Finance law changes

              2009
FINANCE LAW
CHANGES
PREPARED BY
FINANCE TEAM LEGAL STAFF:
Cindy Avrette
Dan Ettefagh
Heather Fennell
Trina Griffin
Martha Walston TABLE OF CONTENTS
(Sorted by Session Law #)
SESSION LAW #
BILL #
SHORT TITLE
SPONSOR
PAGE
S.L. 2009-54
SB 575
Modify Corporate Apportionment Formula.
Senator Hoyle
1
S.L. 2009-81, as amended by S.L. 2009-550
HB 201 HB 274
Add Division of LESS to CCPS.
Rep. Spear, R. Warren
4
S.L. 2009-98
SB 703
State Treasurer Investments.
Senator Rand
5
S.L. 2009-108
SB 200
Temporary Floor for Motor Fuels Tax Rate.
Senator Jenkins
8
S.L. 2009-140
SB 754
Changes for Bonds Authorized Under ARRTA.
Senator Clodfelter
9
S.L. 2009-180
HB 1530
Rescind Advanced Property Tax Appraisal.
Rep. Cole, Holloway, Burr, Starnes
13
S.L. 2009-209
HB 1508
Two-Thirds Bonds Act of 2008.
Rep. Owens, Goforth, Womble
14
S.L. 2009-233
HB 511
EMS/Fire Dept. Sales Tax Refund.
Rep. Williams, Goforth, Lucas, E. Warren
16
S.L. 2009-283
SB 691
Tax Info Disclosure to State Treasurer.
Senator Dorsett
17
- i -
SESSION LAW # BILL # SHORT TITLE SPONSOR PAGE
S.L. 2009-308
HB 852
Defer Tax on Builders' Inventory.
Rep. Dickson, Brubaker, Holliman, Wainwright
20
S.L. 2009-375
SB 304
Energy Savings Contracts' Cap/Program Admin.
Senator Clodfelter
21
S.L. 2009-394
HB 1516
JDIG Technical Modifications.
Rep. Crawford, Dickson, Gibson
23
S.L. 2009-395
HB 311
Continue School Construction Funding.
Rep. Yongue, Glazier, Johnson, Wainwright
25
S.L. 2009-413
SB 909
Sales Tax: Reliance on Written Advice by DOR.
Senator Clodfelter
26
S.L. 2009-422
SB 367
Franchise Tax-Overbilling Out of Capital Base.
Senator Jenkins
27
S.L. 2009-445
SB 509
Rev Laws Tech, Clarifying, & Admin. Changes.
Senator Hartsell
28
S.L. 2009-451, as amended by S.L. 2009-575
SB 202
Appropriations Act of 2009.
Senator Garrou
37
S.L. 2009-454
SB 405
Real Property Sales Information.
Senator Hartsell
56
S.L. 2009-476
SB 1006
Withholding on Contractors Identified by ITIN.
Senator Hoyle
58
S.L. 2009-481
HB 1586
Community Land Trust Property Taxation.
Rep. Luebke, Hall
59
- ii -
SESSION LAW # BILL # SHORT TITLE SPONSOR PAGE
S.L. 2009-505
HB 1500
Development Tier Designation Exception.
Representative Spear
61
S.L. 2009-511
SB 1057
Sales Tax Incentives for Flight Simulators.
Senator Dorsett
62
S.L. 2009-520
HB 884
JMAC Modifications.
Representative Cole
63
S.L. 2009-522
HB 1389
Revolving Loan Fund for Energy Improvements.
Rep. Fisher, Harrison, Rapp
67
S.L. 2009-523
HB 1514
IDF Changes/Research & Prod. Serv. Districts.
Rep. Crawford, Dickson, Gibson
68
S.L. 2009-524
SB 898
Development Tier Exception Modification.
Senator Soles
70
S.L. 2009-525
SB 97
Critical Infrastructure Assm't Changes.
Senator Hartsell
73
S.L. 2009-527
HB 148
Congestion Relief/Intermodal Transport Fund.
Rep. Carney, Allen, Ross, McGee
76
S.L. 2009-529
SB 943
Expand Film Credit.
Senator Garrou
80
S.L. 2009-548
HB 512
Incentives for Energy Conservation.
Rep. Holliman, Harrison, Luebke
82
S.L. 2009-559
SB 777
Affiliate Liability for OTP Excise Tax.
Senator Garrou
84
Appendices
Appendix A - Table of Contents Sorted by Bill #
- iii -
SESSION LAW # BILL # SHORT TITLE SPONSOR PAGE
Appendix B - Table of Contents Sorted by Short Title
Appendix C - Table of Contents Sorted by Sponsor
- iv -
2009 Finance Law Changes
Modify Corporate Apportionment Formula.
Session Law
Bill #
Sponsor
S.L. 2009-54
SB 575
Senator Hoyle
AN ACT TO ENCOURAGE THE LOCATION AND EXPANSION OF CAPITAL INTENSIVE COMPANIES IN THIS STATE BY PROVIDING FOR APPORTIONMENT OF CORPORATE INCOME BASED SOLELY ON THE SALES FACTOR FOR COMPANIES THAT MEET CERTAIN INVESTMENT AND QUALITY JOBS CRITERIA.
OVERVIEW: This act changes the corporate income tax apportionment formula used by a capital intensive multistate corporation meeting specific investment criterion from a three-factor formula based upon property, payroll, and double-weighted sales to a single sales factor formula. The apportionment formula determines the amount of a multistate corporation's income that may be taxable by North Carolina. A single sales factor formula reduces the income tax liability of a corporation with relatively large shares of its nationwide property in North Carolina but a relatively small share of its nationwide sales in North Carolina.
FISCAL IMPACT: The act reduces General Fund revenues by approximately $3 million annually beginning in fiscal year 2011-2012. The loss could become as great as $12.5 million a year by fiscal year 2018-2019. (For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2009 Session. Available in the Legislative Library.)
EFFECTIVE DATE: The act is effective for taxable years beginning on or after January 1, 2010.
ANALYSIS: A corporation that does business in more than one state must pay income tax to each of the states in which it has nexus. The U.S. Supreme Court cases have upheld the right of states to tax the income of multistate corporations so long as the income is fairly sourced to the taxing state. The conventional method used by states to source income has been the apportionment formula, which is used to derive an apportionment percentage. Generally speaking, a taxpayer multiplies its taxable income by its apportionment percentage to determine the amount of its income sourced to a state. The state's corporate income tax rate is applied to the corporation's income apportionable to that state.
Most states use an apportionment formula based on or substantially similar to the Uniform Division of Income for Tax Purposes Act (UDITPA).1 The UDITPA formula is a composite of three factors: a property factor, a payroll factor, and a sales factor. The property factor represents the ratio of the taxpayer's real and tangible personal property in the taxing state to its real and tangible personal property everywhere. Likewise, the payroll
1 UDITPA dates back to 1957.
- 1 -
factor and the sales factor represent a ratio of the taxpayer's payroll and sales in the taxing state to its payroll and sales everywhere. Under UDITPA, the sum of the three factors is divided by three, resulting in a taxpayer's apportionment percentage.
North Carolina shifted to a double-weighted sales factor apportionment formula in 1988 at the request of RJR Nabisco.2 A double-weighted sales factor tends to favor home-state industries that have a concentration of their total facilities in a state but sell their products all over the country. Under North Carolina's current apportionment formula, the payroll and property factors are each weighted 25% and the sales factor is weighted at 50%; the sum of the four factors is divided by four.
This act creates a single sales factor apportionment formula at the request of Apple, who plans to build a major East Coast data center in Maiden, NC.3 Apple will invest at least $1 billion in the infrastructure hub and it is expected to employ 50 full-time employees. Under the single sales factor formula, the total allocation of a corporation's nationwide profits to North Carolina is solely based on where the corporation's sales occur. This method of apportionment provides a tax reduction to a corporation with relatively large shares of its nationwide property and payroll in North Carolina but a relatively small share of its nationwide sales in North Carolina. 4
The act limits the single sales factor apportionment formula to a 'qualified capital intensive corporation'. The act defines a 'qualified capital intensive corporation' as one that meets all of the requirements listed below. At the time the General Assembly considered this legislation, no taxpayer met these requirements. However, it is anticipated that Apple will meet these requirements. The act provides that if no corporation has met these requirements by January 1, 2019, the single sales factor provision is repealed.
• The corporation's property factor must meet one of the following conditions:
o The property factor as a percentage of the sum of the factors in North Carolina's double weighted sales factor apportionment formula must exceed 75%.
o The average property factor for the preceding three years as a percentage of the average sum of the double weighted sales factor apportionment formula must exceed 75%.
• The Secretary of Commerce makes a written determination that the corporation has invested or is expected to invest at least $1 billion in private funds to construct a facility in this State within nine years of the time that construction begins.
• With respect to the facility that meets the $1 billion investment threshold, it must:
2 RJR Nabisco had plans for a large automated bakery in the Garner area. After the change was adopted, RJR Nabisco was bought out and forced to cut back on capital expenditures. The company never built the plant.
3 Although the identity of the company was not made public during the legislative deliberations, Governor Perdue issued a press release on June 3, 2009, the same day she signed Senate Bill 575 into law, announcing that Apple selected North Carolina as the location for a new data center. Apple announced in July that it would locate the data center in Catawba County, in the town of Maiden. It had also considered locating the facility in Cleveland County.
4 The Department of Commerce projects that a data center investment of $1 billion will create more than 3,000 jobs in the regional economy over the next 10 years.
- 2 -
o Be located in a county designated as a tier one or tier two area at the time construction began.5
o Maintain the average number of employees it has at the facility during the first two years after the facility is placed in service for the remainder of time in which the corporation must complete the required $1 billion investment.
o Meet the weekly wage standard set out in Article 3J.6 The applicable weekly wage standard for Catawba County in 2009 is $592.
o Provide health insurance for all full-time jobs at the facility.7
The act provides that a qualified capital intensive corporation must forfeit the benefit of the single sales factor apportionment formula prospectively if it fails to make the required investment in capital facilities within nine years. It does not require the recapture of any benefits already received. The act also provides that a qualified capital intensive corporation is ineligible for Article 3J tax credits8 a grant from the Job Development Investment Grant Program9 or a grant from the One NC Fund10 with respect to a facility that met the $1 billion investment threshold. Lastly, the act encourages qualified capital intensive corporations to utilize the Employment Security Commission and cooperating local agencies as a first source for recruitment of employees.
In 2006 and 2007, the General Assembly enacted exemptions from the sales and use tax for data centers that meet certain conditions11 In January of 2007, Google announced its decision to invest $600 million in a new facility in Caldwell County in Lenoir, North Carolina.12 G.S. 105-164.13(55) exempts an eligible Internet data center from sales tax on electricity and on certain business property located and used at the data center. G.S. 105-187.51C imposes a privilege tax, in lieu of a sales tax, on certain equipment and machinery purchased by an eligible data center. The rate of tax is 1% of the sales price of the equipment and machinery, capped at $80 per article. To be an eligible Internet data center under G.S. 105-164.13 or an eligible data center under G.S. 105-187.51C, a facility must meet certain use, location, wage, employee insurance benefits, and investment conditions. If Apple meets the conditions of these exemptions, it would be eligible for them as well as the modified corporate apportionment formula.
5 Catawba County is designated as a tier 2 area in 2009.
6 G.S. 105-129.83 provides that a job in a tier two area satisfies the wage standard if it pays an average weekly wage that is at least equal to the lesser of one hundred ten percent (110%) of the average wage for all insured private employers in the State and ninety percent (90%) of the average wage for all insured private employers in the county.
7 Under G.S. 105-129.83, a taxpayer provides health insurance if it pays at least fifty percent (50%) of the premiums for health care coverage that equals or exceeds the minimum provisions of the basic health care plan of coverage recommended by the Small Employer Carrier Committee pursuant to G.S. 58-50-125.
8 See Article 3J of Chapter 105 of the North Carolina General Statutes.
9 See Part 2G of Article 10 of Chapter 143B of the North Carolina General Statutes.
10 See Part 2H of Article 10 of Chapter 143B of the North Carolina General Statutes.
11 Section 24.17 of S.L. 2006-66 and Section 31.22 of S.L. 2007-323.
12 North Carolina also provided a grant to Google under the Job Development Investment Grant Program. The grant required the company to create 200 jobs in four years. In December 2008, Google withdrew its application for the grant incentive because it could not meet the job creation criteria. As of December 2008, the company had approximately 50 employees at the data center located in Lenoir, NC.
- 3 -
Add Division of LESS to CCPS.
Session Law
Bill #
Sponsor
S.L. 2009-81, as amended by S.L. 2009-550
HB 201 HB 274
Rep. Spear, R. Warren
AN ACT TO FACILITATE THE TRANSFER OF MOTOR VEHICLES FROM THE UNITED STATES DEPARTMENT OF DEFENSE TO LOCAL GOVERNMENT UNITS, VOLUNTEER FIRE DEPARTMENTS, AND VOLUNTEER RESCUE SQUADS AND TO CLARIFY THAT THE DIVISION OF LAW ENFORCEMENT SUPPORT SERVICES IS A DIVISION OF THE DEPARTMENT OF CRIME CONTROL AND PUBLIC SAFETY.
