RESTRICTED
CIRCULATION
REVENUE LAWS STUDY
COMMITTEE
REPORT TO THE 2005
GENERAL ASSEMBLY OF NORTH CAROLINA
2005 SESSION
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TABLE OF CONTENTS
Letter of Transmittal i
Revenue Laws Study Committee Membership ii
Preface 1
Committee Proceedings 3
Committee Recommendations and Legislative Proposals 14
1. AN ACT TO UPDATE THE REFERENCE TO THE INTERNAL
REVENUE CODE USED IN DEFINING AND DETERMINING
CERTAIN STATE TAX PROVISIONS 15
2. AN ACT TO AMEND THE SALES AND USE TAX STATUTES TO
CONFORM TO THE STREAMLINED SALES TAX AGREEMENT 35
3. AN ACT TO MODIFY THE TAXATION OF MOTOR FUELS 46
4. AN ACT TO CLARIFY PRESENT-USE VALUE ELIGIBILITY AND TO
AMEND THE PERIOD FOR APPEAL OF A PRESENT-USE VALUE
DETERMINATION OR APPRAISAL 63
5. AN ACT TO INCREASE THE PROPERTY TAX EXCLUSION FOR
THE RESIDENCE OF A DISABLED VETERAN 74
6. AN ACT TO MAKE TECHNICAL AND CLARIFYING CHANGES TO
THE REVENUE LAWS AND RELATED STATUTES 81
Appendices
A. Authorizing Legislation, Article 12L of Chapter 120 of the General Statutes
B. Disposition of Committee's Recommendations to the 2004 Session
C. State Budget Outlook
D. State Revenue Outlook
E. Streamlined Sales Tax Update by Charles Collins, Taxware
F. Streamlined Sales Tax Project Update by Andrew Sabol, Director of the Sales and
Use Tax Division, Department of Revenue
G. Summar\- of Estate Tax Issue prepared by Canaan Huie, Bill Drafting Division
H. Summarv of the Linnited case, prepared by Martha Walston, Fiscal Research
Division
I. Summary- of the Cuno case and Recent Developments, prepared by Canaan Huie,
Bill Drafting Division
Revenue Laws Study Commtitee
State Legislative Building
Raleigh, North Carolina 27603
Senator John H. Kerr, in, Cochair
Representative Paul Luebke, Cochair
Representative David Miner, Cochair
January 25, 2005
TO THE MEMBERS OF THE 2005 GENERAL ASSEMBLY:
The Revenue Laws Study Committee submits to you for your consideration its
report pursuant to G.S. 120-70.106.
Respectfully Submitted,
Rep. Paul Luebk^ Co-Chair
fyiAt"*"
ni John Kerr, Co-Chair
Rep. David Miner, Co-Chair
2003-2004
REVENUE LAWS STUDY COMMITTEE
MEMBERSHIP
Senator John H. Kerr, III, Cochair
Senator Daniel Clodfelter
Senator Walter H. Dalton
Senator Fletcher L. Hartsell, Jr.
Senator David W. Hoyle
Mr. Leonard Jones
Mr. J. Micah Pate, III
Senator Hugh Webster
Representative Paul Luebke, Cochair
Representative David Miner, Cochair
Rep. Gordon Allen
Rep. Harold Brubaker
Rep. Dewey L. Hill
Rep. William McGee
Rep. William Wainwright
Rep. Steve Wood
Staff:
Susan Phillips, Committee Clerk
Cindy Avrette, Staff Attorney
Rodney Bizzell, Fiscal Analyst
David Crotts, Fiscal Analyst
Trina Griffin, Staff Attorney
Y. Canaan Huie, Staff Attorney
Linda Millsaps, Fiscal Analyst
Martha Walston, Staff Attorney
PREFACE
The Revenue Laws Study Committee is established in Article 12L of Chapter 120
of the General Statutes to serve as a permanent legislative commission to review issues
relating to taxation and finance. The Committee consists of sixteen members, eight
appointed by the President Pro Tempore of the Seriate and eight appointed by the
Speaker of the House of Representatives. Committee members may be legislators or
citizens. The co-chairs for 2003-2004 are Senator John Kerr and Representatives Paul
Luebke and David Miner.
G.S. 120-70.106 gives the Revenue Laws Study Committee's study of the revenue
laws a very broad scope, stating that the Committee "may review the State's revenue
laws to determine which laws need clarification, techrucal amendment, repeal, or other
change to make the laws concise, intelligible, easy to administer, and equitable." A copy
of Article 12L of Chapter 120 of the General Statutes is included in Appendix A. A
committee notebook containing the committee minutes and all information presented to
the committee is filed in the Legislative Library.
In 2002, the General Assembly established a permanent subcommittee under the
Revenue Laws Study Committee to study and examine the property tax system.^ The
subcommittee consists of eight members, four appointed by the Senate chair of the
Revenue Laws Study Committee and four appointed by the House chair of the
Committee. The subcommittee may recommend changes in the property tax system to
the full Committee for its consideration in its final report to the General Assembly. The
1 S.L. 2002-184, s. 8.
chairs to the Revenue Laws Study Committee appointed the following eight members
to the Property Tax Subcommittee: Co-Chairmen Senator Dan Clodfelter and
Representative Harold "Bru" Brubaker; Senators Walter Dalton and Fletcher Hartsell;
Representative Gordon Allen, Dewey Hill, and Bill McGee; and public member Leonard
Jones.
Before it was created as a permanent legislative commission, the Revenue Laws
Study Committee was a subcommittee of the Legislative Research Commission. It has
studied the revenue laws ever}' year since 1977.
COMMITTEE PROCEEDINGS
The Revenue Laws Study Committee met twice after the 2004 Regular Session of
the 2003 General Assembly adjourned on July 18, 2004. The Committee considered all
proposed tax changes in light of general principles of tax policy and as part of an
examination of the existing tax structure as a whole.
Review of the Recommendations made to the
2004 General Assembly
The 2004 General Assembly enacted seven of the Revenue Laws Study
Committee's eight legislative proposals in whole or in part. Appendix B lists the
Committee's recommendations and the action taken on them in 2004. A document
entitled "2004 Finance Law Changes" summarizes all of the tax legislation enacted in
2004. It is available in the Legislative Library located in the Legislative Office Building.
Budget and Revenue Outlook
At its first meeting on December 21, 2004, the Revenue Laws Study Committee
was briefed by David Crotts, Linda Millsaps, and Lynn Muchmore from the Fiscal
Research Division on the current budget situation and the revenue outlook for the
upcoming year.
The Committee was informed that although the national economy continues to
recover and revenues are coming in ahead of schedule, the General Assembly will be
facing a budget shortfall of approximately $1.3 billion in fiscal year 2005-2006. The gap
is due to a combination of the carryover of a structural budget shortfall for 2004-2005
(the use of one-time resources to pay for recurring expenditures), a sub par econoniic
recover}', and no relief from the high growth of health care costs. The presentation on
the State Budget Outlook may be found in Appendix C.
The Comnnittee was also briefed on three issues facing the General Assembly that
will play a significant role in influencing the revenue outlook. The first issue is the
expiration of three temporary tax increases: (1) the Vi-cent State sales tax expires July 1,
2005 resulting in a decrease from 4.5% to 4%; (2) the 8.25% income tax rate on high
income expires January 1, 2006; and (3) federal tax action taken in 2001 has the effect of
eliminating the North Carolina estate tax base as of July 1, 2005. The General Assembly
will have to decide whether to extend any or all of these taxes, allow them to expire, or
make some other modification. Second, the decision whether to conform to the federal
Internal Revenue Code will present another budgetary challenge. Generally, the
General Assembly enacts legislation every year to update its reference to the Code to
track federal changes. This year, conforming to the changes made by the Working
Family Relief Act of 2004 and the American Jobs Creation Act of 2004 could result in a
loss to the General Fund of over $39 million in FY 05-06. Finally, the General Assembly
will need to amend its sales and use tax statutes in order to conform to the Streamlined
Sales Tax Agreement. Conformity will require that North Carolina eliminate its
multiple sales tax rates. Items that are currently taxed at a preferential rate will either
need to be taxed at the general rate or exempted entirely. The presentation on the
State's revenue outlook is attached as Appendix D.
Income Tax
The Revenue Laws Study Committee spent considerable time reviewing one
income tax issue. North Carolina's tax law tracks many provisions of the federal
Internal Revenue Code by reference to the Code.i j\yQ General Assembly determines
each year whether to update its reference to the Internal Revenue Code.2 Updating the
Internal Revenue Code reference makes recent amendments to the Code applicable to
the State to the extent that State law previously tracked federal law. Legislative
Proposal #1, /RC Update, changes the statutory reference to the Code from May 1, 2004,
to January 1, 2005 and makes other coriforming changes. Congress enacted two bills
between May 1, 2004, and January 1, 2005, that would affect State tax provisions. The
Working Families Tax Relief Act of 2004, P.L. 108-311, enacted on October 4, 2004,
makes numerous changes to personal income tax provisioris affecting families as well as
individual taxpayers and businesses. The American Jobs Creation Act of 2004, P.L. 108-
357, enacted on October 22, 2004, made extensive income changes for businesses and
individuals. In addition, in its first act of the new session. Congress allowed for
accelerated tax benefits for cash contributions made in January 2005 for tsunami relief
efforts.
Sales and Use Tax
The Revenue Laws Study Committee has spent a considerable amoimt of time
over the past fi\'e to six years on the Streamlined Sales Tax Project. The Streamlined
Sales Tax Project is an effort by states, with input from local goverrunents and the
private sector, to simplify and modenuze sales and use tax collection and
1 North Carolina first began referencing the Internal Revenue Code in 1967, the year it changed its taxation of
corporate income to a percentage of federal taxable income.
2 The North Carolina Constitution inposes an obstacle to a statute that automatically adopts any changes in
federal tax law. Aracle \\ Seaion 2(1) of the Constitution provides in pertinent part that the "power of
taxation ... shall never be surrendered, suspended, or contraaed away." Relying on this provision, the Nonh
Carolina coun decisions on delegation of legislative power to administrative agencies, and an analysis of the
few federal cases on this issue, the Anomey General's Office concluded in a memorandum issued in 1977 to
the Direaor of the Tax Research Division of the Department of Revenue that a "statute which adopts by
reference future amendments to the Internal Revenue Code would ... be invalidated as an unconstitutional
delegation of legislative power."
administration. The Project began in March 2000 and has the goal of achieving sufficient
simplification and uniformity' to encourage sellers without nexus in states to voluntarily
collect use tax in participating states.
In November 2002, the implementing states approved the Streamlined Sales and
Use Tax Agreement. The Agreement contains the uniformity and simplification
provisions developed by the Project. The Agreement becomes effective when at least 10
states representing 20% of the population of all states with a sales tax are in compliance
with the provisions of the Agreement. The Revenue Laws Study Committee has
recommended, and the General Assembly has enacted, changes to North Carolina's
sales tax laws to bring it into compliance with the Agreement. As of January 1, 2005, 12
states representing 19.4% of the sales tax states' population are believed to be in
compliance. It is anticipated that 15 states representing 24.1% of the applicable
population will be in compliance by July 1, 2005, and that 19 states representing 26.3%
of the population will be in compliance by January 1, 2006.
Legislative Proposal #2, Streamlined Sales Tax Changes, contains a few technical
and administrative changes necessary' to bring North Carolina into compliance with the
Agreement, as amended in November 2003 and November 2004. Other, more
substantive changes will need to be made this session for North Carolina to remain in
compliance with the Agreement after January 1, 2006. These changes include the
preferential rate of tax on certain agricultural items and the rates of tax on
telecommunications services, direct-to-home satellite service, and spirituous Uquor.
Appendices E and F contain a more detailed history of the Project and its status.
Motor Fuels Tax
Last year the Revenue Laws Study Committee recommended several changes to
the motor fuels tax laws. The General Assembly enacted one of the changes contained in
that recontmendation, the authorization for law enforcement positions, in the final
hours of the 2004 session. Legislative Proposal #3, Motor Fuel Tax Clmnges, contains
several of the provisions recommended last year and a few new ones.
Estate Tax
At its second meeting on January 25, 2005, the Committee was provided
an overview of the estate tax issue that will be facing the General Assembly in
the upcoming year.
Until 1999 North Carolina imposed an inheritance tax on property
transferred by a decedent. The amount of tax due depended on the relationship
of the person transferring the propert}' (the decedent) to the person receiving the
property (the beneficiary). This was in contrast to federal law, which has a single
rate schedule for estates.
As part of the budget bill in 1998 (S.L. 1998-212) the General Assembly
repealed the inheritance tax for decedents dying on or after January 1, 1999, and
in its place enacted an estate tax. North Carolina's estate tax is what is
commonly known as a "pick-up tax". The amount of state estate tax due is the
maximum amount of the federal credit allowed under the Code for federal estate
tax purposes.
In 2001 Congress enacted several major changes to the federal estate tax
that could have a substantial impact on the North Carolina estate tax. First,
Congress gradually increased the amount of the estate that is excluded from
taxation.3 Second, Congress repealed the estate tax effective in 2010.^ Third,
^ For 2001, the applicable exclusion amount was $675,000. That amount was increased to $1 million for
2002 and 2003, to $1.5 million for 2004, and 2005, to $2 million for 2006 through 2008, and to $3.5 million
for 2009.
Congress phased out the federal credit for state death taxes over four years.'
The effect of this reduction and elimination of the state death taxes credit, if
conformed to, would be to eliminate the North Carolina estate tax as of January
1, 2005.
In 2002 and 2003, the General Assembly evaluated the changes contained
in the federal legislation and responded by partially conforming to the federal
changes. North Carolina conformed to the increased exclusion amounts and to
the 2010 repeal of the estate tax. Thus, as under previous law^, an estate that is
not subject to the federal estate tax is not subject to the state estate tax. However,
North Carolina did not conform to the phase-out of the state death taxes credit.
Based on the 2002 legislation, as amended in 2003, for decedents dying before
Julv 1, 2005, the amount of the North Carolina estate tax is to be computed based
on the state death taxes credit without regard to the phase-out and elimiiiation
of that credit. Without further legislative action. North Carolina v^l conform to
the elimination of the state death taxes credit as of July 1, 2005, and the North
Carolina estate tax will, for practical purposes, cease to exist for decedents dying
on or after that date.
North Carolina was not alone in facing this issue in 2002. At the time of
the federal changes in 2001, all 50 states and the District of Columbia had a state
estate or inheritance tax that relied on the federal credit to some degree.^ Since
2001, a number of states have taken legislative action (or declined to take action)
to offset the effects of the phase-out. Eleven states, including North Carolina,
* However, without further Congressional action, the federal estate tax will be reinstituted automatically
in 2011.
5 The amount of the credit was reduced 25% for 2002, 50% for 2003, 75% for 2004, and eliminated in 2005.
* Thirty-eight states, including North Carolina, had a straight pick-up tax. The other 13 states used the
state death tax credit as a supplemental tax or as an alternative minimum tax.
took affirmative steps to decouple from the phase-out of the federal credits An
additional six states and the District of Columbia decided not to update their
reference to the Code for purposes of the federal credit. At least one state has
created a stand-along estate tax and at least one state has affirmatively acted to
repeal its estate tax.
The Revenue Laws Study Committee acknowledges that the 2005 General
Assembly will need to address this issue and notes that North Carolina has
essentially four options in regard to the estate tax:
• North Carolina could extend or remove the sunset on the decoupling
from the phase-out of the federal credit. Under current law. North
Carolina will conform to the phase-out of the federal credit beginning on
July 1, 2005. The General Assembly could choose to permanentiy tie the
amount of the state estate tax to the amount of the federal credit that
existed in 2001. This would preserve state revenue in the near future, but
it would be more difficult administratively for taxpayers. This is only a
temporary solution since the federal estate tax is set to be repealed
altogether in 2010.
• North Carolina could take no action, thereby conforming to the phase-out
of the federal credit beginning on July 1, 2005. This option could lead to
lower state revenue as early as the 2005-2006 fiscal year.
^ North Carolina decoupled from the federal legislation only temporarily. Under current law. North
Carolina is set to conform to the federal legislation as of January 1, 2004. The other ten states that actively
decoupled must take further legislative action to conform to the federal legislation.
• North Carolina could move awav from the pick-up tax and establish a
stand-alone estate or inheritance tax. This tax could be structured to be
revenue neutral or to result in a revenue gain or a revenue loss.
• North Carolina could repeal the estate tax. This option could lead to
lower state revenues immediately.
The handout on this issue, v^hich was distributed at the second meeting, is
attached as Appendix G.
Property Tax
The Revenue Laws Study Committee reviewed two proposals reconrunended by
the Department of Revenue relating to propert}' tax. Legislative Proposal #4, Present-
Use Value Clarification, makes clarifying changes to the statutes governing the present-
use value taxation of farmland (agricultural land, horticultural land, and forestland).
Legislative Proposal #5, Increase Disabled Vet Property Tax Exclusion, increases the
property tax exclusion for the residence of a disabled veteran receiving federal benefits
for a service-connected disability.
A. Present-Use Value Classification
This proposal has been endorsed by the North Carolina Farm Bureau and sets
out several changes to help the counties and the Department's Property Tax Division
administer the present-use value program. The Proposal clarifies the statutes relating to
present-use value tax eligibility and sets out a specific time period for a taxpayer to
appeal the tax appraiser's classification and appraisal of the taxpayer's property. In
2002, the Revenue Laws Study Committee proposed numerous amendments to the
present-use value statutes including an updated method for calculating the value of
farmland at its present-use value, clarification of the sound management requirement
10
for qualifying for use value taxation, and allowing land subject to a conservation
easement to continue to qualify for use value taxation. Most of these changes v^ere
ratified in S.L. 2002-184. The Department recommends the following clarifying changes
to the present-use value statutes.
Under current law, farmland must be part of a unit engaged in commercial
production to qualify for present-use value tax status. In 2002, the General Assembly
adopted the Revenue Laws Study Committee's proposed definition of a imit. The
definition requires that when a unit is composed of multiple tracts located vdthin
different counties, the tracts must be within 50 miles of a tract that qualifies as farmland
and either share the same classification or use the same equipment and labor force. The
proposal deletes the characteristic that the multiple tracts may use the same equipment
or labor; thus requiring the multiple tracts to be of the same type classification and
within 50 miles of a tract that qualifies as farmland.
The proposal also codifies a procedure that the counties are currently following.
Under current law, an individual owner must live on the farmland or have owned the
farmland for four years in order for the land to qualify for present-use value
classification. An exception to this ownership requirement is allowed if the farmland is
transferred to a person who continues to use the land as farmland and the new owner
certifies that he or she v^l be liable for the deferred taxes owing on the land if the land
is later disqualified. Coimties also allow an exception to the owniership requirement in
situations where no deferred taxes are due. This occurs when farmland, that is not
appraised and taxed at present-use value, passes to a new owner who already owns
farmland meeting the same classification as the newly transferred farmland. The new
ov^mer must file an application for present-use value eligibility, but there are no
deferred taxes to assume.
11
The proposal next adds language setting a 60-day time limit for a taxpayer (1) to
appeal the assessor's decision regarding the qualification or appraisal of the taxpayer's
property as present-use value propert)- or (2) to provide the assessor with additional
information after the taxpayer's property has been disqualified for present-use value
classification. Current law provides no time limit in the above situations.
B. Increase Disabled Vet Property Tax Exclusion
This proposal increases the propert)' tax exclusion for specially adapted housing
used as a residence bv a disabled veteran who receives federal grant money for a
sen,ice-connected disabilit\'. In response to an increase in the federal grant amount in
1989, the General Assembly increased the exclusion to the first $38,000 of the assessed
value of the house and land. The proposal increases the exclusion to $48,000 because of
another increase in the federal grant amount.
Case Law Update
The Re\'enue Laws Study Committee continues to rronitor several ongoing court
cases involving tax matters that have the potential to affect the State's budget and
revenue outlook. At its first meeting, the Comrruttee heard an update on the A&F
Trademark, Inc. z\ Tolsou case, often referred to as the Limited case. On December 7,
2004, the North Carolina Court of Appeals upheld the State's position on the taxation of
royalty income received b\- an out-of-state investment company for the use of
trademarks in this State. The Court ruled that the out-of-state taxpayers, who hold the
trademarks used in North Carolina, were doing business in North Carolina and that the
assessment of corporate income and franchise taxes against the taxpayers was not a
constitutional violation. A more detailed summary of that case was distributed to the
Comrruttee members and is attached as Appendix H.
12
At its second meeting, the Committee heard an overview of the Cuno v.
Daimler Chrysler case and was briefed on recent developments. In Cuno, the Sixth
Circuit Court of Appeals held that Ohio's investment tax credit violated the Commerce
Clause of the United States Constitution, but simultaneously found that a personal
property tax exemption did not violate the Commerce Clause. Shortly after the decision
was announced, the State of Ohio petitioned the Sixth Circuit Court of Appeals for a
rehearing en banc. On January 18, 2005, the Court denied that request. While this case
is not binding on North Carolina, the case is worth monitoring since North Carolina has
made extensive use of a variety of economic development incentive programs. A more
detailed summary of this case and its application to North Carolina is attached as
Appendix I.
13
COMMITTEE RECOMMENDATIONS
AND LEGISLATIVE PROPOSALS
The Revenue Laws Study Committee makes the following six
recommendations to the 2005 General Assembly. Each proposal is followed by an
explanation and, if it has a fiscal impact, a fiscal note or memorandum indicating
any anticipated revenue gain or loss resulting from the proposal.
1. IRC Update
2. Streamlined Sales Tax Changes
3. Motor Fuels Tax Changes
4. Present Use Value Clarification
5. Increase Disabled Vet Property Tax Exclusion
6. Revenue Laws Technical Changes
14
LEGISLATIVE PROPOSAL #1
IRC Update
15
LEGISLATIVE PROPOSAL #1:
A Recommendation of the Revenue Laws Study Committee
TO THE 2005 General Assembly
An Act To Update The Reference To the Internal
Revenue Code Used In Dehning And Determining
Certain State Tax Provisions.
Short Title: IRC Update
Sponsors: Kerr; Dalton, Hartsell, Hoyle, Webster
Brief OvERMEW: This bill would update to January 1, 2005, the reference to the
Internal Re\enue Code used in defining and determining certain State tax
provisions. This bill would be effective when it becomes law.
Fiscal Impact: This bill would result in a loss to the General Fund of
approximateh- S39 million in FY 05-06 and over $56 million in FY 06-07.
Effective Date: This bill would become effective when it becomes law, except
for the provision allowing a deduction for state and local taxes in lieu of a
deduction for State income taxes, which would become effective for taxable years
beginning on or after January 1, 2005.
