5 incorporated in this State or be authorized to transact business in

6 this State.

7 ( 2) If the applicant is a limited liability company, the applicant must

8 either be organized in this State or be authorized to transact business

9 in this State.

10 ( 3) If the applicant is a limited partnership, the applicant must either be

11 formed in this State or be authorized to transact business in this

12 State.

13 ( 4) If the applicant is an individual or a general partnership, the

14 applicant must designate an agent for service of process and give

15 the agent's name and address."

16 SECTION 10. G. S. 1015- 449.73 reads as rewritten:

17 " § 105- 449.73. Reasons why the Secretary can deny an application for a license.

18 The Secretary may refuse to issue a license to an individual applicant that has

19 done any of the following and may refuse to issue a license to an applicant that is a

20 business entity if any principal in the business has done any of the following:

21 ( 1) Had a license or registration issued under this Article or former

22 Article 36 or 36A of this Chapter cancelled by the Secretary for

23 cause.

24 ( 1a) Had a motor fuel license or registration issued by another state

25 cancelled for cause.

26 ( 2) Had a federal Certificate of Registry issued under § 4101 of the

27 Code, or a similar federal authorization, revoked.

28 ( 3) Been convicted of fraud or misrepresentation.

29 ( 4) Been convicted of any other offense that indicates that the applicant

30 may not comply with this Article if issued a license.

31 ( 5) Failed to remit payment for an overdue tax debt tax debt under

32 Chapter 105 or Chapter 119 of the General Statutes. The term

33 " overdue tax debt" " tax debt" has the same meaning as defined in

34 G. S. 105 243.1.

35 ( 6) Failed to file a return due under Chapter 105 or Chapter 119 of the

36 General Statutes."

37 SECTION 11. G. S. 105- 449.86( a) reads as rewritten:

38 "( a) Tax. – An excise tax at the motor fuel rate is imposed on dyed diesel fuel

39 acquired to operate any of the following:

40 ( 1) Repealed by Session Laws 2003- 349, s. 10.8, effective January 1,

41 2004.

52

1 ( 2) Either a local bus or an intercity bus that is allowed by § 4082( b)( 3)

2 of the Code to use dyed diesel fuel.

3 ( 3) A highway vehicle that is owned by or leased to an educational

4 organization that is not a public school and is allowed by §

5 4082( b)( 1) or ( b)( 3) of the Code to use dyed diesel fuel.

6 ( 4) A highway vehicle that is owned by or leased to the American Red

7 Cross and is allowed by § 4082 of the Code to use dyed diesel fuel."

8 SECTION 12. G. S. 105- 449.90A reads as rewritten:

9 " § 105- 449.90A. Payment by supplier of destination state tax collected on

10 exported motor fuel.

11 Tax collected by a supplier on exported motor fuel is payable by the supplier to

12 the destination state if the supplier is licensed in that state for payment of motor fuel

13 excise taxes. state. Tax collected by a supplier on exported motor fuel is payable to

14 the Secretary for remittance to the destination state if the supplier is not licensed in

15 that state for payment of motor fuel excise taxes. Payments of destination state tax

16 are due to the destination state or the Secretary, as appropriate, on the date set by the

17 law of the destination state. Payments of destination state tax to the Secretary must

18 be accompanied by a form provided by the Secretary that contains the information

19 required by the Secretary."

20 SECTION 13. G. S. 105- 449.96 is amended by adding a new subdivision

21 to read:

22 " § 105- 449.96. Information required on return filed by supplier.

23 A return of a supplier must list all of the following information and any other

24 information required by the Secretary:

25 …

26 ( 7) The number of gallons of motor fuel the supplier exchanged with

27 another licensed supplier, pursuant to a two- party exchange

28 agreement, during the month, sorted by type of fuel, person

29 receiving thefuel, and terminal code."

30 SECTION 14. The catch line for G. S. 105- 449.106 reads as rewritten:

31 " § 105- 449.106. Quarterly refunds for certain local governmental entities,

32 nonprofit organizations, taxicabs, and special mobile equipment."

