Finance law changes

              1
2003 Finance Law Changes
ONE-TIME RENTAL CAR TAX ELECTION
EXCEPTION.
Session Law Bill # Sponsor
S.L. 2003-5 SB 235 Senator Hoyle
AN ACT TO ALLOW A RETAILER THAT LEASES MOTOR
VEHICLES AND THAT HAS PAID THE HIGHWAY USE TAX ON
THE MOTOR VEHICLES TO PAY AN ADDITIONAL GROSS
RECEIPTS TAX ON THE MOTOR VEHICLES.
OVERVIEW: This act allows a retailer who leases motor vehicles to elect to begin paying
the highway use tax on the gross receipts derived from leasing the vehicles even though the
retailer has previously paid the 3% highway use tax on these vehicles. The retailer’s election
to begin paying the gross receipts tax must have been made by July 1, 2003 and if made, is
irrevocable. The election does not relieve the retailer of liability from a tax previously
imposed.
FISCAL IMPACT: This act has no fiscal impact. (For a more complete fiscal analysis, see Overview:
Fiscal and Budgetary Actions, 2003 Session. Available in the Legislative Library.)
EFFECTIVE DATE: This act became effective when signed into law by the Governor on
March 28, 2003. An election to pay the gross receipts tax must have been made by the
retailer by July 1, 2003.
ANALYSIS: In 1989, the General Assembly enacted the highway use tax to provide a
major source of revenue for the Highway Trust Fund. The tax rate is 3% of the retail value
of a motor vehicle for which a certificate of title is issued. The Division of Motor Vehicles
collects the tax. A retailer that leases or rents motor vehicles may elect not to pay the
highway use tax. Instead, the retailer may elect to pay an 8% tax on the gross receipts of the
short-term lease or rental and a three percent (3%) tax on the gross receipts of long-term
rentals. Although the gross receipts tax is imposed on the retailer, it is added to the lease or
rental price of the vehicle and is ultimately paid by the person who leases or rents the
vehicle. The gross receipts tax is collected by the Department of Revenue. The tax levied at
3% is credited to the Highway Trust Fund and the tax levied at 8% is credited to the General
Fund.
This act allows a retailer who leases motor vehicles and who elected to pay the highway use
tax on the retail value of the vehicles at the time the retailer obtained a certificate of title for
those vehicles to collect the alternate gross receipts tax. In order to collect the gross receipts
tax on these vehicles, a retailer must have submitted a written request to the Division of
Motor Vehicles and the Department of Revenue by July 1, 2003. The retailer was required to
specifically identify the vehicles to which the election applied, the date upon which the
2
retailer would begin collecting the additional taxes, and any additional information needed to
collect the tax. If a retailer elected to pay the gross receipts tax under this act, that election is
irrevocable and does not relieve the taxpayer of liability for any tax previously imposed.
Typical practice throughout the rental car industry is for the highway use tax to be paid on
the receipts of the rentals. Typically states that impose a tax on the leasing of vehicles
impose a gross receipts tax. However, in North Carolina, at least one rental car retailer
elected to pay the highway use tax at the time the retailer obtained the certificates of title for
its fleet. To be consistent with other companies in the industry and to be consistent among
the various states in which the retailer leases its motor vehicles, the retailer requested
authorization to collect the gross receipts tax on its rentals.
IRC UPDATE.
Session Law Bill # Sponsor
S.L. 2003-25 HB 320 Rep. McComas
AN ACT TO UPDATE THE REFERENCE TO THE INTERNAL
REVENUE CODE USED IN DEFINING AND DETERMINING
CERTAIN STATE TAX PROVISIONS.
OVERVIEW: This act rewrites the definition of the Internal Revenue Code used in State
tax statutes to change the reference date from May 1, 2002 to January 1, 2003. Part
XXXVII-A of S.L. 2003-284 updated the reference date to June 1, 2003. (See summary for
S.L. 2003-284 for more details.) 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.
FISCAL IMPACT: This act results in a revenue gain of less than $30,000 per year. (For a
more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2003 Session. Available in the Legislative Library.)
EFFECTIVE DATE: This act became effective when signed into law by the Governor on
April 24, 2003.
ANALYSIS: Congress enacted the Clergy Housing Allowance Clarification Act of 2002
(P.L. 107-181) which clarifies the amount that may be excluded from gross income by a
minister for a rental allowance paid to the minister as part of the minister’s compensation.
Under previous federal law, the rental allowance was excluded to the extent the allowance
was used to rent or provide a home for the minister. Specifically, new la provides that the
rental allowance is excluded to the extent that it is used to rent or provide a home for the
minister but only to the extent that it does not exceed the fair market rental value of the
home.
This legislation originated as an effort to head off a constitutional challenge to the clergy
housing exclusion in a case before the Ninth Circuit Court of Appeals, Warren v. Commissioner
of Internal Revenue, 282 F.3d 1119 (9th Cir. 2002). In this case, Reverend Rick Warren had
3
purchased a home and for three years excluded a portion of his compensation from his
church on the basis of the rental allowance exclusion. The IRS determined that, pursuant to
a 1971 Revenue Ruling, the amount excluded should have been limited to the fair market
rental value of his home and assessed a deficiency. Rev. Warren contested the deficiency. In
May 2000, the United States Tax Court ruled that the IRS erred in finding Rev. Warren’s
housing allowance exclusion was limited to the fair market rental value of his home. The
government appealed the Tax Court decision to the Ninth Circuit Court of Appeals.
Although neither party raised a constitutional issue on appeal, the Ninth Circuit, on its own,
queried whether the rental allowance exclusion for ministers of the Code violated the
Establishment Clause of the United States Constitution and requested the parties to submit
briefs on that issue. This prompted the introduction of the Clergy Housing Allowance
Clarification Act of 2002 as an effort by Congress to preserve the 81-year-old law exempting
from federal income tax the provision of residential housing for clergy. The legislation
moved swiftly thorough Congress, and two days after the President signed the measure, both
parties in the case requested a dismissal of the appeal.
MODIFY COUNTY TAX CERTIFICATION
AUTHORITY.
Session Law Bill # Sponsor
S.L. 2003-72 HB 393 Representative Stam
AN ACT TO MODIFY THE AUTHORITY OF THE BOARD OF
COUNTY COMMISSIONERS IN CERTAIN COUNTIES TO
REQUIRE THE REGISTER OF DEEDS IN THE COUNTY NOT
TO ACCEPT ANY DEED TRANSFERRING REAL PROPERTY FOR
REGISTRATION UNLESS THE COUNTY TAX COLLECTOR
CERTIFIES THAT NO DELINQUENT TAXES ARE DUE ON
THAT PROPERTY.
OVERVIEW: This act provides that a register of deeds serving in a county where tax
collector certification of a deed is normally required prior to registration must accept an
uncertified deed if the closing attorney states the intent to pay any delinquent taxes from the
closing proceeds. It also adds Hyde County to the list of counties that have the authority to
require tax certification of a deed prior to registration.
FISCAL IMPACT: This act does not affect State revenues.
EFFECTIVE DATE: This act became effective when signed into law by the Governor on
May 20, 2003.
ANALYSIS: G.S. 161-31 provides that in certain counties, the board of county
commissioners may adopt a resolution to require the register of deeds to refuse to register a
4
deed unless the county tax collector has certified that no delinquent taxes are due on the
property. Before the 2003 Session, this provision applied to the following 45 counties:
Alleghany, Anson, Beaufort, Bertie, Cabarrus, Camden, Carteret, Cherokee, Chowan, Clay,
Cleveland, Currituck, Davidson, Durham, Forsyth, Gaston, Graham, Granville, Harnett,
Haywood, Henderson, Hertford, Iredell, Jackson, Lee, Macon, Madison, Martin,
Montgomery, Northampton, Pasquotank, Perquimans, Person, Pitt, Polk, Rockingham,
Rowan, Rutherford, Stanly, Swain, Transylvania, Vance, Warren, Washington, and Yadkin
Counties. This act adds Hyde County to the list. S.L. 2003-189 added Gates County and S.L.
2003-354 added Duplin County to the list, to bring the total to 48.
In addition to G.S. 161-31, the General Assembly has enacted similar laws that prohibit a
register of deeds from registering a deed unless the tax collector has certified that no
delinquent taxes are due. These provisions apply to the following local governments: Avery
County (1963); Mitchell County (1987); Ashe County (1993); the Towns of Newland and
Spruce Pine and Alleghany County (1997);1 the Town of Banner Elk (1998); and the Town
of Bakersville (1999).
In a county or local government where G.S. 161-31 and other similar State laws do not
apply, the register of deeds registers deeds regardless of whether delinquent taxes are due on
the property.
The purpose of G.S. 161-31 is to provide certain counties an additional tool to collect
delinquent property taxes. This act amended G.S. 161-31 to provide that if the board of
county commissioners has adopted a resolution to require the register of deeds to refuse to
register a deed without the certification of the county tax collector, the register of deeds
must still accept an uncertified deed that is submitted for registration under the supervision
of a closing attorney and containing the statement, "This instrument prepared by:
_________________, a licensed North Carolina attorney. Delinquent taxes, if any, to be
paid by the closing attorney to the county tax collector upon disbursement of closing
proceeds." The change is intended to provide the same level of protection for counties while
reducing the paperwork burden associated with transfers of real property.
PUBLISH REVENUE-NEUTRAL PROPERTY TAX
RATE.
Session Law Bill # Sponsor
S.L. 2003-264 SB 511 Senator Rucho
AN ACT TO REQUIRE LOCAL GOVERNMENTS TO PUBLISH
THE REVENUE-NEUTRAL TAX RATE IN YEARS WHEN THERE
IS A GENERAL REVALUATION OF REAL PROPERTY.
1 Although Allegheny County had a local provision, it was added to G.S. 161-31 in 2001 because that provision
allows the county to decide what form the certification will take.
5
OVERVIEW: This act requires counties to state the revenue-neutral property tax rate in
their budgets in a year in which a general reappraisal of real property takes place.
FISCAL IMPACT: This act has no fiscal impact.
EFFECTIVE DATE: This act became effective when signed into law by the Governor on
June 26, 2003.
ANALYSIS: The amount of property tax due is dependent upon two factors: the property
tax rate and the value of the property to which the rate is applied. Property is to be appraised
for tax purposes at its true value or market value.2 To ensure that property is appraised at its
true value, the law requires that a county conduct a general reappraisal of real property at
least once every eight years.3 Typically, the value of the tax base increases in revaluation
years, especially in urban areas. This increase in value may result in a decreased tax rate, if the
county seeks to maintain revenue neutrality with regard to the stream of revenue derived
from property taxes.
This act requires a county, in the year in which it conducts a general reappraisal of property,
to include in its budget a statement of the revenue-neutral property tax rate for the budget.
The revenue-neutral tax rate is the rate that is estimated to produce revenue for the next
fiscal year equal to the revenue that would have been produced for the next fiscal year by the
current tax rate if no reappraisal had occurred. To calculate the revenue-neutral tax rate, the
budget officer must first determine a rate that would produce revenues equal to those
produced for the current fiscal year and then increase the rate by a growth factor equal to the
average annual percentage increase in the tax base due to improvements since the last
general reappraisal. This growth factor should represent the expected percentage increase in
the value of the tax base due to improvements during the next fiscal year. The budget officer
must further adjust the rate to account for any annexation, deannexation, merger, or similar
event.
2003 BUDGET ACT.
Session Law Bill # Sponsor
S.L. 2003-284 HB 397 Rep. Crawford, Sherrill
(Primary Sponsors)
AN ACT TO APPROPRIATE FUNDS FOR CURRENT
OPERATIONS AND CAPITAL IMPROVEMENTS FOR STATE
DEPARTMENTS, INSTITUTIONS, AND AGENCIES, AND FOR
OTHER PURPOSES, AND TO IMPLEMENT A STATE BUDGET
THAT ENABLES THE STATE TO PROVIDE A SUSTAINABLE
2 Agricultural, horticultural, and forestland property, upon proper application, are appraised at present-use
value.
3 G.S. 105-286.
6
RECOVERY THROUGH STRONG EDUCATIONAL AND
ECONOMIC TOOLS.
OVERVIEW, EFFECTIVE DATES, AND FISCAL IMPACT:
37 Adjust Local Government
Hold-Harmless
Effective June 30, 2003, changed the date
that sales tax hold-harmless payments are
made to local governments each year,
from September 15 to August 15. It also
provided that the payments will be made
in 2003 and 2004, with intent language for
the payments to continue through 2012.
This part also provided that the estimates
used to calculate the hold-harmless
payments must be updated to reflect
legislative changes.
No significant fiscal impact on
the General Fund in the
2003-05 fiscal biennium.