OVERVIEW: This act provides exemptions from the highway use tax for State agencies acting as a pass-through for vehicles received through a United States Department of Defense program that are subsequently transferred to an emergency response unit, a law enforcement agency, or fire department. S.L. 2009-550 establishes the retail value of a vehicle transferred through this program for purposes of the highway use tax as the price paid by the purchaser of the vehicle rather than the market value of the vehicle.13 The remainder of this act does not affect North Carolina tax laws and is not discussed below.
FISCAL IMPACT: No impact. (For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2009 Session. Available in the Legislative Library.)
EFFECTIVE DATE: This act became effective when the Governor signed it into law on June 11, 2009. The clarifying change in S.L. 2009-550 became effective when the Governor signed it into law on August 23, 2009.
ANALYSIS: Federal law provides programs through which vehicles are disbursed from the Department of Defense to emergency response units, local law enforcement, and fire departments.14 The Federal programs require a state agency to facilitate the transfer of these vehicles. The Department of Crime Control and Public Safety (DCCPS) has been operating one of these programs for over 15 years. Last year, the DCCPS facilitated the transfer of over $1 million in vehicles to local law enforcement through this program.15 A similar program facilitated by the Department of Environment and Natural Resources (DENR) has been in operation for the past two years and has facilitated the transfer of approximately 90 vehicles.
13 Section 2.(e) of S.L. 2009-550, AN ACT TO MAKE VARIOUS CLARIFYING CHANGES TO THE GENERAL STATUTES AND SESSION LAWS.
14 10 U.S.C. §381 establishes procedures under which states and units of local government may purchase law enforcement equipment for counter-drug activities through the Department of Defense. 10 U.S.C. § 2576b establishes procedures under which states may purchase personal property to assist firefighting agencies.
15 Section 17.5 of S.L. 2009-451 established a fee that a local law enforcement agency must pay to the Department of Crime Control and Public Safety for equipment it receives through the Department from the United States Department of Defense. The fee amount is set by the DCCPS. (see G.S. 143B-475.2)
- 4 -
When vehicles under this program are initially transferred, the department facilitating the program does not take title to the vehicle. The ultimate recipient, which is either an emergency response unit, local law enforcement, or a fire department, takes title to the vehicle and pays the highway use tax. If the recipient decides the vehicle is no longer needed, the vehicle is transferred to the department facilitating the program for transfer to another emergency response unit, local law enforcement, or fire department in the State. During this subsequent transfer, the department may take title, at which point the department would be required to pay highway use tax.
The highway use tax is payable when a person applies for a certificate of title for a motor vehicle. The rate of tax is 3% of the retail value of the vehicle. The retail value of a vehicle is its sales price if the vehicle is sold by a retailer. Otherwise, the retail value of a vehicle is its market value, which is presumed to be the value of the vehicle as set in a schedule of values adopted by the Commissioner of Motor Vehicles.
The program operated by DCCPS was momentarily halted this year after the Division of Motor Vehicles raised concerns about whether the facilitating agency should obtain title to the vehicles when initially transferred, and if so, whether the facilitating agency should pay the highway use tax. The question also arose as to the retail value of the vehicle, for purposes of the highway use tax, since the price paid for the vehicle may be less than its market value. This act, and S.L. 2009-550, resolve these issues.
Section 1 of this act and Section 2(b) of S.L. 2009-550 exempt the facilitating department from the requirement under G.S. 20-73 to apply for a certificate of title within 28 days of the transfer of the vehicle.16 This exemption will allow both DCCPS and DENR to transfer vehicles under the federal programs without first obtaining title to the vehicle. If the agency does not have to obtain a title, it does not have to pay the highway use tax. Sections 2(a), (b), and (d) of S.L. 2009-550 also exempt the facilitating agency from the mileage and damage disclosure requirements of Chapter 20 of the North Carolina General Statutes.
Section 2 of this act exempts the facilitating agency from paying highway use tax when it obtains title to a vehicle from a unit of local government, volunteer fire department, or volunteer rescue squad for the purpose of transferring the vehicle to another unit of local government, volunteer fire department, or volunteer rescue squad. Section 2(e) of S.L. 2009-550 sets the retail value of a vehicle transferred under this federal program as the price paid for the vehicle rather than its market value.
State Treasurer Investments.
Session Law
Bill #
Sponsor
S.L. 2009-98
SB 703
Senator Rand
AN ACT CONCERNING INVESTMENTS OF THE STATE TREASURER.
16 A person who fails to apply for a certificate of title within the required time frame is subject to a $15 civil penalty and is guilty of a Class 2 misdemeanor.
- 5 -
OVERVIEW: This act, requested by the Office of the State Treasurer, gives the State Treasurer more flexibility to invest special funds17 held by the State Treasurer, with the goal of increasing portfolio return and better managing risk.
FISCAL IMPACT: No impact.
EFFECTIVE DATE: This act became effective when it was signed into law by the Governor on June 11, 2009.
ANALYSIS: The State Treasurer has statutory authority to invest certain special funds held by the Treasurer in excess of the amount required to meet the current needs and demands of these funds. Authorized investments are outlined by statute in G.S. 147-69.1(c)(1)-(7) and G.S. 147-69.2(b). This act provides the Treasurer with more flexibility and tools to invest these funds as follows:
• Authorizes the investment of funds in obligations that are convertible into equity securities. These are non-investment grade securities. These newly authorized investments, as well as the currently authorized investment in obligations, must bear one of the four highest ratings of at least one nationally recognized rating service when acquired. The act deletes the requirement that the obligations must not bear a rating below the four highest by any nationally recognized rating service that rates the particular security. (See G.S. 147-69.2(b)(4)).
• Permits investment in asset-backed securities that bear a rating below the four highest by any nationally recognized rating service that rates the particular securities. (See G.S. 147-69.2(b)(6)).
• Requires the Treasurer to invest assets of the Retirement Systems18 so that no less than 20% of these assets are at all times invested in investments authorized by G.S. 147-69.2(b)(1)-(6). This liquidity requirement is designed to ensure that funds are available to meet the cash needs of the Retirement Systems. (See G.S. 147-69.2(b)(6a)).
• Authorizes the Treasurer to make investments pursuant to G.S. 147-69.2(b)(1)-(6) directly, or indirectly through contractual arrangements as long as the indirect investment is managed by an investment manager that has assets under management of at least $100,000,000. (See G.S. 147-69.2(b)(6b)).
• Authorizes the Treasurer to invest the assets of the Retirement Systems in obligations and other debt securities, including debt securities convertible into other securities, that do not meet the investment requirements of G.S. 147-69.2(b)(1)-(6) and (7) as long as these investments in credit opportunities meet all of the following requirements:
17 These special funds are listed in G.S. 147-69.2 and include, among others, the various State and local governmental employee retirement systems. The employee retirement systems are supported by investment returns, employee contributions, and employer contributions.
18 The following systems are referred to collectively as the Retirement Systems: the Teachers' and State Employees' Retirement System, the Consolidated Judicial Retirement System, the Firemen's and Rescue Workers' Pension Fund, the Local Governmental Employees' Retirement System, the Legislative Retirement System, and the North Carolina National Guard Pension Fund.
- 6 -
o The investments must be made through the following investment entities or vehicles: investment companies registered under the Investment Company Act of 1940, individual, common collective trust funds of banks and trust companies, group trusts and limited partnerships, limited liability companies or other limited liability investment vehicles that invest primarily in investments authorized by G.S. 147-69.2(b)(6c) and through contractual arrangements. If the investment is through a contractual arrangement, the investment manager for each investment must have assets under management of at least $100,000,000.
o The investments may not exceed 5% of the market value of all invested assets of the Retirement Systems.
(See G.S. 147-69.2(b)(6c)).
• Authorizes the investment of Retirement Systems' assets in equity securities traded on a public securities exchange or market organized and regulated under the laws of the jurisdiction of the exchange or market. Prior law permitted investment only in preferred or common stock. These investments are still capped at 65% of the market value of all invested assets of the Retirement Systems, but the act removes the 5% cap on assets that may be invested in the stocks or shares of a diversified investment company registered under the Investment Company Act of 1940. So long as each investment manager manages assets of at least $100,000,000 (was $50,000,000), Retirement Systems assets may be invested through the following:
o Investment companies registered under the Investment Company Act of 1940.
o Individual, common, or collective trust funds of banks and trust companies.
o Group trusts.
The act adds the following investments to this list:
o Contractual arrangements in which investment managers have full and complete discretion and authority to invest assets specified in such contractual arrangements.
(See G.S. 147-69.2(b)(8)).
• Authorizes the Treasurer to directly invest Retirement Systems' assets in any equity securities represented in the S&P 500 Index or that have been publicly announced to be included in the S&P 500 Index. The act eliminates certain statutory limitations on the investments of Retirement Systems' assets. The act, however, maintains the requirement that no more than 1½% of the market value of the Retirement Systems' assets be invested directly in the stock of a single corporation, and the total number of shares in that corporation not exceed 8% of the issued and outstanding stock of the corporation. Prior to this legislation, all stock management was outsourced. The Treasurer will still outsource most stock management, but the direct management of some funds should allow the Treasurer greater access to market data and savings in fees. (See G.S. 147-69.2(b)(8)).
• Authorizes the Retirement Systems' assets to be invested in inflation resistant assets such as commodities, timberlands, real estate, and treasury inflation protected - 7 -
securities.19 As some of the other investments authorized by this act, these investments must be made through investment companies registered under the Investment Company Act of 1940, individual, common or collective trust funds of banks and trust companies, group trusts and limited liability investment vehicles and through contractual agreements in which the investment manager has full discretion and authority to invest Retirement Systems assets in these investments. For each investment allowed under G.S. 147-69.2(b)(9a), the investment manager must manage assets of at least $100,000,000, and the investments authorized under subdivision (9a) must not exceed 5% of the market value of all invested assets of the Retirement Systems. (See G.S. 147-69.2(b)(9a)).
The act permits the Treasurer to use fees assessed under G.S. 147-69.2((b2) and (b3) to defray the cost of administering these investments. Subsection (b2) applies to the investment of public hospital funds deposited with the Treasurer, and subsection (b3) applies to the investment of UNC Hospitals at Chapel Hill funds deposited with the Treasurer.
The remaining changes to G.S. 147-69.2 are conforming and technical.
Temporary Floor for Motor Fuels Tax Rate.
Session Law
Bill #
Sponsor
S.L. 2009-108
SB 200
Senator Jenkins
AN ACT TO ESTABLISH A MINIMUM MOTOR FUELS TAX RATE FOR TWO YEARS.
OVERVIEW: This act establishes a minimum variable rate of 12.4¢ a gallon for calculation of the motor fuel tax rate, applicable for the period July 1, 2009, through June 30, 2011. With a minimum variable rate of 12.4¢, the motor fuel tax rate may be greater than 29.9¢ per gallon but it may not be less.
FISCAL IMPACT: The act increases revenue $50 million for fiscal year 2009-2010 and it is expected to increase revenue $17.5 million for fiscal year 2010-2011. Three-fourths of the revenue derived from the excise tax on motor fuel is allocated to the Highway Fund and the remaining quarter is allocated to the Highway Trust Fund.20 (For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2009 Session. Available in the Legislative Library.)
EFFECTIVE DATE: This act became effective when the Governor signed it into law on June 15, 2009.
ANALYSIS: This act establishes a minimum motor fuel tax rate of 29.9¢ a gallon for the period July 1, 2009, through June 30, 2011, by providing that the variable component of the rate may not be less than 12.4¢ a gallon. The motor fuel tax rate consists of a flat rate of
19 The cash flows from treasury inflation protected securities are based on inflation; as inflation sets in periodic interest payments increase.
20 One-half cent per gallon of the excise tax is allocated to various environmental funds. The remaining revenue is allocated to the Highway Fund or the Highway Trust Fund.
- 8 -
17.5¢ per gallon plus a variable rate based upon the average wholesale price of motor fuel. With a minimum variable rate of 12.4¢, the rate may be greater than 29.9¢ per gallon, but it may not be less.
The variable component of the motor fuel tax rate is equal to the greater of 7% of the average wholesale price of motor fuel during a base six-month period or 3.5¢ per gallon. The base six-month period for the motor fuel rate applicable on and after July 1 ends March 31. The base six-month period for the motor fuel rate applicable on and after January 1 ends September 30. Based upon the average wholesale price of motor fuel for the base period April 1, 2008, through September 30, 2008, the motor fuel rate effective on and after July 1, 2009, would have been 27.8¢ a gallon.
In 2006, the General Assembly capped the variable wholesale component of the motor fuels tax at 12.4¢ per gallon, the wholesale rate for the period of January 1, 2006, through June 30, 2006.21 The General Assembly extended the cap in 2007 from July 1, 2007, through June 30, 2009.22 With the cap, the rate could be less than 29.9¢ per gallon, but it could not be greater. During this period, the rate fell to 29.7¢ per gallon for the period July through December 2007. Otherwise, it stayed at 29.9¢ per gallon.