33 SECTION 15. G. S. 105- 449.115 reads as rewritten:

34 " § 105- 449.115. Shipping document required to transport motor fuel by

35 railroad tank car or transport truck.

36 ( a) Issuance. – A person may not transport motor fuel by railroad tank car or

37 transport truck unless the person has a shipping document for its transportation that

38 complies with this section. A terminal operator and the operator of a bulk plant must

39 give a shipping document to the person who operates a railroad tank car or a

40 transport truck into which motor fuel is loaded at the terminal rack or bulk plant rack.

53

1 ( b) Content. – A shipping document issued by a terminal operator or the

2 operator of a bulk plant must contain the following information and any other

3 information required by the Secretary:

4 ( 1) Identification, including address, of the terminal or bulk plant from

5 which the motor fuel was received.

6 ( 2) The date the motor fuel was loaded.

7 ( 3) The gross gallons loaded.

8 ( 4) The destination state of the motor fuel, as represented by the

9 purchaser of the motor fuel or the purchaser's agent.

10 ( 5) If the document is issued by a terminal operator, the document must

11 be machine printed and it must contain the following information:

12 a. The net gallons loaded.

13 b. A tax responsibility statement indicating the name of the

14 supplier that is responsible for the tax due on the motor fuel.

15 ( c) Reliance. – A terminal operator or bulk plant operator may rely on the

16 representation made by the purchaser of motor fuel or the purchaser's agent

17 concerning the destination state of the motor fuel. A purchaser is liable for any tax

18 due as a result of the purchaser's diversion of fuel from the represented destination

19 state.

20 ( d) Duties of Transporter. – A person to whom a shipping document was

21 issued must do all of the following:

22 ( 1) Carry the shipping document in the conveyance for which it was

23 issued when transporting the motor fuel described in it. When

24 operating an empty transport, carry the shipping document in the

25 conveyance for the motor fuel last contained in the conveyance.

26 ( 2) Show the shipping document to a law enforcement officer upon

27 request when transporting the motor fuel described in it.

28 ( 3) Deliver motor fuel described in the shipping document to the

29 destination state printed on it unless the person does all of the

30 following:

31 a. Notifies the Secretary before transporting the motor fuel into

32 a state other than the printed destination state that the person

33 has received instructions since the shipping document was

34 issued to deliver the motor fuel to a different destination

35 state.

36 b. Receives from the Secretary a confirmation number

37 authorizing the diversion.

38 c. Writes on the shipping document the change in destination

39 state and the confirmation number for the diversion.

40 ( 4) Give a copy of the shipping document to the distributor or other

41 person to whom the motor fuel is delivered.

54

1 ( e) Duties of Person Receiving Shipment. – A person to whom motor fuel is

2 delivered by railroad tank car or transport truck may not accept delivery of the motor

3 fuel if the destination state shown on the shipping document for the motor fuel is a

4 state other than North Carolina. To determine if the shipping document shows North

5 Carolina as the destination state, the person to whom the fuel is delivered must

6 examine the shipping document and must keep a copy of the shipping document. The

7 person must keep a copy at the place of business where the motor fuel was delivered

8 for 90 days from the date of delivery and must keep it at that place or another place

9 for at least three years from the date of delivery. A person who accepts delivery of

10 motor fuel in violation of this subsection is jointly and severally liable for any tax

11 due on the fuel.

12 ( f) Sanctions Against Transporter. – The following acts are grounds for a civil

13 penalty payable to the Department of Transportation, Division of Motor

14 VehiclesDepartment of Crime Control and Public Safety, or the Department of

15 Revenue:

16 ( 1) Transporting motor fuel in a railroad tank car or transport truck

17 without a shipping document or with a false or an incomplete

18 shipping document.

19 ( 2) Delivering motor fuel to a destination state other than that shown on

20 the shipping document.

21 The penalty imposed under this subsection is payable by the person in whose

22 name the conveyance is registered, if the conveyance is a transport truck, and is

23 payable by the person responsible for the movement of motor fuel in the conveyance,

24 if the conveyance is a railroad tank car. The amount of the penalty is five thousand

25 dollars ($ 5,000). A penalty imposed under this subsection is in addition to any motor

26 fuel tax assessed.