37-A Update Internal Revenue Code
Reference and Adjust Bonus
Depreciation and Estate Tax
Effective June 30, 2003, changed the State
tax law reference to the Internal Revenue
Code from January 1, 2003 to June 1,
2003. In May 2003, Congress enacted the
Jobs and Growth Tax Relief
Reconciliation Act of 2003. That
legislation increased from 30% to 50% the
bonus depreciation allowance originally
enacted in March 2002 in response to the
September 11 terrorist attacks and moved
the sunset for bonus depreciation from
September 10, 2004 to December 31,
2004. In addition, the package increased
the amount of investment in capital
equipment that a business can expense
during the acquisition year (instead of
depreciating over many years) from
$25,000 to $100,000
Continued technical conformity to bonus
depreciation so that taxpayers do not have
to keep a separate depreciation schedule
for State tax purposes for each piece of
equipment in addition to the federal
The update in the Code
reference fully conforms
North Carolina law to the
federal expensing limit
increase at a cost to the
General Fund of $29.2 million
in FY 2003-04 and $18.0
million in FY 2004-05.
This will reduce state revenues
in FY 2003-04 by $40.8
million (due to the increase in
bonus depreciation from 30%
to 50%) but increase revenues
by $18.0 million in FY
2004-05.
This provision has no impact
for the 2003-04 fiscal year
because estates have 9 months
after a death to file a return.
For FY 2004-05, the proposal
saves $70.8 million of General
Fund revenue that would have
disappeared if the 2002 partial
7
schedule.
Extended until July 1, 2005, the partial
conformity of the State estate tax to
changes in the federal estate tax.
conformity had been allowed
to sunset on January 1, 2004.
38 Temporarily Maintain State Sales Tax
Rate
Effective June 30, 2003, extended sunset
on the half-cent state sales tax enacted in
2001 from July 1, 2003 to July 1, 2005.
Joint estimates provided by
Fiscal Research and the Office
of State Management and
Budget suggest the following
revenue stream from this tax
extension.
FY 2003-04 $341.7 million
FY 2004-05 $388.2 million
FY 2005-06 $26.5 million
39 Temporarily Maintain Upper Income
Tax Rate
Effective June 30, 2003, extended the
sunset of the 8.25% individual income tax
bracket from January 1, 2004 to January 1,
2006.
The additional revenue from
this extension is calculated
using the North Carolina
Individual Income Tax Model.
The model estimates that
$83.3 million in individual
income tax payments will be
generated in tax year 2004 and
$104.2 million in revenue in
tax year 2005. This revenue is
divided into fiscal years as
follows:
FY 2003-2004: $37.5 million
FY 2004-2005: $92.7 million
FY 2005-2006: $57.3 million
39-B Conform Child Tax Credit to Federal
Credit
Effective for the 2003 tax year, conformed
the State definition of a dependent child to
the federal definition for purposes of the
individual income tax credit for children.
The change will increase
General Fund revenue by
$16.8 million in FY 2003-04
and by $17 million in FY
2004-05.
43 Equalize Insurance Tax Rates on
Article 65 Corporations
Raised the insurance premiums tax rate on
Article 65 corporations from 1.0% to
1.9%, effective for the 2004 tax year. In
addition, for the 2004 and 2005 tax years,
This change will increase
General Fund revenue by
$18.6 million for the 2003-04
fiscal year and $13.9 million
for FY 2004-05.
8
this act required the affected companies to
make estimated tax payments in April and
June of each year equal to 50% of the
annual liability for that tax year.
43-A Clarify Property Tax Exclusion for
Property Used to Reduce Cotton Dust
Clarified a property tax exclusion
No impact on General Fund.
No estimate on the fiscal
impact on local governments
is possible, but the impact is
expected to be small.
44 Continue Use Tax Line Item on
Income Tax Form
Effective June 30, 2003, this act extended
for two years the law that provides that
consumer use tax is payable on the
individual income tax return.
This extension will increase
General Fund revenue by $3.1
million in both FY 2003-04
and FY 2004-05.
45 Conform to Streamlined Sales and Use
Tax Agreement
This act made numerous changes to the
sales and use tax statutes to bring North
Carolina into conformity with the
Streamlined Sales Tax Agreement. Various
effective dates.
The tax on soft drinks will
increase sales tax revenues by
$41.4 million in FY 2003-04
and by $45.1 million in FY
2004-05. Conversely, the 50%
vending machine exemption
will reduce sales tax revenue
by $4.05 million in FY
2003-04 and $8.6 million in
FY 2004-05. The tax on
prepared food will increase
revenue by $3.05 million in FY
2003-04 and by $3.3 million in
FY 2004-05. The candy
exemption will reduce revenue
by $400,000 in FY 2003-04
and by $800,000 in FY
2004-05.
45-A Eliminate Tobacco and Alcohol
Discounts
Effective August 1, 2003, eliminated tax
reductions that were allowed to
distributors and wholesalers who pay the
excise taxes on cigarettes and other
tobacco products.
Effective August 1, 2003, eliminated tax
reductions that were allowed to
distributors and wholesalers who pay the
The change will increase
General Fund revenue by
$1.74 million in FY 2003-04
and by $1.9 million in FY
2004-05.
The change will increase
General Fund revenue by
$3.67 million in FY 2003-04
and by $4.0 million in FY
9
excise taxes on wine, beer, and spirituous
liquor.
2004-05.
46 Repairs and Renovations
Effective July 1, 2003, enacts the
procedural and regulatory provisions
governing the State's issuance of security
interest indebtedness. It also provides the
specific legislative authorization for up to
$300 million of special indebtedness to be
used for the repair and renovation of State
facilities and related infrastructure.
The expected debt service is
$35 million for 2004-05, $32.5
million for 2005-06, and $31.6
million for 2006-07.
46-A State Capital Facilities Finance
Effective July 1, 2003, provides specific
legislative authorization for three projects:
The purchase of two private prisons
currently leased by the State.
Up to $6,780,000 for the design,
construction drawings, and solicitation of
bids for three youth development centers.
The construction of a structural pest
control training facility to be located at
NCSU.
The amount of the issuance is
to be negotiated. No other
fiscal information available.
No fiscal information
available, in planning stage.
No fiscal information
available.
47 Lease-Purchase Three New Prisons
Effective July 1, 2003, provides specific
legislative authorization for the
lease-purchase of three new prisons.
The cost of constructing the
prisons is expected to be
between $344 and $364
million. The annual operating
cost is expected to be $18
million.
(For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2003 Session. Available in the Legislative
Library.)
ANALYSIS:
Part 37: Adjust Local Government Hold-Harmless
Part 37 of this act changes the date that sales tax hold-harmless payments are made to local
governments each year, from September 15 to August 15. It also provides that the payments
will be made in 2003 and 2004 only, but includes intent language for the payments to
continue through 2012. The Governor's budget would have eliminated the hold harmless
payments beginning in 2003.
10
In 2001, the General Assembly gave local governments the authority to increase their local
sales tax by one-half percent, effective upon the repeal of the State's additional half-percent
sales tax on July 1, 2003. Also effective July 1, 2003, the State's reimbursements to local
governments were repealed, and the State was directed to provide hold-harmless payments
to those local governments whose potential gain from the half-cent local sales tax increase
would be less than their loss from the repealed State reimbursements. State reimbursements
were for losses due to the repeal of the property tax on inventories and on poultry and
livestock, the repeal of the intangibles tax, the "homestead exclusion" from property tax, and
the repeal of local sales and use taxes on food purchased with food stamps.
In 2002, the General Assembly accelerated the repeal of the State reimbursements from July
1, 2003, to July 1, 2002, and accelerated the effective date that local governments could begin
levying the additional half-cent local tax from July 1, 2003, to December 1, 2002.
This part also provides that the estimates used to calculate the hold-harmless payments must
be updated to reflect legislative changes.
This part became effective when the act was signed into law by the Governor on June 30,
2003.
Part 37-A: Update Internal Revenue Code Reference And Adjust Bonus Depreciation And Estate Tax
This part makes three changes relating to conformity of State tax laws to federal tax laws.
These provisions were not in the House or Senate budgets.
Section 37A.1 of this act updates to June 1, 2003, the date used in defining and determining
certain State tax provisions. In May 2003, Congress enacted the Jobs and Growth Tax Relief
Reconciliation Act of 2003. That act contained two tax changes that affect federal taxable
income, which is the starting point for determining State taxable income, and became
effective for the 2003 tax year. The two changes were an increase in the bonus depreciation
allowance first enacted after the September 11, 2001, terrorist attacks and an increase in the
amount that can be expensed under section 179 of the Internal Revenue Code4 Section
37A.1 of the act conforms to both of these provisions. Sections 37A.2 and 37A.3 of the act
would provide for a bonus depreciation add-back for the 2004 taxable year to offset the
second-year losses from the depreciation and expensing provisions.
Sections 37A.4 and 37A.5 delay until July 1, 2005, the phase-out and elimination of the State
estate tax that would otherwise occur due to the phase-out and elimination of the federal
credit for State death taxes. North Carolina repealed its inheritance tax in 1998, effective for
deaths occurring on or after January 1, 1999. It replaced the inheritance tax with an estate tax
that is equivalent to the federal state death tax credit allowed on a federal estate tax return.
This type of state estate tax is known as a "pick-up" tax because it picks up for the state the
amount of federal estate tax that would otherwise be paid to the federal government. In
2001, Congress increased the exclusion amount for the federal estate tax and phased out the
state death tax credit over four years by reducing it 25% in 2002, 50% in 2003, and 75% in
2004, and by repealing it entirely in 2005. In 2002, the General Assembly enacted legislation
not to conform to the phase-out of the state death tax credit. In other words, the amount of
the State estate tax is tied to the federal credit as it existed in 2001 rather than as it currently
4 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.
11
exists. The 2002 legislation was set to sunset for estates of decedents dying on or after
January 1, 2004. This part extends the sunset to July 1, 2005, meaning that the estate tax will
continue to be based on the federal credit as it existed in 2001. This part became effective
when the act signed into law by the Governor on June 30, 2003.
Part 38: Temporarily Maintain State Sales Tax Rate
Part 38 of this act delays the sunset of the one-half-percent increase in the State sales tax
from July 1, 2003, to July 1, 2005. This part became effective when the act was signed into
law by the Governor on June 30, 2003. In the 2001 Appropriations Act, S.L. 2001-424, the
General Assembly increased the State sales tax by one-half percent, from 4% to 4.5%,
effective October 16, 2001. This State sales tax increase was to sunset July 1, 2003. Before
2001, the State sales tax rate had last been increased in 1991 from 3% to 4%.
Part 39: Temporarily Maintain Upper Income Tax Rate
Part 39 of this act delays the sunset of the upper-income individual income tax bracket from
January 1, 2004, to January 1, 2006. In 2001, the General Assembly added a new tax bracket
that imposed an additional one-half percent income tax (a total rate of 8.25%) on certain
North Carolina taxable income for three years. Under prior North Carolina law, tax was
imposed at the following rates on individuals' North Carolina taxable income:
Tax Rate
Married filing
jointly
Heads of
household
Single filers Married filing
separately
6.0% Up to $21,250 Up to $17,000 Up to $12,750 Up to $10,625
7.0% Over $21,250
and up to
$100,000
Over $17,000
and up to
$80,000
Over $12,750
and up to
$60,000
Over $10,625 and
up to $50,000
7.75% Over $100,000 Over $80,000 Over $60,000 Over $50,000
The 2001 law created a fourth tax bracket for North Carolina taxable income as follows:
Tax Rate
Married filing
jointly
Heads of
household
Single filers Married filing
separately
8.25% Over $200,000 Over $160,000 Over $120,000 Over $100,000
This change was estimated to affect approximately 2% of North Carolina taxpayers. This
provision extending the tax rate for two more years was recommended by the Governor.
This part became effective when the act was signed into law by the Governor on June 30,
2003.
Part 39-B: Conform Child Tax Credit To Federal Credit
Part 39-B of this act conforms the State credit for children to the federal definition of
whether a dependent child is eligible for the federal credit for dependent children. The effect
of this change is to limit the credit to children below 17 years of age. The federal credit is
12
limited to dependent children under age 17 but the North Carolina credit previously applied
to 17-year-olds as well as to children over 17 up to age 23 if they are in college. This
provision was part of a provision that was in the Senate budget that would have also delayed
the scheduled increase in the credit. This change is effective beginning with the 2003 tax
year.
Part 43: Equalize Insurance Tax Rates On Article 65 Corporations
Before 2004, nonprofit medical service corporations, such as Blue Cross/Blue Shield and
Delta Dental Corporation, and HMOs paid a gross premiums tax of 1%. Other insurance
providers pay a gross premiums tax of 1.9% on most insurance contracts. Companies that
pay a gross premiums tax are automatically exempt from corporate income and franchise
taxes. This part increases the gross premiums tax rate on medical service corporations from
1% to 1.9% effective January 1, 2004. The tax rate for HMOs (including HMOs directly
operated by medical service corporations) remains at 1%.
This part also provides that for the 2004 and 2005 tax years only, medical service
corporations will make the following estimated payments of the tax: 50% on April 15 and
50% on June 15, with true-up the following March 15. For subsequent tax years, the general
law on installment payments of gross premiums tax will apply. This change accelerates the
timing of the tax payment to move the revenue gain to an earlier fiscal year.