A copy of the proposed legislation, bill analysis, and fiscal analysis begin on the next page
16
GENERAL ASSEMBLY OF NORTH CAROLINA
SESSION 2005
U D
BILL DRAFT 2005-LYxz-13A [v.2] (12/2)
(THIS IS A DRAFT AND IS NOT READY FOR INTRODUCTION)
1/19/2005 2:58:52 PM
Short Title: IRC Update. (Public)
Sponsors: Senators Kerr; Dalton, Hartsell, Hoyle, and Webster.
Referred to:
1 A BILL TO BE ENTITLED
2 AN ACT TO UPDATE THE REFERENCE TO THE INTERNAL REVENUE
3 CODE USED IN DEFINING AND DETERMINING CERTAIN STATE TAX
4 PROVISIONS.
5 The General Assembly of North Carolina enacts:
6 SECTION 1. G.S. 105-228.90(b)(lb) reads as rewritten:
7 "(b) Definitions. - The following definitions apply in this Article:
8
9 (lb) Code. - The Internal Revenue Code as enacted as of May 1,
10 30047Januarv 1, 2005. including any provisions enacted as of that
1 1 date which become effective either before or after that daterdate, but
12 not including the amendments made to Section 1 64 of the Code by
13 Section 501 ofP.L. 108-357."
14 SECTION 2. G.S. 105- 130.5(a) reads as rewritten:
15 "(a) The following additions to federal taxable income shall be made in
16 determining State net income:
17
18 (16) The amount excluded from gross income under Subchapter R of
19 Chapter 1 of the Code."
20 SECTION 3. Notwithstanding Section 1 of this act, any amendments to
21 the Internal Revenue Code enacted after May 1, 2004, that increase North Carolina
22 taxable income for the 2004 taxable year become effective for taxable years
23 beginning on or after January 1 , 2005.
17
1 SECTION 4. G.S. 105-228.90(b), as amended by Section 1 of this act,
2 reads as rewritten:
3 "(b) Definitions. - The following definitions apply in this Article:
4
5 (lb) Code. - The Internal Revenue Code as enacted as of January 1,
6 2005, including any provisions enacted as of that date which
7 become effective either before or after that date, but not including
8 the amendments made to Section \6^ of the Code by Section 501 of
9 P.L. 108 357.date."
10 SECTION 5. G.S. 105-134.6(c) reads as rewritten:
1 1 (c) Additions. - The following additions to taxable income shall be made in
1 2 calculating North Carolina taxable income, to the extent each item is not included in
1 3 taxable income:
14
15 (3) Any amount deducted from gross income under section 164 of the
16 Code as state, local, or foreign income tax or as state or local
17 general sales tax to the extent that the taxpayer's total itemized
18 deductions deducted imder the Code for the taxable year exceed the
19 standard deduction allowable to the taxpayer under the Code
20 reduced by the amount the taxpayer is required to add to taxable
21 income under subdivision (4) of this subsection.
22
23 SECTION 6. Notwithstanding any other provision of law, a taxpayer
24 whose federal taxable income for 2004 is reduced due to a charitable contribution of
25 cash made in January 2005 for Indian Ocean tsunami relief efforts in accordance with
26 P.L. 109-1 is not required to add back the amount of the deduction related to that
27 contribution in determining North Carolina taxable income for 2004.
28 SECTION 7. Sections 4 and 5 of this act become effective for taxable
29 years beginning on or after January 1, 2005. The remainder of this act is effective
30 when it becomes law.
18
Bill Analysis of Legislative Proposal #1:
IRC Update
By: Y. Canaan Huie, Bill Drafting Divisio>4
SUMMARY: This bill updates the reference to the Internal Revenue Code used in
determining and defining certain State tax provisions. The bill would become
effective when it becomes law.
CURRENT LAW: North Carolina's tax law tracks many provisions of the federal
Internal Revenue Code, by reference to the Code.^ The General Assembly
determines each year v^hether to update its reference to the Internal Revenue Code.2
Updating the Internal Revenue Code reference makes recent amendments to the
Code applicable to the State to the extent that State law tracks federal law. The
General Assembly's decision whether to conform to federal changes is based on the
fiscal, practical, and policy implications of the federal changes and is normally
enacted in the following year, rather than in the same year the federal changes are
made. Under current law, the reference date to the Code is May 1, 2004.
bill ANALYSIS:
This bill would change the reference date to January 1, 2005. Changing the reference
date to Januar>' 1, 2005, would incorporate federal changes made in the Working
Families Tax Relief Act of 2004 (P.L. 108-311) and the American Jobs Creation Act of
2004 (P.L. 108-357). In addition, in early 2005 Congress enacted an act to enhance
the tax benefit for certain charitable contributions made in January 2005 for tsimami
relief (P.L. 109-1). That act did not amend the Code, but rather used uncodified
language to bring about that result. This bill would conform to that legislation as
well.
Working Families Tax Relief Act (WFTRA) of 2004 (P.L. 108-311).
The Working Families Tax Relief Act of 2004 was signed into law by President Bush
on October 4, 2004. Despite its title, the act provides tax benefits for businesses as
1 North Carolina first began referencing the Internal Revenue Code in 1967, the year it changed its
taxation of corporate income to a percentage of federal taxable income.
2 The North Carolina Constitution imposes an obstacle to a statute that automatically adopts any
changes in federal tax law. Article V, Section 2(1) of the Constitution provides in pertinent part that
the "power of taxation ... shall never be surrendered, suspended, or contracted away." Relying on
this provision, the North Carolina court decisions on delegation of legislative power to
administrative agencies, and an analysis of the few federal cases on this issue, the Attorney General's
Office concluded in a memorandum issued in 1977 to the Director of the Tax Research Division of
the Department of Revenue that a "statute which adopts by reference fuhire amendments to the
Internal Revenue Code would ... be invalidated as an unconstitutional delegation of legislative
power."
19
well as individuals and faniilies. The following features of the act are important for
State tax purposes:
• Creation of a more uniform definition of "child" throughout the Code starting unth
tJie 2005 taxable year. At the federal level, the definition of "child" is
important in five areas: the dependency exemption, the child credit, the
earned income credit, the dependent care credit, and head of household
filing status. WFTRA creates a uniform definition of "child" that applies to
each of these areas. Under the new definition, a child is a qualifying child if
the child satisfies three separate conditions. First, the child must have the
same principal place of abode as the taxpayer for more than one half the tax
vear (residency test). Temporar}' absences due to special circumstances are
not included. Second, the child must be the child, stepchild, sibling,
stepsibling, or a descendant of any of these relations of the taxpayer
(relationship test). Third, the child must satisfy an age condition to be
deemed a qualifying child. In general, a child must be under age 19, or
under age 24 if a full-time student, to be a qualifying child. However, lower
age limits were retained for the dependent care credit (under 13 years of age
unless disabled) and the child tax credit (under 17 years of age). For State tax
purposes, the changes are important in so far as they relate to the
dependency exemption, the child tax credit, and head of household filing
status. The new definition of qualifying child for the dependency exemption
may result in a change of status of some children - where the new law has a
residency test, the old law had a support test (the one claiming the child had
to provide at least 50% of the child's support). For the federal child tax
credit, some taxpayers may become eligible to claim the credit due to the
elimination of some restrictions related to foster children. This is important
because eligibilit}- for the State child tax credit is dependent on the taxpayer's
eligibilit}' for the federal credit. In general, the xmiform definition should not
affect head of household filing status.
• Extension of the aboi^e-the-line deduction for educators. Under previous law, an
eligible educator was allowed an above-the-line deduction of up to $250 for
amounts paid by the teacher for books or supplies used in the classroom.
This provision was set to expire with the 2003 taxable year. WFTRA
extended this provision for the 2004 and 2005 taxable years.
• Extension of elective expensing of qualified environmental remediation expenditures.
Under previous law, a taxpayer could elect to treat qualified environmental
remediation expenditures that would normally be charged to a capital
account and depreciated over time as deductible in the current year. To be
deductible currently, the expenditure must be paid or incurred with the
abatement or control of hazardous substances at a qualified contaminated
20
site. This provision would have expired with the 2003 tax year. WFTRA
extended this provision for the 2004 and 2005 taxable years.
• Extension of enJmnced deduction for qualified computer contributions. Under
previous law, corporations were allowed an enhanced charitable
contribution deduction for contributions of computer technology or
equipment to schools or public libraries that would use the computer
equipment for educational purposes. This provision would have expired
with the 2003 tax year. WFTRA extended this provision for the 2004 and
2005 taxable years.
• Elimination of the phase down of the deduction for qualified clean fuel property.
Under previous law, a taxpayer was allowed a specified deduction for clean
fuel vehicles or refueling property placed into service before January 1, 2007.
The amount of that deduction was to be reduced by 25% in 2004, 50% in
2005, and 75% in 2006, and was to be completely phased out in 2007.
WFTRA eliminated the phase down in the 2004 and 2005 taxable years.
Without further action, the phase dov^n:! will resume at 75% in 2006.
• Extension of Arclier Medical Savings Accounts (MSAs). Archer MSAs were
designed to give small employers, their employees, and self-employed
individuals a way of creating tax-deferred savings to offset qualifying
medical expenses. The program was designed to be limited in scope: no
new Archer MSAs could be set up after a certain threshold had been met or
after the end of 2003. WFTRA extends the period in which new Archer
MSAs may be created until the end of 2005.
American Jobs Creation Act (AJCA) of 2004 (P.L. 108-357).
The American Jobs Creation Act of 2004 was signed into law by President Bush on
October 22, 2004. The bill makes many substantial changes in many different areas
of tax law. The more significant changes for State tax purposes are listed below.
• Repeal of the exclusion for extraterritorial income (ETI)/deduction for qualified
domestic production income. Under previous law, U.S. exporters were eligible
for an exclusion from gross income for qualifying extraterritorial income. In
2000, the World Trade Organization declared this exclusion an illegal trade
subsidy. Congress did not take action regarding this finding until the
European Union began placing sanctions on U.S. exports. At the time
Congress acted those sanctions were at 12% and were rising by one
percentage point per month. This exclusion will be phased out over several
years. The ETI exclusion will be reduced by 20% in 2005 and by 40% in 2006.
The ETI exclusion will be eliminated altogether beginning in 2007. Based on
Congress's enactment of this law, the EU has indicated it will drop sanctions
on U.S. imports begirming January 1, 2005.
21
In part to replace the ETI exclusion. Congress created a new deduction for
domestic production activities. "Domestic production activities" is defined
fairly broadly and includes a) the sale, lease, or license of property
manufactured or produced by the taxpayer in significant part in the United
States, b) the sale, lease, or license of United States produced motion pictures
and video tapes, c) the sale of electricity, natural gas, or potable water within
the United States, d) construction activities performed in the United States, e)
engineering or architectural services performed in the United States for
construction projects occurring in the United States. For taxable years
beginning in 2009, the amount of the deduction is equal to nine percent (9%)
of the lesser of the domestic production activities income of the taxpayer or
taxable income without regard to the deduction. This deduction will be
phased in over several years beginning in 2005. For the 2005 and 2006
taxable \'ears the deduction will be limited to three percent (3%): this amount
will grow to six percent (6%) for the 2007 and 2008 taxable years.
Extension of 279 expensing limit increase/revisions regarding SUVs. Section 179
of the Code allows a taxpayer to treat the cost of certain property as an
expense which is not chargeable to a capital account. This allows the
taxpayer to take a deduction for the property' in the year in which it is placed
into ser\-ice rather than depreciating the property over a number of years. In
2003, Congress increased the amount that could be expensed under Section
179 of the Code from twenty-five thousand dollars ($25,000) to one hundred
thousand dollars (S100,000).3 The federal change was originally set to expire
after the 2005 taxable year. The AJCA extends this provision through the
2007 taxable year.
One frequent complaint about the federal provision was that it allowed
expensing of costs associated with the purchase of a sports utilit}' vehicle by
a small business. General rules relating to the depreciation of motor vehicles
did not apph- to many large SUVs because those rules applied only to
vehicles weighing 6,000 pounds or less. The effect of this provision was to
allow an immediate write-off for the purchase price of a large SUV, but to
require more gradual depreciation for the purchase of most other passenger
vehicles. Taxpayers thus had a greater incentive to purchase a large SUV.
The AJCA limits the amount of that may be expensed under Section 179 with
respect to a vehicle weighing less than 14,000 pounds to twenty-five
' The General Assembly conformed to this federal change as pan of the 2003 Budget Aa (Si. 2003-
284).
22
thousand dollars ($25,000)4. The federal legislation made this change
effective when it become law, October 22, 2004.
Establishment of 15-year straight line cost recovery for qualified leasehold
improvements and qualified restaurant property. The AJCA provides for 15-year
straight-line depreciation for qualified leasehold improvements to
nonresidential real property placed into service after the date of enactment
(October 22, 2004) and prior to January 1, 2006. A qualified leasehold
improvement is an improvement made to the interior of a building by either
the lessor or lessee and placed in service more than three years after the
building is placed in service. Under prior law, a qualified leasehold
improvement was depreciated using straight-line depreciation over a 39-year
period - the same period as for depreciation of nonresidential property in
general.
A similar depreciation schedule is put into place for qualified restaurant
property placed into service after the date of enactment (October 22, 2004)
and prior to January 1, 2006. In order to qualify as "qualified restaurant
property", the property must be a building improvement placed in service
more than three years after the building is placed in service and the
restaurant must use more than half of the square footage of the building.
If the leasehold improvement or restaurant property contains tangible
personal property that may be segregated from the cost of other
improvements and that tangible personal property has a shorter depreciation
period, then the taxpayer may depreciate that propert)' separately using the
shorter period.
Modification of deduction for clwritable contribution of used motor vehicles. The
AJCA limits the amount of the deduction for contributions of motor vehicles
to charity. Vehicle donation programs have become popular in recent years.
Generally, the taxpayer who has donated the motor vehicle has claimed a
deduction for the full "blue book" value of the vehicle. The new law will
limit the amount of the deduction based on how the donee organization uses
the vehicle. If the charitable organization sells the vehicle without using it in
any significant way, the amount of the deduction cannot exceed the gross
proceeds of the sale. If the charity retains the vehicle for its own use, the
taxpayer must receive an acknowledgment from the charity as to the value of
the vehicle. The deduction may not exceed the acknowledged value of the
■* There are some exceptions to this rule for certain vehicles. These exceptions were put in place to
ensure that the legislation would apply only to SUV and not other types of heavy motor vehicles (such as
delivery trucks) that have a weight greater than 6,000 pounds but less than 14,000 pounds.
23
vehicle to the charits'. These changes become effective with the 2005 taxable
year.
Establishment of an above-the-line deduction for certain attorney fees and court
costs. The AJCA allows an individual taxpayer an above-the-line deduction
(i.e. from gross income) for attorney fees and court costs associated v\ith
certain civil rights actior\s, claims against the government, and Medicare
fraud claims. Under previous law, these costs were deductible only as an
itemized deduction, meaning that they were deductible only if the taxpayer
itemized deductions and only to the extent aggregate itemized deductions
exceeded 2% of the taxpaver's adjusted gross income. This provision became
effective when the legislation became law, October 22, 2004.
Modification of deduction for automobile expenses of United States Postal Service
employees. The AJCA allows United States Postal Service employees who
deliver and collect mail on rural routes and receive qualified reimbursements
of automobile expenses involving these duties to deduct their actual
automobile expenses that exceed the reimbursement amount. This is an
itemized deduction and therefore may be claimed orily to the extent
aggregate deductions exceed 2% of the taxpayer's adjusted gross income.
Under previous law, the deduction could not exceed the amount of the
qualified reimbursements, regardless of actual expenditures. As under
previous law, reimbursements in excess of the amount of actual expenditures
do not have to be included in gross income.
Exclusion of National Health Service Corps Loan Program repayments from gross
income and from employment taxes. The National Health Service Corps is an
agency housed within the U.S. Department of Health and Human Services
and has as its mission improving the health of the nation's underserved
populations. Under the National Health Service Corps Loan Repayment
Program, participants in the program may receive up to $25,000 per year for
two years to pay off qualified educational loans. The loan repayment is in
addition to any salary the participant receives from the employing
community' site. Under previous law, the amount of loan repayment was
included in taxable income and was also subject to employment taxes (i.e.
FICA). Under the AJCA, these loan repayments are to be excluded from
both gross income and from employment taxes. This provision became
effective with the 2004 taxable year.
Creation of a deduction for start-up costs and amendments to the expensing schedule
for such costs. Under the AJCA, a taxpayer may take a deduction of up to
$5,000 for start-up and organization expenses. However, the amount of the
deduction is reduced by the amount by which those expenses exceed
$50,000. Any expenses in excess of $5,000 must be amortized over a 15-year
24
period. Under previous law, no current expensing was allowed, the full
amount of the start-up and organizational expenses would be amortized
over 5 years. This provision is effective for expenses that occur on or after
the date the legislation became effective, October 22, 2004.
Modification regarding tlie treatment of gain on ilie sale of a principal residence
wJien tlie residence was acquired in a like-kind exchange. Under current law, a
taxpayer is allowed to exclude up to $250,000 of gain from the sale of a
residence ($500,000 if a married couple filing jointly) if the taxpayer owned
and used the residence as a principal residence for at least 2 of the last 5
years. The AJCA makes a change to this provision when the home was
acquired as -part of a like-kind exchange.' Under the AJCA, a residence
received in a like-kind exchange must be owned by the taxpayer for at least
five years and must be used as a principal residence of the taxpayer for at
least two of the last five years in order to qualify for the exclusion from gross
income of the gain on the sale of the residence. This provision became
effective for residences sold on or after the date the legislation was enacted,
October 22, 2004.
Creation of a tonnage tax in lieu of an income tax on qualifying shipping activities.
The AJCA provides that a corporation can elect to be subject to a tonnage tax
rather than an income tax on its qualified shipping activities. The tonnage
tax is based on the taxpayer's "notional shipping income." Notional shipping
income is determined by reference to a monetary rate per ton shipped. The
rate is 40 cents per 100 tons per day for the first 25,000 tons shipped per
vessel and 20 cents per 100 tons per day for the amount shipped in excess of
25,000 tons per vessel. Once notional shipping income has been determined,
tax is computed on that amount at the rate of 35%. In exchange for electing
to be subject to the tormage tax, the taxpayer may exclude from its gross
income any amount resulting from its qualifying shipping activities.
Conforming to this exclusion would result in income from shipping activities
being excluded from taxation in North Carolina. In effect, it would result in
a loss of tax revenues at the State level vdthout a corresponding loss at the
federal level. In order to maintain this revenue source. North Carolina could
follow one of two paths. First, North Carolina could adopt a tonnage tax as
has been done at the federal level. This would require the State to develop
an apportionment formula to ensure that the State taxes only an appropriate
share of the tonnage. Alternatively, the State could require the taxpayer to
add back the amounts deducted from gross income because of this new
5 A like- kind exchange is an exchange of property held for productive use in a trade or business or for
investment for similar property. Unless cash is received as part of the trade, the exchange is not a
taxable event.
25
provision. For discussion purposes, this draft includes Section 2, which
would require the taxpayer to add back to taxable income any amount
deducted because of this new federal provision.
Establishment of deduction of State sales and use taxes in lieu of deduction for State
income taxes. The AJCA allows taxpayers to deduct state and local sales taxes
in lieu of deducting state and local income taxes. This provision became
effective with the 2004 taxable year and is set to expire for taxes beginning in
2006 and thereafter. Taxpayers that elect to deduct state and local sales taxes
instead of state and local income taxes will have two options for determining
the deductible amount: a) they may accumulate receipts for the actual
amount of sales and use tax paid, or b) they may refer to tables prepared by
the Secretan,^ of the Treasury' which estimate the amount of taxes paid based
on average consumption and other factors.
This federal provision is of particular benefit to taxpayers who reside in
states that do not impose a personal income tax. For most North Carolina
taxpayers, the greater benefit would come from deducting state income taxes
rather than from deducting state and local sales taxes. Some exceptions to
this general statement would include the following:
o Nonresidents or part-year residents who reside in a state that does not
impose an income tax and who have relatively low income tax
liability' in North Carolina or other states,
o Taxpayers who may have a low tax liability due to eligibility for a
significant amount of tax credits,
o North Carolina residents for whom a large portion of income is not
subject to taxation. This class of taxpayers would include many
government retirees whose government pensions are not subject to
State income tax under the decisions in Bailey and the related cases
and whose Social Security payments are not subject to State income
tax under G.S. 105-134.6.
North Carolina law currently requires taxpayers to add back the amount of
the deduction allowed under the Code for state, local, and foreign income
taxes. In order to treat the deduction for state and local sales taxes
equivalent to the deduction for state, local, and foreign income taxes, the
General Assembly should require the add back of the deduction for state and
local sales taxes if it decides to conform to the federal change. This is
problematic, however, given that the federal legislation is effective for the
2004 taxable year and the General Assembly cannot conform to the federal
legislation and require the add back unless it acts before the end of the year.
Although the practical effect of conforming to the change and requiring the
add back is the same as not conforming to the change at all, a court could
26
find that requiring an add back would in effect be a retroactive tax increase.
Therefore, for discussion purposes, this draft does not conform to the
change allowing a deduction of state and local sales taxes in the 2004
taxable year, but does conform to that change and require an add back
beginning with the 2005 taxable year. This can be seen in Sections 1, 4, and
5 of the bill.
An Act to accelerate the income tax benefits for charitable cash contributions
for the relief of victims of the Indian Ocean tsunami (P.L. 109-lV
On December 26, 2004, a large earthquake centered in the Indian Ocean
unleashed a catastrophic tsunami that resulted in widespread devastation in
11 countries in South Asia, Southeast Asia, and Africa. The disaster is
estimated to have caused billions of dollars in damages and produced a
death toll in excess of 160,000.
On January 6, 2005, the first act of the 109 Congress was to approve
accelerated tax benefits for charitable cash contributions for the relief of
victims of the Indian Ocean tsunami. President Bush signed the act into law
the following day. The act allows a taxpayer to treat a cash contribution for
tsunami relief efforts made in January 2005 to be treated as if it were made
on December 31, 2004. Thus, the taxpayer would be able to take a deduction
in the 2004 taxable year rather than the 2005 taxable year. In order to qualify
for the accelerated benefit, the contribution must be cash. Donations of
property or cash substitutes, such as marketable securities, are not eligible
for the accelerated benefits. In addition, the contribution must be specifically
designated to be for tsunami relief. A contribution that is made to charitable
organization that is assisting in relief efforts but that is not specifically
designated to relief efforts is not eligible for the accelerated benefits. For
example, a donation to the Red Cross would be eligible for the accelerated
benefit only if the donation were specifically designated for tsunami relief
efforts; a general donation to the Red Cross would not be eligible for the
accelerated benefit.