27 ( g) Sanctions Against Terminal Operator. – The Secretary may assess a civil

28 penalty of five thousand dollars ($ 5,000) against a terminal operator for issuing a

29 shipping document that does not satisfy the requirements of subsection ( b) of this

30 section."

31 SECTION 16. G. S. 105- 449.115A reads as rewritten:

32 " § 105- 449.115A. Shipping document required to transport fuel by tank wagon.

33 ( a) Issuance. – A person who operates a tank wagon into which motor fuel is

34 loaded at the terminal must comply with the document requirements in G. S. 105-

35 449.115( b). A person may not transport motor fuel by who operates a tank wagon

36 into which motor fuel is loaded from some other source must have unless that person

37 has an invoice, bill of sale, or shipping document containing the following

38 information and any other information required by the Secretary:

39 ( 1) The name and address of the person from whom the motor fuel was

40 received.

41 ( 2) The date the fuel was loaded.

55

1 ( 3) The type of fuel.

2 ( 4) The gross number of gallons loaded.

3 ( b) Duties of Transporter. – A person to whom an invoice, bill of sale, or

4 shipping document was issued must do all of the following:

5 ( 1) Carry the invoice, bill of sale, or shipping document in the

6 conveyance for which it is issued when transporting the motor fuel

7 described in it.

8 ( 2) Show the invoice, bill of sale, or shipping document upon request

9 when transporting the motor fuel described in it.

10 ( 3) Keep a copy of the invoice, bill of sale, or shipping document at the

11 place of business for at least three years from the date of delivery.

12 ( c) Sanctions. – Transporting motor fuel in a tank wagon without an invoice,

13 bill of sale, or shipping document containing the information required by this section

14 is grounds for a civil penalty payable to the Department of Transportation, Division

15 of Motor Vehicles, or the Department of Revenue. The penalty imposed under this

16 subsection is payable by the person in whose name the tank wagon is registered. The

17 amount of the penalty is one thousand dollars ($ 1,000). A penalty imposed under this

18 subsection is in addition to any motor fuel tax assessed."

19 SECTION 17. G. S. 105- 449.123 reads as rewritten:

20 " § 105- 449.123. Marking requirements for dyed fuel storage facilities.

21 ( a) Requirements. – A person who is a retailer of dyed motor fuel or who

22 stores both dyed and undyed motor fuel for use by that person or another person must

23 mark the storage facility for the dyed motor fuel as follows in a manner that clearly

24 indicates the fuel is not to be used to operate a highway vehicle. The storage facility

25 must be marked " Dyed Diesel, Nontaxable Use Only, Penalty For Taxable Use" or

26 " Dyed Kerosene, Nontaxable Use Only, Penalty for Taxable Use" or a similar phrase

27 that clearly indicates the fuel is not to be used to operate a highway vehicle. A person

28 who fails to mark the storage facility as required by this section is subject to a civil

29 penalty equal to the excise tax at the motor fuel rate on the inventory held in the

30 storage tank at the time of the violation. If the inventory cannot be determined, then

31 the penalty is calculated on the capacity of the storage tank.

32 ( 1) The storage tank of the storage facility must be marked if the

33 storage tank is visible.

34 ( 2) The fillcap or spill containment box of the storage facility must be

35 marked.

36 ( 3) The dispensing device that serves the storage facility must be

37 marked.

38 ( 4) The retail pump or dispensing device at any level of the distribution

39 system must comply with the marking requirements.

40 ( b) Exception. – The marking requirements of this section do not apply to a

41 storage facility that contains fuel used only for one of the purposes listed in G. S.

56

1 105- 449.105A( a)( 1) and is installed in a manner that makes use of the fuel for any

2 other purpose improbable."

3 SECTION 18. G. S. 119- 15 is amended by adding the following two new

4 subdivisions:

5 " § 119- 15. Definitions that apply to Article.

6 The following definitions apply in this Article:

7 …

8 ( 1a) Dyed diesel fuel distributor. – A person who acquires dyed diesel

9 fuel from either of the following:

10 a. A person who is not required to be licensed under Part 2 of

11 Article 36C of Chapter 105 of the General Statutes and who

12 maintains storage facilities for dyed diesel fuel to be used for

13 nonhighway purposes.