This part provides a conditional sunset of the increased tax rate. It requires the
Commissioner of Insurance to make a certification to the Department of Revenue and the
Revisor of Statutes when there are no longer any medical service corporations that offer
anything other than dental service plans. Beginning with the first taxable year after that
certification is made, this part will expire and the gross premiums tax rate applied to medical
service corporations will revert to 1%. The effect of this provision would be to reduce the
rate on medical service corporations if Blue Cross/Blue Shield completes its conversion to
for-profit status. In July 2003, Blue Cross/Blue Shield announced its intention not to pursue
conversion at this time.
The insurance gross premiums taxes are taxes based on the amount of insurance premiums
that are paid or, for certain self-insurers, would have been paid during the year. Before the
effective date of this part, they consist of the following:
• A 1.9% tax on most insurance contracts.
• A 1% tax on HMOs and on nonprofit medical service companies, such as Blue
Cross/Blue Shield and Delta Dental, that provide hospital, medical, and dental
service plans.
• A 2.5% tax on workers' compensation premiums and workers' compensation
self-insurers.
• An additional 1.33% tax on premiums for fire and lightening coverage of property
other than motor vehicles and boats.
• An additional 0.5% tax on premiums for fire and lightening coverage of property
within a fire district.
Part 43-A: Clarify Property Tax Exclusion For Property Used To Reduce Cotton Dust
13
Part 43A amends the existing property tax exclusion for property exclusively used to reduce
or prevent cotton dust in textile plants in accordance with OSHA standards. The new law
provides that if parts of a ventilating or air conditioning system are integrated with the
cotton dust equipment, the entire system benefits from the tax exclusion, except for the
chillers and cooling towers. Because it apparently reflects the previous practice in some
counties, the provision became effective when the act was signed into law by the Governor
on June 30, 2003.
Part 44: Continue Use Tax Line Item On Income Tax Form
Part 44 extends for two years the law that provides that consumer use tax is payable on the
individual income tax return. The law would otherwise sunset for the 2003 taxable year.
North Carolina has State and local sales and use taxes. The sales tax is paid on purchases
made in this State. It is collected by the retailer and remitted to the State. The use tax
complements the sales tax by taxing transactions that are not subject to the sales tax because
of movement in interstate commerce. The use tax is imposed on the purchaser. Unlike the
sales tax, the responsibility for remitting the use tax to the Department of Revenue is also on
the purchaser. The 1997 General Assembly established an annual filing period for the
payment of use taxes owed by consumers on mail-order and other out-of-state purchases.
This change relieved consumers of the duty to file either monthly or quarterly returns.
In 1999, the General Assembly further simplified use tax collection by providing that the use
tax will be paid on taxpayers’ income tax returns. An individual who owes use tax on
nonbusiness purchases and who must remit a State income tax return must pay the use tax
with the income tax return. The income tax return has space on it to indicate the amount of
use tax owed. Placing the use tax on the individual income tax return, as opposed to a
separate use tax return sent to the taxpayer with the income tax return, is intended to
increase taxpayers’ awareness of their responsibility to pay the tax. In 2000, the General
Assembly sunset this provision in anticipation that use tax collection would be handled by
retailers by 2003 as a result of the Streamlined Sales Tax Agreement. The 2003 sunset date
may have been overly optimistic; this part extends it for two more years. This part became
effective when the act was signed into law by the Governor on June 30, 2003.
Part 45: Conform To Streamlined Sales And Use Tax Agreement
In November 2002, the Streamlined Sales Tax implementing states5 approved a final version
of an historic multistate agreement designed to simplify and modernize sales and use tax
collection and administration. One objective of the Streamlined Sales and Use Tax Project is
to encourage remote vendors to voluntarily collect use tax owed to the states, thereby
increasing their collections. A study issued in September 2001 by Bruce and Fox of the
University of Tennessee, Knoxville estimated the state and local government revenue loss
from sales made through the Internet at $7 billion in 2001 and increasing to $24.2 billion by
2006. The study estimates that North Carolina is currently losing $200 to $300 million a year
in uncollected use tax revenues.
A second objective of the Project is to convince Congress or the U.S. Supreme Court to
grant collection authority over remote sales to the states that enact the streamlined system
embodied in the multistate agreement, on the premise that the system eliminates the burdens
5 Currently, 40 states plus the District of Columbia are involved in the Streamlined Sales Tax Project. In
November 2002, 35 states plus the District of Columbia were involved in the Project.
14
on interstate commerce that have been the justification for denying states that authority. If
federal legislation is enacted granting states this authority, it is likely to be linked with
proposals to extend the Internet Tax Freedom Act moratorium, which expires on November
1, 2003.
To participate in the Streamlines Sales and Use Tax Agreement (Agreement), a state must
amend or modify its sales and use tax law to conform to the simplifications and uniformity
in the Agreement. The Agreement becomes effective when at least 10 states representing at
least 20% of the total population of all states imposing a state sales tax have petitioned for
membership and have been found to be in compliance with the requirements of the
Agreement. A certificate of compliance will document each state's compliance with the
provisions of the Agreement. As of July 7, 2003, 19 states, with more than 20% of the total
population of all states, were in compliance with the Agreement.
Part 45 makes changes to the sales and use tax statutes to bring North Carolina into
conformity with the Agreement.
Uniform local sales tax base. – Under the Agreement, all local jurisdictions in a state must have a
common tax base. The base for the most recent ½% local sales tax and the ½%
Mecklenburg local transit tax does not include food while the other local sales and use taxes
do. To conform to the Agreement, the base must be consistent. The State is allowed to tax
food at a different rate than its general rate of tax. Section 45.6A of this part finesses the
non-uniform local base effective October 1, 2003, by stating that the taxes will be
administered as if the local tax on food were zero and the State had a 2% tax on food. This
change complies with the Agreement without changing the amount of tax. The State will
collect and distribute the 2% local tax on food. Under this act, the distribution with respect
to food tax proceeds would have be in proportion to other local sales tax proceeds rather
than based on the actual county of collection. This would have resulted in a shifting of
revenue among counties, in favor of counties that are retail centers. However, this part was
amended by Section 27 of S.L. 2003-416. Half of these proceeds will now be distributed
based on population with the remaining half being distributed based on the proportion of
sales taxes on food collected under Article 39 of Chapter 105 of the General Statutes within
the county in the 1997-98 fiscal year in relation to the total collections under that Article.
Candy, soft drinks, and prepared food. – Under the Agreement, if there is a uniform definition for
a type of product, a state may not exempt only part of the items included in the definition.
Candy, soft drinks, and prepared foods have uniform definitions in the Agreement. Under
previous law, North Carolina exempted those items as food only to the extent they were
purchased for home consumption. To conform to the Agreement, the products must be
treated consistently whether or not they are intended for home consumption. This part
removed soft drinks and prepared foods from the exemption for food effective July 15,
2003. It offsets the impact of this change by extending to vending machine soft drinks the
50% sales tax reduction currently allowed to other products sold in vending machines,
effective January 1, 2004. This part exempts all candy as if it were food, effective January 1,
2004.
Definitions. – The Agreement mandates that a state that uses any of the terms defined in the
Agreement in its sales and use tax laws must define the terms in substantially the same
language as the Agreement uses. To conform to the Agreement, this part modifies and
defines the following terms: computer, computer software, custom computer software,
15
prewritten computer software, delivered electronically, load and leave, direct mail, drug,
durable medical equipment, durable medical supplies, electronic, lease or rental, mobility
enhancing equipment, over-the-counter drug, prepared food, prescription, prosthetic device,
and tangible personal property. This provision became effective July 15, 2003.
Modifications to prewritten software. – As discussed above, the Agreement mandates that a state
must either tax or exempt all products within a given uniform definition. Previously, North
Carolina taxed prewritten computer software that had not been modified and it exempted
both custom computer software and prewritten computer software that had been modified.
To conform to the Agreement, the State will tax the prewritten portion of modified
computer software and it will exempt the modifications to it if the charges for the
modifications are separately stated. Through the use of defined terms, computer software
that is delivered electronically or by "load and leave" will remain exempt from tax. This
provision became effective July 15, 2003.
Mobility enhancing equipment. – To provide consistent treatment of products within a uniform
definition, this part provides that mobility enhancing equipment must be sold on a
prescription to be exempt from tax. Under previous law, a few items that come within this
defined term, such as crutches, did not need to be sold on a prescription to be exempt.
However, to preserve the previous tax treatment as much as possible, this part requires
mobility enhancing equipment to be sold on a prescription in order to be exempt since
previous law required most items in this category to be sold on prescription in order to be
exempt. This provision became effective July 15, 2003.
Uniform sourcing rules. – North Carolina adopted many of the uniform sourcing principles in
2001. This part codifies additional sourcing principles for periodic rental payments. The
codified principles reflect previous practice. This provision became effective July 15, 2003.
Uniform returns and remittances and notices. – North Carolina adopted many of the uniform
provisions governing returns, remittances, and notices in 2001. This part adds a few more
provisions:
• The collection period for a seller that collects less than $1,000 in State sales tax
during a calendar year cannot be more often than annually. This provision became
effective October 1, 2003.
• Monthly returns are due by the 20th day of the month, instead of the 15th day of the
month. This provision became effective October 1, 2003.
• Catalog sellers must be given at least 120 days' notice of tax changes and tax rate
changes. This provision became effective July 15, 2003.
Sales tax holiday. – The Agreement sets forth certain conditions that sales tax holidays must
meet after December 31, 2003. One of the conditions is that the items to be exempt must be
specifically defined in the Agreement. North Carolina's sales tax holiday exempts printers,
printer supplies, educational computer software, and school supplies. None of these terms
are defined in the Agreement. The implementing states are currently working on a definition
of "school supplies". This act makes the following changes to the Sales Tax Holiday
effective October 1, 2003: It removes printers, printer supplies, and educational computer
software from the exemption. It also extends the exemption to layaway sales.
16
In addition to the sales and use tax modifications made by this part, North Carolina will
need to address the following issue in the near future to remain in conformity with the
Agreement:
Multiple rates, caps, and thresholds. – The Agreement mandates the elimination of caps and
thresholds under most circumstances after December 31, 2005. It also mandates a single tax
rate per taxing jurisdiction after December 31, 2005. North Carolina currently has a 1% tax
rate on certain items and a 1% rate with a $80 cap on some other items. It has a 3% rate with
a $1,500 cap on mobile classrooms and offices. It also has a different rate on
telecommunications, satellite TV, and spirituous liquor and it has a $1,500 threshold for the
sales tax applicable to funeral expenses.
Part 45-A: Eliminate Tobacco And Alcohol Discounts
Part 45A of this act eliminates tax reductions that were previously allowed to distributors
and wholesalers who pay the excise taxes on cigarettes, other tobacco products, wine, beer,
and spirituous liquor. These discounts were equal to 4% of the tax due. The cigarette and
tobacco discounts were intended to cover expenses incurred in preparing tax reports and the
expense of furnishing a bond. The discounts for alcoholic beverages are intended to cover
these expenses and also losses due to spoilage or breakage. This part became effective
August 1, 2003.
An amendment to House Bill 1303 would have partially restored these discounts. On July
19, 2003, the Senate passed an amendment that would have reinstated these discounts at a
rate of 2% rather than 4%. That bill then passed the Senate and was sent to the House for
concurrence. The House adjourned without voting on concurrence.
Part 46: Repairs And Renovations
Part 46 enacts the procedural and regulatory provisions governing the State's issuance of
security interest indebtedness by creating the "State Capital Facilities Financing Act".6
Security interest indebtedness, commonly referred to as "certificates of participation", is debt
that is secured by an interest in the property being financed, repaired, or renovated. Since the
property serves as the security for the indebtedness, there is no pledge of the State’s faith
and credit or taxing power. Thus, voter approval is not necessary for the borrowing. If the
State defaulted on its repayments, no deficiency judgment could be rendered against the
State, but the capital facilities that serve as security could be disposed of to generate funds to
satisfy the debt. The State could choose not to appropriate funds to repay the debt, but such
a decision would have negative consequences for the State’s credit rating.
The Act uses the term "special indebtedness" to cover the three forms that this type of debt
can take: installment purchase (with or without certificates of participation), lease-purchase
(with or without certificates of participation), and limited obligation bonds. The particular
form to be used for a given project will depend on its size, the nature of the property and the
improvement, and other circumstances. Based on these circumstances, one form or another
of security interest debt may be the least expensive and most practical for the State to utilize.
(For a more extensive summary of the "State Capital Facilities Financing Act", see the summary for S.L.
2003-314.)
6 This act rewrites the "State Capital Facilities Financing Act" contained in S.L. 2003-314. In that legislation,
the procedural and regulatory provisions applied only to the financing of a new psychiatric hospital.