Section 6 of this bill contains special language to ensure that North Carolina
conforms to this federal act.
27
Fiscal Analysis Memorandum
[This confidential fiscal memorandum is a fiscal analysis of a draft bill, amendment,
committee substitute, or conference committee report that has not been formally
introduced or adopted on the chamber floor or in committee. This is not an official
fiscal note. If upon introduction of the bill you determine that a formal fiscal note is
needed, please make a fiscal note request to the Fiscal Research Division, and one will
be provided under the rules of the House and the Senate.]
DATE: Januan 24, 2005
TO:
Revenue Laws Study Committee
FROM: Linda Struyk Millsaps and David Crotts
Fiscal Research Division
RE:
IRC Update
FISCAL IMPACT
(millions)
Yes (X) No ( ) No Estimate Available ( )
F^^ 2005-06 FY 2006-07 FY 2007-08 FY 2008-09 FY 2009-10
(21.77) 12.48 (2.07)
(39.19)
(5636)
REVENUES:
General Fund
EXPENDITURES:
POSITIONS
(cumulative):
PRINCIPAL DEPARTMENT(S) & PROGRAM(S) AFFECTED: North Carolina
Department of Rexenue.
EFFECTI\'E DATE: Sections 4 and 5 of this act become effective for taxable
years beginning on or after January 1, 2005. The remainder of this act is effective when itj
becomes law.
BILL SUMMARY: This bill updates the statutory reference to the Federal Internal
Revenue Code used in defining and determining certain state income tax provisions. NOTE:
28
Because of the structure of the federal legislation, many of these provisions would be
retroactive.
ASSUMPTIONS AND METHODOLOGY: In 1989 the General Assembly decided to
Imk the State personal income tax directly to the federal income tax by adopts the federal
taxable income as the starting point for the calculation of state taxable income, hi addition,
each year the state must proactively determine whether to update its reference to the Internal
Revenue Service code to continue this conformance. Under current North Carolina law the
reference date in the code is May 1, 2004. The legislation changes the reference date to
January 1 , 2005. This would effectively incorporate the changes made by both the Working
Families Relief Act and the American Job Creation Act. In addition, in early January 2005
Congress enacted additional legislation to enhance the tax benefits associated with charitable
contributions made for tsunami relief. The legislation conforms to that change as well.
Harking Families Tax Relief Act of 2004
There are six provisions of the code update that potentially affect state law and are a part of
this legislation.
1 . Uniform Child Definition: The term "child" is defined in numerous places in the federal
code. The legislation creates a uniform definition, with three separate conditions. First a
residency test that says the child must live with the taxpayer more than V2 the year.
Temporary absences due to special circumstances are not included. Second, a relationship
test requires the child to be a child, stepchild, sibling, stepsibling, or descendant of the
taxpayer. Finally, an age test. Generally a child must be under 19, or 24 if they are a ftill-
time student. However, lower age limits still apply to the dependent care credit and the
child tax credit. These changes may result in a change of status for some children in North
Carolina. They also potentially affect eligibility for the State child tax credit.
The staff of the Congressional Joint Committee on Taxation (JTC) estimates that this
exclusion will cost the federal treasury $84 million in the first year, $206 million in the
second, and $209 in the third. The chart below shows the JCT estimate of the federal loss,
with adjustments made to apply the estimate to North Carolina.
(millions)
Child Definition
FY05-
06
FY06-
07
FT07-
08
FY08-
09
¥Y 09-10
JTC Estimate of Federal Tax Loss
(84.0)
-206
-209
-218
-225
Divided by Average Federal Rate
21.9%
21.9%
21.9%
21.9%
21.9%
Estimated Loss of Federal bcome
(383.6)
(940.6)
(954.3)
(995.4)
(1,027.4)
NC Children as % of National
2.63%
2.63%
2.63%
2.63%
2.63%
Estimated Loss of NC Taxable hicome
(10.09)
(24.74)
(25.10)
(26.18)
(27.02)
Multiply by Average Tax Rate
6.80%
6.80%
6.80%
6.80%
6.80%
Estimated NC Loss
(0.69)
(1.68)
(1.71)
(1.78)
(1.84)
29
2. Deduction for Educators: Previously educators could take an above the line deduction of
up to $250 to cover their out of pocket expenses related to the classroom, such as supplies,
books, computers, software, and equipment. This provision expired with the 2003 tax year.
The federal legislation extends the provision for the 2004 and 2005 tax years. The
Department of Public Instruction estimates, based on the requirements in the bill, 11 8,462
educators will likely qualify for the $250 credit in 2004. Because the credit can be reduced
or eliminated by other tax-fi-ee distributions, the fiscal memo assumes a 92% participation
rate, with each educator taking the full amount of the credit. This change will also impact
the current fiscal year.
Teacher Credit
FY 05-06
FY 06-07
FY 07-08
FY 08-09
FY 09-10
Estimated Affected
Educators
113462
115196
116463
117448
118417
Multiply by $250 credit
$250
$250
$250
$250
S250
Estimated Loss of NC
Taxable Income
28,365,500
28,799,000
29,115,750
29,362,000 29,604,250
Multiply by Average Tax
Rate
6.80%
6.80%
6.80%
6.80%
6.80%
Estimated NC Loss
1,928,854
1,958,332
1,979,871
1,996,616
2,013,089
Loss After Adj. for
Participation Rate
1,774,546
1,801,665
1,821,481
1,836,886
1,852,042
3, 4, and 5. Brownfields, Computer Donations, and Clean Fuel Property: The Act includes
three additional changes, each with limited fiscal impact. First, it extends the previous
elective expensing of qualified environmental remediation expenditures. Since it is
unknown how many North Carolina taxpayers will take advantage of this expensing method
to cleanup the estimated 1,000 brownfield sites in the state, the memo uses 0.53% of the
federal estimate, as North Carolina corporate tax collections are that proportion of federal
corporate tax collections. Second, it enhances the deduction, by allowing a deduction in
excess of basis, for qualified computer donations by companies to schools and libraries.
North Carolina's proportion of the corporate revenues is also used to determine North
Carolina' potential loss. Finally, it delayed the planned phase-out of the deduction allowed
for the purchase of clean-fiiel vehicles and refiieling property. These items all extend
previous tax relief and primarily affect corporate taxes. The fiscal impact to the state is as
follows:
(millions)
Brownfields, Computers, and Clean
Fuel
FY 05-06
FY 06-07
FY 07-08
FY 08-09
FY 09-10
JTC Estimate of Federal Tax Loss
-726
-171
57
54
51
NC Proportion of Federal Collections
0.53%
0.53%
0.53%
0.53%
0.53%
Estimated NC Loss
(3.8)
(0.9)
0.3
0.3
0.3
Estimated NC Loss after Fiscal Year Adj.
(2.10)
(1.0)
0.1
0.3
0.3
30
This loss applies primarily to corporate tax.
6. Archer Medical Savings Accounts: These savings accounts are similar to IRAs, but are
used to pay for qualifying medical expenses. It must be set up in conjunction with an IRS
qualified high deductible health plan (HDHP). Previously no new Archer MSAs could be
created after the end of 2003. The federal legislation retroactively extends that penod
through 2005. Currently several companies offer Archer accounts in North Carolina.
However, no information is available at this time concerning the number or value of
policies. In addition, the Joint Select Committee indicates, at the federal level, the revenue
impact IS limited. Therefore, no fiscal estimate is possible on this portion of the bill.
American Job Creation Act of 2004
There are several provisions of this federal legislation that potentially affect state law and
are a part of this bill.
1. Repeal of the Exclusion for Extraterritorial Income (ETD/Deduction for Qualified
Domestic Production Income: Under previous law, U.S. companies that export could
exclude from their gross income certain income earned outside the United States. In 2000
the World Trade Organization declared this to be an illegal subsidy. As a result. Congress is
phasing out the exclusion, with total elimination set for 2007. However, as a replacement
Congress passed a new deduction for domestic production activities. Qualifying activities
include 1 ) the sale, lease or licensing of property manufactured or produced primarily in the
U.S. 2) similar activities related to motion pictures and videos, 3) the sale of electricity,
natural gas, or potable water within the United States, 4) construction in the U.S. and 5)
engineering and architectural services related to U.S. construction. The deduction will be
phased in between 2005 and 2008.
The starting point for the North Carolina impact estimate of the Qualified Production
Activities Income deduction was the federal income tax amounts projected by the Joint
Committee on Taxation. These estimates were converted to tax year amounts by assuming
that 22.5% of the ultimately tax for the year is paid during each quarter of the tax year, with
the remainder being remitted in March of the following calendar year. The conversion took
into account the fact that the federal fiscal year ends September 30.
Next, the calendar year federal estimates were sensitized to North Carolina by relating the
manufacturing share of 2002 gross state product in North Carolina to the same share
computed for the nation (Bureau of Economic Analysis, U. S. Department of Commerce).
This ratio turned out to be 5.1%.
Finally, the estimated calendar year impact was converted to state fiscal year using the same
quarterly payment assumption outlined in converting the federal fiscal year estimate back to
the appropriate tax year.
The estimate for the elimination of the export exclusion ("FSC/ETI repeal") was similar to
the estimate for Qualified Production Activities (see immediately preceding section) except
31
that the calculations took into account the phase in schedule for the change. That schedule
eliminates 20% of the benefits for the 2005 tax year, 40% for 2006, and 100% for 2007 and
later years.
(millions)
FY05-
06
FY06-
07
FY07-
08
FY OS-
OP
FY09-
10
Qualified Production Activities
Deduction
-31.2
-45.7
-63.6
-64.2
-79.5
FSC/ETI Repeal
14.8
35.7
55.3
57.9
60.6
This primarily affects corporate revenues.
2. Section 179 Expensing: hi 2001 Congress raised the threshold for small business
expensing, often referred to as Section 179 expensing, fi-om $25,000 to $100,000. (The
benefit is reduced when the purchase exceeds $400,000). This legislation extends the
special treatment through 2007. The estimate of the impact of this provision was based on
the following analyses:
(1) A review of the 2003 session estimates of the original Section 179 authorization,
compared to the state specific estimates of the Center for Budget Policies and Priorities
(CBPP).
(2) A conversion of the new federal fiscal year estimates of the federal impact to the
relevant tax year. The federal fiscal year estimates were developed by the Joint Committee
on Taxation.
(3) A simulation of the year-by-year impact of Section 179 expensing (compared to
regular depreciation) for a $75,000 investment (equals the increase the expensing limit).
This analysis used both 5-year and 7-year properties and assumed the taxpayer would use
the double declining balance method of depreciation.
(4) An allocation of the U. S. total impact data to North Carolina by reviewing the ratio of
N.C. personal income to the U.S. and a comparison of North Carolina's marginal tax rate of
6.9% to a federal rate of 34%.
(millions)
FY 05-06
FY 06-07
FY 07-08
FY 08-09
FY 09-10
Sec. 179
-20.1
-45.6
-13.8
18.8
16.6
3. Tonnage Tax: The federal legislation allows a corporation to elect to be subject to a
tonnage tax, rather than an income tax, on its qualifying shipping activities. Because North
Carolina does not currently levy a tonnage tax, the net effect of the federal change is a loss
of state tax revenues. This legislation requires a taxpayer who elects the tonnage tax at the
federal level to add back that deduction at the state level. As a result of the combination of
these two items, there is no Fiscal Impact to the state.
32
4. Deduction for State Sales and Use Taxes: Under previous law. taxpayers could deduct the
amount they paid in state income taxes on their federal return. In the new act, as an effort to
pnmarily aid individuals who live in states that do not levy a personal income tax. Congress
allows individual taxpayers to elect to deduct either their state income taxes or their state
sales taxes paid. Generally, this portion of the legislation will affect few taxpayers as the
vast majonty pays more in personal income taxes than sales taxes. However, some
taxpayers with particularly low taxable income, such as Bailey recipients or others similarly
situated individuals, or those who make a substantial purchase, will take advantage of this
provision. Because of limited data, no fiscal estimate is possible at this time.
5. Tsunami Relief: Generally charitable donations must be made in a given calendar year to
be used to reduce that same year's tax liability. However, this year Congress is allowing
donations made in January 2005 to apply to 2004 liabilities. This provision only applies if
the donation is made specifically for Tsunami relief and is notated as such. This state
legislation conforms to the federal change. Because of the lack of data currently available,
no estimate is possible on this portion of the bill.
6. Leasehold Improvements and Restaurant Property: The estimate for this change was
based on sensitizing the federal estimates of the Joint Committee on Taxation to North
Carolina. The adjustment was based on the state share of personal income and the state tax
rate, relative to federal. The estimate ignored a portion of the FY05 federal impact because
the Department of Revenue has advised taxpayers to use the new depreciation rule for the
2004 tax year. This means that the 2004 tax year impact will affect the General Fund
revenue estimates used for adopting the budget, but will not be a part of the fiscal estimate
for the bill.
Before estimating the N.C. impact, the federal numbers were adjusted to a tax year basis and
the fact for the 2004 tax year the federal estimates applied to a partial year.
(milli
ons)
FY05-
06
FY06-
07
FY07-
08
FY08-
09
FY09-
10
Leasehold Improvements
-1.2
-1.5
-L5
-1.4
-1.3
Restaurants
-0.3
-0.4
-0.4
-0.4
-0.4
7. Other Provisions: There are numerous other provisions in the legislation that affect the tax
liability of North Carolina businesses, farmers, and individual taxpayers. These relate to
Section 179 expensing of sports utility vehicles (SUV), the donation of automobiles to
charity, expensing of attorney's fees and court costs, vehicle modification costs to postal
employees, National Health Service Corps Loan repayments, start-up cost deduction, gain
on a sale of a principal residents when acquired in a like-kind exchange, and farm losses due
to natural disasters. The estimate for this change was also based on sensitizing the federal
estimates of the Joint Committee on Taxation to North Carolina. The adjustment was based
on the state share of personal income and the state tax rate, relative to federal. The estimate
ignored a portion of the FY05 federal impact because the Department of Revenue has
33
advised taxpayers to use the new depreciation rule for the 2004 tax year. This means that
the 2004 tax year impact will affect the General Fund revenue estimates used for adopting
the budget, but will not be a part of the fiscal estimate for the bill.
FY05-
06
FY06-
07
FY07-
08
FY08-
09
FY09-
10
Other Provisions
3.37
5.62
5.66
5.10
5.32
SOURCES OF DATA: North Carolina Department of Public Instruction, North Carolina
Department of Revenue, The Joint Committee on Taxation, Economy.com, U.S. Census
Bureau, and the Center for Budget and Policy Priorities.
TECHNICAL CONSIDERATIONS: None
34
LEGISLATIVE PROPOSAL #2
Streamlined Sales Tax Changes
35
LEGISLATIVE PROPOSAL #2:
A Recommendation of the Revenue Laws Study Committee
TO THE 2005 General Assembly
An Act to Amend the Sales and Use Tax Statutes to
Conform to the Streamlined Sales Tax Agreement.
Short Title: Streamlined Sales Tax Changes
Sponsors: Kerr; Clodfelter, Dalton, Hartsell, Hoyle, Webster
Brief Overview: This bill amends several of the sales and use tax statutes to
conform to the Streamlined Sales Tax Agreement.
Fiscal Impact: This proposal would result in an annual General Fund loss of
$500,000 and an armual loss of $278,000 for local governments beginning with FY
05-06.
Effective Date: This act is effective when it becomes law.
A copy of the proposed legislation, bill analysis, and fiscal note begin on the next page
36
GENERAL ASSEMBLY OF NORTH CAROLINA
SESSION 2005
U D
BILL DRAFT 2005-RBx2-6A [v.lj (1/20)
(THIS IS A DRAFT AND IS NOT READY FOR INTRODUCTION)
1/24/2005 5:27:20 PM
Short Title: Streamlined Sales Tax Changes. (Public)
Sponsors: Senators Kerr; Clodfelter, Dalton, Hartsell, Hoyle, and Webster.
Referred to:
1 A BILL TO BE ENTITLED
2 AN ACT TO AMEND THE SALES AND USE TAX STATUTES TO CONFORM
3 TO THE STREAMLINED SALES TAX AGREEMENT.
4 The General Assembly of North Carolina enacts:
5 SECTION 3.(a) G.S. 105-164.3 reads as rewritten:
6 "§ 105-164.3. Definitions.
7 The following definitions apply in this Article:
8
(4b) Computer supplies. - Items that are considered to be a 'school
computer supply' under the Streamlined Agreement.
(10) Food. - Substances that are sold for ingestion or chewing by
humans and are consumed for their taste or nutritional value. The
substances may be in liquid, concentrated, solid, fi-ozen, dried, or
dehydrated form. The term does not include an alcohohc beverage,
as defined in G.S. 105-113.68. or a tobacco products, product, as
defined in G.S. 105 113.4.
(37a) School supplies. - Items commonly used by students in the course
of their studies and that are considered to be a 'school supply', a
'school art supply', or a 'school instructional material' under the
Streamlined Agreement.
37
1 (45a) Streamlined Agreement. - The Streamlined Sales and Use Tax
2 Agreement adopted November 12. 2002, as amended on November
3 19. 2003. and on November 16, 2004."
4 SECTION 2.(a) G.S. 105-1 64. 13B(a) reads as rewritten:
5 "(a) State Exemption. - Food is exempt from the taxes imposed by this Article
6 unless the food is included in one of the subdivisions in this subsection. The
7 following food items are subject to tax:
8 (4) Alcoholic bovcrageo. as defined in G.S. 105 1 13.68.
9 (2) Dietary supplements.
10 (3) Food sold through a vending machine.
1 1 (4) Prepared food.
12 (5) Soft drinks.
13 (6) (Repealed effective January 1, 2004) Candy, unless the item is
14 purchased for home consumption and would be exempt if purchased
15 imder the Federal Food Stamp Program, 7 U.S.C. § 51 ."
16 SECTION 2.(b) Subdivision (b)(5) of Section 5 of Part IV of Chapter 908
17 of the 1 983 Session Laws, as amended by Chapter 82 1 of the 1 989 Session Laws and
18 S.L. 200 1 -347, reads as rewritten:
19 "(b) Definitions. The defmitions in G.S. 105-164.3 apply to this Part insofar as
20 they are not inconsistent with the provisions of this Part. In addition, the following
21 definitions apply in this Part:
22
23 (5) Prepared Food and Beverages. The term has the same mcamng as
24 thn tnrm "prnpnroH fnnH" in G S 105 1 61 .3. includes the following:
25 a. Prepared food, as defined in G.S. 105-164.3.
26 b. An alcoholic beverage, as defined in G.S. 18B-101. that
27 meets at least one of the conditions of prepared food imder
28 G.S. 105-164.3."
29 SECTION 2.(c) Subdivision (a)(2) of Section 2 of Chapter 413 of the
30 1993 Session Laws, as amended by S.L. 2001-347, reads as rewritten:
31 "Sec. 2. Definitions; Sales and Use Tax Statutes. - (a) The definitions in
32 G.S. 105-164.3 apply to this act to the extent they are not inconsistent with the
33 provisions of this act. In addition, the following definitions apply in this act:
34
35 (2) Prepared food and beverages. - The term has the oamc moaning as
36 th" t^rrp "p'"T"''^^ ^^"^" '" ^' ^ ^^^ ^ 6^1 3 includes the following:
37 a. Prepared food, as defined in G.S. 105-164.3.
38 b. An alcoholic beverage, as defined in G.S. 18B-101. that
39 meets at least one of the conditions of prepared food under
40 G.S. 105-164.3."
38
1 SECTION 2.(d) Section 2 of Chapter 449 of the 1985 Session Laws, as
2 amended by Chapter 826 of the 1985 Session Laws, Chapter 177 of the 1991 Session
3 Laws, and S.L. 2001-347, reads as rewritten:
4 "Sec. 2. Definitions. The definitions in G.S. 105-164.3 apply in this act. In
5 addition, the following definitions apply in this act.
6 (1) Net proceeds. Gross proceeds less the cost to the county of
7 administering and collecting the tax.
8 (2) Prepared food and beverages. The term has the same meaning as the
term "prepared food" in G.S. 105 16'1 .3 .includes the following:
a. Prepared food, as defined in G.S. 105-164.3.
b. An alcoholic beverage, as defined in G.S. 18B-10L that
meets at least one of the conditions of prepared food under
G.S. 105-164.3."
SECTION 2.(e) Subsection (b) of Section 1 of Chapter 449 of the 1993
Session Laws, as amended by S.L. 2001-347, reads as rewritten:
"(b) Definitions; Sales and Use Tax Statutes. - The definitions in
G.S. 105-164.3 apply to this section to the extent they are not inconsistent with the
provisions of this section. The provisions of Article 5 and Article 9 of Chapter 1 05 of
the General Stamtes apply to this section to the extent they are not inconsistent with
the provisions of this section. In addition. For the purposes of this section, the term
"prepared food and beverages" has the same meaning as the term "prepared food" in
G.S. 105-164.3. includes the following:
( 1 ) Prepared food, as defined in G.S. 105-164.3.
(2) An alcoholic beverage, as defined in G.S. 18B-101, that meets at
least one of the conditions of prepared food under G.S. 105-164.3.
The proviijionf. of .\rticle 5 and Article 9 of Chapter 105 of the General Statutes
apply to this section to the extent they are not inconsistent with the provisions of this
section."
SECTION 2.(0 Subdivision (3) of Section 2 of Chapter 594 of the 1991
Session Laws, as amended by S.L. 2001-347, reads as rewritten:
"Sec. 2. Definitions. The definitions in G.S. 105-164.3 apply to this act to the
extent they are not inconsistent with the provisions of this act. The following
definitions also apply in this act:
(3) Prepared food and beverage. The term has the same meaning as the
term "prepared food" in G.S. 105 164. 3. includes the following:
a. Prepared food, as defined in G.S. 105-164.3.
b. An alcoholic beverage, as defined in G.S. 1 SB- 101, that
meets at least one of the conditions of prepared food under
G.S. 105-164.3."
SECTIONS. G.S. 105-164.13C(a) reads as rewritten:
39
1 "(a) The taxes imposed by this Article do not apply to the following items of
2 tangible personal property if sold between 12:01A.M. on the first Friday of August
3 and 1 1 :59 P.M. the following Sunday:
4 ( 1 ) Clothing with a sales price of one hundred dollars ($100.00) or less
5 per item.
6 (2) School supplies with a sales price of one hundred dollars ($100.00)
7 or less per item.
8 (3) Computers with a sales price of three thousand five hundred dollars
9 ($3,500) or less per item.