Changes for Bonds Authorized Under ARRTA.
Session Law
Bill #
Sponsor
S.L. 2009-140
SB 754
Senator Clodfelter
AN ACT TO AMEND THE NORTH CAROLINA GENERAL STATUTES TO ALLOW THE STATE TO TAKE FULL ADVANTAGE OF THE EXPANSION OF EXISTING BOND PROGRAMS AND THE CREATION OF NEW BOND PROGRAMS UNDER THE AMERICAN RECOVERY AND REINVESTMENT TAX ACT OF 2009 (ARRTA).
OVERVIEW: This act does two things:
• It authorizes local governments to issue several types of government bonds established under the American Recovery and Reinvestment Tax Act of 2009 (ARRTA).
• It authorizes the private sale of general obligation bonds that have a credit rating below "AA" or that are unrated and that are issued prior to December 31, 2010.
FISCAL IMPACT: No fiscal impact.
EFFECTIVE DATE: This act became effective when the Governor signed it into law on June 19, 2009.
21 Section 24.3 of S.L. 2006-66. Section 2.2(g) of S.L. 2006-66 provided a reserve in the General Fund for the purpose of holding harmless the Highway Fund and the Highway Trust Fund in the event that the variable wholesale component of the tax would have exceeded 12.4¢ per gallon.
22 Section 31.15 of S.L. 2007-323.
- 9 -
ANALYSIS:
Authorize new bonds. – This act authorizes local governments to issue several types of government bonds23 established under ARRTA. Bonds under these programs are either tax-exempt24 bonds or tax credit bonds. Tax credit bonds are a recent alternative to traditional tax-exempt bonds. They are not interest-bearing obligations; instead, a taxpayer holding a tax credit bond is allowed a credit against federal income tax equivalent to the interest that the bond would otherwise pay. The bondholder must include the amount of the credit in gross income and treat it as interest income. The credit effectively replaces the interest that would be paid on an exempt bond, allowing the issuer to borrow interest-free. The types of bonds authorized under ARRTA are:
• Build America bonds. – Unlike tax credit bonds, which provide a tax credit in lieu of interest payments, build America bonds pay interest to the bondholders and also provide a tax credit. The bondholder must include the interest in gross income, but is allowed a credit against federal income tax liability for a portion of the interest payments received. The tax credit is equal to 35% of the interest payable on the interest payment date of the bond. These bonds must be issued before January 1, 2011. State and local governments may elect to receive a direct payment in the form of a refundable credit in lieu of the credit to the bondholder.
• Qualified school construction bonds. – ARRTA provides bond authority to states and local governments for school infrastructure through two primary tax credit bond programs: a new qualified school construction bond program and the extension of the qualified zone academy bond (QZAB) program.
North Carolina's QZAB program is currently administered by the State Board of Education. The national volume cap for these bonds is $11 billion for 2009 and another $11 billion for 2010. There is also an annual cap allocated among the states based on their respective populations of individuals below the poverty line. North Carolina's QZAB allocation for 2009 is $44.1 million.
The State Board of Education will also administer the statewide allocation of qualified school construction bonds, which are to be issued in the same manner and under the same guidelines as the QZABs. The statewide allocation to North Carolina under ARRTA for these bonds is approximately $187.2 million.25 A bond is a qualified school construction bond if all of the following conditions are met:
23 State and local bonds are classified as either governmental bonds or private activity bonds. Governmental bonds are primarily used to finance governmental functions and are repaid with governmental funds. Interest on these bonds is generally exempt from federal and State income tax. Private activity bonds are bonds that allow the state or local government to serve as a conduit for providing financing to nongovernmental entities. Interest on private activity bonds is not excluded from gross income for federal income tax purposes unless the bonds fall within certain defined categories.
24 Federal law limits the amount of certain types of tax-exempt bonds that may be issued each year in the State. North Carolina has established the North Carolina Federal Tax Reform Allocation Committee (Committee) to manage the federal allocation and to decide which of the local bonds may be issued if the demand exceeds the supply. The Committee consists of the Secretary of the Department of Commerce, the Executive Assistant to the Governor for Budget Management, and the Treasurer.
25 ARRTA provided that the 100 largest school districts in the United States are to receive a percentage of the total amount of bonds authorized. The following counties will receive a part of this special allocation:
• Mecklenburg - $25.96 million
- 10 -
o 100% of the available project proceeds of the issue of which it is a part are to be used for the construction, rehabilitation, or repair of a public school facility or to acquire land on which a facility funded by the same issue is to be built.
o The bond is issued by a state or local government within the jurisdiction of which the school is located.
o The issuer designates the bond as a qualified school construction bond under section 54F of the Internal Revenue Code.
• Recovery zone facility bonds. – Recovery zone facility bonds are a type of qualified private activity bond, the interest income of which is tax-exempt. The national limitation on the amount of these bonds that may be issued before January 1, 2011 is $15 billion. The IRS will allocate the national amount to the states based on an amount that bears the same ratio to the total limitation that its employment decline for 2008 bears to the aggregate of the 2008 employment declines for all of the states.
A recovery zone facility bond is any bond issued before January 1, 2011 and where 95% or more of the net proceeds of the issue are to be used for recovery zone property. Recovery zone property is depreciable property constructed, reconstructed, renovated, or acquired by purchase by the taxpayer after the date on which the recovery zone designation took effect where substantially all of the use of the property is in a recovery zone and is in the active conduct of a qualified business by the taxpayer in the zone. A recovery zone is (1) any area designated as having significant poverty, unemployment, rate of home foreclosures, or general distress; (2) any area designated by the issuer as economically distressed by reason of the closure or realignment of a military installation; or (3) any area for which a designation as an empowerment zone or renewal community is in effect.
• Recovery zone economic development bonds. – Recovery zone economic development bonds are a type of qualified bond, which entitles the county or municipal issuer to elect to receive a 45% tax credit for the interest paid on the bond. Up to $10 billion in these bonds may be issued nationally before January 1, 2011. It is estimated that $351.7 million will be allocated to North Carolina. The proceeds of the bonds are to be used for qualified economic development purposes defined as expenditures for promoting development or other economic activity in a recovery zone.
• Qualified energy conservation bonds. – Qualified energy conservation bonds are a new type of tax credit bond authorized under the Emergency Economic Stabilization Act of 2008. These bonds provide a federal subsidy to assist state and local governments in financing energy conservation projects with respect to capital expenditures, research expenditures, expenses for mass commuting facilities, demonstration projects that promote green building technology, and other
• Cumberland - $15.95 million
• Forsyth - $12.24 million
• Guilford - $17.15 million
• Wake - $17.30 million
- 11 -
technologies that promote energy efficiency. ARRTA expands the program by increasing the national cap from $800 million to $3.2 billion. North Carolina's allocation is $95.7 million.
Conform Federal Tax Reform Allocation Committee. – This act also amends the Article governing the Federal Tax Reform Allocation Committee (Committee) to reflect the addition of recovery zone facility bonds, recovery zone economic development bonds, and qualified energy conservation bonds under ARRTA. With this change, the Committee is authorized to manage the allocation of these new bonds and to study the ways in which these bonds can be utilized.
Authorize private sale of certain general obligation bonds. – Bonds issued by units of local government must be sold by the Local Government Commission (LGC) after advertisement and upon sealed bids, unless they meet one of the statutory exceptions. Under prior law, the following types of bonds could be sold at private sale:
• Bonds that a state or federal agency has previously agreed to purchase.
• Any bonds for which no legal bid is received within the time allowed for submission of bids.
• Revenue bonds and special obligation bonds issued pursuant to Chapter 159I of the General Statutes.
• Special obligation refunding bonds.
• Refunding bonds issued pursuant to G.S. 159-72, if the LGC determines that a private sale is in the best interest of the issuing unit.
• Bonds designated as qualified zone academy bonds pursuant to G.S. 115C-489.6, if the LGC determines that a private sale is in the best interest of the issuing unit.
• Project development financing debt instruments.
This act adds to the above list general obligation bonds issued pursuant to the Local Government Bond Act that have been rated by a nationally recognized credit rating agency at a credit rating below "AA" or that are unrated if they are sold prior to December 31, 2010.
The act also authorizes the private sale of bonds that are part of an issue in which the interest payments on some or all of the bonds are intended to be subsidized by payments from the federal government under federal tax laws, if the LGC determines that a private sale is in the best interest of the issuing unit. The purpose of this language is to permit the use of build America bonds, in which the interest subsidy is paid directly by the U.S. Treasury to the issuer of the obligations.
Conform Industrial and Pollution Control Facilities Financing Act. – The act makes conforming changes to the Industrial and Pollution Control Facilities Financing Act to take into account the recovery zone facility bonds authorized under ARRTA.
The Industrial and Pollution Control Facilities Financing Act authorizes the issuance of tax-exempt industrial development and pollution control bonds. Under this Act, a local political subdivision issues bonds, the proceeds of which are used to finance the acquisition and construction of industrial, pollution control, or other capital facilities to be used by a private company. The bonds are secured by and are sold exclusively on the basis of the
- 12 -
company's obligation to make payments under a financing agreement entered into between the company and the political subdivision. Because the interest on the bonds is exempt from North Carolina and federal income taxes, the interest payments (made indirectly by the private company) are considerably lower than would be required in an ordinary taxable financing. The type and size of facilities that may be financed by industrial development and pollution control bonds are limited by both federal and state law.
The act authorizes a county or city to designate an Industrial Facilities and Pollution Control Financing Authority as a governmental entity authorized to issue recovery zone facility bonds. It allows facilities that qualify as recovery zone property in connection with the issuance of recovery zone facility bonds to qualify as "special purpose projects" under the Act. Finally, it allows facilities used in the production of tangible or intangible personal property to qualify as "industrial projects" under the Act.
Conform North Carolina Capital Facilities Financing Act. – The act also makes changes similar to those made to the Industrial and Pollution Control Facilities Financing Act, to the North Carolina Capital Facilities Financing Act. It allows facilities used in the production of tangible or intangible personal property to qualify as "projects" under the North Carolina Capital Facilities Financing Act.
Rescind Advanced Property Tax Appraisal.
Session Law
Bill #
Sponsor
S.L. 2009-180
HB 1530
Rep. Cole, Holloway, Burr, Starnes
AN ACT TO VALIDATE THE SCHEDULE OF VALUES USED TO APPRAISE REAL PROPERTY FOR THE TAXABLE YEAR BEGINNING JULY 1, 2009, BY A COUNTY THAT ADOPTED A RESOLUTION TO POSTPONE A 2009 REAPPRAISAL BETWEEN JANUARY 1, 2009, AND JUNE 30, 2009.
OVERVIEW: This act validates a resolution adopted by a board of county commissioners between January 1, 2009, and June 30, 2009, to postpone a 2009 property tax reappraisal. The effect of the validated resolution is that the schedule of values adopted by the board of county commissioners and used to appraise real property in the county for its last reappraisal will remain the schedule of values for property tax appraisal purposes until the county reappraises real property in accordance with the statutory time schedule.26
FISCAL IMPACT: No General Fund impact.
26 G.S. 105-286 requires counties to reappraise real property at least every eight years. The purpose of a reappraisal is to help a county fairly and equitably distribute the tax burden between the different classes of property. To accomplish this purpose, a county may voluntarily advance its reappraisal schedule to a shorter cycle by passing a resolution setting a different reappraisal cycle. A county that has advanced its reappraisal cycle may also pass a resolution to go back to a longer cycle, so long as the octennial requirement continues to be met.
- 13 -
EFFECTIVE DATE: This act became effective when it was signed into law by the Governor on June 26, 2009.
ANALYSIS: This past year's economic condition, in which the national median sales price for existing homes dropped by roughly 25%, the stock market began sliding, and North Carolina's unemployment rate increased, was an impetus for counties to postpone their 2009 property tax reappraisals.27 In 2009, six counties voted to repeal or postpone their 2009 revaluations. Four of the counties that had advanced their property tax appraisals and had already conducted reappraisals for the 2009 taxable year, chose to postpone the 2009 appraisals after January 1, 2009.28 In April, 2009, the North Carolina Attorney General issued an advisory memorandum confirming the earlier opinions of the Department of Revenue and the School of Government that North Carolina law does not permit a county to rescind a revaluation once the schedule of values becomes effective on January 1. The advisory memorandum pointed out that under North Carolina law a board of county commissioners must review and approve a schedule of values before January 1 of the year they are applied, and that the value of real property is determined as of January 1 of the year in which the valuation is fixed. Because the statutes do not expressly authorize a county to repeal a schedule of values once it takes effect, such authority may not be read into the statutes. A county must therefore proceed with the schedule of values approved by the county commissioners. The memorandum also emphasized that if a county were allowed to rescind previous approval of an advanced reappraisal and the new schedule of values at any time during the year, then the tax rate determined by the county might not meet its financial needs.29
The act validates the resolutions adopted by Caldwell, Stanley, and Rockingham Counties, as well as that of any other county, to repeal or postpone the 2009 revaluations so long as the boards of county commissioners voted to do so by June 30, 2009.
Two-Thirds Bonds Act of 2008.