14 b. Another dyed diesel fuel distributor.

15 ( 1b) Dyed diesel fuel. – Defined in G. S. 105- 449.60."

16 SECTION 19. G. S. 119- 15.1( a) reads as rewritten:

17 "( a) License. – A person may not engage in business in this State as any of the

18 following unless the person has a license issued by the Secretary authorizing the

19 person to engage in business:

20 ( 1) A kerosene supplier.

21 ( 2) A kerosene distributor.

22 ( 3) A kerosene terminal operator.

23 ( 4) A dyed diesel fuel distributor."

24 SECTION 20. G. S. 119- 15.3( a) reads as rewritten:

25 "( a) Initial Bond. – An applicant for a license as a kerosene supplier, kerosene

26 distributor, or kerosene terminal operator must file with the Secretary of Revenue a

27 bond or an irrevocable letter of credit. A bond or irrevocable letter of credit must be

28 conditioned upon compliance with the requirements of this Article, be payable to the

29 State, and be in the form required by the Secretary. The amount of the bond or

30 irrevocable letter of credit may not be less than five hundred dollars ($ 500.00) and

31 may not be more than twenty thousand dollars ($ 20,000)."

32 SECTION 21. G. S. 20- 91 reads as rewritten:

33 " § 20- 91. Audit of vehicle registrations under the International Registration

34 Plan.

35 ( a) Repealed by Session Laws 1995 ( Regular Session, 1996), c. 756, s. 9.

36 ( b) The Division Department of Revenue may audit a person who registers or

37 is required to register a vehicle under the International Registration Plan to determine

38 if the person has paid the registration fees due under this Article. A person who

39 registers a vehicle under the International Registration Plan must keep any records

40 used to determine the information provided to the Division when registering the

41 vehicle. The records must be kept for three years after the date of the registration to

57

1 which the records apply. The Division Department of Revenue may examine these

2 records during business hours. If the records are not located in North Carolina and an

3 auditor must travel to the location of the records, the registrant shall reimburse North

4 Carolina for per diem and travel expense incurred in the performance of the audit. If

5 more than one registrant is audited on the same out- of- state trip, the per diem and

6 travel expense may be prorated.

7 The Commissioner Secretary of Revenue may enter into reciprocal audit

8 agreements with other agencies of this State or agencies of another jurisdiction for

9 the purpose of conducting joint audits of any registrant subject to audit under this

10 section.

11 ( c) If an audit is conducted and it becomes necessary to assess the registrant

12 for deficiencies in registration fees or taxes due based on the audit, the assessment

13 will be determined based on the schedule of rates prescribed for that registration year,

14 adding thereto and as a part thereof an amount equal to five percent ( 5%) of the tax to

15 be collected. If, during an audit, it is determined that:

16 ( 1) A registrant failed or refused to make acceptable records available

17 for audit as provided by law; or

18 ( 2) A registrant misrepresented, falsified or concealed records, then all

19 plates and cab cards shall be deemed to have been issued

20 erroneously and are subject to cancellation. The Commissioner

21 Commissioner, based on information provided by the Department of

22 Revenue audit, may assess the registrant for an additional

23 percentage up to one hundred percent ( 100%) North Carolina

24 registration fees at the rate prescribed for that registration year,

25 adding thereto and as a part thereof an amount equal to five percent

26 ( 5%) of the tax to be collected. The Commissioner may cancel all

27 registration and reciprocal privileges.

28 As a result of an audit, no assessment shall be issued and no claim for refund shall

29 be allowed which is in an amount of less than ten dollars ($ 10.00).

30 The results of any audit conducted under this section shall be provided to the

31 Division. The notice of any assessments will shall be sent by the Division to the

32 registrant by registered or certified mail at the address of the registrant as it appears

33 in the records of the Division of Motor Vehicles in Raleigh. The notice, when sent in

34 accordance with the requirements indicated above, will be sufficient regardless of

35 whether or not it was ever received.