17
Part 46 also provides the specific legislative authorization for up to $300 million of special
indebtedness to be used for the repair and renovation of State facilities and related
infrastructure that are supported from the General Fund. The proceeds of the obligations
would be used to repair and renovate State buildings in the same manner as funds in the
Reserve for Repair and Renovations are used. Funds in that Reserve may be used for
structural and roof repairs, repairs to heating, air conditioning and related equipment, repairs
needed for health and safety or to comply with standards imposed by law, and repairs for
energy efficiency and to improve the usage of space. Funds may not be used for new
buildings or to increase the footprint of a building unless required to comply with standards
imposed by law. Except in the case of an emergency, the Director of the Budget is required
to consult with the Joint Legislative Commission on Governmental Operations before
incurring debt for specific repair and renovation projects.
Part 31.5 of this act modifies how the funds in the Repairs and Renovations Reserve
Account can be used for the 2003-04 fiscal year; it did not amend G.S. 143-15.3A, the statute
that governs the Reserve Account. Under Part 31.5, 46% of the funds in the Reserve for the
2003-04 fiscal year is allocated to the Board of Governors of The University of North
Carolina for repairs and renovations and the remaining 54% is allocated to the Office of
State Budget and Management. Notwithstanding G.S. 143-15.3A, Part 31.5 provides that the
Board of Governors may use the funds allocated to it for repairs and renovation of facilities
not supported by the General Fund if the Board determines that sufficient funds are not
available from other sources and that conditions warrant General Fund assistance. Part 31.5
also provides that the Office of State Budget and Management can use the funds allocated to
it during the 2003-04 fiscal year to complete the construction of State-owned facilities that
are partially completed.
The bond proceeds authorized to be issued by this Part will not go directly into the Repairs
and Renovations Reserve Account; they will go into a trust account and, according to this
Part, be used "for the purposes and in accordance with the procedures provided in G.S.
143-15.3A". Because the modifications made by Part 31.5 of this act to the purposes for
which the funds in the Reserve Account could be used were not made to the statute itself, it
is unclear whether the bond proceeds authorized by this Part may be used in accordance
with the modifications made by Part 31.5 of this act. Section 98 of the technical corrections
bill, House Bill 281, 6th edition, sought to clarify this issue by providing that the debt issued
during the 2003-04 fiscal year for repairs and renovations be spent in accordance with the
modifications to G.S. 143-15.3A made by Part 31.5 of this act. However, the General
Assembly did not enact House Bill 281.
Part 46-A: State Capital Facilities Finance
Part 46A authorizes the State to incur security interest indebtedness for three projects. The
first is to purchase two private prisons currently being leased and operated by the State.7 The
Office of the State Treasurer estimates that the annual debt payments will be lower than the
annual lease payments. The Treasurer's Office has been advised by bond counsel that under
the terms of the lease it may be possible to purchase these prisons during the 2003-2004
fiscal year, possibly during the first six months of the fiscal year. For that reason, the bond
counsel advised that the authorization be included within the budget for the upcoming fiscal
7 Pamlico County Correctional Facility and the Mountain View Correctional Facility located in Avery County.
The prisons are owned by a private vendor and were originally operated by the vendor.
18
year. The provision states that the amount that the Department of Correction would
otherwise pay for property taxes on the facilities during the 2004-2005 biennium will be paid
to the counties in lieu thereof if the purchase is made at a time that will result in no taxes
being due for either year of the biennium.
Second, Part 46A authorizes the State to incur up to $6,780,000 in security interest
indebtedness for design, construction drawings, and solicitation of bids for construction of
three youth development centers to be operated by the Department of Juvenile Justice and
Delinquency Prevention and for infrastructure and site work at one of the three centers. The
Office of State Construction will manage the design process. Section 15.7 of this act allows
the Department for Juvenile Justice and Delinquency Prevention to continue planning for
the new centers but requires a quarterly status report on the planning and design to the JPS
Appropriations Chairs and the Joint Legislative Corrections, Crime Control, and Juvenile
Justice Oversight Committee. The design phase should be completed by April 15, 2004, and
a final report should be issued that includes the anticipated total cost of each proposed
center and the recommended locations.
Third, Part 46A authorizes the State to incur security interest indebtedness for the
construction of a structural pest control training facility to be located at North Carolina State
University.
Part 47: Lease-Purchase Three New Prisons
Part 47 would authorize the State to enter into lease-purchase contracts to build three new
prisons. In 2001, the General Assembly authorized lease-purchase financing of three new
1000-cell close security prisons. Section 47.1 would authorize three more substantially
identical prisons. Section 47.2 provides that if construction begins before January 1, 2004,
and the plans have been approved by the Department of Insurance, the 1996-1999 version
of the Building Code applies to the first two of the three prisons.
The State may first try to negotiate a contract for these new prisons with the same company
that is building the 2001 prisons. If the Secretary of Administration and the Council of State
find that the negotiations have failed to produce a reasonable price, the State would solicit
proposals for the projects using a similar procedure as for the 2001 prisons. Unlike with the
2001 prisons, the initial construction loan will not be obtained by the vendor on a private,
taxable basis. The entire cost, including construction, will be financed by the State with
tax-exempt obligations. The prisons are exempt from property taxes both during and after
construction.
Part 47 provides that a nonprofit corporation controlled by the State will work with the
Department of Correction to contract directly with the construction contractor for
construction of the prisons and will lease the prisons to the State under a lease-purchase
agreement. The nonprofit corporation would finance the costs by selling tax-exempt
obligations known as certificates of participation (COPs). The COPs would represent
interests in the nonprofit corporation's rights to receive the lease payments under the
lease-purchase agreement with the State. The COPs would be secured by a lien on the
property, not by a pledge of the State's full faith and credit. The COPs would be paid from
the State's lease-purchase payments over the course of 20 years.
Because the construction contract is technically between a private, nonprofit corporation
and the construction contractor, the Attorney General's Office has determined that
19
requirements for public bidding of construction would not apply. The new prisons are to be
substantially identical to the 2001 prisons, so the State and the nonprofit corporation will
first try to negotiate a contract with the existing construction contractor to build the new
prisons. If, in the opinion of the Secretary of Administration and the Council of State, the
terms of the proposed negotiated contract are not favorable to the State, the Department of
Correction will solicit for the construction of the new prisons. In this situation, the
Department of Correction would be required to consult with the Joint Legislative
Commission on Governmental Operations before making a final award decision. The final
award decision would also be subject to the approval of the Council of State.
The prisons would be required to be built in accordance with plans and specifications
developed by the Department of Correction, and the Department of Correction and the
State Construction Office would inspect and review the facilities during construction to
ensure that they are suitable for use and acquisition by the State. The minority participation
requirements of G.S. 143-128.2 apply to these projects.
The lease-purchase agreement would be between the nonprofit corporation and the State.
Under the agreement, which must be approved by the Council of State and the State
Treasurer, the State would make lease-purchase payments to the nonprofit corporation,
which would use the funds to retire the COPs. The COPs would be secured by a lien on the
property and the State's failure to make payments could result in its eviction from the
property. The State Treasurer would determine the price to be paid for the COPs and the
rate of interest to be paid on them. The State would retain the option of refinancing the debt
if interest rates fall. The State would also retain the option of paying off its obligations and
purchasing the property before the end of the lease-purchase period. Under the
lease-purchase agreement, the State will own the facilities at the end of the lease term. The
nonprofit corporation that issues the COPs would be subject to the Public Records Act and
the Open Meetings Law.
WAIVE DEADLINES FOR TROOPS.
Session Law Bill # Sponsor
S.L. 2003-300 SB 936 Senator Kerr
AN ACT TO WAIVE VARIOUS DEADLINES, FEES, AND
PENALTIES FOR DEPLOYED MILITARY PERSONNEL.
OVERVIEW: This act provides assistance to military personnel called to active duty in
support of Operation Iraqi Freedom on or after January 1, 2003 as follows:
• Authorizes the Governor to allow military personnel 90 days from the end of their
deployment to renew their driver's license, renew their motor vehicle liability
insurance, or renew an occupational license.
20
• Allows military personnel 90 days from the end of their deployment to pay current
year's property taxes or list property for next year's property taxes.
• Authorizes the Governor to waive civil penalties and restoration fees for military
personnel whose motor vehicle liability insurance lapsed during the period of
deployment or within 90 days after the member returned to North Carolina if the
member certifies that the motor vehicle was not driven during the period in which
the vehicle was uninsured and that the vehicle is now insured.
• Directs community colleges to grant full refunds of tuition to military reserve and
National Guard personnel called to active duty and to active personnel, who because
of their reassignments, are unable to complete courses. The community colleges
must buy back textbooks to the extent possible.
• Authorizes the constituent institutions of The University of North Carolina to issue
refunds of tuition and required fees and to determine whether to give full or pro rata
refunds of housing, parking, and other optional fees to students to whom they give
tuition and required fee refunds. The refunds may be issued to students who are
involuntarily called to active duty, who volunteer for military service, or who
withdraw because of circumstances related to a national emergency.
• Waives repayment of the North Carolina Legislative Tuition Grant for any semester
that the student loses full-time student status due to a call to active military duty.
FISCAL IMPACT: The act does not affect the State General Fund, but it may delay
revenue collection in the 2003-2004 fiscal year for driver's licenses (Highway Fund),
occupational licenses (Licensing Board Special Accounts), and property tax collections (local
governments). It is not possible to estimate this temporary fiscal impact, because the General
Assembly's Fiscal Research Division does not have access to records of military personnel
assigned to Operation Iraqi Freedom. Even if such records were accessible, the Division
could not easily match driver records, local tax records, and occupational license records to
military personnel. (For a more complete fiscal analysis, see the Overview: Fiscal and Budgetary Actions, 2003 Session.
Available in the Legislative Library.)
EFFECTIVE DATE: This act became effective when signed into law by the Governor on
July 4, 2003.
ANALYSIS: This act provides relief to deployed military personnel by extending certain
deadlines, waiving penalties and fees, and allowing tuition refunds. The term "deployed
military personnel" is defined as a member of any of the following that are on active duty in
support of Operation Iraqi Freedom on or after January 1, 2003:
• Armed forces or armed forces reserves of the United States.
• The North Carolina Army National Guard or the North Carolina Air National
Guard, but only if called to active duty in support of the Operation on or after
January 1, 2003.
Verification by the military member's command specifying deployment is conclusive
evidence of the soldier's deployment.
Extend Deadlines and Waive Penalties and Fees
21
The act allows the Governor to extend deadlines and waive penalties and fees for deployed
military personnel. These extensions and waivers include the following:
• Extend for up to 90 days from the end of deployment the validity of a driver's
license or temporary driver's license.8
• Extend for up to 90 days the validity of an occupational license and allow for the
prorating of any renewal fee associated with an occupational license.9
• Waive any civil penalty and restoration fees associated with motor vehicle liability
lapses if the soldier certifies that the motor vehicle was not driven during the period
in which the vehicle was insured and that the vehicle is now insured. The Division of
Motor Vehicles already has policies and procedures in place to handle military
personnel on a case-by-case basis. Fines, penalties, and revocations are waived if a
person is deployed or unable to handle his or her business due to military actions.
Extend Property Tax Listing and Payment
The act extends property tax deadlines for deployed military personnel by allowing them 90
days after the end of their deployment to pay property taxes that become due or delinquent
during the deployment. If the taxes are paid within this 90-day period, no interest is due. The
act also provides that deployed military personnel are allowed 90 days after the end of their
deployment to list for taxation property that was otherwise required to be listed during their
deployment. If the property is listed within this 90-day period, no penalties for failure to list
apply.10
Refund Community College and UNC System Tuition and Fees
The act requires community colleges to grant a full refund of tuition and fees to deployed
military reserve and national guard personnel who request a refund because their deployment
makes it impossible to complete course requirements. The community colleges must also
buy back textbooks to the extent possible and use distance-learning technologies to help
these students complete their course requirements. This section of the act applies to the
2002-2003 and 2003-2004 academic years only.
The act authorizes the constituent institutions of The University of North Carolina to grant
a full refund of tuition and required fees to students who request a refund because of
8 S.L. 2003-152 establishes a military designation for a driver's license issued to a person on active duty and to
the person's spouse and dependent children. The military designation allows the holder of the license to renew
by mail no more than two times during the holder's lifetime. A license renewed by mail is considered a
permanent license and does not expire when the holder returns to the State. The military designation also
allows the person on active duty to renew the license up to one year prior to its expiration. A license holder
who is serving in a combat zone or a qualified hazardous duty zone may renew by mail without having to take
an eye exam.
9 Section 3 of the act refers to the definition of "occupational license" as defined in G.S. 93B-1. Although that
definition does not specifically preclude occupational licenses issued by State agencies, such as a license to sell
insurance, the term "occupational licensing board" in G.S. 93B-1 specifically excludes State agencies. House
Bill 281 would have amended this portion of the act to clarify that the authority of the Governor to extend the
validity of occupational licenses for deployed military personnel includes occupational licenses issued by a State
agency. House Bill 281 was sent to a conference committee but was never ratified.