Session Law
Bill #
Sponsor
S.L. 2009-209
HB 1508
Rep. Owens, Goforth, Womble
AN ACT TO MAKE TECHNICAL CORRECTIONS TO THE TWO-THIRDS BONDS ACT OF 2008 AND TO PROVIDE FOR THE ISSUANCE OF GENERAL OBLIGATION BONDS TO FINANCE
27 See Christopher B. McLaughlin, "The Revaluation Revolt of 2009", Local Government Law Bulletin No. 121 (September2009), available at www.sog.unc.edu/bulletins/lglb for a detailed discussion of the history of this legislation.
28 Caldwell County passed a resolution on January 5, 2009, to delay its revaluation until 2011; Stanly County passed a resolution on January 20, 2009;Rockingham County passed its resolution on March 9, 2009; and Swain County abandoned its 2009 revaluation in June, 2009.
29 A county must submit a tax rate to the governing board by June 1, and the rate must be approved by July 1. The tax rate, necessary to meet the financial needs of the county, is based upon the value of the taxable property.
- 14 -
THE COSTS OF THE BIOMEDICAL RESEARCH IMAGING CENTER.
OVERVIEW: This act modifies the Two-Thirds Bonds Act of 200830 in the following two ways:
• It changes the way the term 'biennium' is used for purposes of calculating the two-thirds bonds availability. The effect of this change is to extend the authorization for the sale of bonds for the Green Square Project into the 2009-2011 biennium.
• It adds as an authorized special indebtedness project the Biomedical Research Imaging Center at the University of North Carolina at Chapel Hill. The act authorizes the issuance of $223 million of non-voted general obligation bond indebtedness to finance the capital costs of this facility.
FISCAL IMPACT: No fiscal impact.
EFFECTIVE DATE: This act became effective when the Governor signed it into law on June 29, 2009.
ANALYSIS: Last year, the General Assembly, in its continuation budget, authorized the issuance of $107 million of non-voted general obligation bond indebtedness to finance the Green Square Project. General obligation bond indebtedness is secured by the faith and credit and taxing power of the State. As a general rule, general obligation bond indebtedness must be approved by the voters. However, under Article V, Section 3(f)31 of the North Carolina Constitution, the State may issue non-voted general obligation bonds in an amount not to exceed two-thirds of the amount by which it reduced its outstanding general obligation debt in the preceding biennium. The term 'biennium' is not specifically defined in the Constitution. The Two-Thirds Bonds Act of 2008 used the term 'biennium' to refer to any consecutive two-year period. Specifically, it referred to the two-year period ending June 30, 2008. Based upon this formula, the State could have issued up to $125 million of non-voted general obligation bonds for fiscal year 2008-2009. No bonds have been issued under this authorization yet.
The current bond counsel for the State of North Carolina interprets the term 'biennium' as used in Article V, Section 3(f) of the North Carolina Constitution to refer to the traditional State biennium beginning on July 1 of odd-numbered years and ending on June 30 of the second following year. Thus, two-thirds bonds may be issued during the biennium ending June 30, 2011 based on the amount of net debt reductions for the biennium ending June 30, 2009. This interpretation is consistent with the way the State applied the two-thirds provision for bonds authorized by legislation enacted in 1988 (S.L. 1987-1048) and in 1991
30 Section 27.9 of S.L. 2008-107, as amended by Section 2.7(c) and (d) of S.L. 2008-118.
31 "Sec. 3. Limitations upon the increase of State debt.
(1) Authorized purposes; two-thirds limitation. The General Assembly shall have no power to contract debts secured by a pledge of the faith and credit of the State, unless approved by a majority of the qualified voters of the State who vote thereon, except for the following purposes:
…
(f) for any other lawful purpose, to the extent of two-thirds of the amount by which the State's outstanding indebtedness shall have been reduced during the next preceding biennium."
- 15 -
(S.L. 1991-760). With this change, the issuance of the two-thirds bonds authorized last session for the Green Square Project would be moved to the 2009-2011 biennium.
The Green Square Project consists of an office building for the North Carolina Department of Environment and Natural Resources, the construction of a Nature Research Center for the NC Museum of Natural Science, and an underground parking deck with 426 spaces. The Project also consists of another parking deck, authorized in S.L. 2006-231, which will house up to 900 spaces. The total cost of the Project, excluding the parking deck authorized in 2006, is $150 million. The General Assembly appropriated $25 million for the project last year. Parking receipts will service the debt for parking construction and the Friends of the Museum of Natural Science have committed $27.5 million towards the cost of the Nature Research Center and $15.5 million toward the cost of the exhibits.
This act also adds as a project to the Two-Thirds Bonds Act of 2008, the Biomedical Research Imaging Center at the University of North Carolina at Chapel Hill (BRIC). The act authorizes the issuance of $223 million of non-voted general obligation bond indebtedness to finance the capital costs of this facility.
Under the constitutional two-thirds limitation, the State may issue up to $486.8 million of non-voted general obligation bonds this coming biennium. Under the Debt Affordability Study, dated February 2009, the State's recommended debt affordability capacity for each of the next five years is $50.2 million. In conducting its analysis, the Treasurer's Office included anticipated debt of the Green Square Project. The addition of the BRIC project to the act would cause the State to exceed the recommended debt capacity. Therefore, the act also adjusts the indebtedness for several projects financed through special indebtedness to provide enough debt capacity, under the Debt Affordability Study, to add BRIC to the Two-Thirds Bonds Act of 2008.
EMS/Fire Dept. Sales Tax Refund.
Session Law
Bill #
Sponsor
S.L. 2009-233
HB 511
Rep. Williams, Goforth, Lucas, E. Warren
AN ACT TO REENACT THE SALES TAX REFUND FOR CERTAIN VOLUNTEER EMERGENCY RESPONSE PERSONNEL.
OVERVIEW: This act allows a volunteer fire department and a volunteer EMS squad that is exempt from income tax under the Internal Revenue Code (Code) a sales and use tax refund, regardless of how the nonprofit is organized.
FISCAL IMPACT: The act will reduce General Fund revenues by $2.4 million in fiscal year 2009-2010 and $2.5 million in fiscal year 2010-2011. The act will also reduce local revenues by $1.0 million in fiscal years 2009-2010 and approximately $1.0 million in each
- 16 -
year thereafter. (For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2009 Session. Available in the Legislative Library.)
EFFECTIVE DATE: The act is effective July 1, 2008, and applies to purchases made on or after that date. The retroactive effective date refers to the date that the 2008 clarifying legislation became effective. The change made by this bill effectively reinstates the semiannual sales and use tax refund for volunteer fire departments and voluntary EMS squads.
ANALYSIS: During the 2008 Session, the General Assembly clarified the types of nonprofits that may receive a semiannual refund of State and local sales and use taxes paid by the nonprofit on direct purchases of tangible personal property and services32 for use in carrying on the work of the nonprofit entity. Prior to the clarification, the Department of Revenue had to determine whether an entity requesting a refund was a 'charitable institution.' To make its determination, the Department relied upon past determinations and court decisions. In May 2008, the North Carolina Court of Appeals appeared to expand what could be considered a 'charitable institution.'33 The intent of the 2008 legislation was neither to expand nor limit the prior law's application but to clarify it.
The clarification provided a bright line test that used as its starting point nonprofits exempt from income tax under section 501(c)(3) of the Code. The clarification became effective July 1, 2008. After the passage of the legislation, some volunteer fire departments learned they no longer qualified for the sales and use tax refund because they were not organized as a section 501(c)(3) organization. Many of the volunteer fire departments organized prior to the mid-1970s organized as a section 501(c)(4) organization34 because that is how, at the time, the IRS recommended they organize.
This act allows a volunteer fire department or a volunteer EMS squad that is exempt from income tax under the Code a sales and use tax refund, regardless of how the nonprofit is organized. A request for a refund for the first six months of a calendar year is due the following October 15, and a request for a refund for the second six months of a calendar year is due the following April 15. However, under G.S. 105-164.14(d), a refund is not barred unless it is applied for more than three years after its due date.
Tax Info Disclosure to State Treasurer.
Session Law
Bill #
Sponsor
S.L. 2009-283
SB 691
Senator Dorsett
AN ACT TO PERMIT DISCLOSURE OF CERTAIN TAX INFORMATION OF LOCAL GOVERNMENTS TO THE DEPARTMENT OF STATE TREASURER AND TO ENACT THE
32 The refund does not apply to direct purchases of electricity, telecommunications service, or ancillary service.
33 The Lynnwood Foundation v. N.C. Department of Revenue. 660 S.E.2d 611 (2008).
34Section 501(c)(4) refers to civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.
- 17 -
TREASURER'S GOVERNANCE AND TRANSPARENCY ACT OF 2009.
OVERVIEW: This act makes the following changes related to the authority of the State Treasurer:
• Permits the Department of Revenue to disclose certain tax information concerning local governments to the Treasurer's Office.
• Increases the membership of the State Treasurer's Investment Advisory Committee from five to seven members by adding two public members and changes the experience requirements of the public members.
• Codifies the fiduciary standard to be applied to the Treasurer with respect to the discharge of his or her duties in connection with the retirement systems administered by the Treasurer's Office.
• Requires the Treasurer to make annual reports to the General Assembly on investments made under new grants of authority.35
FISCAL IMPACT: No fiscal impact.
EFFECTIVE DATE: This act became effective when the Governor signed it into law on July 10, 2009.
ANALYSIS: This act was requested by the Office of the State Treasurer and makes several changes related to the Treasurer's authority.
Disclosure of tax information. – The act creates a new exception in the tax secrecy statute by authorizing the Department of Revenue to release tax information to the Treasurer's Office concerning whether a local government has timely filed a withholding report, has charged a penalty, or has paid a penalty for failure to file the report. This information may be used by the Treasurer to determine compliance with the Local Government Finance Act.
Current law provides that the disclosure of tax information is prohibited unless the disclosure is for one of the purposes enumerated by statute. There are currently over 35 purposes for which disclosure is permitted. Individuals who disclose tax information in violation of the statute are guilty of a Class 1 misdemeanor. Public officials and employees who disclose tax information in violation of the statute are dismissed from office or employment and may not hold public office or public employment for five years after the violation.
Increased Investment Advisory Committee membership. – The State Treasurer is authorized to appoint an Investment Advisory Committee (Committee). Under prior law, the Committee consisted of five members: the State Treasurer, two members from the board of trustees of the Retirement Systems, and two public members. The public members were required to have experience in one or more of the following areas: investment management, real estate investment trusts, real estate development, venture capital investment, or absolute return strategies. The Committee has only advisory powers.
35 The last three bullets were originally the contents of Senate Bill 632.
- 18 -
This act increases the membership of the Committee from five to seven members, with the two additional members to be appointed by the Treasurer as public members. The act also changes the experience requirements for the public members by removing the requirement for experience in real estate investment trusts and venture capital investments, and substituting experience in securities law.
Codification of fiduciary standard. – The State Treasurer is authorized to invest the assets of all the State-administered retirement systems. There are several limitations on the amount and types of investments that can be made with these funds. This act codifies the fiduciary standard applicable to the Treasurer with regard to the administration of the retirement systems. The standard was modeled on the Model Uniform Management of Public Employee Retirement Systems Act, which was approved by the National Conference of Commissioners on Uniform State Laws. Specifically, the Treasurer must discharge his or her duties as follows:
• Solely in the interest of participants and beneficiaries.
• For the exclusive purpose of providing benefits and paying reasonable administrative expenses.
• With the care, skill, and caution under the circumstances that a prudent person who was familiar with the matters would use in a like situation.
• Impartially, taking into account the differing interests of participants and beneficiaries.
• Incurring only appropriate and reasonable costs.
• In accordance with a good-faith interpretation of the law governing the Retirement Systems.
The act also sets standards to be used by the Treasurer in investing and managing the assets of the retirement systems, including that the Treasurer:
• Must consider the following circumstances:
o General economic conditions.
o The possible effects of inflation or deflation.
o The role of each investment in the overall portfolio.
o The expected total return and the appreciation of capital.
o Needs for liquidity, regular income, and preservation or appreciation of capital.
o The adequacy of funding based on reasonable actuarial factors.
• Must diversify the investments unless the Treasurer determines it is clearly not prudent to do so.
• Must make reasonable efforts to verify relevant facts.
• May invest in any kind of real property which the State is authorized to acquire under Article 6 of Chapter 146 of the General Statutes.
• May consider other benefits created by an investment in addition to return on the investment, only if the investment would be prudent even without the collateral benefit.
- 19 -
The Treasurer's compliance with this standard must be determined based on the facts and circumstances at the time the decision was made, not using hindsight. In addition, the Treasurer's investment and management decisions must be evaluated in light of the portfolio as a whole and as part of an overall investment strategy.
Reporting requirement. – The act also provides that when the Treasurer is granted broadened investment authority by the General Assembly regarding certain funds, the Treasurer must report in detail to the General Assembly regarding the investments. The report must be made for four years after the new authority is granted, and include the return on those investments, earnings, changes to value, and gains and losses in the disposition of the investments. The funds are:
• The General Fund.
• The Teachers' and State Employees' Retirement System.