36 The failure of any registrant to pay any additional registration fees or tax within

37 30 days after the billing date, shall constitute cause for revocation of registration

38 license plates, cab cards and reciprocal privileges.

39 ( d) Repealed by Session Laws 1995 ( Regular Session, 1996), c. 756, s. 9."

40 SECTION 22. Sections 1, 6, 7, 8, 15, and 17 of this act become effective

41 January 1, 2006. The remainder of this act is effective when it becomes law.

58

BILL ANALYSIS OF LEGISLATIVE PROPOSAL # 3:

MOTOR FUELS TAX CHANGES

BY: CINDY AVRETTE, RESEARCH DIVISION

SUMMARY: Legislative Proposal # 3 makes several changes to the motor fuel

laws. The Revenue Laws Study Committee recommended many of these changes to

the 2004 General Assembly.

BACKGROUND & ANALYSIS: Section 1 was a provision that the Committee

approved in its Motor Fuel bill last session. It allows the Secretary to impose a

$ 1,000 penalty for failure to obtain a license under G. S. 105- 449.65 or G. S. 105-

449.1311. Currently, the Secretary has general authority to impose a penalty for

failure to obtain a license. Under that general authority, the amount of the penalty

imposed is equal to 5% of the amount prescribed for the license for each month the

taxpayer fails to obtain the license, with a maximum penalty of 25% of the amount

prescribed for the license. Because this general authority limits the penalty to a

percentage of the amount prescribed for the license, it effectively bars assessing a

penalty when there is no charge to obtain a license. There is no charge for the

licenses issued pursuant to G. S. 105- 449.65 or G. S. 105- 449.131. This provision

becomes effective January 1, 2006.

Section 2 conforms the refund statute applicable to motor carriers to the general

rule applicable to tax refunds of overpaid taxes. Under the general administrative

provisions of G. S. 105- 266( a)( 3), the Secretary does not have to refund a tax

overpayment of less than $ 3.00 unless the taxpayer makes a written request for the

refund. A motor carrier is entitled to a credit on its quarterly report for tax paid by

the carrier on fuel purchased in this State. If the credit exceeds the amount of tax

owed, the statute provides that the Secretary must refund the excess to the carrier.

The statute does not set a minimum amount. This statute appears to conflict with

the general administrative provision. This section clarifies that the general

administrative law applicable to refunds applies to refunds payable to motor

carriers. This provision becomes effective when it becomes law.

1 G. S. 105- 449.65 is contained in the Article dealing with gasoline, diesel fuel, and blended fuel, and

requires the following to have a license: refiners, suppliers, terminal operator, importers, exporters,

blenders, motor fuel transporters, and distributors who purchase motor fuel from an elective or

permissive supplier at an out- of- state terminal for import into this State. G. S. 105- 449.131 is

contained in the Article dealing with alternative fuels and requires the following to have a license:

providers of alternative fuel, bulk- end users, and retailers.

59

Section 3 removes obsolete language to conform to current administrative practice.

G. S. 105- 449.44 establishes the calculation by which a motor carrier determines the

amount of fuel used in North Carolina. The formula under current law has not been

used since 1991. In 1992, North Carolina became a participant in the International

Fuel Tax Agreement. The method proposed by this section conforms to the IFTA

agreement and is the method motor carriers have been using to determine the

amount of fuel used in this State since 1992. This provision becomes effective when

it becomes law.

Sections 4 and 21 were included in last year's recommendation. They transfer audit

functions related to the International Registration Plan from the Department of

Transportation, Division of Motor Vehicles to the Department of Revenue, Motor

Fuels Tax Division. The International Registration Plan is the mechanism through

which interstate motor carriers are licensed. It helps to ensure that the proper

amount of motor fuels tax is credited to each jurisdiction in which the motor carrier

travels. It has been suggested that the Department of Revenue has more expertise

in auditing taxpayers and would be a more appropriate home for these audit

functions. The positions associated with these audit functions were transferred July

1, 2004, through an administrative transfer. These provisions become effective when

they become law.