10 Under G.S. 105-360, property taxes are due September 1 of the fiscal year, and interest begins to accrue on
the taxes on or after January 6 following the due date. Under G.S. 105-307, the regular listing period for
property taxes ends on January 31.
22
involuntary or voluntary service in the military or because of circumstances related to
national emergencies. The constituent institutions should determine whether to give full or
pro rata refunds of housing, parking, and other optional fees to students to whom they give
tuition and required fee refunds. The act recommends that every campus review its policy on
tuition refunds and make modifications to cover the circumstances described in the act.
Legislation similar to this part of the act was enacted for military personnel deployed or
called to active duty during Operation Desert Storm, S.L. 1991-160, and during Operation
Enduring Freedom and Noble Eagle, S.L. 2001-508. As a result of the 2001 legislation, the
State Board of Community Colleges and the UNC System now have policies on refunds of
tuition and fees. The State Board of Community Colleges authorized the initiation of the
rule-making process to make permanent military tuition refunds when students are unable to
complete their course requirements because they were called to active duty in September
2001.11 Effective October 12, 2001, the UNC Policy Manual has guidelines for refunds of
tuition and fees for students requesting refunds due to military service or national
emergencies.12
Waive Legislative Tuition Grants
The act waives repayment of the North Carolina Tuition Grant by students who lose their
full-time student status due to active military duty or circumstances related to national
emergencies. This section of the act applies to the 2002-2003 and 2003-2004 academic years
only.
PSYCHIATRIC HOSPITAL FINANCING.
Session Law Bill # Sponsor
S.L. 2003-314, as amended
by S.L. 2003-284
HB 684 Rep. Crawford, G. Allen,
Fox, Luebke (Primary
Sponsors)
AN ACT TO PROVIDE FOR FINANCING THE CONSTRUCTION
OF A NEW PSYCHIATRIC HOSPITAL TO BE LOCATED IN
BUTNER.
OVERVIEW: This act, as rewritten by S.L. 2003-284, authorizes the issuance of up to $110
million in security interest debt to finance the acquisition, construction, and equipping of an
approximately 450,000 square foot, 432-bed new psychiatric hospital to be located in Butner.
The act also enacts the procedural and regulatory provisions governing the State's issuance
11 23 NCAC 02D.0202(f) and 23 NCAC 02D.0203(e). The wording of this rule is almost verbatim the language
in Sections 5(a) and (b) of the act.
12 The wording of the policy is almost verbatim the language in Section 6(a) of the act.
23
of security interest indebtedness by creating the "State Capital Facilities Financing Act".13
Security interest indebtedness is debt that is secured by an interest in the property being
financed, repaired, or renovated. The act uses the term "special indebtedness" to cover the
three forms that this type of debt can take: installment purchase, lease-purchase, and bonds.
In each case, the debt is non-voted.
FISCAL IMPACT: Debt service for the construction of the new psychiatric hospital is
anticipated to cost the State from $12.1 million to $5.83 million a year. It is anticipated that
the cost savings from the closure of both Dorothea Dix Hospital and John Umstead
Hospital will be sufficient to offset the cost of these debt service payments. (For a more complete
fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2003 Session. Available in the Legislative Library.)
EFFECTIVE DATE: The act became effective when signed into law by the Governor on
July 10, 2003. S.L. 2003-284 became effective June 30, 2003. Therefore, the limited scope of
the State Capital Facilities Financing Act as enacted by this act was superseded from the
beginning by the broader rewrite of the Act in S.L. 2003-284.
ANALYSIS: The North Carolina Constitution14 and the North Carolina General Statutes
restrict the General Assembly's authority to issue debt. Except in limited circumstances, 15
the General Assembly does not have the power to authorize the issuance of bonds secured
by a pledge of the faith and credit of the State without a referendum approved by a majority
of the voters voting in an election. These bonds are referred to as general obligation bonds
because the general taxing power of the State secures the bonds. Article 5 of Chapter 159 of
the General Statutes authorizes the State to use revenue bonds to finance a project without
voter approval, but authorization by specific legislation is required under G.S. 159-88(c).
Revenue bonds involve the pledge of non-tax revenues related to the project, such as
parking fees for parking decks and water and sewer charges for water and sewer projects. In
recent years, the State has used security interest indebtedness as a financing tool on a
project-by-project basis.16 This act provides the procedural and regulatory provisions needed
to carry out security interest indebtedness. As with revenue bonds, authorization to use
security interest indebtedness must be given by the General Assembly through specific
legislation under G.S. 142-83, as enacted by this act.
13 The bill as enacted provided procedural and regulatory provisions only for security interest indebtedness for
the psychiatric hospital. The Current Operations and Capital Improvements Appropriations Act of 2003, S.L.
2003-284, rewrote this act to extend the procedural and regulatory framework to any State security interest
indebtedness. Under S.L. 2003-284, the State may employ security interest indebtedness for the following
projects: $300,000,000 for repairs and renovations of State facilities and related infrastructure that are
supported from the General Fund; the acquisition of two private prisons in Pamlico and Avery Counties;
$6,780,000 for the design and planning of three youth development centers; $310,000 for a structural pest
control training facility at North Carolina State University; and the lease purchase of three new prisons.
14 Article V, Sec. 3 of the North Carolina Constitution.
15 The North Carolina Constitution allows the General Assembly to issue non-voted general obligation bonds
in an amount not to exceed 2/3 of the amount by which it reduced its outstanding general obligation debt in
the preceding biennium. Other Constitutional exceptions for non-voted general obligation debt include the
following: to fund or refund an existing debt; to supply an unforeseen deficiency in the revenue; to borrow in
anticipation of the collection of taxes due and payable within the current fiscal year to an amount not exceeding
50% of the taxes due; to suppress riots or insurrections, or to repel invasions; and to meet emergencies
immediately threatening the public health or safety, as conclusively determined in writing by the Governor.
16 S.L. 2000-143 authorized installment contract financing for a $13.5 million office building and wildlife
education center for the Wildlife Commission and a $4 million Eastern Wildlife Education Center. S.L. 2001-84
authorized the State to enter into lease-purchase contracts to finance three prisons. S. L. 2002-161 authorized
installment-financing contracts for guaranteed energy savings contracts for State buildings.
24
Security interest indebtedness is commonly referred to as "certificates of participation". The
act employs the term "special indebtedness" to cover the three forms that this type of debt
can take: installment purchase (with or without certificates of participation), lease-purchase
(with or without certificates of participation), and limited obligation bonds. In each case, the
debt is non-voted. The particular form to be used for a given project17 will depend on its
size, the nature of the property and the improvement, and other circumstances. Based on
these circumstances, one form or another of security interest debt may be the least expensive
and most practical for the State to utilize.
Under security interest indebtedness, the debt is secured by a lien on or security interest in all
or any part of the capital facilities to be financed, including all or part of any land on which
improvements are to be constructed. If the project is a renovation, the entire existing facility
as well as the improvement could serve as security. The value of the property securing the
debt may exceed the amount of the debt and the financing of several capital projects may be
jointly secured by liens on some or all of the capital facilities being financed.
Because the property serves as the security for the indebtedness, there would be no pledge
of the State’s faith and credit or taxing power. Thus, voter approval is not necessary for the
borrowing. If the State defaulted on its repayments, no deficiency judgment could be
rendered against the State, but the capital facilities that serve as security could be disposed of
to generate funds to satisfy the debt. The State could choose not to appropriate funds to
repay the debt, but such a decision would have negative consequences for the State’s credit
rating.
Before special indebtedness can be issued or incurred, the State Treasurer must certify that
debt financing may be desirable for a specific project presented to it by the Department of
Administration. Next, the Council of State must give preliminary approval. If preliminary
approval is obtained, the Council of State must give final approval, setting out details such as
the maximum amount to be financed, the maximum maturity, and the maximum interest
rates. The maximum maturity may not exceed 40 years. The State Treasurer must approve
the financing, finding that the amount to be borrowed is adequate and not excessive and will
not require an excessive increase in any State revenues to provide for repayment, and that
the special indebtedness can be incurred or issued on terms favorable to the State. Finally,
the State Treasurer must report to the Joint Legislative Commission on Governmental
Operations at least five days before any special indebtedness is issued or incurred.
Once it is determined that special indebtedness can be issued or incurred, the funds can be
borrowed from a single entity in an installment purchase or lease purchase contract,
generated by the issuance of limited obligation bonds, or borrowed under an installment
financing contract by the sale of certificates of participation. A certificate of participation
represents the holder’s undivided interest in the right to receive the installment payments to
be made by the State. If certificates of participation are issued, a nonprofit corporation will
act as a straw person to facilitate the financing.
This act not only provides the statutory framework for special indebtedness as a financing
tool of the State, but also provides the specific legislative authorization for up to $110
17 The Act specifically defines the capital expenditures that may be financed as any combination of buildings,
utilities, structures, and other facilities and property developments, including streets, landscaping, equipment
and furnishing in connection with a building project; additions, renovations, and improvements to existing
facilities; land acquisition; infrastructure; and furniture, equipment, vehicles, machinery, and similar items.
25
million of this type of indebtedness to be used for a new psychiatric hospital to be located in
Butner. The new facility will consist of approximately 450,000 square feet and contain 432
beds. The indebtedness for this project cannot be incurred prior to July 1, 2004.
The new psychiatric hospital to be built in Butner will replace the current John Umstead
Hospital in Butner and Dorothea Dix Hospital in Raleigh. These two psychiatric hospitals
are outdated facilities that need extensive repairs and renovations. Even with significant
repairs and renovations, the Secretary of Health and Human Services says that they would
still be unable to support the latest mental health treatments. The Secretary believes that
replacing the two hospitals with one regional facility will save an estimated $40.9 million a
year by reducing costs. The act directs that any nonrecurring savings in State appropriations
realized from the closure of the two current facilities that are in excess of the cost of
operating and maintaining the new hospital will be credited to the Trust Fund for Mental
Health, Developmental Disabilities, and Substance Abuse Services and Bridge Funding
Needs. The act also directs that any recurring savings realized from the closure of the
existing two hospitals shall be used for the payment of debt service on financing contract
indebtedness for the construction of the new hospital. The act provides that the State
Treasurer may require one or more reports evidencing the savings expected to be realized
from the closure of existing psychiatric hospitals that are to be replaced by the project and
the feasibility of the financing of the project.
The act also makes the following changes:
• Requires DHHS to maintain research programs currently being conducted at
Dorothea Dix hospital and John Umstead hospital by the UNC Medical School and
the UNC-Chapel Hill Psychology Department.
• Authorizes the county chosen as the site for the hospital to acquire the land by
eminent domain and to convey the land to the State.
• Creates a study commission to consider the potential disposition of the State-owned
real property encompassing the Dorothea Dix Hospital campus. The Dorothea Dix
Hospital Property Study Commission must make recommendations on the options
for sale of the property to the Joint Legislative Commission on Governmental
Operations before any part of the property may be sold to a nongovernmental entity.
WATER & SEWER AUTHORITY SETOFF.
Session Law Bill # Sponsor
S.L. 2003-333 SB 529 Senator Hartsell
AN ACT TO AUTHORIZE WATER AND SEWER AUTHORITIES
TO USE THE SETOFF DEBT COLLECTION ACT.
26
OVERVIEW: This act adds water and sewer authorities to the list of local governments
allowed to submit debts to the Department of Revenue for collection under the Setoff Debt
Collection Act.
FISCAL IMPACT: This act has no impact on the State General Fund, and any fiscal
impact on water and sewer authorities cannot be determined.
EFFECTIVE DATE: This act is effective January 1, 2004, and applies to income tax
refunds determined on or after that date.
ANALYSIS: The act adds water and sewer authorities to the Setoff Debt Collection Act,
under which the Department of Revenue diverts part or all of an individual's income tax
refund to pay a debt the individual owes to a State or local agency.18 Thus, the debt the
individual owes the agency is set off against the individual's income tax refund. Before
January 1, 2000, the setoff program was open only to State agencies.19 Now, counties and
municipalities participate through a clearinghouse that submits debts on their behalf to the
Department of Revenue. The clearinghouse was established pursuant to an interlocal
agreement adopted under Article 20 of Chapter 160A of the General Statutes. Because there
are so many local agencies, funneling their claims through a clearinghouse avoids placing an
undue administrative burden on the Department of Revenue.
The act allows water and sewer authorities to participate in the setoff program through the
clearinghouse in the same manner as counties and cities. Like counties and cities, a water and
sewer authority will be authorized to submit its debts for collection by setoff only after
providing the debtor with notice, an opportunity to be heard before the water and sewer
authority, and an appeal process under the Administrative Procedure Act.