• The Consolidated Judicial Retirement System.
• The Firemen's and Rescue Workers' Pension Fund.
• The Local Government Employees' Retirement System.
• The Legislative Retirement System.
• The North Carolina National Guard Pension Fund.
• Any idle fund.
Defer Tax on Builders' Inventory.
Session Law
Bill #
Sponsor
S.L. 2009-308
HB 852
Rep. Dickson, Brubaker, Holliman, Wainwright
AN ACT TO DEFER A PORTION OF THE PROPERTY TAX DUE ON REAL PROPERTY HELD FOR SALE BY A BUILDER.
OVERVIEW: This act creates a property tax deferral program to defer for a maximum of three years the portion of taxes on an unoccupied, unsold residence attributable to the construction of the residence by a builder.
FISCAL IMPACT: This act is estimated to result in a deferral of local property tax revenues in the amount of $30-$35 million in FY 2010-11 and $7-$12 million in FY 2011-12. Minimal or positive impact in subsequent years as program sunsets and deferred taxes are paid.
EFFECTIVE DATE: This act is effective for taxes imposed for taxable years beginning on or after July 1, 2010, and is repealed for taxes imposed for taxable years beginning on or after July 1, 2013.
ANALYSIS: North Carolina currently has six property tax deferral programs: (i) historic district property held as future site of historic structures , (ii) the circuit breaker tax deferral program , (iii) nonprofit property held as future site of low or moderate income housing ,
- 20 -
(iv) present use value (PUV) property , (v) working waterfront property , and (vi) historic property. Uniform tax provisions for all deferral programs include the following:
• Taxes that are deferred under one of these programs become a lien on the property, which is extinguished when the taxes are paid.
• The deferred taxes are due and payable on the day the property loses its eligibility for deferral as a result of a disqualifying event.
• Interest accrues during the deferral period as of the date the taxes would have originally become due without the deferral program.
• Upon disqualification, the tax for a year in which a disqualifying event occurs is computed without the benefit of the deferral program.
This act adds a seventh property tax deferral program for an occupant-ready residence constructed36 and owned by a general contractor for resale on a parcel of real property. The amount of property tax liability that can be deferred is the portion of tax that represents the increase in the property value resulting from the construction of the residence on the property. For example, if the land value of unimproved real estate was $100,000, and the value of the property, as improved by the construction of a residence, was $400,000, the builder must pay the property tax on the land value ($100,000) but may defer the property tax liability for the value of the improvement ($300,000).
The deferred taxes are carried forward in the records of the county and, if applicable, the city in which the property is located until the occurrence of one of the following disqualifying events: (1) the builder transfers the residence; (2) the residence is occupied by the builder or another with the builder's consent; (3) five years from the time the improved property was first subject to being listed for taxation by the builder, or (4) three years from the date the improved property first received the property tax benefit provided by this deferral program. The uniform provisions for deferral programs apply to this inventory tax deferral program. Applications should be filed within the regular listing period and may be filed later if the board of equalization and review determines there is good cause for the lack of timely filing.
Energy Savings Contracts' Cap/Program Admin.
Session Law
Bill #
Sponsor
S.L. 2009-375
SB 304
Senator Clodfelter
AN ACT TO INCREASE THE AMOUNT THE STATE MAY FINANCE UNDER GUARANTEED ENERGY SAVINGS CONTRACTS AND TO MODIFY THE REPORTING REQUIREMENTS.
36 Construction activities limited to renovating, refinishing, rehabilitating, or remodeling do not qualify.
- 21 -
OVERVIEW: This act increases the cap on guaranteed energy savings contracts and modifies the reporting requirements of the program.
FISCAL IMPACT: There is no net impact on General Fund revenues. (For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2009 Session. Available in the Legislative Library.)
EFFECTIVE DATE: This act became effective when signed into law by the Governor on July 20, 2009.
ANALYSIS: State agencies and local governments have the authority to enter into financing contracts to finance the cost of energy conservation measures. Prior to this act, the aggregate principal amount payable by the State under these contracts was limited to $100 million. An energy conservation measure is a facility or meter alteration, training, or services that will provide anticipated energy savings with respect to a facility. The financing contracts are known as guaranteed energy savings contracts. Under the contract to implement energy conservation measures, all payments, except obligations on early termination, are to be made over time, and energy cost savings are guaranteed to exceed the cost of the contract.
The law provides that a guaranteed energy savings contract is not a pledge of the government's taxing power. The debt is secured by a lien on, or a security interest in, any part of the property with respect to which an energy conservation measure is undertaken and/or the land upon which the property is or will be located. It is anticipated that the energy savings will generate enough money to pay the debt service on the contract. This is a method of funding repair and renovation projects without impacting the State's debt capacity.
State agencies that enter into guaranteed energy savings contracts are required to report to the State Energy Office which, in turn, reports annually to the Joint Legislative Commission on Governmental Operations. State energy conservation measures are subject to inspection and compliance by the State Construction Office or the local building inspector. The cost of the evaluation of the contract by either an independent architect or engineer, or by the State Construction Office, and the costs of the necessary building inspections are included in the cost of the contract.
Before a guaranteed energy savings contract can be entered into, the Office of State Budget and Management must certify that resources are expected to be available to pay the amounts due under the contract. Next, the Council of State must approve the contract by resolution that sets out the maximum maturity and the maximum interest rates. The maximum maturity may not exceed 20 years. The State Treasurer also must approve the financing, finding that the amount to be borrowed is adequate and not excessive, that it 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.
This act increases the limit on the contracts from $100 million to $500 million, and clarifies that the limit is a revolving limit based on the amount of contracts at any given time rather than a limit on the aggregate amount of all savings contracts entered into. The act requires a qualified provider to conduct a life-cycle cost analysis of each conservation measure in a final proposal. A life-cycle cost analysis considers certain costs of owning and using property over its economic life, including the initial costs, system repair and replacement costs, maintenance costs, operating costs, and salvage value. The act also requires local governments that enter into energy savings contracts to report the contracts and the terms of the contracts to the State Energy Office. Previously, local governments that entered into - 22 -
energy savings contracts were required to report the contracts to the Local Government Commission.
JDIG Technical Modifications.
Session Law
Bill #
Sponsor
S.L. 2009-394
HB 1516
Rep. Crawford, Dickson, Gibson
AN ACT TO MAKE CERTAIN MODIFICATIONS TO AND EXTEND THE SUNSET OF THE JOB DEVELOPMENT INVESTMENT GRANT PROGRAM.
OVERVIEW: This act makes clarifying and technical changes to the Jobs Development Investment Grant program and extends the sunset of the program from 2010 to 2016.
FISCAL IMPACT: No impact.
EFFECTIVE DATE: This act became effective when the Governor signed it into law on July 31, 2009.
ANALYSIS: In 2002, the General Assembly created a new economic development tool for new and expanding businesses in North Carolina, the Job Development Investment Grant (JDIG) Program. JDIG is used to attract businesses to the State by allowing a five-member Economic Investment Committee37 to award grants to businesses. The grants may be awarded over as many as 12 years, and the amounts of the grants are based on income tax withholdings from new jobs created by the businesses. The Committee may enter into no more than 25 agreements per calendar year and may commit no more than $15 million in any fiscal year under all agreements entered into during a single calendar year. When the General Assembly created the program, it imposed a two-year sunset on the authority of the Committee to enter into new grant agreements. The General Assembly has voted to extend this sunset three times since its enactment.38 This act extends the program a fourth time, from January 1, 2010 to January 1, 2016.
The act also makes the following clarifying and technical changes to the program, upon the recommendation of the Department of Commerce.
• Section 1 removes the reference to 'negotiated' agreements because the form of the basic agreement is standard for all grantees. The term 'negotiated' has led some grantees to believe they may negotiate the terms required by the State.
• The act clarifies that the JDIG program awards grants, and that the program may enter into agreements with businesses to provide grants.
37 The members of the Committee are the Secretary of Commerce, the Secretary of Revenue, The Director of the Office of State Budget and Management, and two public members appointed by the General Assembly, one upon the recommendation of the President Pro Tempore of the Senate and the other upon the recommendation of the Speaker of the House of Representatives. G.S. 143B-437.54.
38 S. L. 2004-124, S.L. 2005-241, and S.L. 2006-168.
- 23 -
• Section 1 removes language that refers to the cap on annual grants for the year 2006.
• Section 2 clarifies that a business may apply for grants that include performance by related members of the business. The purpose of this change is to make it clear that the grantee is not the legal representative of the related member and that the related member has no legal right to grant payments. Current law provides that a business may not include performance by related members in its application for a grant unless the related members assign to the business any claim of right the related members may have to apply for grants individually.
• Section 2 changes the annual reporting requirements of the JDIG program as follows:
o The report must include the annual maximum State liability under each grant awarded as well as the maximum total lifetime State liability under the grant.
o The report may list the wage levels of jobs created by projects that received grants in increments of $10,000 as opposed to $5,000.
o The report must identify any changes in criteria developed by the Economic Investment Committee to implement the program.
o The report must indicate separately the number of awards made to new businesses and those made to existing, expanding businesses.
• Sections 3 and 5 change the method for reducing grants whenever a grantee defaults upon one or more of the provisions in the agreement. Previously, the Economic Investment Committee had to must formally approve an amendment to the grant agreement to implement the grant reduction. Under the act, the Committee and its staff may reduce the amount or term of grant if a grantee fails to comply with the terms of the agreement. A grant agreement must include provisions providing the Committee with this authority. It also provides for a reduced payment due to default in the payment for the year in which the default occurred, rather than the following year.
• Section 4 clarifies that the grantees must provide annual reports showing withholding as well as identifying positions created during the year that remained filled at the end of the year.
Continue School Construction Funding.
Session Law
Bill #
Sponsor
S.L. 2009-395
HB 311
Rep. Yongue, Glazier, Johnson, Wainwright
AN ACT TO CONTINUE THE CONSTRUCTION FUNDING OF SCHOOLS THROUGH THE FIRST AND THE SECOND ONE-HALF CENT SALES AND USE TAXES. - 24 -
OVERVIEW: This act makes permanent the designation of a certain percentage of local sales and use taxes for public school capital outlay purposes or related debt retirement by eliminating the sunsets on those requirements.
FISCAL IMPACT: This act has no impact on General Fund revenues. (For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2009 Session. Available in the Legislative Library.)
EFFECTIVE DATE: This act is effective January 1, 2010, and applies to sales made on or after that date.
ANALYSIS: A percentage of the first ½ cent and second ½ cent sales and use tax levied by counties must be used for public school capital outlays. Under both the first ½ cent and second ½ cent sales and use tax, the amount designated for public school capital outlay may be used to retire indebtedness incurred for public school capital outlay. However, if a county can demonstrate that it does not need the earmarked revenue to meet its public school capital needs, it may petition the Local Government Commission to authorize it to use the money for any public purposes. In making its decision, the Commission must consider not only the public school capital needs but also the other capital needs of the county.
First ½ Percent Sales and Use Tax. – Article 40 of Chapter 105 of the General Statutes provides counties that levy a one percent (1%) sales and use tax the authority to levy an additional one-half percent (1/2%) sales and use tax. For the first five years of the tax, 40% of the revenue must be used for public school capital outlay; for the next 23 years of the tax, 30% of the revenue must be used for public school capital outlay. This act amends G.S. 105-487 to require that after the first five years that the first one-half percent (1/2%) sales tax is in effect, 30% of the revenue must always be used for public school capital outlay or indebtedness.
Second ½ Percent Sales and Use Tax. – Article 42 of Chapter 105 provides counties that levy the one percent (1%) sales tax and the additional first one-half percent (1/2%) sales and use tax the authority to levy a second one-half percent (1/2%) sales and use tax. For the first 25 years of the tax, 60% of the revenue must be used for public school capital outlay, unless the amount allocated to the county under the first one-half percent (1/2%) is greater than the amount allocated under the second one-half percent (1/2%) sales tax, the difference between the two amounts. This act amends G.S. 105-502 to require that 60% of the revenue from the second one-half percent (1/2%) sales tax, as designated in that section, must always be used for public school outlay purposes or to retire indebtedness incurred for that purpose during the five years before the indebtedness took effect.
Sales Tax: Reliance on Written Advice by DOR.
Session Law
Bill #
Sponsor
S.L. 2009-413
SB 909
Senator Clodfelter
AN ACT EXTINGUISHING THE LIABILITY OF RETAILERS FOR SALES TAX OVERCOLLECTIONS MADE IN RELIANCE ON WRITTEN ADVICE OF THE SECRETARY OF REVENUE.
- 25 -
OVERVIEW: This act provides that if a retailer collects sales tax from a customer in excess of the amount that should have been collected, based on specific written advice it received from the Secretary of Revenue, the retailer is not liable to the customer for the overcollected amount. The act also clarifies that there is no change to the current requirement that a retailer must issue a refund to the customer prior to the retailer obtaining a refund from the Department.
FISCAL IMPACT: No fiscal impact.
EFFECTIVE DATE: This act became effective when the Governor signed it into law on August 5, 2009.