10 (4) Sport or recreational equipment with a sales price of fifty dollars
11 ($50.00) or less per item. Computer supplies with a sales price of
12 two hundred fifty dollars ($250.00) or less per item.
13 (5) Sport or recreational equipment with a sales price of fifty dollars
14 ($50.00) or less per Item."
15 SECTION 4. G.S. 105-164.28 reads as rewritten:
16 "§105-164.28. Certificate of resale.
1 7 (a) Seller's Responsibility. - A seller who accepts a certificate of resale from a
1 8 purchaser of tangible personal property has the burden of proving that the sale was
19 not a retail sale unless all of the following conditions are met:
20 ( 1 ) For a sale made in person, the certificate is signed by the purchaser,
21 purchaser and states the purchaser's name, address, aad-registration
22 number, and type of business, describes the t>pc of tangible
23 personal property generally sold by the purchaser in the regular
24 course of business.
25 (2) For a sale made in person, the purchaser is engaged in the business
26 of selling tangible personal property of the type sold.sold is
27 typically used in the type of business stated on the certificate.
28 (3) For a sale made over the Internet or by other remote means, the
29 sales tax registration number given by the purchaser matches the
30 number on the Department's registry.
31 (b) Liabilities. Purchaser's Liability. - A purchaser who does not resell
32 property purchased under a certificate of resale is liable for any tax subsequently
33 determined to be due on the sale. A seller of property sold under a certificate of
34 resale is jointly liable with the purchaser of the property for any tax subsequently
35 determined to be due on the sale only if the Secretary proves that the sale was a retail
36 sakr"
37 SECTION 5. G.S. 105-164.428(1) reads as rewritten:
38 "§ 105-164.42B. Definitions.
39 The following definitions apply in this Part:
40 (1) Agreement. The — Streamlined Sales — and — Use — Ta*
41 Agreement.Agreement, as defined in G.S. 105-164.3.
40
SECTION 6. This act is effective when it becomes law.
41
Bill Analysis of Legislative Proposal #2;
Streamlined Sales Tax Changes
By: Cindy Avrette, Research Division
SUMMARY; This bill draft makes several technical and administrative changes
to the sales and use tax laws to conform to the Streamlined Sales and Use Tax
Agreement, as amended in November 2004. The bill becomes effective when it
becomes law.
CURRENT LAW: Legislative Proposal 2 makes the following changes to the sales
and use tax laws to conform them to the Streamlined Sales and Use Tax Agreement,
as amended in November 2004.
Section
Explanation
1,2
Section 1 conforms the defirution of food to the Streamlined
Agreement by removing 'alcoholic beverage' from the definition of
food. Section 2(a) makes a conforming change to the exemption of
food from the State sales tax base. Sections 2(b) through ( ) make
conforming changes to the local meals tax statutes.
1,3
States may allow sales tax holidays, but the items included in the
holiday must be defined terms under the Streamlined Agreement.
Section 1 defines the terms 'computer supplies' and 'school supplies'
to conform to the defined terms in the Streamlined Agreement. The
proposal defines the term 'school supplies' to mean the all-inclusive
list of items defined as 'school supplies', 'school art supplies', and
'school instructional material' under the Streamlined Agreement. It
also defines the term 'Streamlined Agreement' as the Streamlined
Sales and Use Tax Agreement, adopted November 12, 2002, as
amended November 16, 2003, and November 19, 2004.
Section 3 amends the sales tax holiday statute to include the defined
terms. The primary difference between the current law and the
proposed law is the inclusion of computer supplies in the sales tax
holiday. Computer supplies include computer storage media,
printers, printer supplies, hand-held electronic schedulers, and
personal digital assistants. The State's sales tax holiday included
most of these items prior to August of 2004. The General Assembly
42
changed the law in 2003 to except these items from the hoUday in
2004, in confonTut\' with the Streamlined Agreement. This proposal,
based upon amendments to the Streamlined Agreement in
November of 2004, expands the holiday to include these items once
again so long as the sales price does not exceed S250 per item.
Conforms the statutory' language to the information actually
requested on a certificate of resale.
To remain in compliance, other, more substantive changes involving multiple tax
rates will need to be made before January 1, 2006. The Streamlined Agreement
allows for one rate and prohibits the use of caps and thresholds. North Carolina
currently has multiple rates, such as the preferential rate on certain agricultural
items, and the differing rates on telecommurucations services, direct-to-home
satellite service, and spirituous liquor.
43
Fiscal Analysis Memorandum
[This confidential fiscal memorandum is a fiscal analysis of a draft bill, amendment,
committee substitute, or conference committee report that has not been formally
introduced or adopted on the chamber floor or in committee. This is not an official
fiscal note. If upon introduction of the bill you determine that a formal fiscal note is
needed, please make a fiscal note request to the Fiscal Research Division, and one will
be provided under the rules of the House and the Senate.]
DATE: January 26, 2005
TO: Revenue Laws
FROM: Linda Millsaps
Fiscal Research Division
RE:
Streamlined Sales Tax Changes
FISCAL IMPACT
Yes (X) No () No Estimate Available ( )
FY 2005-06 FY 2006-07 FY 2007-08 FY 2008-09 FY 2009-10
(500,000)
(278,000)
(500,000)
(278,000)
(500,000)
(278,000)
(500,000)
(278,000)
REVENUES:
General Fund
Local Government
EXPENDITURES:
POSITIONS
(cumulative):
PRINCIPAL DEPARTMENT(S) & PROGRAM(S) AFFECTED: North Carolina
Department of Revenue.
EFFECTIVE DATE: When it becomes law.
(500,000)
(278,000)
BILL SUMMARY: The bill makes several definitional changes to the state's sales tax
statutes, particularly as they relate to alcoholic beverages and the sales tax holiday. These
changes are in response to compliance issues with the Streamlined Sales Tax Agreement.
44
ASSUMPTIONS AND METHODOLOGY: To meet the requirements of the Streamlined
Sales Tax Agreement, the legislation removes "alcoholic beverage" from the definition of
food, and transfers it to the definition of prepared food. Because alcoholic beverages were
already set out as a special type of food that is subject to the general sales tax rate, and
prepared foods are also taxed at the general rate, there is no fiscal impact because of this
change. The bill makes a similar transfer in the local prepared meals tax statutes. No fiscal
impact is expected because of this change.
The legislation also makes changes that relate to the sales tax holiday. Under the agreement,
states can host a sales tax holiday, but must apply the holiday to only a specific set of
defined terms. The legislation alters several related North Carolina definitions to conform to
those in the agreement. While items shift between terms, the only items that actually change
tax status are "computer supplies". Under the agreement computer supplies are defined to
include computer storage media (such as CDs and discs), printers, printer supplies, hand-
held electronic schedulers, and personal digital assistants. North Carolina's sales tax
holiday applied to most of these items before August 2004. In 2003, the General Assembly
changed the law to exempt these items from the holiday, effective for the 2004 holiday.
This change was made to conform to Streamline. In November 2004 the Streamline
agreement was amended to allow state holidays to include these items, as long as the sales
price IS less than S25 1 . Therefore, the revenue loss associated with this portion of the bill is
the revenue associated with exempting "computer supplies" from sales tax during the aimual
sales tax holida\ . Based on industry data and original estimates of the impact of the sales
tax holida\'. the annual cost is expected to be less than $500,000.
TECHNICAL CONSIDERATIONS: None
45
LEGISLATIVE PROPOSAL #3
Motor Fuels Tax Changes
46
LEGISLATIVE PROPOSAL #3:
A Recommendation of the Revenue Laws Study Committee
TO THE 2005 General Assembly
An Act To Modify the Taxation of Motor Fuels.
Short Title: Motor Fuel Tax Changes
Sponsors: Luebke; Brubaker, Hill, McGee, Wainwright
Brief Overview; This bill makes several changes to the motor fuels tax laws.
Fiscal Impact: No fiscal estimate available at this time.
Effective Date: Several provisions become effective January 1, 2006 and the
remainder becomes effective when it becomes law.
A copy of the proposed legislation and bill analysis begin on the next page.
47
GENERAL ASSEMBLY OF NORTH CAROLINA
SESSION 2005
U D
BILL DRAFT 2005-RBxfz-2 (v.61 (12/8)
(THIS IS A DRAFT AND IS NOT READY FOR INTRODUCTION)
12/21/2004 11:29:28 AM
Short Title: Motor Fuel Tax Changes. (Public)
Sponsors: Representatives Luebke; Brubaker, Hill, McGee, and Wainwright.
Referred to:
1 A BILL TO BE ENTITLED
2 AN ACT TO MODIFY THE TAXATION OF MOTOR FUELS.
3 The General Assembly of North Carolina enacts:
4 SECTION 1. G.S. 105-236(2) reads as rewritten:
5 "§ 105-236. Penalties.
6 Penalties assessed by the Secretary under this Subchapter are assessed as an
7 additional tax. Except as otherwise provided by law, and subject to the provisions of
8 G.S. 105-237, the following penahies shall be applicable:
9
1 0 (2) Failure to Obtain a License. - For failure to obtain a license before
1 1 engaging in a business, trade or profession for which a license is
12 required, the Secretary shall assess a penalty equal to five percent
1 3 (5%) of the amount prescribed for the license per month or fraction
14 thereof until paid, not to exceed twenty- five percent (25%) of the
15 amount so prescribed, but in any event shall not be less than five
16 dollars ($5.001 In cases in which the taxpayer fails to obtain a
17 license as required under G.S. 105-449.65 or G.S. 105-449.131. the
18 Secretary may assess a penalty of one thousand dollars ($1.000)."
19 SECTION 2. G.S. 105-449.39 reads as rewritten:
20 "§ 105-449.39. Credit for payment of motor fuel tax.
21 Every motor carrier subject to the tax levied by this Article is entitled to a credit
22 on its quarterly report for tax paid by the carrier on fuel purchased in the State. The
23 amount of the credit is determined using the flat cents-per-gallon rate plus the
24 variable cents-per-gallon rate of tax in effect during the quarter covered by the report.
48
1 To obtain a credit, the motor carrier must furnish evidence satisfactory to the
2 Secretar\' that the tax for which the credit is claimed has been paid.
3 If the amount of a credit to which a motor carrier is entided for a quarter exceeds
4 the motor carrier's habihty for that quarter, the Secretary must refund the excess to
5 the motor eam^frcarrier in accordance with G.S. 105-266(a)(3)."
6 SECTION 3. G.S. 105-449.44(a) reads as rewritten:
7 "(a) Calculation. -The amount of motor fuel or ahemative fuel a motor carrier
8 uses in its operations in this State for a reporting period is the ratio of the number of
9 miles the motor carrier travels in this State during that period divided bv the
10 calculated miles per gallon for the motor carrier for all qualified vehicles to the total
11 number of milco the motor carrier travolG inside and outside this State during that
12 period, multiplied by the total amount of fuel the motor carrier uses in its operations
1 3 inside and outside the State during that period."
14 SECTION 4. G.S. 105-449.46 reads as rewritten:
15 "§105-449.46. Inspection of books and records.
16 The Secretary and his authorized agents and representatives shall have the right at
17 any reasonable time to inspect the books and records of any motor carrier subject to
18 the tax imposed by this AfttelerArticle or to the registration fee imposed bv Article 3
19 of Chapter 20 of the General Statutes."
20 SECTION 5. G.S. 105-449.47(al) reads as rewritten:
21 "(al) Registration and Identification Marker. - When the Secretary registers a
22 motor carrier, the Secretary must issue at least one identification marker for each
23 motor vehicle operated by the motor carrier. A motor carrier must keep records of
24 identification markers issued to it and must be able to account for all identification
25 markers it receives from the Secretary. Registrations and identification markers
26 issued by the Secretary are for a calendar year. All identification markers issued by
27 the Secretarv' remain the property of the State. The Secretary may withhold or revoke
28 a registration or an identification marker when a motor carrier fails to comply with
29 this Article, former Article 36 or 36A of this Subchapter, Article_or Article 36C or
30 36D of this Subchapter.
31 A motor carrier must carry a copy of its registration in each motor vehicle
32 operated by the motor carrier when the vehicle is in this State. A motor vehicle must
33 clearly display an identification marker at all times. The identification marker must
34 be affixed to the vehicle for which it was issued in the place and manner designated
35 by the authority that issued it."
36 SECTION 6. Article 36B of Chapter 105 of the General Statutes is
37 amended by adding a new section to read:
38 "105-449.47A. Reasons whv the Secretarv can deny an application for a
39 registration and identification marker.
40 The SecretaPv- may refuse to register and issue an identification marker to an
41 individual applicant that has done any of the following and may refuse to register and
49
1 issue an identification marker to an applicant that is a business entity if any principal
2 in the business has done any of the following:
3 (1) Had a registration issued under Chapter 105 or Chapter 119 of the
4 General Statutes cancelled by the Secretary for cause.
5 (2) Had a registration issued by another jurisdiction, pursuant to G.S.
6 105-449.57, cancelled for cause.
7 (3) Been convicted of fraud or misrepresentation.
8 (4) Been convicted of any other offense that indicates that the applicant
may not comply with this Article if registered and issued an
identification marker.
(5) Failed to remit payment for a tax debt under Chapter 105 or Chapter
n 9 of the General Statutes. The term 'tax debt' has the same
meaning as defined in G.S. 105-243.1.
(6) Failed to file a return due under Chapter 105 or Chapter 1 19 of the
General Statutes."
SECTION 7. G.S. 105-449.51 reads as rewritten:
"§ 105-449.51. \'iolations declared to be misdemeanors.
Any person uho operates or causes to be operated on a highway in this State a
motor vehicle that does not carry a registration card as required by this Article, does
not properK display an identification marker as required by this Article, or is not
registered in accordance with this Article is guilty of a Class 3 misdemeanor and,
upon conviction thereof, shall ealy-be fined no less than ten dollars ($10.00) nor
more than uvo hundred dollars ($200.00). Each day's operation in violation of any
provision of this section shall constitute a separate offense."
SECTION 8. G.S. 105-449.65(b) reads as rewritten:
"(b) Multiple Activity. - A person who is engaged in more than one activity for
which a license is required must have a separate license for each activity, unless this
subsection provides otherwise. A person who is licensed as a supplier is not required
to obtain a Lieparate license for any other activity for which a license is required and
is considered to have a license as a distributor. A person who is licensed as an
occasional importer or a tank wagon importer is not required to obtain a separate
license as a distributor, distributor unless the importer is also purchasing motor fiiel.
at the terminal rack, from an elective or permissive supplier who is authorized to
collect and remit the tax to the State. A person who is licensed as a distributor is not
required to obtain a separate license as an importer if the distributor acquires fuel for
import only from an elective supplier or a permissive supplier and is not required to
obtain a separate license as an exporter. A person who is licensed as a distributor or a
blender is not required to obtain a separate license as a motor fuel transporter if the
distributor or blender does not transport motor fiiel for others for hire."
SECTION 9. G.S. 105-449.69(b) reads as rewritten:
50
1 "(b) Most Licenses. - An applicant for a license as a refiner, a supplier, a
2 terminal operator, an importer, a blender, a bulk end user of undycd dicsel fuel, a
3 retailer of undycd dicscl fuel, or a distributor must meet the following requirements:
4 (1) If the applicant is a corporation, the applicant must either be
5 incorporated m this State or be authorized to transact business in
6 this State.
7 (2) If the applicant is a limited liability company, the applicant must
8 either be organized in this State or be authorized to transact business
9 in this State.
10 (3) If the applicant is a limited partnership, the applicant must either be
1 1 formed in this State or be authorized to transact business in this
12 State.
13 (4) If the applicant is an individual or a general partnership, the
14 applicant must designate an agent for service of process and give
15 the agent's name and address."
16 SECTION 10. G.S. 1015-449.73 reads as rewritten:
17 "§ 105-449.73. Reasons why the Secretary can deny an application for a license.
18 The Secretary may refuse to issue a license to an individual applicant that has
19 done any of the following and may refuse to issue a license to an applicant that is a
20 business entity if any principal in the business has done any of the following:
21 (1) Had a license or registration issued under this Article or former
22 Article 36 or 36A of this Chapter cancelled by the Secretary for
23 cause.
24 (la) Had a motor fuel license or registration issued by another state
25 cancelled for cause.
26 (2) Had a federal Certificate of Registry issued under § 4101 of the
27 Code, or a similar federal authorization, revoked.
28 (3) Been convicted of fraud or misrepresentation.
29 (4) Been convicted of any other offense that indicates that the applicant
30 may not comply with this Article if issued a license.
31 (5) Failed to remit payment for an overdue tax debt tax debt under
32 Chapter 105 or Chapter 119 of the General Statutes. The term
33 "overdue tax debt" "tax debt" has the same meaning as defined in
34 G.S. 105 243.1.
35 (6) Failed to file a return due under Chapter 105 or Chapter 1 19 of the
36 General Statutes."
37 SECTION 11. G.S. 105-449.86(a) reads as rewritten:
38 "(a) Tax. - An excise tax at the motor fuel rate is imposed on dyed diesel fuel
39 acquired to operate any of the following:
40 (1) Repealed by Session Laws 2003-349, s. 10.8, effective January 1,
41 2004.
51
1 (2) Either a local bus or an intercity bus that is allowed by § 4082(b)(3)
2 ofthe Code to use dyed diesel fuel.
3 (3) A highway vehicle that is owned by or leased to an educational
4 organization that is not a public school and is allowed by §
5 4082(b)(1) or (b)(3) ofthe Code to use dyed diesel fuel.
6 f4) A highway vehicle that is owned by or leased to the American Red
7 Cross and is allowed by § 1082 ofthe Code to use dyed diesel fuel."
8 SECTION 12. G.S. 105-449.90A reads as rewritten:
"§ 105-449.90A. Payment by supplier of destination state tax collected on
exported motor fuel.
Tax collected by a supplier on exported motor fuel is payable by the supplier to
the destination state if the suppher is licensed in that state for payment of motor fuel
excise taxes.state. Tax collected by a supplier on exported motor fuel is payable to
14 the Secretary for remittance to the destination state if the supplier is not licensed in
15 that state for payment of motor fuel excise taxes. Payments of destination state tax
16 are due to the destination state or the Secretar>', as appropriate, on the date set by the
17 law ofthe destination state. Pa>TOents of destination state tax to the Secretary^ must
18 be accompanied by a form provided by the Secretary' that contains the information
required by the Secretapy^"
SECTION 13. G.S. 105-449.96 is amended by adding a new subdivision
to read:
"§ 105-449.96. Information required on return filed by supplier.
A return of a supplier must list all of the following information and any other
information required by the Secretary:
(7) The number of gallons of motor fuel the supplier exchanged with
another licensed supplier, pursuant to a two-party exchange
agreement, during the month, sorted by type of fuel, person
receiving thefuel, and terminal code."
SECTION 14. The catch line for G.S. 105-449.106 reads as rewritten:
"§ 105-449.106. Quarterly refunds for certain local governmental entities,
nonprofit organizations, taxicabs, and special mobile equipment."
SECTION 15. G.S. 105-449.1 15 reads as rewritten:
"§ 105-449.115. Shipping document required to transport motor fuel by
railroad tank car or transport truck.
(a) Issuance. - A person may not transport motor fuel by railroad tank car or
transport truck unless the person has a shipping document for its transportation that
complies with this section. A terminal operator and the operator of a bulk plant must
give a shipping document to the person who operates a raihoad tank car or a
transport truck into which motor fuel is loaded at the terminal rack or bulk plant rack.
52
1 (b) Content. - A shipping document issued by a terminal operator or the
2 operator of a bulk plant must contain the following information and any other
3 information required by the Secretary:
4 (1) Identification, including address, of the terminal or bulk plant from
5 which the motor fuel was received.
6 (2) The date the motor fuel was loaded.
7 (3) The gross gallons loaded.
8 (4) The destination state of the motor fuel, as represented by the
9 purchaser of the motor fuel or the purchaser's agent.
10 (5) If the document is issued by a terminal operator, the document must
1 1 be machine printed and it must contain the following information:
12 a. The net gallons loaded.
13 b. A tax responsibility statement indicating the name of the
14 supplier that is responsible for the tax due on the motor fuel.
15 (c) Reliance. - A terminal operator or bulk plant operator may rely on the
16 representation made by the purchaser of motor fuel or the purchaser's agent
17 concerning the destination state of the motor fuel. A purchaser is liable for any tax
1 8 due as a result of the purchaser's diversion of fuel from the represented destination
19 state.
20 (d) Duties of Transporter. - A person to whom a shipping document was
2 1 issued must do all of the following:
22 (1) Carry the shipping document in the conveyance for which it was
23 issued when transporting the motor fuel described in it. When
24 operating an empty transport, carry the shipping document in the
25 conveyance for the motor fuel last contained in the conveyance.
26 (2) Show the shipping document to a law enforcement officer upon
27 request when transporting the motor fuel described in it.
28 (3) Deliver motor ftiel described in the shipping document to the
29 destination state printed on it unless the person does all of the
30 following:
31 a. Notifies the Secretary before transporting the motor fuel into
32 a state other than the printed destination state that the person
33 has received instructions since the shipping document was
34 issued to deliver the motor fuel to a different destination
35 state.
36 b. Receives from the Secretary a confirmation number
37 authorizing the diversion.
3g c. Writes on the shipping document the change in destination
39 state and the confirmation number for the diversion.
40 (4) Give a copy of the shipping document to the distributor or other
41 person to whom the motor fuel is delivered.
53
1 (e) Duties of Person Receiving Shipment. - A person to whom motor fuel is
2 delivered by raikoad tank car or transport truck may not accept delivery of the motor
3 fuel if the destination state shown on the shipping document for the motor fuel is a
4 state other than North Carolina. To determine if the shipping document shows North
5 Carolina as the destination state, the person to whom the fuel is delivered must
6 examine the shipping document and must keep a copy of the shipping document. The
7 person must keep a copy at the place of business where the motor fuel was delivered
8 for 90 days from the date of delivery and must keep it at that place or another place
for at least three years from the date of delivery. A person who accepts delivery of
motor fuel in violation of this subsection is jointly and severally liable for any tax
due on the fuel.
(f) Sanctions Against Transporter. - The following acts are grounds for a civil
penalty payable to the Department of Transportation, — Division — of Motor
VGhiclei3Department of Crime Control and Public Safety, or the Department of
Revenue:
(1) Transporting motor fuel in a railroad tank car or transport truck
without a shipping document or with a false or an incomplete
shipping document.
(2) Delivering motor fuel to a destination state other than that shown on
the shipping document.
The penalty imposed under this subsection is payable by the person m whose
name the conveyance is registered, if the conveyance is a transport truck, and is
payable by the person responsible for the movement of motor fuel in the conveyance,
if the conveyance is a railroad tank car. The amount of the penalty is five thousand
dollars ($5,000). A penalty imposed under this subsection is in addition to any motor
fuel tax assessed.