The creation of a water and sewer authority is one mechanism a county and city can use to
address water and sewer needs. One or more counties, cities, sanitary districts, and other
political subdivisions may create a water and sewer authority by adopting resolutions stating
their intent to do so.20 Each resolution must be adopted after notice is published and a
public hearing is held on the issue. A political subdivision can withdraw from the authority at
any time before obligations of the authority have been incurred. A water and sewer authority
may issue revenue bonds; enter into installment finance contracts; impose rates, fees, and
charges; and levy special assessments. Water and sewer authorities may also apply for grants
from the Clean Water Revolving Loan and Grant Fund.
Currently there are fewer than a dozen water and sewer authorities in the State. A water and
sewer authority may discontinue services to a customer whose account is delinquent for 30
days or more. However, this remedy is not sufficient when the customer moves out of the
authority's service district or when the amount due is large enough that discontinuing the
service would not result in the payment of the amount due.
18 The Setoff Debt Collection Act applies only to a debt that is at least $50 and to a refund that is at least $50.
Debts collected through the Setoff Debt Collection Act are subject to both a State collection assistance fee and
a local collection assistance fee. The amount of the local fee is $15. The amount of the State collection
assistance fee is based on the Department's actual cost of collection debts under the Act during the preceding
year. The current amount of that fee is $4.32.
19 S.L. 1997-490.
20 In certain circumstances, a nonprofit water company may also be a part of a water and sewer authority. See
G.S. 162A-3.
27
REVENUE ADMINISTRATIVE CHANGES.
Session Law Bill # Sponsor
S.L. 2003-349 SB 236 Senator Kerr
AN ACT TO MODIFY THE DIVIDEND RECEIVED DEDUCTION
FOR REGULATED INVESTMENT COMPANIES AND REAL
ESTATE INVESTMENT TRUSTS TO ENSURE THAT ALL
DIVIDENDS ARE TREATED UNIFORMLY, TO EXTEND FOR
TWO YEARS THE DEPARTMENT OF REVENUE'S AUTHORITY
TO OUTSOURCE THE COLLECTION OF IN-STATE TAX DEBTS,
TO AMEND THE MOTOR FUEL TAX LAWS, AND TO MAKE
VARIOUS ADMINISTRATIVE CHANGES IN THE TAX LAWS.
OVERVIEW: This act makes the following changes:
• It modifies the dividends received deduction for regulated investment companies and
real estate investment trusts to ensure that all dividends are treated uniformly, effective
for taxable years beginning on or after January 1, 2003, as recommended by the Revenue
Laws Study Committee.
• It amends the reporting requirements regarding sales of seized property by the Secretary
of Revenue to avoid duplicative filing of reports, as recommended by the Revenue Laws
Study Committee.
• It extends until October 1, 2005, the Department of Revenue's authority to continue
using private collection agencies for the collection of in-state tax debts, as recommended
by the Revenue Laws Study Committee.
• It revises the secrecy provision regarding the disclosure of tax information to reflect the
transfer of certain functions and personnel from the Division of Motor Vehicles to the
Division of the State Highway Patrol of the Department of Crime Control and Public
Safety, as recommended by the Revenue Laws Study Committee.
• It ensures that the monthly distribution of local sales and use tax proceeds is based on
taxpayer data from filed returns, effective July 1, 2003, as recommended by the Revenue
Laws Study Committee.
• It simplifies the process for making the local sales tax hold-harmless calculation by
requiring the Department of Revenue, rather than the Office of State Budget and
Management, to make the required projection of estimated tax proceeds, as
recommended by the Revenue Laws Study Committee.
• It clarifies that the $20 filing fee for corporate annual reports is nonrefundable, as
recommended by the Revenue Laws Study Committee.
28
• It clarifies the Research and Development tax credit, as requested by the Department of
Commerce and the Department of Revenue.
• It directs the Revenue Laws Study Committee to form a group of tax professionals to
work with the Department of Revenue to gather appropriate data to support an estimate
of the fiscal impact of allowing corporations to file consolidated tax returns.
• It makes various changes to the motor fuel laws, as requested by the Motor Fuels Tax
Division of the Department of Revenue. These changes include technical changes,
conforming changes, and substantive changes.
• It codifies the administrative practice of allowing municipalities that sell electricity to
exempt from their gross receipts for sales tax purposes those customer accounts that
have been determined to be worthless. The sales tax law clearly allows this exemption for
other taxpayers.
FISCAL IMPACT: This act has no impact on the General Fund. Part 10 of this act is
expected to affect the Highway Fund and other funds, as described in the analysis of Part 10,
below. (For a more complete fiscal analysis, see the Overview: Fiscal and Budgetary Actions, 2003 Session. Available in the
Legislative Library.)
EFFECTIVE DATE: See Analysis.
ANALYSIS:
Part 1: Modify Dividends Received Deduction for RICs and REITs
Part 1 of this act repeals the dividend deduction provisions that previously applied to
regulated investment companies (RICs) and real estate investment trusts (REITs), effective
beginning with the 2003 tax year. The effect of the repeal is to conform to the federal
dividend deduction for RICs and to the federal disallowance of any dividend deduction for
REITs.
The federal dividends received deduction21 is meant to reduce the negative effects of the
double tax on C corporation profits distributed as dividends to corporate shareholders.
Subject to certain exceptions and limitations, corporations may deduct 70% of the dividends
received from another domestic corporation if the receiving corporation owns less than 20%
of the distributing corporation. The deduction rises to 80% of dividends if the corporation
owns 20% or more of the corporation paying the dividends, and to 100% if the corporations
are "affiliated" under the Internal Revenue Code.
Certain investment companies, including mutual funds, may elect to be taxed as RICs. There
are several conditions that must be satisfied to qualify for the election, including (i) 90% of
gross income must be derived from dividends, interest, and gains on the sale of stock or
securities and (ii) the corporation's investments must be diversified as prescribed by Section
851 of the Internal Revenue Code. A qualified RIC is taxed only on its undistributed income
and is treated as a partial conduit for the income it earns. The fundamental premise of
conduit treatment is that the RIC's income should be taxed only once, at the shareholder
level, rather than to the RIC. Dividends received from RICs are eligible for the federal
deduction, subject to additional limitations.22
21 26 U.S.C. § 243.
22 Capital gain dividends received from a regulated investment company do not qualify for the deduction.
29
A REIT is a corporation or trust that uses the pooled capital of many investors to purchase
and manage real estate. REITs are traded on major exchanges just like stocks and are granted
special tax considerations. A REIT pays yields in the form of dividends. It is required to pay
out at least 90% of its income to shareholders and deducts the amount paid out, so there is
no taxation at the REIT level. The shareholders pay tax on the dividends they receive.
Under prior law, G.S. 105-130.7 provided that a corporation may deduct the proportionate
part of dividends received by it from a RIC or a REIT as corresponds to income received by
the company or trust that would not be taxed by North Carolina if received directly by the
corporation. In other words, dividends received by a corporation from a RIC or REIT were
deductible to the extent that income received by that corporation from a RIC or a REIT
would not be taxable by North Carolina.
Section 1.1 of the act repeals G.S. 105-130.7.23 In 2001, the General Assembly piggybacked
the federal law with regard to the corporate dividends received deduction, by repealing G.S.
105-130.7(b) and G.S. 105-130.5(a)(7), which had provided corporations with an income tax
deduction for dividends received by their subsidiaries. Adopting the federal approach
simplified tax administration and compliance because the taxpayer is required to make fewer
adjustments to taxable income in order to calculate State net income. The repeal under
Section 1.1 of this act is consistent with this philosophy.
Dividends received from a RIC qualify for the federal dividends received deduction.
Therefore, despite the repeal of G.S. 105-130.7 by this act, dividends received from RICs
will continue to be deductible. The repeal of G.S. 105-130.7 also ensures that dividends
received from a RIC are subject to the same rules concerning attribution of expenses as
dividends received from other corporations.
Dividends from REITs do not qualify for the federal dividends received deduction.
Therefore, under past law, dividends from REITs were taxed more favorably for State tax
purposes than under federal law. The repeal of G.S. 105-130.7 ensures that the State
treatment of dividends from REITs is the same as under federal law.
Part 2: Avoid Duplicative Reporting Requirements Regarding Sales of Seized Property
If any tax levied by the State and payable to the Department of Revenue has not been paid
within 30 days after the taxpayer was given a notice of final assessment of the tax, the
Department is authorized to collect the tax through the levy upon and sale of the taxpayer's
real or personal property. The Department may direct the sheriff to levy upon and sell
property or it may levy upon the property itself through one of its employees.
Most personal property seized by the Department of Revenue is for the payment of
unauthorized substance taxes. When the Department employees levy upon the property
without the use of the sheriff, the actual sale of the property is conducted by the
Department of Administration's State Surplus Property section in accordance with the same
notice and bidding procedures that apply to surplus property. The State Surplus Property
section posts information related to bids and sales of seized property both online and in
written format, which is available to the public.
23 The repeal of G.S. 105-130.5(b)(3) and the changes in Sections 1.2 and 1.3 of the act are conforming
changes.
30
The laws in Article 29B of Chapter 1 of the General Statutes, which apply to the sheriff
when conducting the levy and sale of property, also apply to the Department of Revenue
when it conducts the levy and sale of property. Among those provisions is G.S. 1-339.63,
which states that the sheriff must file a report of sale with the clerk of superior court.
Because the Department is subject to the same laws governing execution sales, it had
construed this provision to mean that the Department must file a report of all sales of seized
property with the clerk of superior court.
Because the Department of Administration makes a report of all property sold through the
surplus property sales, the Department of Revenue did not see a need to file a report of sale
with the clerk of court as well. Therefore, Section 2 of the act amends G.S. 105-242 to
provide that the Department of Revenue is not required to file a report of sale of seized
property with the clerk of superior court as long as the sale is otherwise publicly reported.
This change became effective when the act was signed into law by the Governor on July 27,
2003. In addition to improving efficiency by avoiding duplicative reporting, this change
should also reduce costs since several clerks of court have begun charging a fee for filing
these reports.
Part 3: Extend Authority to Use Collection Agencies to Collect In-state Tax Debts
Part 3 of this act extends for two years the Department of Revenue's authority to use private
collection agencies to collect in-state tax debts. The Department of Revenue has permanent
authority to use private collection agencies to collect out-of-state tax debts. The authority to
outsource in-state debts was scheduled to expire on October 1, 2003. This act extends it to
October 1, 2005. A tax debt is the amount of tax, interest, and penalties due for which a final
notice of assessment has been mailed to the taxpayer after the taxpayer no longer has the
right to contest the debt.
In 1999, the General Assembly authorized the Department of Revenue to initiate a pilot
program whereby the Department would contract for the collection of tax debts owed by
nonresidents and foreign entities. In September 2000, the Department, in conjunction with
the Office of the State Auditor, began outsourcing some of its out-of-state tax debts.
Between September 2000 and May 2001, it collected in excess of $12 million in out-of-state
receivables using a combination of outsourcing and in-house collection techniques.
In 2001, the Department of Revenue was authorized to outsource out-of-state tax debts
permanently and to outsource in-state tax debts for two years. When outsourcing tax debts,
the Department is required to notify the taxpayer prior to submitting the debt to a collection
agency. The taxpayer has 30 days after the notice is sent to pay the tax debt. If the debt
remains unpaid at the end of the 30 days, then the debt may be outsourced to a collection
agency. The collection agencies that contract to collect tax debts are prohibited from
revealing confidential tax information. If a contractor reveals tax information, it is subject to
a misdemeanor penalty, its contract is terminated, and it is barred from contracting again for
five years.
Part 4: Revise Secrecy Provision To Reflect Transfer of DMV Enforcement to the State Highway Patrol
Under the tax secrecy law (G.S. 105-259(b)), an officer, employee, or agent of the State who
has access to tax information in the course of service or employment by the State may not
disclose the information to any other person except for the purposes expressly authorized by
statute. One of the allowed purposes is to exchange information with the Division of Motor
31
Vehicles of the Department of Transportation when the information is needed to fulfill a
duty imposed on the Department of Revenue or the Division of Motor Vehicles.
In 2002, the General Assembly enacted legislation24 that transferred to the Department of
Crime Control and Public Safety the personnel and functions of the Department of
Transportation Division of Motor Vehicles Enforcement Section for the regulation and
enforcement of commercial motor vehicles, oversize and overweight vehicles, motor carrier
safety, and mobile and manufactured housing. The transfer became effective January 1,
2004. In order to preserve the secrecy provision in existing law, Section 4 of the act replaces
the phrase "Division of Motor Vehicles of the Department of Transportation" with the
phrase "Division of the State Highway Patrol of the Department of Crime Control and
Public Safety" because the State Highway Patrol will be performing the functions of the
prior DMV Enforcement Section. This change became effective when the act was signed
into law by the Governor on July 27, 2003.
Part 5: Base Local Sales Tax Distributions on Taxpayer Data
Pursuant to G.S. 105-472, the Secretary of Revenue makes distributions of local sales and
use tax proceeds to cities and counties. In 2001, the General Assembly accelerated these
distributions from quarterly to monthly, effective July 1, 2003. This Part provides that each
monthly distribution will include tax proceeds for which a return has been filed. Proceeds
received the month before the related return is expected to be filed will be held until the
month the return is filed. Because the return contains information necessary for determining
the distribution formula, distributing some taxes before the related return is filed would
result in misallocation of the tax proceeds. This Part became effective July 1, 2003.