ANALYSIS: This act provides that a seller is not liable to a purchaser if the seller collected and remitted sales and use tax in accordance with written advice it received from the Department.
All sales taxes, including over-collections, must be remitted to the Department. In the case of an overcollection, a purchaser's first course of remedy is to seek a refund from the seller who, in turn, may obtain a refund from the Department. A cause of action against the seller does not accrue until a purchaser has provided written notice to a seller, and the seller has had sixty days to respond. If the seller issues a refund or credit to the purchaser, the seller may then apply to the Department for the amount of the refund or credit. A seller is not entitled to a refund or credit unless the purchaser has been refunded or received a credit for the amount of tax erroneously charged.
A taxpayer may request specific advice from the Department. If the Department furnishes erroneous advice and the taxpayer reasonably relies on that advice, the taxpayer is not liable to the Department for any penalty or additional assessment attributable to the erroneous advice to the extent the following conditions are satisfied:
• The advice was reasonably relied upon by the taxpayer.
• The penalty or additional assessment did not result from the taxpayer's failure to provide adequate or accurate information.
• The Department provided the advice in writing or the Department's records establish that the Department provided erroneous verbal advice.
Current law already provides that a taxpayer (in this case, the seller) is not liable to the Department for any penalty or additional assessment if the advice it received from the Department was wrong. Under this act, a seller is immunized from liability with respect to a purchaser from whom it overcollected sales and use tax based on advice the seller relied upon from the Department.
- 26 -
Franchise Tax-Overbilling Out of Capital Base.
Session Law
Bill #
Sponsor
S.L. 2009-422
SB 367
Senator Jenkins
AN ACT TO REMOVE BILLINGS IN EXCESS OF COSTS FROM THE FRANCHISE TAX CAPITAL BASE FOR TAXPAYERS USING THE PERCENTAGE OF COMPLETION METHOD OF REVENUE RECOGNITION.
OVERVIEW: This act excludes from a corporation's franchise tax base all billings in excess of costs, effective for taxable years beginning on or after January 1, 2010.
FISCAL IMPACT: This act has the potential to impact General Fund revenues. However, according to the Department of Revenue a specific determination was not possible. Currently, the account is either incorrectly included in the liabilities total as definite and accrued, or properly excluded from this amount. Because the exclusion is not specifically reported on the return, it is not possible to quantify the number of taxpayers in compliance with current law or not in compliance. (For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2009 Session. Available in the Legislative Library.)
EFFECTIVE DATE: The act becomes effective for taxable years beginning on or after January 1, 2010.
ANALYSIS: This act exempts billings in excess of costs from surplus and undivided profits, thus excluding them from the franchise tax capital base.
The State imposes a franchise tax on C-corporations and S-corporations. The tax rate is $1.50 per $1,00039 and is applied to a company's capital stock, surplus, and undivided profits.40 The term "surplus" for franchise tax purposes has a broader and more inclusive meaning than the generally accepted accounting definition. G.S. 105-122(b) provides that surplus and undivided profits includes all liabilities, reserves, and deferred credits unless those items are specifically exempt. One of the exemptions from surplus and undivided profits is "definite and accrued legal liabilities." The Department of Revenue defines a definite and accrued legal liability as one that meets both of the following conditions:
• The liability is definite in amount, meaning it is exactly determined and not merely accurately estimated.
• The liability will be incurred before the end of the taxable year.
Generally accepted accounting principles require that revenue be recorded in the period it is earned regardless of when it is billed or when cash is received. In long-term construction contracts, there is often a mismatch between actual billed revenue and earned revenue. Sometimes elements of a contract are billed in advance and sometimes they are delayed. The accounting solution to this problem is the percentage of completion method of revenue recognition. Under this method of accounting, where the costs can be reasonably estimated,
39 The minimum tax is $35.
40 A corporation's capital base may not be less than 55% of the appraised value of tangible property in NC, nor less than its actual investment in tangible property in the State.
- 27 -
revenue is recognized as production takes place. This method of accounting may result in "billings in excess of costs" or "cost in excess of billings." Billings in excess of costs is a balance sheet liability because it represents unearned income. Cost in excess of billings is a balance sheet asset. For purposes of the State's franchise tax, the balance sheet liability of "billings in excess of costs" is not considered a definite and accrued legal liability because it is based on estimates; therefore, it is included in a corporation's capital base.
The construction industry sought to change this interpretation because it resulted in contractors having to pay taxes on liabilities and for revenue they had not actually received. The act incorporates the industry position by providing that billings in excess of costs that are determinable using the percentage of completion principles are exempted from surplus and divided profits, and therefore, excluded from the franchise tax base.
Rev Laws Tech, Clarifying, & Admin. Changes.
Session Law
Bill #
Sponsor
S.L. 2009-445
SB 509
Senator Hartsell
AN ACT TO MAKE TECHNICAL, CLARIFYING, AND ADMINISTRATIVE CHANGES TO THE TAX AND RELATED LAWS.
OVERVIEW: This act makes technical, clarifying, and administrative changes to the following taxes and related laws: privilege license, income, excise and insurance taxes; sales and use taxes and highway use taxes; property taxes; occupancy taxes; and motor fuel taxes.
FISCAL IMPACT: No impact. (For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2009 Session. Available in the Legislative Library.)
EFFECTIVE DATE: Except as otherwise specified, this act became effective when signed into law by the Governor on August 7. 2009.
ANALYSIS:
Section
Explanation
Privilege License, Income, Excise, and Insurance Tax Changes
1
Clarifies the privilege license tax on home inspectors applies to an individual licensed under the Home Inspector Licensure Act so that associate home inspectors will be taxed similarly. S.L. 2008-206 imposed an annual State privilege license tax of $50 on a licensed home inspector but it failed to mention associate home inspectors. Without this change, an associate home inspector would be subject to local privilege license tax in each city that levies the tax.41
2
Moves the definitions from subsection (b) to a newly created subsection (b1).
41 S.L. 2009-509 sunset the associate home inspector license. That legislation provides that the Home Inspector Licensure Board may not accept applications for associate home inspector licensees after April 1, 2011, and it may not renew an associate home inspector license after October 1, 2013.
- 28 -
The current subsection (b) contains two different subdivision lists. This change puts the defined terms, listed by subdivisions, into a new subsection.
3
Clarifies that a recycling facility42 that is eligible for the tax credit for investing in large or major recycling facility is not also eligible for the Article 3J tax credit for investing in business property. This section becomes for taxable years beginning on or after January 1, 2007, the year the Article 3J tax credits became effective.
4
Changes the term 'nonbusiness activities' to 'activities producing nonapportionable income', which is a defined term in the statute that sets out the manner in which corporations must allocate and apportion their income to North Carolina for income tax purposes. In 2002, the terms 'business income' and 'nonbusiness income' were replaced by apportionable and nonapportionable. This subsection was missed when those changes were made.
5
Clarifies that a corporate taxpayer may not use an alternative apportionment method unless it receives a written decision from the Secretary authorizing it to do so. A return that is not filed in accordance with the statutes is an improper return. This section specifically states that return prepared using an alternative apportionment formula without the permission of the Secretary is an unlawful return.
6
Corrects an effective date relating to changes made to the statute designating who may sign an income tax return. These changes were originally part of the major rewrite of the tax appeals procedure in 2007 (SB 242).
7
Repeals an unnecessary statute in the corporate and personal income tax laws. The Department of Revenue does not ask taxpayers to file a 'supplemental' return. A taxpayer files either an original return or an amended return. If the Department determines additional tax is due, it proposes an assessment.
8
Clarifies the reporting requirements for the film industry credit. The term 'claimed' may have several different meanings. The Department of Revenue requested clarity as to the meaning of the term.
9
Clarifies the application of the dollar cap amounts under the qualified business investment credit and the credit for certain real property donations in light of the 2009 Court of Appeals decision in the North Carolina Department of Revenue v. Hudson case. In that case, the court held that the statutory cap of $50,000 limits the amount a taxpayer may claim in a single tax year and allowed the taxpayer to carry forward amounts in excess of the cap. The change makes clear that an individual may only carry forward unused amounts of the credit up to the cap rather than being able to carry forward amounts in excess of the cap.
10
Changes the date by which the State Treasurer must make a transfer from the General Fund to the North Carolina Health Insurance Risk Pool Fund. The
42 The General Assembly enacted the credit as a tax incentive for Nucor in 1985.
- 29 -
statute provided that within 75 days after the end of each fiscal year, the Treasurer must transfer to the Fund an amount equal to the growth in net revenue from the gross premiums tax on insurance companies. Insurance tax returns are due by March 15. Insurance companies are also required to prepay their tax in installments. The first installment of the fiscal year is due by October 15. Therefore, until those installments are remitted, little or no funds are available for transfer. This section changes the date from within 75 days after the end of the fiscal year, or September 14, to November 1, as recommended by the Department of Revenue.
Sales and Use Tax and Highway Use Tax Changes
11
Updates the reference to the Streamlined Agreement from June 23, 2007 to May 12, 2009. North Carolina does not need to amend its sales and use tax laws to conform to the changes made in the Agreement since June 23, 2007. A copy of the Agreement, as well as a document summarizing the changes made to the Agreement since June 23, 2007, may be found on the Streamlined Sales Tax Project's website: www.streamlinedsalestax.org
12
Makes two conforming changes to the general sales tax sourcing principles. It provides that direct mail is sourced to the location where the property is delivered, and if that is unknown, it is sourced to the location from which the direct mail was shipped. This change ensures compliance with the Streamlined Agreement. This section also codifies the long-standing sourcing method used for florist wire sales: the sale is sourced to the business location of the florist that takes the order for the sale.
13
Reorganizes the statutory subsection without making any substantive changes.
14
Replaces the word 'energy' with the word 'electricity' for consistency. This term appears in the statute enacted last year authorizing a sales tax refund for materials used to build a facility that manufactures solar electricity generating materials. This section is effective July 1, 2008, the effective date of the original provision.
15
Provides a new distribution methodology for the allocation of sales tax collected o modular homes to local governments. The methodology currently references the distribution under the third ½ cent local sales and use tax; but this tax is repealed effective October 1, 2009. A 2.5% State sales tax applies to the sale of a modular home. Twenty percent of the tax collected is distributed to the counties. This amounts to approximately $1 million annually. This section provides that 20% of the sales tax collected on modular homes will be allocated to the counties on a per capita basis, and distributed to the county and its municipalities as provided in the first ½ cent local sales tax.
16
Repeals an unnecessary highway use tax exemption. A transfer of a motor vehicle to a handicapped person from the Department of Health and Human Services after the vehicle is equipped by the Department for use by the handicapped is exempt from highway use tax. The exemption is not needed - 30 -
because the Department never takes title to the vehicle.
17
Corrects two incorrect statutory references.
18
Clarifies how a bundled transaction that includes food is taxed under the local option ¼ cent county sales tax article. See GS 105-164.4D.
19
Simplifies the Mecklenburg local sales tax in Chapter 1096 of the 1967 Session Laws without making any substantive changes. Currently, the administration of the sales and use tax under the Mecklenburg local act and Article 39 of Chapter 105 are the same with the exception of the distribution formula. Under the local act, proceeds are divided between the county and the cities on an ad valorem basis; Article 39 gives counties a choice between ad valorem and per capita.
Property Tax Changes
20
Reinserts the word 'shares', which was inadvertently deleted from the definition of 'corporation' when changes were made in 2008 to the property tax homestead circuit breaker.
21
Modernizes the language.
22.(a)
Clarifies that the homestead exclusion applies uniformly to a husband and wife, regardless of how they hold title to the property.
22.(b)
Makes the following clarifying and technical changes to the homestead circuit breaker:
• Clarifies that property owned by a qualifying owner must have been the owner's permanent residence for at least five consecutive years but that the owner's five-year occupancy does not have to be consecutive.
• Clarifies that the occupancy and ownership requirement refers to 'length' of occupancy and ownership.
• Clarifies that the homestead circuit breaker applies uniformly to a husband and wife, regardless of how they hold title to the property.
• Removes an unnecessary word.
• Clarifies that a person may defer the portion of the principal amount of tax that is imposed for the current tax year on the residence and exceeds the percentage of the qualifying owner's income.
• Clarifies that only the deferred taxes for the last three years prior to the disqualifying event become due and payable.
• Clarifies that notice of the sum of deferred taxes and interest that are due and payable must be sent annually to the mailing address of the residence subject to the circuit breaker benefit as opposed to mailing notice to each owner of the property.
22.(c)
Makes the following clarifying changes to the disabled veteran homestead - 31 -
exclusion:
• Replaces the definition of 'owner' with a definition for 'qualifying owner'.
• Provides that a disabled veteran must have 'separated' instead of 'been discharged' from a branch of the Armed Forces to reflect more clearly the language used by the Armed Forces.
• Provides that the exclusion applies to a disabled veteran whose separation was also under honorable conditions. Prior law applied the exclusion only if the separation was honorable.
• Clarifies that the surviving spouse of a disabled veteran is eligible for the exclusion as long as the spouse does not remarry.