£g} Sanctions Against Terminal Operator. - The Secretary mav assess a civil
penalty of five thousand dollars ($5.000) against a terminal operator for issuing a
shipping document that does not satisfy the requirements of subsection (b) of this
section."
SECTION 16. G.S. 105-449.1 15A reads as rewritten:
"§ 105-449.1 15A. Shipping document required to transport fuel by tank wagon.
(a) Issuance. - A person who operates a tank wagon into which motor fuel is
loaded at the terminal must comply with the document requirements in G.S. 105-
449.115(b). A person mny nnt trnn^.pnrt motor fuel bv who operates a tank wagon
into which motor fuel is loaded from some other source must have unless that person
hafr-an invoice, bill of sale, or shipping document containing the following
information and any other information required by the Secretary:
(1) The name and address of the person from whom the motor fuel was
received.
(2) The date the fuel was loaded.
54
1 (3) The type of fuel.
2 (4) The gross number of gallons loaded.
3 (b) Duties of Transporter. - A person to whom an invoice, bill of sale, or
4 shipping document was issued must do all of the following:
5 (1) Carry the invoice, bill of sale, or shipping document in the
6 conveyance for which it is issued when transporting the motor fuel
7 described in it.
8 (2) Show the invoice, bill of sale, or shipping document upon request
9 when transporting the motor fuel described in it.
10 (3) Keep a copy of the invoice, bill of sale, or shipping document at the
11 place of business for at least three years from the date of delivery.
12 (c) Sanctions. - Transporting motor fuel in a tank wagon without an invoice,
1 3 bill of sale, or shipping document containing the information required by this section
14 is grounds for a civil penalty payable to the Department of Transportation. Division
1 5 of Motor Vehicles, or the Department of Revenue. The penalty imposed under this
1 6 subsection is payable by the person in whose name the tank wagon is registered. The
1 7 amoimt of the penalty is one thousand dollars ($1 ,000). A penalty imposed imder this
1 8 subsection is in addition to any motor fuel tax assessed."
19 SECTION 17. G.S. 105-449.123 reads as rewritten:
20 "§ 105-449.123. Marking requirements for dyed fuel storage facilities.
21 (a) Requirements. - A person who is a retailer of dyed motor fuel or who
22 stores both dyed and undyed motor fiiel for use by that person or another person must
23 mark the storage facility for the dyed motor fiiel as follows in a manner that clearly
24 indicates the fuel is not to be used to operate a highway vehicle. The storage facility
25 must be marked "Dyed Diesel, Nontaxable Use Only, Penalty For Taxable Use" or
26 "Dyed Kerosene, Nontaxable Use Only, Penalty for Taxable Use" or a similar phrase
27 that clearly indicates the fuel is not to be used to operate a highway vehicle. A person
28 who fails to mark the storage facility as required by this section is subject to a civil
29 penalty equal to the excise tax at the motor fuel rate on the inventory held in the
30 storage tank at the time of the violation. If the inventory cannot be determined, then
31 the penalty is calculated on the capacity of the storage tank.
32 (1) The storage tank of the storage facility must be marked if the
33 storage tank is visible.
34 (2) The fillcap or spill containment box of the storage facility must be
35 marked.
36 (3) The dispensing device that serves the storage facility must be
37 marked.
38 (4) The retail pump or dispensing device at any level of the distribution
39 system must comply with the marking requirements.
40 (b) Exception. - The marking requirements of this section do not apply to a
41 storage facility that contains fiiel used only for one of the purposes listed in G.S.
55
105-449.1 05 A(a)(l) and is installed in a manner that makes use of the fuel for any
other purpose improbable."
SECTION 18. G.S. 1 19-15 is amended by adding the following two new
subdivisions:
"§ 119-15. Definitions that apply to Article.
The following definitions apply in this Article:
(la) Dved diesel fuel distributor. - A person who acquires dyed diesel
fuel from either of the following:
a. A person who is not required to be licensed imder Part 2 of
Article 36C of Chapter 105 of the General Statutes and who
maintains storage facilities for dved diesel fuel to be used for
nonhighwav purposes.
b. Another dved diesel fuel distributor,
(lb) Dved diesel fuel. - Defined in G.S. 105-449.60."
SECTION 19. G.S. 1 19- 15. 1(a) reads as rewritten:
"(a) License. - A person may not engage in business in this State as any of the
following unless the person has a license issued by the Secretary authorizing the
person to engage in business:
(1) A kerosene supplier.
(2) A kerosene distributor.
(3) A kerosene terminal operator.
(4) A dved diesel fuel distributor."
SECTION 20. G.S. 11 9- 15. 3(a) reads as rewritten:
"(a) Initial Bond. - An applicant for a license as a kerosene supplier, kerosene
distributor, or kerosene terminal operator must file with the Secretary of Revenue a
bond or an irrevocable letter of credit. A bond or irrevocable letter of credit must be
conditioned upon compliance with the requirements of this Article, be payable to the
State, and be in the form required by the Secretary. The amount of the bond or
irrevocable letter of credit may not be less than five hundred dollars ($500.00) and
may not be more than twenty thousand dollars ($20,000)."
SECTION 21. G.S. 20-91 reads as rewritten:
"§ 20-91. Audit of vehicle registrations under the International Registration
Plan.
(a) Repealed by Session Laws 1995 (Regular Session, 1996), c. 756, s. 9.
(b) The Divir.ion Department of Revenue may audit a person who registers or
is required to register a vehicle under the International Registration Plan to determine
if the person has paid the registration fees due under this Article. A person who
registers a vehicle under the International Registration Plan must keep any records
used to determine the information provided to the Division when registering the
vehicle. The records must be kept for three years after the date of the registration to
56
1 which the records apply. The DiviGJon Department of Revenue may examine these
2 records during business hours. If the records are not located in North Carolina and an
3 auditor must travel to the location of the records, the registrant shall reimburse North
4 Carolina for per diem and travel expense incurred in the performance of the audit. If
5 more than one registrant is audited on the same out-of-state trip, the per diem and
6 travel expense may be prorated.
7 The Commi'-.^^ioner Secretary of Revenue may enter into reciprocal audit
8 agreements with other agencies of this State or agencies of another jurisdiction for
9 the purpose of conducting joint audits of any registrant subject to audit under this
10 section.
11 (c) If an audit is conducted and it becomes necessary to assess the registrant
12 for deficiencies in registration fees or taxes due based on the audit, the assessment
1 3 will be determined based on the schedule of rates prescribed for that registration year,
1 4 adding thereto and as a part thereof an amount equal to five percent (5%) of the tax to
1 5 be collected. If. during an audit, it is determined that:
16 (1 ) A registrant failed or refused to make acceptable records available
17 for audh as provided by law; or
18 (2) A registrant misrepresented, falsified or concealed records, then all
19 plates and cab cards shall be deemed to have been issued
20 erroneously and are subject to cancellation. The Commissioner
21 Commissioner, based on information provided by the Department of
22 Revenue audit, may assess the registrant for an additional
23 percentage up to one hundred percent (100%) North Carolina
24 registration fees at the rate prescribed for that registration year,
25 adding thereto and as a part thereof an amount equal to five percent
26 (5°o) of the tax to be collected. The Commissioner may cancel all
27 registration and reciprocal privileges.
28 As a result of an audit, no assessment shall be issued and no claim for refimd shall
29 be allowed which is in an amount of less than ten dollars ($10.00).
30 The results of anv audit conducted under this section shall be provided to the
3 1 Division. The notice of any assessments witt-shaU be sent bv the Division to the
32 registrant b\- registered or certified mail at the address of the registrant as it appears
33 in the records of the Division of Motor Vehicles in Raleigh. The notice, when sent in
34 accordance with the requirements indicated above, will be sufficient regardless of
35 whether or not it was ever received.
36 The failure of any registrant to pay any additional registration fees or tax within
37 30 days after the billing date, shall constimte cause for revocation of registration
38 license plates, cab cards and reciprocal privileges.
39 (d) Repealed by Session Laws 1995 (Regular Session, 1996), c. 756, s. 9."
40 SECTION 22. Sections 1, 6, 7, 8, 15, and 17 of this act become effective
41 January 1, 2006. The remainder of this act is effective when it becomes law.
57
Bill Analysis of Legislative Proposal #3:
Motor Fuels Tax Changes
By: Cindy Avrette, Research Division
SUMMARY; Legislative Proposal #3 makes several changes to the motor fuel
laws. The Revenue Laws Study Committee recommended many of these changes to
the 2004 General Assembly.
BACKGROUND & ANALYSIS: Section 1 was a provision that the Committee
approved in its Motor Fuel bill last session. It allows the Secretary to impose a
$1,000 penalty for failure to obtain a license under G.S. 105-449.65 or G.S. 105-
449.131^. Currently, the Secretary has general authority to impose a penalty for
failure to obtain a license. Under that general authority, the amount of the penalty
imposed is equal to 5% of the amount prescribed for the license for each month the
taxpayer fails to obtain the license, with a maximum penalty of 25% of the amount
prescribed for the license. Because this general authority limits the penalty to a
percentage of the amount prescribed for the license, it effectively bars assessing a
penalty when there is no charge to obtain a license. There is no charge for the
licenses issued pursuant to G.S. 105-449.65 or G.S. 105-449.131. This provision
becomes effective January 1, 2006.
Section 2 conforms the refund statute applicable to motor carriers to the general
rule applicable to tax refunds of overpaid taxes. Under the general administrative
provisions of G.S. 105-266(a)(3), the Secretary does not have to refund a tax
overpayment of less than $3.00 unless the taxpayer makes a written request for the
refund. A motor carrier is entitled to a credit on its quarterly report for tax paid by
the carrier on fuel purchased in this State. If the credit exceeds the amount of tax
owed, the statute provides that the Secretary must refund the excess to the carrier.
The statute does not set a minimum amount. This statute appears to conflict with
the general administrative provision. This section clarifies that the general
administrative law applicable to refunds applies to refunds payable to motor
carriers. This provision becomes effective when it becomes law.
^ G.S. 105-449.65 is contained in the Article dealing with gasoline, diesel fuel, and blended fuel, and
requires the following to have a license: refiners, suppliers, terminal operator, importers, exporters,
blenders, motor fuel transporters, and distributors who purchase motor fuel from an elective or
permissive supplier at an out-of-state terminal for import into this State. G.S. 105-449.131 is
contained in the Article dealing with alternative fuels and requires the following to have a license:
providers of alternative fuel, bulk-end users, and retailers.
58
Section 3 removes obsolete language to conform to current administrative practice.
G.S. 105-449.44 establishes the calculation by which a motor carrier determines the
amount of fuel used in North Carolina. The formula under current law has not been
used since 1991. In 1992, North Carolina became a participant in the International
Fuel Tax Agreement. The method proposed by this section conforms to the IFTA
agreement and is the method motor carriers have been using to determine the
amount of fuel used in this State since 1992. This provision becomes effective when
it becomes law.
Sections 4 and 21 were included in last year's recommendation. They transfer audit
functions related to the International Registration Plan from the Department of
Transportation, Division of Motor Vehicles to the Department of Revenue, Motor
Fuels Tax Division. The International Registration Plan is the mechanism through
which interstate motor carriers are licensed. It helps to ensure that the proper
amount of motor fuels tax is credited to each jurisdiction in which the motor carrier
travels. It has been suggested that the Department of Revenue has more expertise
in auditing taxpayers and would be a more appropriate home for these audit
functions. The positions associated with these audit functions were transferred July
1, 2004, through an administrative transfer. These provisions become effective when
they become law.
Section 5 removes language that is no longer applicable. G.S. 105-449.47 provides
that the Secretar}' must issue identification markers to motor carriers. The current
statute provides that the Secretary may withhold an identification marker if a motor
carrier fails to comply with former Article 36 or 36A. The General Assembly repealed
those articles in 1996. The authorit}^ of the Department to issue an assessment under
one of those articles has expired and any uncollectible assessments issued under
those articles has been written off. Therefore, the language repealed by this section
is obsolete. This provision becomes effective when it becomes law.
Section 6 sets forth the reasons the Secretary could refuse to register and issue an
identification marker to a motor carrier. The Department requests this change to
enable it to only register applicants that are in good standing with North Carolina
and other taxing jurisdictions. The statute proposed in this section is very similar to
G.S. 105-449.73, which sets forth the reasons the Secretary may refuse to issue a
license to an applicant under the motor fuel statutes. This provision becomes
effective January- 1, 2006.
Section 7 simplifies the criminal penalty imposed on persons who operate in this
State as a motor carrier without obtaining the necessar\' registration and
identification markers. A violation of the motor carrier requirements is a Class 3
misdemeanor. Under current law it is punishable by a fine that is no less than $10
nor more than $200. This section sets the amount of the fine at $200. The civil
penalty- for this offense is $100. This provision becomes effective January 1, 2006.
59
Section 8 clarifies the current licensing requirements by conforming them to the
current Department policy and practice. This provision becomes effective January 1,
2006.
Section 9 removes obsolete language. In 1999, the General Assembly removed the
licensing requirements for bulk-end users and retailers of undyed diesel fuel. The
legislation did not include a coriforming change to G.S. 105-449.69(b). This
provision becomes effective when it becomes law.
Section 10 changes the defined term 'overdue tax debt' to the appropriate defined
term 'tax debt'. Under the general administrative provisions in G.S. 105-243.1, a tax
debt is defined as the total amount of tax, penalty, and interest due for which a
notice of final assessment has been mailed to the taxpayer after the taxpayer no
longer has the right to contest the debt. An 'overdue tax debt' is any part of a tax
debt that remains unpaid 90 days or more after the notice of final assessment was mailed
to the taxpayer. A collection assistance fee is imposed on an overdue tax debt that
remains unpaid 30 days or more after the appropriate fee notice is mailed to the
taxpayer. G.S. 105-449.73 sets forth the reasoris the Secretary can deny a license to
an applicant. One of the reasons is failure to remit taxes that remain due after a
taxpayer no longer has the right to contest the tax debt. Since G.S. 105-449.73 has
nothing to do with the imposition of a collection assistance fee, the term 'overdue
tax debt' is not the appropriate term to use. This provision becomes effective when
it becomes law.
Section 11 was included in last year's recommendation. It exempts motor fuel
acquired to operate a highway vehicle owmed by or leased to the American Red
Cross from the motor fuel excise tax. In Department of Employment v. United
States, 385 U.S. 355, 87 S.Ct. 464 (1966), the United States Supreme Court ruled that
the Red Cross is an instrumentality of the Uruted States for state tax immvmity
purposes. This provision codifies the current admiriistrative practice of the
Department of Revenue. This section is effective when it becomes law.
Section 12 removes the ability of a person exporting motor fuel to another state to
pay the tax directly to the Department if the person is not licensed in the destination
state of the motor fuel because it is no longer necessary. This provision was
included in the statutes in 1996 when North Carolina first adopted 'tax at the rack'
to accommodate persons exporting product to a state that was not a 'tax at the rack'
state. Today, with the exception of Georgia, all of the surrounding states have
adopted 'tax at the rack'. The Georgia border in the western part of the State would
not be affected by this repeal because the closest terminal to the Georgia line is in
Charlotte. This provision becomes effective when it becomes law.
Section 13 provides that a supplier must list on its return to the Secretary the
number of gallons of motor fuel the supplier exchanged with another licensed
60
supplier pursuant to a two-part\' exchange agreement. The Secretan' oirrently
requires this information on the suppher return. This provision becomes effective
with it becomes law.
Section 14 removes obsolete language from the catch line of G.S. 105-449.106. In
2003, the General Assembly exempted motor fuel sold to a count}' or city for its use
from the motor fuel tax. Although the legislation authorizing the exemption made
the appropriate conforming change to the refund statute, it failed to amend the
catch line. This provision becomes effective when it becomes law.
Section 15 was included in last year's recommendation. It allows the Secretary' of
Revenue to assess a penalty of $5,000 on a terminal operator who fails to issue a
shipping document that satisfies the requirements for the shipping document.
Under G.S. 105^149.115, shipping documents issued by a terminal operator must
contain the following information: 1) identification of the terminal or bulk plant
from which the fuel was received, 2) the date the fuel was loaded, 3) the gross
gallons loaded, 4) the destination state of the motor fuel, 5) the net gallons loaded,
and 6) a tax responsibilitv statement indicating the name of the supplier that is
responsible for the tax. The Motor Fuels Tax Division has noticed a problem with
some terminal operators failing to issue proper shipping documents. Without an
accurate shipping document, it is difficult, if not impossible, for the Department to
ensure that the proper amount of tax is being paid.
Section 15 also requires a person operating an empty transport to carry the shipping
document in the conveyance for the motor fuel last contained in the conveyance.
The US Department of Transportation already requires a transporter to carr\' this
information. This requirement will help the Motor Fuels Division in its enforcement
of fuel tax evasion by identifying the product that was last hauled by the
transporter and determining if the transporter is truly empty at the time of
investigation. If there is product in the conveyance, then Motor Fuels would have
the last known deliver^' to determine if the transporter 'short dropped' the product.
The Division could also use the information to verify that the product that was
delivered to a retail location is what the retail station had facilities to store. This
section becomes effective January- 1, 2006.
Section 16 would require the same documentation requirements for a person who
operates a tank wagon into which motor fuel is loaded at the terminal as for a
person who operates a transport truck into which motor fuel is loaded at the
terminal. This provision becomes effective when it becomes law.
Section 17 would impose a civil penalty on a person who does not properly mark
the storage facility of motor fuel. Undyed fuel is subject to the motor fuel tax; dyed
fuel is not. This section becomes effective January 1, 2006.
61
Sections 18 and 19 were included in the Committee's recommendations last year.
They make changes to Chapter 119 necessitated by legislation enacted in 2003. In
2003, the General Assembly voted to apply the inspection tax to dyed diesel fuels.
The inspection tax is imposed on all fuel types at the rate of Vi<t per gallon.
Proceeds of the tax are used to offset the expenses of administering the motor fuels
taxes. The changes in these two sections are needed to apply the tax to distributors
who purchase only dyed diesel fuel. These two sections are effective when they
become law.
Section 20 is a technical change. It becomes effective when it becomes law.
Section 22 is the effective date section and it becomes effective when it becomes law.
62
LEGISLATIVE PROPOSAL #4
Present-Use Value Clarification
63
LEGISLATIVE PROPOSAL #4:
A Recommendation of the Revenue Laws Study Committee
TO THE 2(X)5 General Assembly
An Act To Clarify Present-Use Value Eligibility and to
Amend the Period for Appeal of a Present-Use Value
Determination or Appraisal.
Short Title:
Present-Use Value Clarification
Sponsors:
Brubaker; Hill, Luebke, McGee, Wainwright
Brief Overview: This proposal clarifies the property tax statutes relating to
present-use value eligibility and amends the period for appeal of a present-use
value determination or appraisal.
Fiscal Impact: No fiscal impact.
Effective Date; This act is effective for taxes imposed for taxable years
beginning on or after July 1, 2005.
A copy of the proposed legislation, bill analysis, and fiscal analysis begin on the next page.
64
GENERAL ASSEMBLY OF NORTH CAROLINA
SESSION 2005
U D
BILL DRAFT 2005-LAx2-l [v.7] (12/16)
(THIS IS A DRAFT AND IS NOT READY FOR INTRODUCTION)
1/25/2005 11:57:48 AM
Short Title: Present-Use Value Clarification. (Public)
Sponsors: Representatives Brubaker; Hill, Luebke, McGee, and Wainwright.
Referred to:
1 A BILL TO BE ENTITLED
2 AN ACT TO CLARIFY PRESENT-USE VALUE ELIGIBILITY AND TO AMEND
3 THE PERIOD FOR APPEAL OF A PRESENT-USE- VALUE
4 DETERMINATION OR APPRAISAL.
5 The General Assembly of North Carolina enacts:
6 SECTION 1. G.S. 105-277.2(7) reads as rewritten:
7 "(7) Unit. - One or more tracts of agricultural land, horticultural land, or
8 forestland. Multiple tracts must be imder the same
9 ownership.ownership and be of the same type of classification. If
10 the multiple tracts are located within different counties, they must
1 1 be within 50 miles of a tract qualifying under G.S. 105 277.3(a) and
12 share one of the following characteristics:
13 ftr T>pe of classification.
14 br Use of the same equipment or labor force. 105-277.3(a)."
15 SECTION 2. G.S. 105-277.3(b2) reads as rewritten:
16 "(b2) Exception to Ownership Requirements. - Notwithstanding the provisions
17 of subsections (b) and (bl) of this section, land may qualify for classification in the
1 8 hands of the new owner if all of the conditions listed in either subdivision of this
19 subsection are met, even if the new owner does not meet all of the ownership
20 requirements of subsections (b) and (b 1 ) of this section with respect to the land.
21 (1) Exception for Assumption of Deferred Liability. If the land
22 qualifies for classification in the hands of the new owner under the
23 provisions of this subsection.subdivision, then the deferred taxes
24 remain a lien on the land under G.S. 105-277.4(c), the new owner
65
1 becomes liable for the deferred taxes, and the deferred taxes become
2 payable if the land fails to meet any other condition or requirement
3 for classification. Land qualifies for classification in the hands of
4 the new owner if all of the following conditions are met:
5 f4^a^ The land was appraised at its present use value or was
6 eligible for appraisal at its present use \ alue at the time title
7 to the land passed to the new owner.
8 t^b. At the time title to the land passed to the new owner, the new
9 owner acquires the land for the purposes of and continues to
10 use the land for the purposes it was classified under
11 subsection (a) of this section while under previous
1 2 ownership.
1 3 f^c The new ovmer has timely filed an application as required by
14 G.S. 105-277.4(a) and has certified that the new owner
1 5 accepts liability for the deferred taxes and intends to continue
1 6 the present use of the land.
17 (2) Exception for Expansion of Existing Unit. - If deferred liabilit\^ is
18 not assumed under subdivision (1) of this subsection, the land
19 qualifies for classification in the hands of the new owner if, at the
20 time title passed to the new owTier. the land was being used for the
21 same purpose and had the same classification as other land already
22 owned bv the new owner and classified under subsection (a) of this
23 section. The new owner must timely file an application as required
24 bvG.S. 105-277.4(a)."
25 SECTIONS. G.S. 105-277.4(bl) reads as rewritten:
26 "(bl ) Appeal. - Decisions of the assessor regarding the qualification or appraisal
27 of property under this section may be appealed to the county board of equalization
28 and review or, if that board is not in session, to the board of county commissioners.