Section 5 removes language that is no longer applicable. G. S. 105- 449.47 provides

that the Secretary must issue identification markers to motor carriers. The current

statute provides that the Secretary may withhold an identification marker if a motor

carrier fails to comply with former Article 36 or 36A. The General Assembly repealed

those articles in 1996. The authority of the Department to issue an assessment under

one of those articles has expired and any uncollectible assessments issued under

those articles has been written off. Therefore, the language repealed by this section

is obsolete. This provision becomes effective when it becomes law.

Section 6 sets forth the reasons the Secretary could refuse to register and issue an

identification marker to a motor carrier. The Department requests this change to

enable it to only register applicants that are in good standing with North Carolina

and other taxing jurisdictions. The statute proposed in this section is very similar to

G. S. 105- 449.73, which sets forth the reasons the Secretary may refuse to issue a

license to an applicant under the motor fuel statutes. This provision becomes

effective January 1, 2006.

Section 7 simplifies the criminal penalty imposed on persons who operate in this

State as a motor carrier without obtaining the necessary registration and

identification markers. A violation of the motor carrier requirements is a Class 3

misdemeanor. Under current law it is punishable by a fine that is no less than $ 10

nor more than $ 200. This section sets the amount of the fine at $ 200. The civil

penalty for this offense is $ 100. This provision becomes effective January 1, 2006.

60

Section 8 clarifies the current licensing requirements by conforming them to the

current Department policy and practice. This provision becomes effective January 1,

2006.

Section 9 removes obsolete language. In 1999, the General Assembly removed the

licensing requirements for bulk- end users and retailers of undyed diesel fuel. The

legislation did not include a conforming change to G. S. 105- 449.69( b). This

provision becomes effective when it becomes law.

Section 10 changes the defined term ' overdue tax debt' to the appropriate defined

term ' tax debt'. Under the general administrative provisions in G. S. 105- 243.1, a tax

debt is defined as the total amount of tax, penalty, and interest due for which a

notice of final assessment has been mailed to the taxpayer after the taxpayer no

longer has the right to contest the debt. An ' overdue tax debt' is any part of a tax

debt that remains unpaid 90 days or more after the notice of final assessment was mailed

to the taxpayer. A collection assistance fee is imposed on an overdue tax debt that

remains unpaid 30 days or more after the appropriate fee notice is mailed to the

taxpayer. G. S. 105- 449.73 sets forth the reasons the Secretary can deny a license to

an applicant. One of the reasons is failure to remit taxes that remain due after a

taxpayer no longer has the right to contest the tax debt. Since G. S. 105- 449.73 has

nothing to do with the imposition of a collection assistance fee, the term ' overdue

tax debt' is not the appropriate term to use. This provision becomes effective when

it becomes law.

Section 11 was included in last year's recommendation. It exempts motor fuel

acquired to operate a highway vehicle owned by or leased to the American Red

Cross from the motor fuel excise tax. In Department of Employment v. United

States, 385 U. S. 355, 87 S. Ct. 464 ( 1966), the United States Supreme Court ruled that

the Red Cross is an instrumentality of the United States for state tax immunity

purposes. This provision codifies the current administrative practice of the

Department of Revenue. This section is effective when it becomes law.

Section 12 removes the ability of a person exporting motor fuel to another state to

pay the tax directly to the Department if the person is not licensed in the destination

state of the motor fuel because it is no longer necessary. This provision was

included in the statutes in 1996 when North Carolina first adopted ' tax at the rack'

to accommodate persons exporting product to a state that was not a ' tax at the rack'

state. Today, with the exception of Georgia, all of the surrounding states have

adopted ' tax at the rack'. The Georgia border in the western part of the State would

not be affected by this repeal because the closest terminal to the Georgia line is in

Charlotte. This provision becomes effective when it becomes law.

Section 13 provides that a supplier must list on its return to the Secretary the

number of gallons of motor fuel the supplier exchanged with another licensed

61

supplier pursuant to a two- party exchange agreement. The Secretary currently

requires this information on the supplier return. This provision becomes effective

with it becomes law.

Section 14 removes obsolete language from the catch line of G. S. 105- 449.106. In

2003, the General Assembly exempted motor fuel sold to a county or city for its use

from the motor fuel tax. Although the legislation authorizing the exemption made

the appr