• Provides that the surviving spouse may also qualify for the exclusion if the Veterans Administration certifies that the veteran's death was the result of a service-connected condition. This new language would apply where the veteran died while on active duty and the death was the result of a service-connected condition or where the veteran died after discharge due to a service connected condition that did not rise to the level of total and permanent disability.
• Clarifies that the exclusion is available to a disabled veteran who 'received' instead of 'receives' federal benefits to adapt the veteran's housing, since these benefits are generally a one-time payment.
• Clarifies that the exclusion applies uniformly to a husband and wife, regardless of how they hold title to the property.
22.(d)
Section 22 of the act is effective for taxes imposed for taxable years beginning on or after July 1, 2009
23.(a)
Repeals a reference to an incorrect effective date for the wildlife conservation land tax benefit.
23.(b)
Repeals the provision in the working waterfront statute regarding application procedures because there is a general statute governing application procedures for property tax exemptions or exclusions.
23.(c)
Adds drug samples to the list of exempt property not requiring an application, effective for taxes imposed for taxable years beginning on or after July 1, 2008.
Adds solar energy electric systems to the list of property excluded from taxation that must file a single application, effective for taxes imposed for taxable years beginning on or after July 1, 2008.
23.(d)
Adds working waterfront property to the list of property classified for taxation at reduced valuation that must file a single application, effective for taxes imposed for taxable years beginning on or after July 1, 2009.
23.(e)
Adds wildlife conservation to the list of property classified for taxation at
- 32 -
reduced valuation that must file a single application, effective for taxes imposed for taxable years beginning on or after July 1, 2010.
23.(f)
Sets out the effective dates for section 23, as noted in the subsections above.
24.(a)
Makes the following changes to the combined motor vehicle registration and property tax system which provides for the collection of vehicle property taxes with the issuance and renewal of vehicle registrations.
Adds the following definitions to G.S. 105-330: 'registered classified motor vehicle', 'unregistered classified motor vehicle', and 'registration fees'.
• Amends G.S. 105-330.1 to add the following to the list of motor vehicles that are exempt from classification under the combined system: motor vehicles issued permanent registration plates and self-propelled property-carrying vehicles issued three-month registration plates at the farmer rate.
• Amends G.S. 105-330.2(a) and (a1) to clarify the period in which the value of a classified motor vehicle is determined so that the date of valuation will continue to be January 1. If the value cannot be determined on January 1, then the value will be the most currently available January 1 retail value of the vehicle. Subsection (a) also clarifies that the situs of a vehicle is determined on the date registration is applied for or renewed and may not be changed until the next registration date.
• Amends G.S. 105-330.2(b) to add language that the initial appraised value of a vehicle purchased from a dealer is the sales price, including all accessories attached to the vehicle.
• Amends G.S. 105-330.2(b1) to clarify the right to appeal the appraised value or taxability of a vehicle as follows: require that the right to appeal must be set out in the combined tax and registration notice or the tax receipt, and require that the lessee of a motor vehicle be given the right to appeal the value if the lessee is required to pay the tax on the vehicle under the terms of the lease.
• Amends G.S. 105-330.3 to add subsection (d) setting out the penalty for willfully attempting or aiding or abetting any person to evade or defeat the taxes imposed under the combined system, and to make technical and stylistic changes.
• Amends G.S. 105-330.4 as follows: subsection (a) removes unnecessary language and adds language clarifying when taxes are due on an unregistered classified motor vehicle, a classified motor vehicle registered under the staggered system, a classified motor vehicle registered under the annual system, and a classified motor vehicle that has a temporary registration plate or a limited registration plate; subsection (b) deletes unnecessary language; subsection (c) clarifies that the enforcement remedies for unpaid property taxes apply only
- 33 -
to unpaid taxes on an unregistered classified motor vehicle.
• Amends G.S. 105-330.5 by deleting unnecessary language, making stylistic changes, and adding the following clarifications: subsection (a) authorizes the Department to select a third party contractor to prepare and mail combined tax and registration notices, clarifies the contents of the combined notice, clarifies that if there is a pre-payment of taxes then the tax rate will be the rate in effect on the date the taxes are computed, and provides that the combined notice serves as the registration certificate for a vehicle issued a limited registration plate; subsection (b) clarifies that a lessee of a vehicle would receive a combined notice since the definition of 'owner' includes the lessee of a vehicle; subsection (d) clarifies that taxes on motor vehicles be included in the tax levy for the fiscal year in which the taxes are collected; and new subsection (e) describes the method for handling small underpayments and overpayments of taxes.
• Amends G.S. 105-330.8 to add the following property tax statutes to the statutes that do not apply to the combined motor vehicle registration and property tax system: G.S. 105-321(f) (governing the collection of minimal taxes charged) and G.S. 105-360 (governing the due date of property taxes, interest for nonpayment of taxes, and discounts for prepayment of taxes).
• Amends G.S. 105-330.9 to add subdivision headings.
Amends G.S. 105-330.11 by making stylistic changes.
Except for changes to G.S. 105-330.9 and G.S. 1-5-330.11, the above changes become effective July 1, 2011, and apply to combined tax and registration notice issued on or after that date, or when the Division of Motor Vehicles and the Department of Revenue certify that the integrated computer system for registration renewal and property tax collection for motor vehicles is in operation, whichever occurs first.
24.(b)
Amends G.S. 20-79.1A to clarify issuance of a limited registration plate as follows: (1) the limited registration plate is issuable to a person who applies for a title to a motor vehicle and a registration plate if the person submits the title and registration fees but does not submit municipal corporation property taxes due on the vehicle; (2) if the municipal corporation property taxes are paid, then the person receives an annual registration plate; (3) a limited registration plate may only be used on the vehicle for which issued and if lost or stolen, a replacement plate must be received and attached to the vehicle before it may be driven.
Subsection (b) becomes effective July 1, 2011, and applies to combined tax and registration notices issued on or after that date, or when the Division of Motor Vehicles and the Department of Revenue certify that the integrated computer system for registration renewal and property tax collection for motor vehicles is in operation, whichever occurs first.
- 34 -
24.(b1)
Amends G.S. 20-63(h) to clarify that a contract agent with the Division of Motor Vehicles receives compensation for issuing a vehicle registration card only when property taxes on the vehicle are not paid at the same time.
24.(c)
Sets out the effective dates for section 24 of this act.
25
Moves the effective date of the combined motor vehicle registration and property tax system from July 1, 2010 to July 1 2011, and clarifies that it applies to combined tax and registration notices issued on or after that date, or when the DMV and the Department of Revenue certify that the system is in operation, whichever occurs first.
26
Amends G.S. 105-361(a) to make stylistic changes and to clarify that the amount of taxes that a tax collector must report on a tax certificate includes any deferred taxes that would become due if a disqualifying event occurs.
27
Makes the following clarifying changes to G.S. 160A-215.2 (Heavy equipment gross receipts tax in lieu of property tax):
• Changes the word 'resolution' to 'ordinance' to reflect that cities adopt ordinances while counties adopt resolutions.
• Provides that a tax levied prior to the effective date of this act remains valid and in effect until amended or repealed, regardless of whether the city called the action a resolution or an ordinance.
• Removes the reference to 'city finance officer', because the city may contract with the county to collect the gross receipts tax.
Occupancy Tax Changes
28
Adds a Session Law reference that was inadvertently omitted when the Cherokee County local occupancy tax act was amended last year. In 2007, a number of local occupancy tax local acts were amended to change the due date for remitting occupancy tax proceeds and filing returns from the 15th to the 20th of the month to conform to current sales tax statutes. The Cherokee County local occupancy tax act was one of the acts so amended. However, when the rest of the local act was amended in 2008, the 2007 change was not incorporated. To make this technical change, the entire local act must be set out under drafting convention. However, no substantive change is being made.
29
Corrects an incorrect Session Law reference.
30
Adds to S.L. 2005-68, a Session Law reference to the 2007 act referenced above that made changes to a number of local occupancy tax acts related to the due date of the tax and return. S.L. 2005-68 is the act that authorized the additional occupancy tax to finance the NASCAR Hall of Fame Museum.
Motor Fuel Tax Changes
31
Provides the Secretary with the ability to mandate electronic filing of motor carrier tax returns. The Secretary may currently mandate electronic filing of motor fuel tax returns. The Department developed an online filing system
- 35 -
for motor carrier returns six years ago. To date, voluntary compliance is around 19%. This section becomes effective January 1, 2010.
32
Inserts a missing word.
33
Provides an exception to the requirement that a distributor, importer, or motor fuel transporter must obtain a bond or irrevocable letter of credit when the person is supplying motor fuel into the State because the market for motor fuel has been disrupted and emergency supplies are needed, as identified by an executive order of the Governor. The bonding requirement became an issue during the recent motor fuel supply shortages in the western part of the State.
34
Specifies that the tax on fuel grade ethanol is payable by the refiner or fuel alcohol provider. The difference between a refiner and a fuel alcohol provider is the amount of fuel the person produces. A refiner is a person who produces an average of more than 500,000 gallons a month; a person who produces less than this amount is a fuel alcohol provider. This section changes the law enacted last year in S.L. 2008-134 that specified when fuel grade ethanol was subject to tax. Effective January 1, 2009, the fuel is taxable when it was removed from a terminal or when it is produced in the State or imported to the State and not delivered to a terminal. However, the Department has had difficulty administering this provision. Ethanol is primarily shipped by railroad tank car and once imported into the State the ethanol may not be off-loaded for weeks. Since the tax is imposed upon importation, this delay in off-loading creates a loop-hole for filers. This section provides that the ethanol produced in this State is taxable when it is removed from the storage facility at the production location; ethanol produced outside the State is taxable when it is imported to the State. Prior to 2009, fuel grade ethanol was first subject to tax when it was blended. This section becomes effective January 1, 2010.
35
Changes the hold harmless refund from a quarterly one the Department calculates and administers to a monthly one the taxpayer requests. This section becomes effective January 1, 2010, and applies to motor fuel purchased on or after that date.
36
Requires a shipping document to transport fuel grade ethanol since the ethanol is now subject to tax before it is blended. This section accomplishes this change by expanding the statute to include refiners and fuel alcohol providers. This section also recognizes that the content of a shipping document issued for motor fuel transported by railroad tank car differs from a one issued for fuel transported by transport trucks. This section becomes effective January 1, 2010.
37
Corrects a misspelled word.
38
Conforms the tax exemptions for alternative fuel to the tax exemptions for motor fuel.
Other Changes
- 36 -
39
Amends the tax secrecy provisions to prohibits the disclosure of standards used or to be used for the selection of returns for examination and the disclosure of data used for determining those standards. The Department of Revenue requested this provision.
40
Corrects a statutory reference. The statute cited was repealed in 2006.
41
Repeals the session law that created the Economic Development Reserve and its exemption from rule-making. The Reserve had a one-time appropriation. The money in the fund has been drawn down. The Reserve has served its intended purpose and is no longer necessary.
42
Corrects the prefatory language of Section 28.19.(a) of S.L. 2008-107.
43
Corrects the prefatory language of Section 28.25.(c) of S.L. 2008-107.
44
Corrects an incorrect statutory reference.
45
Corrects the effective date sections in S.L. 2008-146 to refer to 'Parts' rather than 'sections'.
46
Corrects the effective date section in Section 5.4 of S.L. 2008-204 to refer to 'Part' rather than 'section'.
Appropriations Act of 2009.
Session Law
Bill #
Sponsor
S.L. 2009-451, as amended by S.L. 2009-575
SB 202
Senator Garrou
AN ACT TO MAKE BASE BUDGET APPROPRIATIONS FOR CURRENT OPERATIONS OF STATE DEPARTMENTS, INSTITUTIONS, AND AGENCIES, AND FOR OTHER PURPOSES.
OVERVIEW: This act updates the reference to the Internal Revenue Code to May 1, 2009, but decouples from the bonus depreciation provision and the new additional standard deductions for real property taxes and motor vehicle sales taxes. The act adopts the proposal recommended by the Revenue Laws Study Committee to apply the State and local general rate of sales and use tax to audio works (music and ringtones), audiovisual works (movies), books, and computer software that are delivered or accessed electronically to the extent those items would be taxable if sold in a tangible medium and to revise the mail order sale statute to specifically set out certain circumstances that constitute soliciting business in this State for purposes of requiring a remote retailer to collect sales tax. Lastly, the act generates revenue required to balance the 2009-2010 biennium budget by making the following tax law changes:
- 37 -
• Income tax surtax on individuals whose North Carolina taxable income is greater than $100,00043 and on corporations, for taxable years 2009 and 2010.
• A State sales tax increase of 1%, effective September 1, 2009, until July 1, 2011.
• An increase in the excise taxes on beer, wine, liquor, cigarettes, and other tobacco products. All of the increased tax revenue is distributable to the State.
• Retention by the State of a portion of the distribution of the excise tax on beer and wine that would otherwise be distributable to counties and cities for one year.
The act also authorizes the Finance Committees of the Senate and the House of Representatives to meet during the interim to study and recommend legislation to reform North Carolina's sales and income tax structure in order to broaden the tax base and lower the State's tax rates.
FISCAL IMPACT: The act increases General Fund revenues by approximately $990 million for fiscal year 2009-2010 and $1.3 billion for fiscal year 2010-2011. (For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2009 Session. Available in the Legislative Library.)