29 An appeal must be made within 60 days after the decision of the assessor. If an
30 owner submits additional information to the assessor pursuant to G.S. 105-296(i). the
31 appeal must be made within 60 days after the assessor's decision based on the
32 additional information. Decisions of the county board may be appealed to the
33 Property Tax Commission."
34 SECTION 4. G.S. 105-2960) and (1) read as rewritten:
35 "(j) The assessor must annually review at least one eighth of the parcels in the
36 county classified for taxation at present-use value to verify that these parcels qualify
37 for the classification. By this method, the assessor must review the eligibility of all
38 parcels classified for taxation at present-use value in an eight-year period. The period
39 of the review process is based on the average of the preceding three years' data. The
40 assessor may request assistance from the Farm Service Agency, the Cooperative
66
1 Extension Service, the Forest Resources Division of the Department of Environment
2 and Natural Resources, or other similar organizations.
3 The assessor may require the owner of classified property to submit any
4 information, including sound management plans for forestland, needed by the
5 assessor to verify that the property continues to qualify for present-use value
6 taxation. The owner has 60 days from the date a written request for the information is
7 made to submit the information to the assessor. If the assessor determines the owner
8 failed to make the information requested available in the time required without good
cause, the property loses its present-use value classification and the property's
deferred taxes become due and payable as provided in G.S. 105-277.4(c). The-If the
property loses its present-use value classification for failure to provide the requested
information, the assessor must reinstate the property's present-use value classification
when the owner submits the requested information within 60 days after the
disqualification unless the information discloses that the property no longer qualifies
for present-use value classification. When a property's present-use value
classification is reinstated, it is reinstated retroactive to the date the classification was
revoked and any deferred taxes that were paid as a result of the revocation must be
refunded to the property owner. The owner may appeal the fmal decision of the
assessor to the county board of equalization and review as provided in G.S. 105-
277.4(bn.
In determining whether property is operating under a sound management
program, the assessor must consider any weather conditions or other acts of nature
that prevent the growing or harvesting of crops or the realization of income from
cattle, swine, or poultry operations. The assessor must also allow the property ovvoier
to submit additional information before making this determination.
(1) The assessor shall annually review at least one-eighth of the parcels in the
county exempted or excluded from taxation to verify that these parcels qualify for the
exemption or exclusion. By this method, the assessor shall review the eligibility of all
parcels exempted or excluded from taxation in an eight-year period. The assessor
may require the ovmer of exempt or excluded property to make available for
inspection any information reasonably needed by the assessor to verify that the
property continues to qualify for the exemption or exclusion. The owner has 60 days
from the date a written request for the information is made to submit the information
to the assessor. If the assessor determines that the owner failed to make the
information requested available in the time required without good cause, then the
property loses its exemption or exclusion. If the property loses its exemption or
exclusion for failure to provide the requested information. the^Fhe assessor must
reinstate the property's exemption or exclusion when the owner makes the requested
information available within 60 days after the disqualification unless the information
discloses that the property is no longer eligible for the exemption or exclusion."
67
1 SECTION 5. This act is effective for taxes imposed for taxable years
2 beginning on or after July 1, 2005.
3
4
68
Bill Analysis of Legislative Proposal #4:
Present-Use Value Clarification
By: Martha Walston, Fiscal Research Division
SUMMARY: This bill is a recommendation of the Department of Revenue to clarify
the property tax statutes relating to present-use value eligibility and to amend the
period for appeal of a present-use value determination or appraisal.
ANALYSIS: The Property Tax Division of the Department of Revenue has
requested the following changes to the statutes governing the present-use value for
agricultural land, horticultural land, and forestland (hereinafter farmland). The
Division has indicated that these changes need to be made for clarification and that
the changes would help the counties and the Division admiiuster the present-use
value program. The North Carolina Farm Bureau has endorsed these
recommendations.
Section 1 of the bill amends the definition of "urut". Under current law, farmland
must be part of a unit engaged in commercial production to qualify for present-use
value. If the unit is composed of multiple tracts, these tracts must be under the
same ownership. Also, if the tracts are located within different counties, they must
be within 50 miles of a tract that meets the definition of farmland and either share
the same classification OR use the same equipment or labor force. The Department
proposes deleting the language that the tracts may qualify if they use the same
equipment or labor force. The proposed language would require that tracts located
in different counties be the same type of classification, i.e. every tract in the unit
must be all agricultural land, horticultural land, or forestland. A unit composed of
a tract of agricultural land in one county and a tract of horticultural land in another
county would no longer qualify as a unit even if the tracts used the same equipment
or labor force and were within 50 miles of each other.
Section 2 of the bill deletes certain language and adds language to the statute that
provides an exception to the ownership requirements of present-use value
classification. The proposed language codifies a procedure the counties are
currently following. In order to qualify for present-use value taxation under
current law, the farmland must be owned by certain qualifying individuals, family
business entities, or trusts. Also, individual owners must live on the land or have
owned the land in their family for four years. There is an exception to this
ownership requirement if use value land is transferred to a person who continues to
use it as farmland and meets the other conditions for use value treatment. The
deferred taxes that accrued while the land was owned by the first owner continue
69
as a lien on the property in the hands of the new owner. In addition, the new
owner must file an application for present-use value treatment within 60 days after
acquiring the land. The new owner must certify that the present use will continue
and that the new owner will be liable for the deferred taxes if the land is later
disqualified.
The proposed language also allows an exception to the ownership requirements
when farmland passes to a new owner who does not assume deferred liability. This
occurs when farmland, which is not appraised and taxed at its present-use value is
transferred to a new owner. To qualify for present-use value under this proposal,
the farmland passing to the new owner must have been used for the same purpose
and had the same classification as other land already owned by the new owner.
The new owner must also file a timely application showing that the property comes
within one of the classes of farmland. The proposed language merely codifies an
exception to the ownership requirements that the counties currently recognize.
The proposal deletes the condition that to qualify for the current exception to the
ownership requirement, the new owner may show that the land was "eligible for
appraisal at its present-use value" at the time title passes to the new owner. This
language is not applicable since a new owner must assume the deferred taxes when
the land is transferred. There are no deferred taxes unless the property is currently
appraised at its present-use value.
Section 3 of the bill adds language that a taxpayer has 60 days to appeal the
assessor's decision regarding the qualification or appraisal of the taxpayer's
property as use value property. Current law requires a taxpayer to submit an
application for present-use value appraisal within 60 days of the date of the
property's transfer to the taxpayer, but does not specify the time that a taxpayer
may appeal the assessor's decision to the county board of equalization and review
or to the board of county commissioners.
Section 3 of the bill also adds language that the taxpayer has 60 days to appeal an
assessor's decision regarding present-use value classification when that decision is
based on additional information. Current law requires an assessor to annually
review at least one eighth of the parcels in a county that are classified for present-
use value taxation in order to verify that these parcels qualify as farmland. An
assessor is also required to annually review at least one eighth of the parcels in the
county that are exempted or excluded from taxation. The assessor may require the
taxpayer to submit information to make the verification, and the taxpayer has 60
days to respond to a written request for information. If no information is provided
within that time, the property loses its classification. The assessor must reinstate
the classification when the requested information is submitted. There is no time
limit for presenting the additional information after the assessor has disqualified
the property.
70
Section 4 of the bill adds language that when property has been disqualified for
present-use value classification or for exemption or exclusion because of failure to
submit additional information, the taxpayer has 60 days after the disqualification to
submit the requested information and seek reinstatement of the classification or
exemption or exclusion.
71
Fiscal Analysis Memorandum
[This confidential fiscal memorandum is a fiscal analysis of a draft bill, amendment,
committee substitute, or conference committee report that has not been formally
introduced or adopted on the chamber floor or in committee. This is not an official
fiscal note. If upon introduction of the bill you determine that a formal fiscal note is
needed, please make a fiscal note request to the Fiscal Research Division, and one will
be provided under the rules of the House and the Senate.]
DATE: January 25, 2005
TO:
Revenue Laws Study Committee
FROM: Rodney Bizzell
Fiscal Research Division
RE:
2005-LAxz-lv6
FISCAL IMPACT
Yes () No (X) No Estimate AvaUable ( )
FY 2005-06 FY 2006-07 FY 2007-08 FY 2008-09 FY 2009-10
REVENUES:
Local Governments (See Assumptions and Methodology)
PRINCIPAL DEPARTMENT(S) & PROGRAM(S) AFFECTED: Department of Revenue
and Local Governments
EFFECTIVE DATE: July 1,2005
BILL SUMMARY: This bill is a recommendation of the Department of Revenue to clarify
the property tax statutes relating to present-use value eligibility and to amend the period for
appeal of a present-use value determination or appraisal. Under current law, farmland must
be part of a unit engaged in commercial production to qualify for present-use value
classification. If the unit is composed of multiple tracks, these tracts must be under the same
ownership. Also, if the tracts are located within different counties, they must be within 50
miles of a tract that meets the definition of farmland and either share the same classification
72
or use the same equipment or labor force. This bill would eliminate the qualification under
use of the same equipment or labor force.
The bill also amends the section of the statute that allows exceptions to ownership
requirements of present-use classification. The current law allows an exception to ownership
requirements when use-value land is transferred to a person who continues to use it as
farmland and meets the other conditions for use value treatment and asstmies deferred
liability for taxes accrued under the previous owner. This proposal codifies the recognized
practice of allowing an excepfion when there is no deferred liability upon transfer of the
land. This occurs when the land being transferred is not appraised and taxed at the present-
use value at the time of transfer.
This bill also adds language that allows 60 days for a taxpayer to appeal an assessor's
decision regarding the qualification or appraisal of the taxpayer's property as use- value
property. The 60-day timefi-ame for appeal would also apply following a decision regarding
classification during an assessor's review of one-eighth of present-use parcels in which
additional information is requested fi-om the taxpayer. The bill also allows 60 days for the
taxpayer to submit additional information when the property has been disqualified for
present-use classification because of failure to submit information.
ASSUMPTIONS AND METHODOLOGY: No revenue impact is expected because this
bill codifies existing practice among coimty assessors.
SOURCES OF DATA: Property Tax Division, Department of Revenue
TECHNICAL CONSIDERATIONS: None
73
LEGISLATIVE PROPOSAL #5
Increase Disabled Vet Property Tax
Exclusion
74
LEGISLATIVE PROPOSAL #5:
A Recommendation of the Revenue Laws Study Committee
TO THE 2005GENERAL ASSEMBLY
AN ACT TO Increase the Property Tax Exclusion for the
Residence of Disabled Veterans.
Short Title: Increase Disabled Vet Property Tax Exclusion.
Sponsors: Bmbaker; Hill, Luebke, McGee, Wainwright
Brief Overview This bill would increase the property tax exclusion for the
residence of a disabled veteran so that the exclusion is more in line with the
corresponding federal grant amount.
Fiscal Impact: This proposal has no General Fund impact but will result in
an annual loss of approximately $17,000 to local governments beginiung with FY
05-06.
Effecttve Date: The bill is effective for taxes imposed for taxable years
beginning on or after July 1, 2005.
A copy of the proposed legislation, bill analysis, and fiscal analysis begin on the next page
75
GENERAL ASSEMBLY OF NORTH CAROLINA
SESSION 2005
U
BILL DRAFT 2005-LAz-2 [v.31 (12/17)
(THIS IS A DRAFT AND IS NOT READY FOR INTRODUCTION)
12/17/2004 5:46:29 PM
Short Title: Increase Disabled Vet Property Tax Exclusion. (Public)
Sponsors: Representatives Brubaker; Hill, Luebke, McGee, and Wainwright.
Referred to:
1 A BILL TO BE ENTITLED
2 AN ACT TO INCREASE THE PROPERTY TAX EXCLUSION FOR THE
3 RESIDENCE OF A DISABLED VETERAN.
4 The General Assembly of North Carolina enacts:
5 SECTION 1. G.S. 105-275(21) reads as rewritten:
6 "§ 105-275. Property classified and excluded from thie tax base.
7 The following classes of property are hereby designated special classes under
authority of Article V, Sec. 2(2), of the North Carolina Constitution and shall not be
listed, appraised, assessed, or taxed:
(21) The fu-st thirty eight thouoand dollars ($38,000) forty-eight
thousand dollars ($48.000) in assessed value of housing together
with the necessary land therefor, ovmed and used as a residence by
a disabled veteran who receives benefits under 38 U.S.C. § 2101.
This exclusion shall be the total amount of the exclusion applicable
to such property."
SECTION 2. This act is effective for taxes imposed for taxable years
beginning on or after July 1, 2005.
76
Bill Analysis of Legislative Proposal #5:
Increase Disabled Veteran Property Tax Exclusion
By: Martha Walston, Fiscal research division
SUMMARY: This bill is a recommendation of the Department of Revenue to
increase the property tax exclusion for the residence of a disabled veteran so that
the exclusion is more in line with the corresponding federal grant amount.
BILL ANALYSIS: G.S. 105-271(21) allows a property tax exclusion for specially
adapted housing (including necessary land) owned and used as a residence by a
disabled veteran receiving federal benefits under 38 U.S.C. § 2101. The amount of
the exclusion is the first $38,000 of the assessed value of the house and land. In 1975,
North Carolina allowed a property tax exclusion in the amount of $34,000. The
exclusion was increased to $38,000 in 1989 to bring it in line with the corresponding
federal grant amount.
The proposal increases the exclusion to $48,000 because of the corresponding
increase in the federal grant amotmt. If a disabled veteran takes this exclusion on
his residence, he may not take the homestead exclusion.
Under 38 U.S.C. § 2101, grants are available for veterans who have a service-
connected disability due to military service, entitling them to compensation for
permanent and total disability due to:
• The loss or loss of use of both lower extremities, such as to preclude
locomotion without the aid of braces, crutches, canes, or a wheelchair, or
• Disability which includes blindness in both eyes, having only light
perception, plus loss or loss of use of one lower extremity, or
• The loss or loss of use of one lower extremity together with (1) residuals of
organic disease or injury, or (2) the loss or loss of use of one upper extremity,
which so affects the functions of balance or propulsion as to preclude
locomotion without the aid of braces, crutches, canes, or a wheelchair.
The grants may be used to furnish the disabled veteran with a home especially
adapted for his needs. The grant may not be more than 50% of the cost of a
specially adapted housing unit up to a maximum of $50,000.
Other current North Carolina property tax exclusions available to disabled veterans
G.S. 105-275(5a) exempts a motor vehicle owned by a disabled veteran from
property taxes if the vehicle is altered with special equipment to acconunodate a
service-connected disability. A service-connected disability is an injury incurred or
disease contracted in or aggravated by active service. The disability must be loss of
77
one or both hands or feet, permanent loss of use of one or both hands or feet, or
permanent impairment of vision of both eyes.
G.S. 105-275(5) exempts from property tax a motor vehicle given by the U.S.
Government to veterans on account of disabilities they suffered in World War II,
the Korean Conflict, or the Vietnam War.
78
Fiscal Analysis Memorandum
[This confidential fiscal memorandum is a fiscal analysis of a draft bill, amendment,
committee substitute, or conference committee report that has not been formally
introduced or adopted on the chamber floor or in committee. This is not an official
fiscal note. If upon introduction of the bill you determine that a formal fiscal note is
needed, please make a fiscal note request to the Fiscal Research Division, and one will
be provided under the rules of the House and the Senate.]
DATE: January 25, 2005
TO:
Revenue Laws Study Committee
FROM: Rodney Bizzell
Fiscal Research Division
RE:
2005-LAz-2v3
REVENUES:
General Fund
Local
Governments
nSCAL IMPACT
Yes (X) No ( ) No Estimate AvaUable ( )
FY 2005-06 FY 2006-07 FY 2007-08 FY 2008-09 FY 2009-10
*No General Fund Impact*
(17,111) (17,111) (17,111) (17,111) (17,111)
PRINCIPAL DEPARTMENT(S) & PROGRAM(S) AFFECTED: N.C. Department of
Revenue and Local Governments
EFFECTFVE DATE: July 1,2005
BILL SUMMARY: This bill is a recommendation of the Department of Revenue to
increase the property tax exclusion for the residence of a disabled veteran from $38,000 to
$48,000 so that the exclusion corresponds to the federal grant amount provided to a disabled
veteran to adapt a home for the individual's needs.
79
ASSUMPTIONS AND METHODOLOGY: The current law allows a property tax
exclusion for the first $38,000 of assessed value for the home of a disabled veteran. The
total value of property that is excluded fi-om property tax under the current law is
$6,954,000. Increasing the exclusion to the first $48,000 of assessed value would add an
additional $1,830,000 in exclusion value. Applying the weighted average tax rate for county
and municipal governments to this property value yields a marginal revenue loss to local
governments of $ 1 7, 1 1 1 .
SOURCES OF DATA: Department of Revenue, County Tax Assessors
TECHNICAL CONSIDERATIONS: None
80
LEGISLATIVE PROPOSAL #6
Revenue Laws Technical Changes
81
LEGISLATIVE PROPOSAL #6:
A Recommendation of the Revenue Laws Study Committee
TO THE 2005 General Assembly
An Act to Make Technical And Conforming Changes
To The Revenue Laws And Related Statutes.
Short Title: Revenue Laws Technical Changes
Sponsors: Hartsell; Clodfelter, Dalton, Hoyle, Kerr, Webster
Brief Overview; Makes technical and clarifying changes to the revenue laws and
related statutes.
Fiscal Impact: No fiscal impact.
Effective Date: When it becomes law.
A copy of the proposed legislation and bill analysis begin on the next page
82
GENERAL ASSEMBLY OF NORTH CAROLINA
SESSION 2005
U D
BILL DRAFT 2005-RBxz-7 [v.4] (1/24)
(THIS IS A DRAFT AND IS NOT READY FOR INTRODUCTION)
1/24/2005 5:16:40 PM
Short Title: Re\ enue Laws Technical Changes. (Public)
Sponsors: Senators Hartsell; Clodfelter, Dalton, Hoyle, Kerr, and Webster.
Referred to:
A BILL TO BE ENTITLED
AN ACT TO MAKE TECHNICAL AND CLARIFYING CHANGES TO THE
REVENUn LAW'S AND RELATED STATUTES.
The General AsscmbK- of North Carolina enacts:
SECTION L(a) G.S. 105-1 13.68(a) reads as rewritten:
"(a) Definitioni>. - As used in this Article, unless the context clearly requires
otherwise:
( 1 ) "ABC Commission" means ABC Commission. - the-The North
Carohna Alcoholic Beverage Control Commission established
under G.S. 18B-200.
( 2 ) Repealed by Session Laws 2004- 1 70, s. 6, effective August 2, 2004.
(3) "ABC permit" means a written or printed authorization issued by
the ABC Commission pursuant to Chapter 18B, other than a
purchase-transportation permit. Unless the context clearly requires
otlienxise, "ABC permit" means a presently valid permit. ABC
permit. - Defined in G.S. 18B-101.
(4) "Alcoholic beverage" means a beverage containing at least one half
of one percent (0.5%) alcohol by volume, including mah beverages,
unfortified wine, — fortified wine, — spirituous — liquor, and mixed
beverages. Alcoholic beverage. - Defined in G.S. 18B-101.
(5) "Fortified wine" means any wine, of more than sixteen percent
(l6"o) and no more than twenty- four percent (24%) alcohol by
volume, made by fermentation from grapes, fruits, berries, rice, or
honey: or by the addition of pure cane, beet, or dextrose sugar; or by
83
1 the addition of pure brandy from the same type of grape, fruit,
2 berry, rice, or honey that is contained in the base wine and produced
3 in accordance with the regulations of the United States.Fortified
4 wine. - Defined in G.S. 18B-101.
5 (6) "License" means a License. - A certificate, issued pursuant to this
6 Article by a city or county, that authorizes a person to engage in a
7 phase of the alcoholic beverage industry.
8 (7) "Malt beverage" means beer, lager, malt liquor, ale, porter, and any
9 other brewed or fermented beverage containing at least one half of
10 one percent (0.5%) and not more than six percent (6Vo) alcohol by
11 volume.Malt beverage. - Defined in G.S. 18B-101 .
12 (8) "Por^.nn" hn^, the .same meaning as in G.S. 105 228.90.Person. -
13 Defined in G.S. 105-228.90.
14 (9) "Sale" means a transfer, trade, exchange, or barter, in any manner or
15 by any means, for consideration.Sale. - Defined in G.S. 18B-101.
16 (10) "Secretary" means the Secretary. - The Secretary of Revenue.
17 (11) "Spirituous liquor" or "liquor" moans distilled spirits or ethyl
18 alcohol, including spirits of wine, whiskey, rum, brandy, gin, and all
19 other distilled spirits and mixtures of cordials, liqueurs, and
20 premixed cocktails in closed containers for beverage use regardless
21 of — the — dilution.Spirituous liquor or liquor. - Defined in
22 G.S. 18B-101.
23 (12) "Unfortified wine" means any wine of sixteen percent ( 1 6%) or less
24 alcohol by volume made by fermentation from grapes, finits,
25 beiTies, rico, or honey; or by the addition of pure cane, beet, or
26 dextrose sugar; or by the addition of pure brandy from the same
27 type of grapo, fruit, berry, rice, or honey that is contained in the
28 base wine, and produced in accordance with the regulations of the
29 United Stateo.Unfortified wine. - Defined in G.S. 18B-101.
30 (13) "Wholesaler or importer" when Wholesaler or importer. - When
31 used with reference to wholesalers or importers of wine or malt
32 beverages includes resident wineries that sell their wines at retail
33 and resident breweries that produce fewer than 310,000 gallons of
34 malt beverages per year.
35 (14) "Wine" means unfortified Wine. - Unfortified and fortified wine.
36 (15) "Winn ahippnr perminoG" means a Wine shipper permittee. - A
37 winery that holds a wine shipper permit issued by the ABC
38 Commission under G.S. 18B-1001.1."
39 SECTION l.(b) G.S. 18B-101(15) reads as rewritten:
40 "(15) 'Unfortified wine' means any wine of sixteen percent (16%) or less
41 alcohol by volume made by fermentation from pure-grapes, fruits,
84
berries, rice, or honey; or by the addition of pure cane, beet, or
dextrose sugar; or by the addition of pure brandy from the same
type of grape, fruit, berry, rice, or honey that is contained in the
base wine and produced in accordance with the regulations of the
United States."
SECTION 2. G.S. 1 05- 129.8(a2) reads as rewritten:
"(a2) Installments. - The credit may not be taken in the taxable year in which the
additional employee is hired. Instead, the credit must be taken in equal installments
over the four years following the taxable year in which the additional employee was
hired and is conditioned on the taxpayer's continued employment by the taxpayer in
this State of the number of full-time employees the taxpayer had upon hiring the
employee that caused the taxpayer to qualify for the credit.