As of January 1, 2002, the threshold for taxpayers required to make semimonthly payments
of sales and use tax was lowered from $20,000 to $10,000, substantially increasing the total
amount of revenues received for processing by the Department on a semi-monthly basis.
For semi-monthly filers, sales and use tax revenues collected between the 1st and 15th of the
month must be paid by the 25th of the same month and sales and use tax revenues collected
the remainder of the month must be paid by the 10th of the following month. The return
for the two semimonthly periods is due 10 days later, on the 20th of the month.
Consequently, for revenues received for the first half of each month, the return indicating
where the funds should be distributed will not be received until the following month.
Section 5 of the act amends the local government sales and use tax distribution statute by
stating that amounts collected by electronic funds transfer payments are included in the
distribution for the month in which the return that applies to the payment is due.
Semimonthly taxpayers are required to pay by electronic funds transfer. This amendment
ensures that the Department of Revenue will distribute local sales and use tax proceeds only
after they have the necessary information provided on semimonthly returns.
Part 6: Simplify the Procedure for Hold-Harmless Calculation
In 2001, the General Assembly authorized all counties of the State to levy a third one-half
cent sales tax.25 The same legislation also provided local governments an annual
hold-harmless distribution from the State's General Fund to ensure that none of them would
24 S.L. 2002-190, as amended by Section 31.5 of S.L. 2002-159.
25 Effective July 1, 2004, all 100 counties will have adopted the local option third one-half cent sales tax
authorized by Section 34.14 of S.L. 2001-424.
32
lose money when the local government reimbursements are repealed.26 The hold-harmless
distribution provides that if a county or city's estimated proceeds from the third half-cent tax
would be less than the amount it would have gotten under the repealed reimbursements, it
will receive a payment equal to the difference. If a county or city's estimated gain from the
third half-cent tax exceeds its repealed reimbursement amount, it does not receive a
hold-harmless payment from the State. The hold-harmless payment would be the same even
if a county had not levied the new tax.
Under prior law, G.S. 105-521(b) directed the Office of State Budget and Management
(OSBM) and the Fiscal Research Division of the General Assembly to each submit to the
Secretary of Revenue and the General Assembly, by May 1 of each year, a projection of the
estimated amount that local governments would be expected to receive from the levy of the
third one-half cent local sales and use tax during the upcoming fiscal year. Then, by
September 15 of each year, the Secretary of Revenue is required to calculate the
hold-harmless distribution amounts, if any, based on the projections and to distribute the
funds. If the Secretary does not use the lower of the two projections when making the
calculation, the Secretary must report the reasons for this decision to the Joint Legislative
Commission on Governmental Operations within 60 days after receiving the projections.
Part 6 of the act requires the Department of Revenue, rather than the OSBM, to provide the
estimate. From a practical standpoint, the data needed to make the projections are housed
within the Department of Revenue. Making this change simplifies the process by eliminating
the need for the OSBM to first obtain the data from Revenue and then make the necessary
projection. This change became effective when the act was signed into law by the Governor
on July 27, 2003.
Part 7: Clarify That the Filing Fee for an Annual Report is Nonrefundable
G.S. 55-1-22 sets out the fees for filing certain documents with the Secretary of State,
including documents such as corporations' articles of incorporation, articles of dissolution,
designation of a registered agent, etc. Included on the list is a $20.00 fee for filing an annual
report. Each corporation authorized to do business in this State is required to file an annual
report, which, unlike the other documents in G.S. 55-1-22, must be delivered to the
Secretary of Revenue. 27 The annual report contains the name of the corporation, its address,
the name and address of its registered agent, the names and addresses of its principal
officers, and a brief description of the nature of its business. Annual reports are due by the
due date for filing the corporation's income and franchise tax return. As a practical matter,
the annual reports are typically attached to the return along with a check for the filing fee.
Part 7 of the act amends G.S. 55-1-22 by adding a new subsection stating that the annual
report fee of $20.00 is nonrefundable. This change became effective when the act was signed
into law by the Governor on July 27, 2003. The purpose of this change is to codify the
Department of Revenue's existing policy that annual report fees are not refundable. G.S.
55-1-22 does not address whether or under what circumstances the filing fees are refundable.
However, it is the policy and practice of the Secretary of State to issue refunds for those
fees, if requested and depending on the circumstances. Specifically, if the Secretary of State's
26 The 2003 General Assembly limited this distribution to two years, 2003 and 2004, but stated the intent that it
would continue through 2012. Part 37 of S.L. 2003-284.
27 Nonprofit corporations are exempt from this requirement and insurance companies are required to deliver
their annual reports to the Secretary of State.
33
office has not begun to process or review the document for which the refund is requested,
then it will usually refund the filing fee at the filer's request, regardless of whether the fee has
been deposited. The Department of Revenue's policy with regard to the annual report is that
the fee is nonrefundable.
Part 8: Clarify Eligibility for R&D Credit
The William S. Lee Quality Jobs and Business Expansion Tax Credits, in Article 3A of
Chapter 105 of the General Statutes, are allowed only to certain types of businesses.28 For
most of the eligible business types, the law specifies that the taxpayer's primary business
must be the designated business. For a few of the business types, including computer
services, the law requires only that the taxpayer's primary activity at an establishment be the
designated business. In addition, to qualify for the credits, the jobs, investment, or activity
must be used in the designated business or activity.
One of the credits under the Bill Lee Act is for research and development. Generally, a
taxpayer that claims a federal income tax credit for increasing research activities under
section 41 of the Internal Revenue Code is allowed a State credit as well for the eligible
research activities conducted in North Carolina. The amount of the credit varies, depending
upon which type of federal credit is claimed.29 Under the Department of Revenue's
interpretation of the Bill Lee Act, to satisfy the eligible business requirements, the jobs,
investment, and activity must be located at an establishment where the primary activity is an
eligible business or eligible activity.
The question arose whether a taxpayer's qualified research expenditures must have occurred
on the premises of an establishment that performed an eligible industry activity. Under the
Department's past interpretation of the law, the answer was yes. Part 8 of the act purports to
clarify the original intent of the General Assembly that research and development activities
need not be on the same premises as an eligible activity. It extends this clarification to the
legislature's recent relaxation of the eligible business requirements surrounding computer
services. The act provides that if the primary activity of an establishment of the taxpayer in
this State is computer services, then the taxpayer's qualified research expenditures in this
State are considered to be used in computer services. For all other taxpayers, the
expenditures are considered to be used in the primary business of the taxpayer. The changes
are retroactive to the years the related provisions were effective, 2001 and 1996, respectively.
Part 9: Revenue Laws to Study Data Needed to Estimate Impact of Consolidated Returns
Whenever study committees discuss tax modernization, one of the issues that arises is the
State's corporate income tax structure. The corporate tax structure has remained
substantially unchanged for years. In the course of these discussions, the Fiscal Research
Division and the Tax Research Division of the Department of Revenue have been asked
what the fiscal consequences would be if the State allowed consolidated corporate income
tax returns. Currently, neither has enough information to form a credible estimate.
28 Central office or aircraft facility; air courier services or data processing; manufacturing, warehousing, or
wholesale trade; computer services or electronic mail order house; customer service center; or warehousing at
an establishment.
29 The credit amount is 5% of the State's apportioned share if the taxpayer claims the credit under section 41(a)
of the Code or 25% if the taxpayer claims the alternative incremental credit under section 41(c)(4) of the Code.
34
Part 9 of the act directs the Revenue Laws Study Committee to establish a study group
composed of tax professionals and representatives of the Department of Revenue to gather
appropriate data that will allow the Department to estimate the fiscal impact of consolidated
returns. Part 9 becomes effective with the 2003 tax year and expires in two years.
Part 10: Motor Fuel Tax Changes
This Part makes several changes to the motor fuel tax laws, effective January 1, 2004. It
provides the Department of Revenue with greater enforcement capabilities, it protects the
State's interest with a shorter temporary permit for motor carriers and a higher bond
requirement for distributors, and it makes the motor fuel statutes more equitable by
extending the inspection tax to dyed diesel fuel. It also makes several technical and
administrative changes.
This Part strengthens the Division of Motor Fuel's enforcement capabilities in the following
ways:
• Sections 10.3 and 10.4 require a taxpayer that imports motor fuel from an
out-of-state terminal into North Carolina to be licensed as a distributor. Past statutes
made the distributor's license optional. If the product was being imported, the
taxpayer was required to register as a licensed importer but none of the importer
categories fit a taxpayer obtaining tax-paid fuel from an out-of-state terminal. For
example, the taxpayer would not owe tax directly to the Department, but an
importer's license requires the taxpayer to file a return on a monthly basis. The
Department of Revenue had determined that a distributor's license, which allows the
taxpayer to import and export the product but does not require periodic returns, was
more appropriate. The Department had implemented this change administratively;
Sections 10.3 and 10.4 change the statutes accordingly. Section 10.5 removes the
requirement that an applicant for licensure as a distributor or an importer notify the
Department of any states to which it plans to export or from which it plans to
import motor fuel, because there is no means for tracking this information.
• Section 10.7 enables the Department to deny a motor fuel license to a taxpayer that
fails to file a return or pay any tax debt due under Chapter 105 or 119 of the General
Statutes.
• Section 10.10 clarifies the Department's authority to investigate illegal use of
non-tax-paid fuel for highway use. One way the Department investigates alleged
violations is through undercover operations. Investigators will film an operation in
which an agent will drive a State truck to a retailer and ask to fill it with dyed
(non-tax-paid) fuel. It would be a violation for the retailer to permit the purchase of
non-tax-paid fuel for highway use. Technically, however, the fuel in this situation is
not taxable because G.S. 105-449.88 exempts motor fuel sold to the State for its use.
This section specifies that it is not a valid defense to a violation of the motor fuel tax
statutes that the State is exempt from motor fuel tax.
• Sections 10.12 through 10.14 require kerosene terminal operators to be licensed and
to file reports. Currently, jet fuel and kerosene are being delivered from the pipeline
directly to airports. This method of delivery bypasses the motor fuels terminals and
thereby bypasses the record-keeping requirements that help ensure that the
Department can uniformly enforce the tax statutes. Kerosene terminal operators are
35
currently subject to tax. The Internal Revenue Service licenses these terminals and
the terminal operators must report deliveries to the airports. These sections do not
subject the airports to greater tax liability, but require them to be licensed and to file
reports so the Department can identify the taxpayers and ensure that they are paying
the requisite amount of tax. As a result, the State should begin collecting an
unknown amount of inspection tax revenue that was otherwise falling through the
cracks. Section 10.16 provides a licensed kerosene distributor the same benefits of
deferred payments and discounts that a licensed motor fuel distributor receives.
Finally, these sections reorganize and modernizes the language of the kerosene
licensing statutes.
Section 10.1 reduces from 20 days to 3 days the maximum time a motor carrier can operate
in the State using a temporary permit, rather than obtaining a license. A licensed motor
carrier pays tax based on the number of miles driven in the State. The cost of a temporary
permit is $50. It would take approximately 1,000 miles to exceed the $50 temporary permit
fee in taxes. A motor carrier can drive far more than 1,000 miles in 20 days and thus could
get many "free" miles by obtaining a temporary permit. Three days is a better approximation
of the time in which a motor carrier would use $50 worth of miles. The Department
surveyed numerous states and determined that, of the 26 states where permit information
was available, 7 states issued 3-day permits, 5 states issued permits for between 4 and 7 days,
5 states issued 10-day permits, 1 state issued a 13-day permit, and 1 state issued a 20-day
permit. Seven states did not issue temporary permits. Section 10.1 could increase Highway
Fund revenues by increasing the number of permits issued or the number of permanent
licenses issued. No estimate is available for the permit volume.
Section 10.6 increases the cap on the bond amount of motor fuel licensees to $500,000. The
most recent bond cap amount of $250,000 was last adjusted in January 1991. The
Department believes the maximum bond amount should be increased to $1 million. Since
1991, licensees' tax liabilities have increased to a point that 28% of the current licensees have
a monthly tax liability of over $250,000, 18.3% over $500,000, 13.17% over $750,000, and
8.48% over $1 million. In the last six months there have been four bankruptcy cases, two of
which exceeded the taxpayer's bond amount. In one of these cases, the potential loss to the
State is in excess of $1 million after payment from the surety company. A survey of the
surrounding states shows that South Carolina, West Virginia, Kentucky, and Louisiana do
not have a cap; Florida has a $100,000 cap; Virginia has a $300,000 cap; Georgia has a
$150,000 cap; and Maryland has a $500,000 cap.