EFFECTIVE DATE: With the exception of the provision related to the real property tax deduction for non-itemizers, which is effective for taxable years beginning on or after January 1, 2008, the remaining IRC conformity provisions are effective for taxable years beginning on or after January 1, 2009. The revision of the statutes relating to remote retailers became effective when signed into law by the Governor on August 7, 2009. The expansion of the sales tax base to digital products becomes effective January 1, 2010. The increase in the excise taxes on beer, wine, liquor, and tobacco products became effective September 1, 2009. The income tax surtax is effective for taxable years 2009 and 2010. The increase in the State sales tax rate became effective September 1, 2009, and expires July 1, 2011.
ANALYSIS: Part XXVIIA of the Current Operations and Capital Improvements Appropriations Act of 2009 made the following tax law changes:
Corporate and Individual Income Tax Surtax. – Section 27A.1 increases General Fund revenues by approximately $196 million in fiscal year 2009-2010 and $202 million in fiscal year 2010-2011, by imposing a temporary income tax surtax on corporate taxpayers and individual taxpayers whose North Carolina taxable income exceeds $100,000. The corporate income tax surtax is equal to 3% of the tax payable by the taxpayer for the taxable year. The individual income tax surtax is also equal to a percentage of the tax payable by the taxpayer.44 The percentage amount varies depending upon the taxpayer's North Carolina taxable income45 and the taxpayer's filing status. For married filing jointly, the surtax percentage is zero for taxable incomes up to $100,000; it is 2% for taxable incomes46 over $100,000 and
43 The $100,000 threshold applies to taxpayers filing as married filing jointly. The threshold for taxpayers filing as head of household is $80,000; the threshold is $60,000 for single taxpayers; and the threshold is $50,000 for married filing separately.
44 North Carolina income tax is the amount recorded on line 14 of NC D-400 tax form.
45 North Carolina taxable income is the amount recorded on line 13 of the NC D-400 tax form.
46 The graduated NC income tax rates are 6%, 7%, and 7.75%. The effective tax rates in the respective tax brackets for taxpayers subject to the 2% surtax are 6.12%, 7.14%, and 7.91% respectively.
- 38 -
up to $250,000; and it is 3% for taxable incomes47 over $250,000. For heads of households, the thresholds are $80,000 and $200,000 respectively; for single taxpayers the thresholds are $60,000 and $150,000 respectively; and for married filing separately the thresholds are $50,000 and $125,000.
The income tax surtaxes imposed by this section are in addition to the corporate income tax and individual income tax owed by the taxpayer. The surtaxes are due at the same time as the filing of the tax return itself. For a corporate taxpayer, the tax is due on or before the fifteenth day of the third month following the close of its income year. For an individual taxpayer, the tax is due on or before April 15th.
The General Assembly made similar income tax adjustments during the budget shortfalls of 1991, 2001, and 2003. During the budget shortfall in 1991, the General Assembly imposed a temporary surtax on corporations in an amount equal to a stated percentage of the corporation's income tax liability.48 During the budget shortfall in 2001, the General Assembly created a temporary 8.25% individual income tax bracket for incomes that exceeded $200,000 for taxpayers filing as married filing jointly. Under the 2001 legislation, the upper income tax bracket would have expired for taxable years beginning on or after January 1, 2004. In 2003, the General Assembly extended the 2004 sunset until 2006 and in 2005 it extended the sunset until 2007. In 2006, the General Assembly reduced the upper income tax rate from 8.25% to 8% for taxable year 2007. The temporary bracket expired for taxable years beginning on or after January 1, 2008.49
Increase Sales and Use Tax By One Percent. – Section 27A.2 increases General Fund revenues by approximately $803 million in fiscal year 2009-2010 and $1.1 billion for fiscal year 2010-2011 by imposing a temporary State sales and use tax increase of one percent, from 4.5% to 5.5%, effective September 1, 2009. The combined State and local tax rate in North Carolina based upon the highest possible county tax rate is 8.25%.50 As of October 1, 2009, only 11 states have a higher combined sales tax rate than North Carolina.51
Effective October 1, 2009, the combined State and local rate will remain the same, but the allocation of the rate between the State and the counties will change based upon legislation enacted in 2007.52 Effective October 1, 2009, the State sales tax rate is 5.75%. Effective July 1, 2011, the State rate will return to 4.75%.
47 The effective graduated tax rates for taxpayers subject to the 3% surtax are 6.18%, 7.21%, and 7.98%. Only nine states have a higher individual income tax rate than 7.98%: Hawaii, Oregon, California, New Jersey, Vermont, Rhode Island, Iowa, New York, and Maine.
48 The percentage rate of the surtax was 4% for taxable year 1991. The rate fell by 1% each taxable year thereafter until it expired in taxable year 1995. See Chapter 689 of the 1991 Session Laws.
49 S.L. 2001-424, S.L. 2003-284, S.L. 2205-276, and S.L. 2006-66.
50 The local tax rate in most counties is 2.25%, making the combined State and local rate 7.75%. In 2007 the General Assembly authorized counties to impose an additional ¼ cent sales tax. As of October 1, 2009, eight counties have done so. In those counties, the combined rate is 8%. (Alexander, Catawba, Cumberland, Haywood, Martin, Pitt, Sampson, and Surry) Mecklenburg County has an additional ½ cent sales tax for public transit. The combined rate in Mecklenburg County is 8.25%.
51 Kansas, Arizona, New York, Oklahoma, Washington, Missouri, Tennessee, California, Illinois, Arkansas, and Idaho.
52 Section 31.16 of S.L. 2007-323. The State assumed 100% of the nonfederal, non-administrative share of Medicaid costs over a three-year period beginning in 2007. To provide the financial resources to assume these costs, the legislation phased out the third one-half cent local sales tax and made a corresponding increase in the State sales tax rate. Effective July 1, 2009, the State assumed the entire non-administrative, nonfederal share of
- 39 -
A sale is complete when delivery is made to a customer. The new tax rate applies to taxable sales and purchases of property or services delivered on or after September 1, 2009, regardless of the date the order was placed, with the following exceptions:
• Gross receipts from the lease of tangible personal property that is delivered to a lessee prior to September 1, 2009, and leased for a definite stipulated period of time.
• Construction materials purchased or sold on and after September 1, 2009, to fulfill a lump-sum or unit-price contract entered into or awarded prior to September 1, 2009.
Section 22 of S.L. 2009-575 provides that a retailer is not liable for an over-collection or under-collection of sales tax for the period beginning September 1, 2009, and ending October 1, 2009, if the retailer made a good faith effort to comply with the law and collect the proper amount of tax and has, due to the increased State rate under this act, over-collected or under-collected the amount of sales tax due.
The General Assembly increased the State sales tax rate from 3% to 4% in 1991. In 2001, it enacted a temporary increase of ½ cent, making the State rate 4.5%. Under the 2001 legislation, the increased rate would sunset effective July 1, 2003. However the General Assembly extended the sunset date in 2003 and 2005, and it maintained ¼ cent of the increased rate in 2007 for a State tax rate of 4.25%.53 The State rate changed from 4.25% to 4.5% as part of the Medicaid swap on October 1, 2008.54
Nexus Clarification and Click Throughs, Use Tax Line on Income Tax Return, Digital Products, Magazines Delivered by Mail. – Section 27A.3, which originated as a Revenue Laws Study Committee recommendation and was included in the House's version of the budget as well as in the proposed Senate tax plan, makes several changes related to the sales tax treatment of digital products and clarifies certain circumstances that satisfy the nexus requirement for purposes of requiring sales tax collection by a remote retailer. This section increases General Fund revenues by approximately $11.8 million in fiscal year 2009-2010 and $24.1 million in fiscal year 2010-2011.
• Nexus Clarification and Click Throughs. – This section provides that a remote retailer who enters into a 'click-through' contractual agreement with a North Carolina resident is soliciting business in this State for purposes of requiring a remote retailer to collect sales tax. This provision became effective when the act became law on August 7, 2009.
G.S. 105-164.8 sets out the circumstances under which a remote retailer is required to collect sales tax on mail order sales. Generally speaking, a remote retailer is one that does not maintain a brick and mortar establishment in this State. This statute reflects principles promulgated in a series of cases that set out circumstances under which a retailer has sufficient nexus with a state to require it to collect sales tax. Several of these cases involved businesses that used independent contractors or other commissioned agents to solicit orders in a state in which the business was not physically located. One of the leading cases in this area is Scripto v. Carson, in which
Medicaid costs. The counties retained responsibility for the costs associated with administering Medicaid at the county level. Effective October 1, 2009, the State sales tax rate increased .25% to 4.75% and the local rate decreased .25%.
53 S.L. 2001-424, 2003-284, 2005-276, 2006-66, 2007-145, and 2007-323.
54 S.L. 2007-323.
- 40 -
the United States Supreme Court held that a state could require tax collection by a remote retailer that had contracts with 10 in-state residents deemed independent contractors who solicited orders for products on its behalf. This principle has been codified in G.S. 105-164.8, which states, in part, that a retailer who makes a mail order sale must collect the sales tax if:
"The retailer has representatives in this State who solicit business or transact business on behalf of the retailer, whether the mail order sales thus subject to taxation by this State result from or are related in any other way to such solicitation or transaction of business."
This case reflected a business model that was common at the time. In recent years, with the growth of the Internet, a new business model has emerged as a way for online retailers to solicit business. Amazon is a prime example of this business model. Under what is referred to as an "affiliate program," Amazon enters into contractual agreements with the owners of other websites and pays a commission for sales that result from a "click-through" to the Amazon website from the other website. Through the operation of this program, Amazon has established nexus in this State by maintaining compensated representatives in the State who solicit business for Amazon. This principle is consistent with the holding of the Scripto case.
This section of the act revises the mail order sales provision in two ways. First, it changes the term "mail order sale" to "remote sale," which covers all transactions that are not face-to-face but reflects more modern terminology and the prevalence of Internet sales. Second, it provides that a retailer is presumed to solicit or transact business in this State and is, therefore, required to collect sales tax if all of the following conditions are met:
o The retailer has entered into an agreement with a resident of this State.
o Under the agreement, the resident receives a commission or other consideration in exchange for directly or indirectly referring potential customers, whether by a link on an Internet website or otherwise, to the retailer.
o The cumulative gross receipts from sales by the retailer to purchasers in this State who are referred to the retailer by all residents with this type of agreement with the retailer is in excess of $10,000 during the preceding four quarterly periods.
This presumption may be rebutted by proof that the resident with whom the retailer has an agreement did not engage in any solicitation in the State on behalf of the retailer that would satisfy the nexus requirement of the United States Constitution.
In a recent New York Supreme Court55 case, Amazon challenged an identical provision in the New York sales tax statutes alleging that it violates the Commerce Clause of the United States Constitution as well as both the Federal and State Constitutions' Due Process and Equal Protection Clauses. The court dismissed the complaint for failure to state a cause of action. The court disagreed with Amazon's assertion that the commissioned agents were mere advertisers concluding that the provision requires tax collection only when an out-of-state seller avails itself of the
55 The New York Supreme Court is a trial-level court.
- 41 -
benefit of in-state contractors who are compensated for referrals and who generate actual business for the seller. Moreover, the court stated that "Amazon should not be permitted to escape tax collection indirectly, through use of an incentivized New York sales force to generate revenue, when it would not be able to achieve tax avoidance directly through the use of New York employees engaged in the very same activities."
Amazon is still in litigation in New York, but so far the courts have sided with the State and have found that this type of arrangement is sufficient to create nexus. Rhode Island enacted similar legislation during its recent legislative session. California and Hawaii did as well, but the measures were vetoed by their respective Governors. Several other states, such as Connecticut, Illinois, Minnesota, Tennessee, and Wisconsin, had similar legislation introduced but not enacted or are continuing to study the issue.
• Digital Products. – This section imposes the State and local general rate of sales and use tax on certain digital goods that are delivered or accessed electronically to the extent those items would be taxable if sold in a tangible medium. It also eliminates the general exemption for prewritten computer software that is delivered electronically with an exception for certain "enterprise" software.
Under current law, the general rate of State and local sales and use tax applies to the sale, lease, or rental of tangible personal property and some services. Tangible personal property is defined as "personal property that may be seen, weighed, measured, felt, or touched, or is in any other manner perceptible to the senses." Digital goods, such as downloaded music and movies, are not tangible personal property, and, therefore, are not taxed. Prewritten computer software is specifically included within the definition of tangible personal property, but it is exempt from sales tax when it is delivered electronically or by load and leave.56
When the Revenue Laws Study Committee examined the existing sales tax treatment of digital goods, three primary findings emerged leading to the recommendation of this provision. First, the Committee recognized that the sales and use tax statutes are outdated in relation to today's modern retail economy. The sales and use tax statutes were originally enacted in the 1930s and were drafted to apply to sales of tangible personal property because those items constituted the bulk of consumer purchases at that time. Technology and the prevalence of the Internet have transformed society in a number of ways, including the way in which consumers make purchases. Over the last 15 years, more and more consumers shop online and downloa