If, in one of the four years in which the installment of a credit accrues, the number
of the taxpayer's ftill-time employees in this State falls below the number of full-time
employees the taxpayer had in this State in the year in which the taxpayer qualified
for the credit, the credit expires and the taxpayer may not take any remaining
installment of the credit. The taxpayer may, however, take the portion of an
installment that accrued in a previous year and was carried forward to the extent
permitted under G.S. 105-129.5."
SECTION 3.(a) G.S. 105- 129.62(c) reads as rewritten:
"(c) Environmental Impact. - A taxpayer is eligible for the credit allowed under
this section Article with respect to a facility in this State only if as of the last day of
the taxable year for which a credit or carryforward is claimed the taxpayer and the
taxpayer's related entities and strategic partners whose employees are included in the
taxpayer's increased employment level have no pending administrative, civil, or
criminal enforcement actions based on alleged significant violations of any program
implemented by an agency of the Department of Environment and Natural
Resources, and have had no final determination of responsibility for any significant
administrative, civil, or criminal violation of any program implemented by an agency
of the Department of Environment and Natural Resources within the last five years.
For the taxpayer's related entities and strategic partners, this subsection applies only
to the activities of the related entity or strategic partner at the facility with respect to
which a credit is claimed. A significant violation is a violation or alleged violation
that does not satisfy any of the conditions of G.S. 143-2 15.6B(d). Upon request, the
Secretary of Envirormient and Natural Resources must notify the Department of
Revenue of whether a person currently has any of these pending actions or has had
any of these final determinations within the last five years."
SECTION 3.(b) G.S. 105- 129.62(d) reads as rewritten:
"(d) Safety and Health Programs. - A taxpayer is eligible for the credit allowed
under this seetien-Article with respect to a facility in this State only if as of the last
day of the taxable year for which a credit or carryforward is claimed the taxpayer and
85
1 the taxpayer's related entities and strategic partners whose employees are included in
2 the taxpayer's increased employment level have no citations under the Occupational
3 Safety and Health Act at the facility with respect to which the credit is claimed that
4 have become a final order within the past three years for willful serious violations or
5 for failing to abate serious violations. For the purposes of this subsection, "serious
6 violation' has the same meaning as in G.S. 95-127. Upon request, the Secretary of
7 Labor must notify the Department of Revenue of whether a person has had these
8 citations become final orders within the past three years."
9 SECTION 3.(c) G.S. 105- 129.62(e) reads as rewritten:
10 "(e) Overdue Tax Debts. - A taxpayer is eligible for the credit allowed under
1 1 this section Amcle with respect to a facility only if as of the last day of the taxable
12 year for which a credit or carryforward is claimed the taxpayer and the taxpayer's
13 related entities and strategic partners whose employees are included in the taxpayer's
14 increased emplovrnent level have no overdue tax debts that have not been satisfied or
15 otherwise resoKed."
16 SECTION 3.(d) G.S. 105-129.63 reads as rewritten:
17 "§ 105-129.63. Determination by the Secretary of Commerce.
18 The taxpa\er must apply to the Secretary of Commerce for the determination
19 required under G.S. 105-129.62. The application must be made under oath and must
20 provide an\ information the Secretary requires in order to make the determination.
21 The determinaiion h> the Secretary of Commerce is a factual determination. The
22 Secretan,' must make this determination in any case in which the taxpayer can
23 demonstrate performance or can provide a credible plan for performance.
24 If the ta\pa\er tails to create the required number of new jobs or to make the
25 required investment, the information provided by the taxpayer on the application
26 proves to ha\ e been false at the time it was given, and the person making the
27 application knew or should have known that the information was false, the taxpayer
28 forfeits an\ credits claimed under this Article with respect to the facility. A taxpayer
29 that forfeits a credit under this section Article is liable for all past taxes avoided as a
30 resuh of the credit plus interest at the rate established imder G.S. 105-241. l(i),
3 1 computed from the date the taxes would have been due if the credit had not been
32 allowed. The past taxes and interest are due 30 days after the date the credit is
33 forfeited: a taxpayer that fails to pay the past taxes and interest by the due date is
34 subject to the penalties provided in G.S. 105-236."
35 SECTION 4.(a). G.S. 105-164.14(j) is amended by adding a new sub-
36 subdivision to read:
37 "(5) Sunset. - Sub-subdivisions a., d.. g., and in. of subdivision (3) of
38 this subsection expire effective for sales made on or after July, 1,
39 20(R"
40 SECTION 4.(b) Section 32B.5 of S.L. 2004-124 reads as rewritten:
86
1 "SECTION 32B.5. The amendment to G.S. 105-1 64. 14(j)(2) made by
2 this part is effective on and after January 1, 2004, and applies to sales made on or
3 after that date. Sections 32B.2 and 32B.3 of this part become effective October 1,
4 2004, and apply to sales made on or after that date. Section 32B.4 of this part
5 becomes effective July 1, 2005, and applies to sales made on or after that date. The
6 remainder of this part becomes effective July 1 , 2004, and applies to sales made on or
7 after that date. The amendments to G.S. 105 164.14(j)(3) made by this part are
8 repealed effective for sales made on or after July 1. 2009."
SECTION 5. G.S. 105-278. 1(c)(2) reads as rewritten:
"(c) For purposes of this section:
(2) By way of illustration but not by way of limitation, the following
boards, commissions, authorities, and institutions are units of State
government:
a. The State Marketing Authority established by G.S. 106-529.
b. The Board of Governors of the University of North Carolina
incorporated under the provisions of G.S. 116-3 and known
as "The University of North Carolina."
c. The North Carolina Museum of Art made an agency of the
State under G.S. HO l.G.S. 140-5.12.
SECTION 6. G.S. 106-516.1 reads as rewritten:
"§ 106-516.1. Carnivals and similar amusements not to operate without permit.
Every person, firm, or corporation engaged in the business of a carnival company
or a show of like kind, including menageries, merry-go-rounds, Ferris wheels, riding
devices, circus and similar amusements and enterprises operated and conducted for
profit, shall, prior to exhibiting in any county annually staging an agricultural fair,
apply to the sheriff of the county in which the exhibit is to be held for a permit to
exhibit. The sheriff of the county shall issue a permit without charge; provided,
however, that no permit shall be issued if he shall find the requested exhibition date
is less than 30 days prior to a regularly advertised agricultural fair and so in conflict
with G.S. 105 37.1(d). fair. Exhibition without a permit from the sheriff of the county
in which the exhibition is to be held shall constitute a Class 1 misdemeanor:
Provided, that nothing contained in this section shall prevent veterans' organizations
and posts chartered by Congress or organized and operated on a statewide or
nationwide basis from holding fairs or tobacco festivals on any dates which they may
select if such fairs or festivals have heretofore been held as annual events."
SECTION 7. G.S. 146-22.5 reads as rewritten:
"§ 146-22.5. Reimbursement of payment in lieu of future ad valorem taxes.
(a) If a State agency acquires land under G.S. 146-22.3 or G.S. 146-22.4 and
later uses this land to mitigate wetlands permitted to be lost in the same county, then
87
1 the county shall reimburse the State agency for a percentage of agency. The
2 reimbursement shall equal the estimated amount of ad valorem taxes paid for the land
3 in accordance with G.S. 146-22.3 minus ten percent (10%) of this amount times
4 multiplied by the number of years the State agency held the land before the wetlands
5 were lost.
6 (b) Application. - This section applies only to land acquired in counties
7 designated as an enterprise tier one or enterprise tier two area under G.S. 105-129.3."
8 SECTION 8. G.S. 160A-2 15(d) reads as rewritten:
9 "(d) Administration. - The taxing city shall administer a room occupancy tax it
10 levies. A room occupancy tax is due and payable to the city finance officer in
1 1 monthly installments on or before the 30^1 5th day of the month following the month
12 in which the tax accrues. Every person, firm, corporation, or association liable for the
13 tax shall, on or before the fifteenth 20"" day of each month, prepare and render a
14 return on a form prescribed by the taxing city. The return shall state the total gross
1 5 receipts derived in the preceding month from rentals upon which the tax is levied. A
16 room occupancy tax return filed with the city finance officer is not a public record
17 and may not be disclosed except in accordance with G.S. 153A- 148.1 or
18 G.S. 160A-208.1."
19 SECTION 9.(a) S.L. 2004-123 is amended by a adding a new section to
20 read:
21 "SECTION 3.1. This act applies to Dare County only."
22 SECTION 9.(b) S.L. 2004- 1 23, as amended by this act, is reenacted.
23 SECTION 10. Section 5 of S.L. 2004-204 reads as rewritten:
24 "SECTION 5. Section 3 of this act becomes effective January 1, 2005,
25 and applies to sales made on or after that date. The remainder of this act is effective
26 for business activities occurring on or after November 1 , 2004, and for taxable years
27 beginning on or after January 1, 2005. Section 4 of this act is repealed for business
28 activities occurring in taxable years beginning on or after January 1 , 2020."
29 SECTION 11. This act is effective when it becomes law.
Bill Analysis of Legislative Proposal #6:
Revenue Laws Technical Changes
By: Cindy Avrette, Research Division
SUMMARY: This draft bill makes the following technical and clarifying changes to the
revenue laws and related statutes.
ANALYSIS: Legislative Proposal 6 makes the following technical and clarifying changes:
Section
Explanation
1
Section 1(a) cross-references the applicable definitions in the Alcoholic
Beverage License and Excise Tax Article to the definitions in Chapter 1 8B
and makes stylistic changes. Secfion 1(b) conforms the definition of
'unfortified wine' in Chapter 18B to the definifion in G.S. 105-1 13.68. The
General Assembly changed the definition of 'unfortified wine' in S.L.2004-
135. The definition in Chapter 18B inadvertently left an unnecessary word.
2
Clarifies that the jobs tax credit installments should end if the number of
jobs in this State should fall below the number the taxpayer had in this State
when the taxpayer claimed the credit.
3
Substitutes the appropriate reference to 'Article,' as opposed to 'section."
4
Secfion 4(a) sets the sunset date in the statute. Section 4(b) removes the
sunset language fi-om the effective date part of the 2004 law. Placing the
sunset date in the statute reduces the possibility of errors and confusion
when and if the relevant subdivisions are amended.
5
Corrects a statutory reference.
6
Deletes an obsolete reference.
7
Clarifies the reimbursement language.
8
Conforms the date by which a city must file an occupancy tax return to the
same date by which a county must file an occupancy tax return.
9
Section 9(a) clarifies that the authorization for the addifional local sales tax
enacted in S.L. 2004-123 applies only to Dare County. Section 9(b) provides
that the original bill, as amended by this act, is effective when it becomes
law.
10
Provides that the exception in the tax secrecy statute created to correspond
with a change in the law sunsets at the same time as that tax law change.
11
The bill is effective when it becomes law.
89
APPENDIX A
AUTHORIZING LEGISLATION
ARTICLE 12L OF CHAPTER 120
OF THE
GENERAL STATUTES
90
ARTICLE 12L
Revenue Laws Study Committee
§ 120-70.105. Creation and membership of the Revenue Laws Study Committee.
(a) Membership. ~ The Revenue Laws Study Committee is established. The Committee
consists of 16 members as follows:
(1) Eight members appointed by the President Pro Tempore of the Senate; the
persons appointed may be members of the Senate or public members.
(2) Eight members appointed by the Speaker of the House of Representatives; the
persons appointed may be members of the House of Representatives or public
members.
(b) Terms. - Terms on the Committee are for two years and begin on January 1 5 of
each odd-numbered year, except the terms of the initial members, which begin on
appointment. Legislative members may complete a term of service on the Committee even if
they do not seek reelection or are not reelected to the General Assembly, but resignation or
removal from service in the General Assembly constitutes resignation or removal from
service on the Conmiittee.
A member continues to serve until a successor is appointed. A vacancy shall be filled within
30 days by the officer who made the original appointment. (1997-483. s. 14.1; 1998-98, s.
39.)
§ 120-70.106. Purpose and powers of Committee.
(a) The Revenue Laws Study Committee may:
(1) Study the revenue laws of North Carolina and the administrafion of those laws.
(2) Review the State's revenue laws to determine which laws need clarification,
technical amendment, repeal, or other change to make the laws concise,
intelligible, easy to administer, and equitable.
(3) Call upon the Department of Revenue to cooperate with it in the study of the
revenue laws.
(4) Report to the General Assembly at the beginning of each regular session
concerning its determinations of needed changes in the State's revenue laws.
These powers, which are enumerated by way of illusfration, shall be liberally construed
to provide for the maximum review by the Committee of all revenue law matters in this
State.
(b) The Committee may make interim reports to the General Assembly on matters for
which it may report to a regular session of the General Assembly. A report to the General
Assembly may contain any legislaUon needed to implement a recommendation of the
Committee. When a recommendation of the Committee, if enacted, would result in an
increase or decrease in State revenues, the report of the Committee must include an estimate
of the amount of the increase or decrease. (1997-483, s. 14.1.)
§ 120-70.107. Organization of Committee.
(a) The President Pro Tempore of the Senate and the Speaker of the House of
Representatives shall each designate a cochair of the Revenue Laws Study Committee. The
Committee shall meet upon the joint call of the cochairs.
(b) A quorum of the Committee is nine members. No action may be taken except by a
majority vote at a meeting at which a quorum is present. While in the discharge of its
official duties, the Committee has the powers of a joint committee under G.S. 120-19 and
G.S. 120-19.1 through G.S. 120-19.4.
(c) The Committee shall be funded by the Legislative Services Commission from
appropriations made to the General Assembly for that purpose. Members of the Committee
receive subsistence and travel expenses as provided in G.S. 120-3.1 and G.S. 138-5. The
Committee may contract for consultants or hire employees in accordance with G.S. 120-
32.02. Upon approval of the Legislative Services Commission, the Legislative Services
Officer shall assign professional staff to assist the Committee in its work. Upon the direction
of the Legislative Services Commission, the Supervisors of Clerks of the Senate and of the
House of Representatives shall assign clerical staff to the Committee. The expenses for
clerical employees shall be borne by the Committee. (1997-483, s. 14.1.)
APPENDIX B
DISPOSITION OF COMMITTEE'S
RECOMMENDATIONS
TO THE
2004 SESSION
OF THE
GENERAL ASSEMBLY
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APPENDIX F
STREAMLINED SALES TAX PROJECT UPDATE
ANDREW SABOL, DIRECTOR OF THE SALES AND
USE TAX DIVISION, DEPARTMENT OF REVENUE
STREAMLINED SALES TAX PROJECT UPDATE
December 2004
The Streamlined Sales Tax Project is an effort by states, with input from local
governments and the private sector, to simplify and modernize sales and use tax
collection and administration. The Project began in March 2000 and has the goal of
achieving sufficient simplification and uniformity to encourage sellers without nexus
in states to voluntarily collect use tax in participating states. Forty-two states and
the District of Columbia have by legislative or executive action authorized
participation in the Project. This body of states is formed as the Implementing
States.
In November 2002, the Streamlined Sales and Use Tax Agreement was approved
by the Implementing States. The Agreement contains the uniformity and
simplification provisions developed by the Project. The Agreement has been
amended In each of the last two years to adopt items that the Project has continued
to address. The Agreement becomes effective when at least ten (10) states
representing 20% of the population of all states with a sales tax are in compliance
with the provisions of the Agreement.
Over the last few years, states, including North Carolina, have enacted provisions to
bring themselves into compliance with the Agreement. As of January 1 , 2005,
twelve (12) states representing 19.4% of the sales tax states' population are
believed to be in compliance; as of July 1, 2005, fifteen (15) states representing
24.1 % of the applicable population will be in compliance; and as of January 1 , 2006,
nineteen (19) states representing 26.3% of the population will be compliant.
The states that have taken actions necessary to bring themselves into compliance
with the Agreement are in the process of completing a document termed a
"compliance checklist." Each state indicates on the checklist which provision in the
law or administrative code places them into compliance with each section of the
Agreement. Completed checklists will be available for public comment, and states
will be able to respond. Over the first half of 2005, the fifteen states that have
indicated they will be in compliance with the Agreement as of July 1 , 2005 will
review each other's checklists. A meeting is planned for July 1 , 2005, at which time
a fonnal vote will be taken In consideration as to whether each state is in
compliance. If the required thresholds are met, the ratified Agreement will be
effective October 1 , 2005.
The co-chaIrs of the Implementing States have appointed a subcommittee known as
the Conforming States to develop administrative policies and procedures for
carrying out the provisions of the Agreement once it is ratified. Each member state
will have representation on a Governing Board, which has oversight of the terms of
the Agreement once it is effective. The Conforming States Subcommittee has
drafted bylaws and rules for the Governing Board and has issued an RFP for the
obtaining of proposals for third-party certified service providers. The certified
service provider concept is one of the technology models provided for in the
Agreement that is expected to encourage remote sellers to voluntarily come fonward
to collect tax on sales to purchasers in the member states by relieving sellers of
collection and reporting responsibilities.
North Carolina has adopted measures necessary for our State to currently come
into compliance with the Agreement, although our Department will be making some
technical recommendations for a few items. There are several multiple tax rate
issues that need to be addressed in the 2005 Session in order for North Carolina to
remain in compliance with the Agreement after January 1 , 2006. These include the
preferential rate of tax on certain agricultural items and the rates of tax on
telecommunications services, direct-to-home satellite service, and spirituous liquor.
We look forward to working with members of the General Assembly and their staff
on these issues.
Our Department is working on technology items necessary under the Agreement.
These include the ability to receive information from a central registration database
for retailers participating under one of the Agreement's technology models, a
simplified electronic return for use by these retailers, and a rate and boundary
database for accessing the appropriate State and local rate of tax by zip code.
Thank you for the opportunity to present this update. My staff and I are always glad
to provide any additional information. 2005 will be a milestone year for the
Streamlined Project. We continue to appreciate the General Assembly's support
and look forward to working on measures necessary for continued participation in
the Project.
Submitted by: Andy Sabol, Director
Sales and Use Tax Division
N. C. Department of Revenue
APPENDIX G
HANDOUT ON THE ESTATE TAX ISSUE,
PREPARED BY CANAAN HUIE, BILL DRAFTING
DIVISION
Recent History of North Carolina Wealth Transfer Taxes
Y. Canaan Huie
Prior to 1 999, North Carolina had a system for taxing weahh transfers that was composed of
an inheritance tax on property transferred by a decedent and a gift tax on property
transferred b\ a Ining donor. For both the inheritance and the gift tax, the amount of tax
due was calculated based on tax rate schedules that varied depending on the relationship of
the person transfemng the property to the person receiving the property. This was in
contrast to federal law in effect at that time, which had a unified rate schedule for estates and
gifts.
For the inhentance tax, state law classified beneficiaries into three classes and set different
inheritance tax rates for each class. A Class A beneficiary was a lineal ancestor, a lineal
descendant, an adopted child, a stepchild, or a son-in-law or daughter-in-law whose spouse
was not entitled to an\- of the decedent's property. A Class B beneficiary was a sibling, a
descendant of a siblmg. or an aunt or uncle by blood. A Class C beneficiary was anyone
who was not a Class A or Class B beneficiary. Class A beneficiaries had the lowest
inhentance rates and were allowed a credit against the inheritance tax that effecfively
exempted fi-om the mhentance tax the first $600,000 of the estate received by Class A
beneficiaries. Class B beneficiaries had higher rates and were not allowed a credit. Class C
beneficianes had the highest rates and were not allowed a credit. Thus, North Carolina's rate
structure fa\orcd transfers to ancestors, descendants, stepchildren, and children-in-law by
giving those transters the lowest rates and a credit and preferred transfers to other close
family members o\ cr transfers to more distant relatives or to persons who were not related.
A similar structure was m place for the gift tax. Under the North Carolina gift tax at that
time, gifts not cxcecdmg a value of $10,000 from any particular donor to any particular
donee were excluded from taxation. After applying this exclusion, gifts were taxed at
varying graduated rates based on the relationship between the donor and the donee. Gifts
that were made to Imcai descendants, lineal ancestors, adopted children, or stepchildren
were taxed at the lowest rates and were subject to a lifetime cumulafive exemption of
$100,000. Gifts that were made to siblings, descendants of siblings, or aunts or uncles by
blood were taxed at higher rates and did not enjoy the benefit of the exempfion. Gifts that
were made to other donees were taxed at the highest rates and did not enjoy the benefit of
the exemption. Thus, as with the inheritance tax, North Carolina's gift tax rate structure
favored transfers to children and parents by giving those transfers the lowest rates and an
exemption and preferred transfers to other close family members over transfers to more
distant relati\es or to persons who were not related.
Other than a change in the annual exclusion amount, the General Assembly has not enacted
any major changes to the gift tax since before 1998. ' By contrast, the General Assembly
For gift tax purpose> the fa\ored class is slightly different than it was for inheritance tax purposes. A
child-in-law whose spouse uas not entitled to any of the decedent's property was a Class A beneficiary for
inheritance tax purposes Children-in-law are not mentioned in either of the preferred classes for gift tax
purposes: therefore, gifts to children-in-law are taxed at the highest rates.
~ In 2002, the General Assembly conformed the annual exclusion amount to the inflation-adjusted exclusion
amount allowed for federal purposes. S.L. 2002-126, s. 30C.5(a). That amount is currently $11, 000.
completely restructured the inheritance tax in 1998. As part of the Appropriations Act of
1998, S.L. 1998-212, the General Assembly repealed the inheritance tax for decedents dying
on or after January 1, 1999, and in its place enacted an estate tax. North Carolina's estate tax
is what is commonly known as a "pick-up tax". The amount of state estate tax due is the
maximum amount of federal credit allowed under the Internal Revenue Code (the Code) for
state death taxes.
In 2001. Congress amended the Code by enacting several major changes to the federal estate
tax that have had a substantial impact on the North Carolina estate tax. First, Congress
gradually increased the amount of the estate that is excluded from taxation.^ Second,
Congress repealed the estate tax effective in 2010.'* Third, Congress phased out the state
death taxes credit over four years.-^ The effect of this reduction and elimination of the state
death taxes credit, if conformed to. would be to eliminate the North Carolina estate tax as of
January 1, 2005.
In 2002 and 2003, the General Assembly evaluated the changes contained in the federal
legislation and responded by partially conforming to the federal changes. North Carolina
conformed to the increased exclusion amounts and to the 2010 repeal of the estate tax.
Thus, as under previous law, an estate that is not subject to the federal estate tax is not
subject to the state estate tax. However, North Carolina did not conform to the phase-out of
the state death taxes credit. Based on the 2002 legislation, as amended in 2003, for
decedents dying before July 1, 2005, the amount of the North Carolina estate tax is to be
computed based on the state death taxes credit without regard to the phase-out and
elimination of that credit. Without further legislative action. North Carolina will conform to
the elimination of the state death taxes credit as of July 1, 2005, and the North Carolina
estate tax will, for practical purposes, cease to exist for decedents dying on or after that date.