Section 10.15 imposes the inspection tax on dyed diesel. The Department of Revenue
estimates that this change will yield an additional $1.2 million of inspection tax a year. The
inspection tax is currently imposed on all other fuel types at the rate of one-fourth of one
cent per gallon30 including dyed kerosene, which, like dyed diesel, is used for heating and
other non-highway purposes. The Department conducts monthly on-road investigations for
the misuse of dyed fuels, including dyed diesel. Each sample of fuel withdrawn must be
tested by the Department of Agriculture for evidence of dye in the fuel.
30 The inspection tax is imposed regardless of whether the fuel is exempt from the per-gallon excise tax. The
proceeds of the tax are applied first to the cost of administering the Motor Fuels Tax Division. The remainder
is credited to the Commercial Leaking Petroleum Underground Storage Tank Cleanup Fund and the
Noncommercial Leaking Petroleum Underground Storage Tank Cleanup Fund.
36
Lastly, Part 10 makes the following technical and administrative changes:
• Section 10.2 clarifies that the definition of a tank wagon includes vehicles designed to
carry at least 1,000 gallons of motor fuel. The past definition appeared to exclude
those vehicles that can carry a total of more than 1,000 gallons but have individual
tanks that are less than 1,000 gallons each.
• Section 10.8 conforms the statutes with the legislative change made last session to
exempt local governments from the motor fuel tax.
• Section 10.9 removes the requirement that shipping documents must be
machine-printed by the operator of a bulk plant. This requirement was imposed
inadvertently when the statutes were reorganized. Bulk plant operators do not have
the necessary equipment and the Department does not need them to provide
machine-printed documents. The act does not change the requirement that terminal
operators must machine-print shipping documents.
• Section 10.11 clarifies that storage facilities for dyed kerosene must be clearly marked
for non-tax use only, just like the storage facilities for dyed diesel fuel. It also
provides that the dispensing device for dyed fuel must be clearly marked as non-tax
use only.
Part 11: Charge-off of Bad Debts
Retailers pay sales tax on their gross sales. If accounts of purchasers are found to be
worthless and are charged off for income tax purposes, then the retailer may deduct those
sales from its gross sales. Municipalities that sell electricity are considered to be retailers and
pay State sales tax on their gross sales of electricity. The practice of the Department of
Revenue was to allow the municipalities to charge-off their bad debts as other retailers are
allowed to do. However, municipalities could not technically meet the conditions of the
statute because they do not pay federal income tax. This Part conforms the statute to the
Department's practice by clarifying that municipalities that sell electricity may deduct
worthless accounts from their gross sales for sales tax purposes. Worthless accounts are
determined in the same way as they would be determined under the Internal Revenue Code
if municipalities were taxed. As under current law, the accounts that are collected afterwards
must be added back to gross sales. Part 11 became effective when the act was signed into law
by the Governor on July 27, 2003.
MODIFY UNC BOND LAW.
Session Law Bill # Sponsor
S.L. 2003-357 SB 633 Senator Clodfelter
AN ACT TO REVISE THE UNIVERSITY OF NORTH CAROLINA
SPECIAL OBLIGATION BOND LAW.
37
OVERVIEW: This act modifies the special obligation bond law that applies to The
University of North Carolina system (UNC). It makes the maximum maturity for special
obligation bonds more consistent with other University debt obligations by increasing the
maximum maturity of special obligation bonds from 25 years to 30 years. It also increases
the maximum maturity for special obligation bond notes from 2 years to 30 years, which
provides UNC with greater flexibility to provide interim financing at lower costs.
FISCAL IMPACT: This act does not have an impact on the General Fund.
EFFECTIVE DATE: This act became effective when signed into law by the Governor on
August 1, 2003.
ANALYSIS: In 2000, the General Assembly authorized the UNC Board of Governors to
issue special obligation bonds payable from any sources of income or receipts of the Board
of Governors or a constituent or affiliated institution, but not including tuition payments or
appropriations from the General Fund from State revenues. The bond proceeds can be used
for construction, improvement, and acquisition of capital facilities located at UNC
constituent and affiliated institutions. The maximum maturity on the bonds was set at 25
years. Special obligation bonds are not general obligation bonds and thus are not required to
be approved by the voters. They are not secured by the full faith and credit or the taxing
power of the State; a statement to this effect appears on the face of the bonds. Property
cannot be pledged to secure the bonds.
The UNC special obligation bonds can be issued only for projects specifically authorized by
the General Assembly. In submitting proposed special obligation bond projects to the
General Assembly for approval, the Board of Governors is required to justify the need for
each project and to itemize the cost of the project, the estimated operating costs upon
completion, and the sources and amounts of resources to be pledged for repayment of the
bonds. The Board of Governors can issue special obligation bonds for a project only if the
board of trustees of the institution at which the project will be located has approved the
project.
This act provides UNC with greater flexibility in amortizing its debt obligations and in
structuring interim financing debt obligations. The act does not authorize the University to
issue additional debt beyond currently authorized levels and it maintains the requirement
that the University obtain explicit approval from the General Assembly to issue debt.
The act changes the maximum maturity on special obligation bonds from 25 years to 30
years. This change makes the maximum maturity of special obligation bonds more consistent
with other University debt obligations. The maximum maturity for University revenue bond
debt issued for student housing and activities, physical education, and recreation31 is 50
years. The maximum maturity for University revenue bond debt issued for the Centennial
Campus, the Horace Williams Campus, and Millennial Campuses32 is 40 years.
The act also makes it easier and less costly to provide short-term, interim financing for bond
projects authorized by the General Assembly. Under prior law, interim financing was
provided through a bond anticipation note that would be issued for each individual project.
A bond anticipation note could not exceed two years. The University proposed a less costly
method of interim financing under which there would be a one-time issuance of notes.
38
Under the program, interim financing for projects would be drawn down from a line of
credit as needed and repaid by draws from the permanent, long-term bond proceeds. This
approach creates a pool of resources to provide interim financing that can be used multiple
times for many projects. To accomplish this method of pooled financing, the act extends the
maximum maturity of bond anticipation notes from 2 to 30 years. Longer-term bond
anticipation notes reduce the issuance costs associated with notes that must be reauthorized
every two years and allow for better interest rates to be obtained through the long-term
market. To ensure that the bond anticipation note proceeds are used for short-term, interim
financing needs only, the act provides that if the Board of Governors issues a bond
anticipation note for a term in excess of three years, no individual project may be funded
from the proceeds of the note for longer than three years.
UNC - NONAPPROPRIATED CAPITAL PROJECTS.
Session Law Bill # Sponsor
S.L. 2003-360 SB 705 Senator Kerr
AN ACT TO AUTHORIZE THE CONSTRUCTION AND THE
FINANCING, WITHOUT APPROPRIATIONS FROM THE
GENERAL FUND, OF CERTAIN CAPITAL IMPROVEMENTS
PROJECTS OF THE CONSTITUENT INSTITUTIONS OF THE
UNIVERSITY OF NORTH CAROLINA.
OVERVIEW: This act authorizes the construction of numerous projects by The University
of North Carolina. The projects will be financed through revenue bonds and special
obligation bonds. No funds from the General Fund will be appropriated to finance the
projects. In addition to bond-financing, the act authorizes the construction and financing of
three capital projects at UNC-Chapel Hill through lease arrangements with nonprofit
corporations.
FISCAL IMPACT: This act will require 12 new positions at a cost to the General Fund
of roughly $500,000 a year beginning January 1, 2005. These positions are required for
increased operating costs resulting from The Rizzo Center Expansion and the McColl
Building Addition at UNC-Chapel Hill.
EFFECTIVE DATE: This act became effective when signed into law by the Governor on
August 1, 2003.
ANALYSIS: The Board of Governors of The University of North Carolina can issue two
types of self-liquidating bonds, revenue bonds and special obligation bonds. Tax revenues
may not be used to pay back either type of bond. Article 21 of Chapter 116 of the General
Statutes authorizes the Board of Governors to issue revenue bonds for the types of projects
enumerated in the Article. The types of projects for which revenue bonds may be issued
include educational buildings, dormitories, recreational facilities, dining facilities, student
39
centers, health care buildings, parking decks, etc. The revenue bonds are payable from
rentals, charges, fees, and other revenues generated by the facility. Article 21B of Chapter
116 of the General Statutes authorizes the Board of Governors to issue revenue bonds for
projects at the Centennial Campus, the Horace Williams Campus, and Millennial Campuses.
The revenue bonds are payable from rentals, charges, fees, and other income generated by
the facility. Article 3 of Chapter 116D of the General Statutes authorizes the Board of
Governors to issue special obligation bonds payable with any sources of income or receipts
of the Board of Governors or a constituent or affiliated institution, but not including tuition
payments or appropriations from the General Fund from State revenues. In this instance,
the bond proceeds could be used for construction, improvement, and acquisition of any
capital facilities located at UNC constituent and affiliated institutions.
The purpose of this act is to authorize the construction and financing of the capital
improvements projects at various constituent institutions of The University of North
Carolina. The projects authorized in the act may not be financed with funds appropriated
from the State's General Fund, but may be financed with gifts, grants, receipts,
self-liquidating indebtedness, other funds available to the constituent institutions, or a
combination of any of those financing methods. The new self-liquidating projects that the
Board of Governors may finance with revenue bonds, special obligation bonds, or both are
listed in Section 2 of the act. Section 3 authorizes revenue bonds and special obligation
bonds to be used for eight capital improvements projects for which general obligation bond
financing was previously authorized in S.L. 2000-3. This act provides additional options for
financing the projects.
Section 4 authorizes the Director of the Budget, at the request of the Board of Governors,
to authorize cost increases or decreases, or changes in the method of financing for the
projects authorized by the act. The Director of the Budget may consult with the Joint
Legislative Commission on Governmental Operations, but consultation is not required.
The current law governing UNC special obligation bonds requires that the specific projects
and their costs be set forth in legislation approved by the General Assembly and that the
maximum amount of special obligation bonds to be issued to finance the specific projects
listed be stated. Sections 2 and 3 set forth the specific projects and their costs. Section 5
expressly states that the maximum principal amount of special obligation bonds to be issued
shall not exceed the amounts listed in Sections 2 and 3 plus $15 million for related additional
costs for which bond proceeds are routinely used, such as issuance expenses, funding of
reserve funds, and capitalized interest.
Section 6 authorizes the financing of three projects at UNC-Chapel Hill through lease
arrangements with nonprofit corporations. Over the years, the University system has used
lease arrangements with nonprofit corporations to construct facilities necessary to academic
life, student support services, physical education and recreation, athletics, and other
programs when the facilities are financed by major gifts. The process followed by the State is
as follows:
• The State, following guidelines established by the Department of Administration and
with Council of State approval, leases land to the nonprofit corporation for the
period of time required for the construction of the facility.
40
• The nonprofit corporation, after review and approval of construction plans by the
State Construction Office, builds the facility. Each project is subject to review by the
Department of Insurance to ensure that it meets State Building Code requirements.
• When construction is completed and the facility has been deemed acceptable to the
State, the lease expires and the land returns to the State's control, along with the
newly constructed facility.
The difference between the three projects named in Section 6 of the act and other projects
constructed in this manner is that the act authorizes the University to issue long-term debt as
a means of financing the indebtedness.
MODIFY STATE FINANCING LAWS.
Session Law Bill # Sponsor
S.L. 2003-388 SB 679 Senator Hoyle
AN ACT TO MODIFY THE PUBLIC FINANCING LAWS OF THE
STATE.
OVERVIEW: This act makes the following changes to the State public financing laws, as
requested by the State Treasurer's Office:
• Authorizes the use of out-of-state banks as well as in-state banks as trustee under a
revenue bond order or a trust agreement securing revenue bonds
• Allows term bonds with sinking fund redemptions to satisfy the statutory
requirements for maturities
• Exempts refunding bonds from the "four times" rule
• Allows local governments to use installment purchase debt to refinance debt for
purposes for which installment debt is currently authorized
• Clarifies and regulates the authority of a local government to enter into an interest
rate swap agreement in connection with bond issuance
FISCAL IMPACT: No impact.
EFFECTIVE DATE: This act became effective when signed into law by the Governor on
August 7, 2003.
ANALYSIS: Section 1 of the act is in response to the recent decline in the number of
North Carolina financial institutions offering trustee services as a result of mergers and
financial institutions selling their trust businesses. Allowing financial institutions outside of
North Carolina to serve as trustee under a revenue bond order or a trust agreement securing
revenue bonds gives issuers more choices and also would allow issuers to continue doing
business with the same trustee staff person who becomes employed by an out-of-state
41
trustee as a result of a merger or sale of a North Carolina financial institution's trust
business. Revenue bonds are bonds that are secured by and repaid from revenues generated
by the facility being financed. For example, parking lots generate parking fees, dorms
generate dorm fees, and water and sewer infrastructure generate water and sewer fees.
Under current law, the Local Government Bond Act requires each issue of bonds to mature
in annual installments with the first installment being paid no more than three years after the
date of the bonds. This means that the only type of bonds that can be issued is serial bonds,
in which some mature each year. Section 2 of the act would change the requirement so that
the bonds themselves do not have to m