' For 2001, the applicable exclusion amount was $675,000. That amount was increased to $1 million for 2002
and 2003. to $1.5 million for 2004 and 2005, to $2 million for 2006 through 2008, and to $3.5 million for
2009.
" However, without fiirther Congressional action, the federal estate tax will be reinstituted automatically in
2011. , ,
^ The amount of the credit was reduced 25% for 2002, 50% for 2003, 75% for 2004, and eliminated completely
in 2005.
APPENDIX H
SUMMARY OF THE LIMITED CASE,
PREPARED BY MARTHA WALSTON, FISCAL
RESEARCH DIVISION
A&F Trademark, Inc. v. Tolson (The Limited Case)
(Summary prepared by Finance Team, December 20, 2004)
Ol^Rl'lEW: This North Carolina Court of Appeals decision, filed December 7, 2004, upholds the
State 's position on the taxation of royalty income received by an out-of state investment company for
the use of trademarks in this State. The Court ruled that the out-of state taxpayers, who hold the
trademarks used in North Carolina, were doing business in North Carolina and that the assessment
of corporate income and franchise taxes against the taxpayers was not a constitutional violation.
FACTS
In this case, the taxpayers are nine wholly-owned subsidiaries^ of the Limited Stores, Inc. The
Limited also owns 100% of eight retail companies' who have retail subsidiaries doing business in
more than 1 30 locations in North Carolina. These retail subsidiaries pay North Carolina corporate
income and franchise taxes. During the 1980's and early 1990's, the Limited incorporated the
taxpayers in Delaware to hold the trademarks owned by the Limited and the related retail companies.
The taxpayers do not own or lease any real property or tangible personal property in any state except
Delaware. The taxpayers have no employees in any state. The taxpayers entered into the following
paper transactions, which had no substantive effect other than eliminating their North Carolina
taxable income:
1. The taxpayers received the trademarks from the related retail companies for little or no
consideration.
2. The taxpayers then entered into licensing agreements with the corresponding related retail
companies. The licensing agreements authorized the related retail companies to continue to
use the trademarks they had previously owned in exchange for royalty payments to the
taxpayers. The royalty payments were based on a percentage of the retail companies' gross
sales. However, the payments were not made by any transfer of funds but only by a
bookkeeping entry.
3. The Limited and the related retail companies deducted these royalty payments from their
income for North Carolina tax purposes.
4. Taxpayers then loaned these royalty payments back to the related companies for use in their
retail operations. Taxpayers charged the retail companies a market rate of interest, which
generated further income tax deductions for the related retail companies. No attempt was
ever made by taxpayers to collect on outstanding loans. The taxpayers did not pay any
income tax to any state on any of the income received from the related retail companies.
For the year at issue (1994), taxpayers recorded $301,067,619 in royalty income and $122,031,344 in
interest income from the related retail companies. This accounted for 100% of taxpayers' income.
In September 2000, the Secretary of Revenue rendered a final decision finding that the taxpayers
were doing business in this State and as such were subject to North Carolina corporate income and
franchise tax. The Tax Review Board^ confirmed the Secretary's decision. On May 22, 2003, the
Wake County Superior Court affirmed the Tax Review Board's administrative decision in its
" A&F Trademark, Inc.; Caciqueco, Inc.. Expressco, Inc.; Lanco, Inc.; Lemco, Inc.; Limco Investments, Inc.;
Limtoo, Inc.; Structureco, Inc.; V. Secret Stores, Inc.
' Lane Bryant, Inc.; Lemer, Inc.; Victoria's Secret, Inc.; Cacique, Inc.; Abercrombie & Fitch, Inc.; Limited
Too, Inc.; Express, Inc.' and Structure, Inc.
* The Tax Review Board is composed of the following members: the State Treasurer, the chair of the Utilities
Commission, a member appointed by the Governor, and the Secretary of Revenue.
entirety. The taxpayers then appealed to the North Carohna Court of Appeals.' In a decision filed
December 7, 2004, the Court of Appeals affirmed the decision of the Wake County Superior Court.
The following issues were presented on appeal:
1 . Whether the taxpayers were "doing business" in North Carolina under the relevant statutory
provisions.
2. Whether the State's attempt to assess the income and franchise taxes offends the Commerce
Clause of the U.S. Constitution.
The Court of Appeals concluded that the taxpayers WERE doing business in the State and that the
Commerce Clause did NOT forbid the unposition of corporate and franchise taxes against the
taxpayers.
DECISION
The North Carolina Court of Appeals affirmed the lower court's decision and upheld the imposition
of income and franchise taxes against taxpayers on the following grounds:
Taxpavers were "doing business" in North Carolina under the relevant statutory provisions.
Under G.S. §105-130.3, a tax is imposed on the net income of a corporation doing business in the
State. The Secretary of Revenue adopted an administrative rule interpreting this statute and defining
"doing business" to mean "the operation of any business enterprise or activity in North Carolina for
economic gain, including... the owning, renting, or operating of business or income-producing
property in North Carolina including... [t]rademarks [and] tradenames...." '° The language adding
trademarks and tradenames to the definition was added in 1992. In 2001 , the General Assembly
enacted § 105-130.7A stating that royalties received for the use of trademarks in this State are
income derived from doing business in this State and thus are subject to N.C. income tax. The 2001
act also provided "taxpayer with an option concerning the method by which these royalties can be
reported for taxation when the recipient and the payer are related members."' ' In finding that the
taxpayers were doing business in North Carolina, the Court of Appeals emphasized that the 2001
legislation did not change what was already considered taxable income but merely enhanced
compliance with the State tax on income generated from using trademarks and added a reporting
option to the income tax statute. The Court concluded that the 2001 legislation supports the premise
that the Secretary's interpretation of G.S. 105-130.3 set out in the administrative rules was consistent
with the language of this statute. The administrative rule properly reflected the policy of the General
Assembly for income taxation of trademark royalty payments and did not, as taxpayers argued,
unlawfully expand the statute.
The Court of Appeals also rejected the taxpayers' argument that the imposition of franchise taxes
exceeded statutory authority. North Carolina imposes a franchise tax on every corporation doing
business in the State. Under G.S. 105-1 14(b)(3), "doing business" for franchise tax purposes is
defined as "[e]ach and every act, power, or privilege exercised or enjoyed in this State, as an incident
to, or by virtue of the powers and privileges granted by the laws of this State." The franchise tax is
imposed on corporations for the opportunity and privilege of transacting business in the State. The
Court found that the State "has provided privileges and benefits that fostered and promoted the
'No. COA03-1203
'° 17NCAC5C.0102
' ' S.L. 2001-327. The General Assembly expressly found that most corporations engaged in manufacturing
and retailing activities in the State comply with the State tax on income generated from using trademarks in
those activities; and it was the intent of this statute to reward taxpayers who comply by giving them an option
on how to file tax returns involving royalty income.
related retail companies". Consequently, additional benefits have inured to the taxpayers. As
support for its holding, the Court sited Geoffrey, Inc. v. South Carolina Tax Commission. 437 S.E.2d
13 (S.C. 1993). There the South Carolina Supreme Court upheld income tax imposed on that portion
of a non-domiciliary trademark holding company's income derived from the use of its trademarks
and trade names within South Carolina by a related retail company. The North Carolina Court of
Appeals adopted the rationale of the Geoffrey court stating "that by providing an orderly society in
which the related retail companies conduct business. North Carolina has made it possible for the
taxpayers to earn income pursuant to the licensing agreements."
North Carolina's attempt to assess income and franchise taxes against taxpavers did not offend the
Commerce Clause of the U.S. Constitution.
The Court of Appeals also rejected the taxpayers' argument that the Commerce Clause of the United
States forbids the State from imposing income and franchise taxes on them. Taxpayers argued that
the Commerce Clause requires that an activity must have substantial nexus with a taxing state before
that activity can be taxed. Because they have no offices, facilities, employees, and real or tangible
property in North Carolina, taxpayers claimed they have no physical presence in the State and,
therefore, no substantial nexus. As support, taxpayers cited the U.S. Supreme Court rulings in
National Bellas Hess. Inc. v. Department of Revenue, 386 U.S. 753, 18 L.Ed.2d 505 (1967) and Quill
Corp. V. North Dakota, 504 U.S. 298, 1 19 L.Ed. 2d 91 (1992).'^ In rejecting the taxpayers'
argument, the Court of Appeals found that the two cases cited by the taxpayers required a physical
presence only for the imposition of sales and use taxes. The Court stressed that the physical
presence requirement has never been established by judicial precedent for other forms of taxation.
The Court also pointed out the distinctions between sales and use taxes and income and franchise
taxes that make the physical presence test inappropriate here. For example, the Bellas Hess and
Quill cases were use tax collection cases based on the vendor's activities in the state. The income
and franchise taxes in the instant case are based solely on the taxpayers' receipt of income from the
use of the taxpayers' property in this State by a commonly-owned third party. Moreover, a sales and
use tax can make a taxpayer an agent of the state who is obligated to collect the tax from the
consumer at the point of sale and then pay it over to the taxing entity. A state income tax is usually
paid only once a year to one taxing jurisdiction at one rate, while a sales and use tax can be due
periodically to more than one taxing jurisdiction within a state and at varying rates.
'" Bellas Hess and Quill involved attempts by a state to require out-of-state mail-order vendors to collect and
pay use taxes on goods purchased within the state despite the fact that the vendors had no outlets or sales
representatives in the state. The Court in Bellas Hess concluded that the vendors' only contacts with the state
were by mail or common carrier and that such contact did not satisfy the "substantial nexus" requirement of the
Commerce Clause. The Court found that physical presence constituted nexus. The Quill Court reaffirmed the
requirement that the vendors must have a physical presence in the state to satisfy the "substantial nexus"
requirement.
APPENDIX I
SUMMARY OF THE CUNO CASE
AND RECENT DEVELOPMENTS
Memorandum
Date: January 24, 2005
To: All Interested Parties
From: Canaan Huie, Staff Attorney, Bill Drafting Division
CanaanH@NCLEG.NET Ph. (919) 733-6660, Fax (919)715-5459
Subject: Effect of Cuno v. DaimlerChrysler on North Carolina Economic Development
Incentives - Updated
Table of Contents
I. Executive Summary 1
II. Summary of Cuno Decision 2
III. Possible Ultimate Outcomes of Cuno 3
IV. Application to North Carolina's Economic
Development Incentive Programs 4
A. Sales and Use Tax Incentives 5
B. Income, Franchise, and Gross
Premiums Tax Incentives 5
1 . Bill Lee Act 6
2. Tax Incentives for Recycling Facilities 7
3. Business and Energy, Historic Rehabilitation,
and Low-Income Housing Tax Credits 7
4. Other Corporate Income Tax Credits 8
I. Executive Summary
This memo is in response to questions about the effect of the decision in Cuno v.
DaimlerChrysler on economic development incentives. The Cuno decision was handed
down by the United States Court of Appeals for the Sixth Circuit and therefore is not
binding in North Carolina. This memo will discuss the effect on North Carolina's economic
development incentive programs if a similar ruling applied to them. At the present time it is
impossible to predict the ultimate outcome of this case or its effects on North Carolina's, or
any other state's, tax incentive programs. Nor is it possible to predict the outcome if a
similar case were filed in North Carolina. Staff will monitor this issue closely and consult
with the Attorney General's Office and other experts in order to advise the General
Assembly as it contemplates any revisions to North Carolina's tax incentive programs.
North Carolina's economic development incentive programs based on grants, infi-astructure
development, or bonds would not be affected by a ruling relying on the reasoning laid out in
the Cuno decision. The Sixth Circuit court specifically stated that "attempts to create
location incentives through the state's power to tax are to be treated differently from direct
subsidies despite their similarity in terms of end-result economic impact." However, many
of North Carolina's tax incentives would potentially be affected by a ruling applicable in this
jurisdiction that relied upon reasoning similar to that laid out in the Cuno decision.
II. Summary of Cuno Decision
On September 2, 2004, the Sixth Circuit Court of Appeals issued its decision in Cuno v.
DaimlerChrysler, 386 F.3d 738 (2004, 6* Cir. (Ohio)). In that decision, the Court found
that Ohio's investment tax credit violated the Commerce Clause of the United States
Constitution, but simultaneously found that a personal property tax exemption did not
violate the Commerce Clause. Shortly after the decision was announced, the State of Ohio
petitioned the Sixth Circuit Court of Appeals for a rehearing en banc. On January 18, 2005,
the Court denied that request.
Ohio's investment tax credit allows a nonrefundable credit against the state's corporate
franchise tax for a taxpayer who purchases new manufacturing machinery and puts it in use
in Ohio. The credit is equal to a percentage of the excess cost of the new machinery over a
measure of average machinery and equipment expenditures in the county in which the
machinery is put in use.
Ohio's tax statutes also allow municipalities to offer personal property tax exemptions to
businesses that a) agree to establish, expand, renovate, or occupy a facility and b) hire new
employees or maintain employment opportunities for current employees. The exemption
applies to tangible personal property first used at the facility by the business after the date of
the agreement entered into between the municipality and the business.
Plaintiffs in the case argued that the investment tax credit interfered with interstate
commerce by encouraging ftxrther investment in the state at the expense of development in
other states. The plaintiffs argued that the tax credit "coerced" businesses already subject to
the Ohio tax to expand in-state rather than out-of-state to offset existing tax liability.
Plaintiffs cited numerous Supreme Court cases in which the Court struck down tax schemes
that had the effect of encouraging greater investment in the state at the expense of
development in other states '^ Plaintiffs ftirther argued that the property tax exemption
violated the Commerce Clause because it required the taxpayer to maintain a specified level
of employment and investment in the state.
'^ See Boston Stock Exchange v. State Tax Commission, 429 U.S. 318, 97 S.Ct. 599
(1911)- Maryland V. Louisiana, 45\ U.S. 725, 101 S.Ct. 2114 (1981); and
Westinghouse Electric Corporation v. Tally, 466 U.S. 388, 104 S.Ct. 1856 (1984).
In Boston Stock Exchange the Supreme Court invalidated a New York tax provision
that provided a significant reduction to the state's transfer tax when a sale of stock
occurred within the state. The transfer tax applied to transfers of securities when
any one of five taxable events, including deliveries or transfers of stock, occurred in
the state. The purpose of the tax reduction when the stock was sold in the state was
to encourage greater use of the New York Stock Exchange at the expense of
regional stock exchanges. In Maryland v. Louisiana, the Supreme Court invalidated
a complicated system of taxes and tax credits that had the effect of encouraging
certain producers of natural gas to expand production in Louisiana at the expense of
expanding production in other jurisdictions. In Westinghouse the Supreme Court
invalidated a New York tax credit that was based on the portion of a taxpayer's
exports that were shipped from within the State.
The defendants argued that the Supreme Court decisions should be read to allow tax
incentives so long as they do not penalize out-of-state economic activity. They argued that
the Supreme Court decisions prohibited tax credits and exemptions only to the extent they
would either function like a tariff or provide different effective rates of taxation based on the
mix of in-state and out-of-state activities.
The Sixth Circuit court held that Ohio's investment tax credit violated the Commerce Clause
because the credit encouraged in-state economic development at the expense of out-of-state
economic development and because the credit allowed the taxpayer to reduce pre-existing
income tax liability by investing in-state but not by investing out-of-state. The Sixth Circuit
rejected the defendants' arguments and found the distinction between laws that benefit
in-state activity and laws that burden out-of-state activity to be one that was not supported
by the relevant Supreme Court cases. The court noted that "economically speaking, the
effect of a tax benefit or burden is the same." The court stated that the relevant Supreme
Court opinions suggest that "constitutionality [should] not depend upon whether one focuses
upon the benefited or burdened." (Quoting Bacchus Imports. Ltd. v. Dias, 468 U.S 263
273 (1984).)
The court limited its holding to tax incentives as opposed to grant incentives. It noted the
Supreme Court's decisions in New Energy Company of Indiana v. Limbach, 486 U.S. 269,
108 S.Ct. 1803 (1988) and West Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 1 14 S.Ct. 2205
(1994) and stated that "attempts to create locafion incentives through the state's power to tax
are to be treated differently from direct subsidies despite their similarity in terms of end-
result economic impact." The court concluded that tax incentives involve state regulation of
interstate commerce but grant incentives do not.
The Sixth Circuit found that the property tax exemption did not violate the Commerce
Clause. The court based its ruling on the following factors. First, the exempfion applied
only to the new personal property acquired for the facility and the "conditions imposed on
the receipt of the Ohio property tax exemption are minor collateral requirements and are
directly linked to the use of the exempted personal property." Second, the exemption did
not require actions that might interfere with interstate Commerce, such as a requirement for
creation of new jobs or for the operation of additional business activities. Third, the
exemption differed fi-om a credit in that it reduced only potential fixture tax liability rather
than any pre-existing liability. Fourth, the property would escape Ohio taxation regardless
of in which state the property was placed - either because of the exemption in Ohio or
because the property was placed out-of-state where Ohio could not tax it.
III. Possible Ultimate Outcomes of Cuno
There are any number of possible ultimate outcomes of the Cuno decision. As mentioned
previously, the Cuno decision is a decision by the Sixth Circuit Court of Appeals. As such,
the decision is persuasive throughout the nation, but binding only in the Sixth Circuit, which
is composed of Kentucky, Michigan, Ohio, and Tennessee.
In addition, there remains one opportunity for appeal that could overturn this decision. As
mentioned earlier, the defendants in this case asked for a hearing by the Sixth Circuit en
banc. The Sixth Circuit denied that request. The defendants could still ask the United
States Supreme Court to review the decision. The Supreme Court might or might not chose
to hear the case and, if it accepts the case, one cannot predict whether it would uphold the
Sixth Circuit ruling. Any decision by the Supreme Court would be binding not only on the
states in the Sixth Circuit, but on the entire nation.
At the present time it is impossible to predict the ultimate outcome of this case or its effects
on North Carolina's, or any other state's, tax incentive programs. Nor is it possible to predict
the outcome if a similar case were filed in North Carolina. Staff will monitor this issue
closely and consult with the Attorney General's Office and other experts in order to advise
the General Assembly as it contemplates any revisions to North Carolina's tax incentive
programs.
IV. Application to North Carolina's Economic Development Incentive Programs
North Carolina has made extensive use of a variety of economic development incentive
programs. These programs can be divided into four broad categories: tax incentive
programs such as the Bill Lee Act and the tax credits for recycling facilities, grant programs
such as JDIG and the One North Carolina Fund, infirastructure development programs such
as the Industrial Development Fund, and bond programs such as the Industrial Revenue
Bond program.
Given the Sixth Circuit's ruling in this case and the Supreme Court's rulings in New Energy
Co. and West Lynn Creamery, one can fairly safely assume that a ruling based on the
Commerce Clause would not affect three of the four broad categories of incentives utilized
in North Carolina - grant programs, infi-astructure development programs, and bond
programs.''* While never having "squarely confi-onted the constitutionality of subsidies,"
the Supreme Court has stated that, "[djirect subsidization of domestic industry does not
ordinarily run afoul of [the Commerce Clause]."'^ However, many of North Carolina's tax
incentive programs would likely be negatively affected by a ruling such as Cuno if applied
in this State.
North Carolina's tax incentives for economic development fall into two major categories,
which will be analyzed separately below. In some cases, the incentive takes the form of an
exemption fi-om, refiind of, or preferential rate for sales and use taxes. Examples of these
types of tax incentives include the following:
''' This should not be read as a categorical statement that these economic
development mcentive programs would withstand any constimtional challenge. For
example, it has been argued that economic development incentive grant programs
may violate the North Carolina Constitution's requirement that the power of taxation
be used only for a public purpose (Article V, Section 2(1), North Carolina
Constitution) or its prohibition against exclusive emoluments (Article V, Section 32,
North Carolina Constimtion). However, the North Carolina Supreme Court's
opinion in Maready v. City of Winston-Salem. 342 N.C. 708. 467 S.E.2d 615
(1996), is generally read to authorize such programs.
'^ West Lynn Creamery. 512 U.S. at 199, n. 15.
'* iVov Energy Co., 486 U.S. at 278.
• The sales and use tax exemption authorized under G.S. 105-1 64. 13(22a) for
sales of audiovisual masters made or used by a production company in making visual and
audio images for first generation reproduction.
• The refund, authorized under G.S. 105-1 64. 14(g) and (j), of sales and use
taxes paid on building materials that become part of certain industrial facilities.
• The preferential sales and use tax rate on manufacturing machinery
authorized under G.S. 105-164.4(ld) and G.S. 105-164.4A.
Most often, however, the tax incentive takes the form of a credit against the income,
franchise, or gross premiums tax. There are numerous examples of these types of credits,
including the tax credits under the Bill Lee Act and the tax credits for major recycling
facilities.
A. Sales and Use Tax Incentives. The tax incentives that take the form of an exemption
from or preferential rate for sales and use taxes would not violate the Commerce Clause
under the reasoning of the Sixth Circuit court in the Cuno decision. As with the personal
property tax exemption in Ohio, these tax incentives are related to "the use or location of the
property itself" In addition, the applicability of the exemption or preferential rate is not
conditioned on the consumer having any economic presence in this State and is not limited
to property that is put into service in this State.
It is less clear whether the refunds of sales and use taxes paid on building materials would
violate the Commerce Clause under the reasoning laid out in Cuno. In order to qualify for
the sales tax refund on building materials that become part of a major recycling facility or of
an eligible industrial facility the taxpayer must make a significant and continuing economic
investment in this State.'' This requirement appears to be problematic for two reasons.
First, because eligibility for the refiand requires that the project be located in this State,
building materials that are purchased in this State for use in a project located outside of the
State are not eligible for the refund. This tax freatment discriminates against building
materials purchased in this State for use in other states. In addition, this gives the taxpayer
additional encouragement to in-State economic investment at the expense of out-of State
economic development. Second, the refiand encourages a company that has decided to
locate within this State to also purchase building materials within this State because other
states' sales taxes on material purchased outside North Carolina would not qualify for the
refund.'^ The effect of this provision is to encourage the business to engage in an additional
'^ In the case of a major recycling facility, the taxpayer must invest at least $300
milhon in the facihty and create at least 250 new, full-time jobs at the facility. If
the taxpayer fails to make the required amount of investment or create the required
number of jobs within the required periods, the taxpayer is liable for any sales and
use taxes previously refunded. See G.S. 105-164. 14(g) and G.S. 105-129.26. In the
case of an eligible industrial facility, the taxpayer must invest at least $50 million,
depending on facility location, to construct the facility. In this case, construction
costs include the costs of acquisition and equipping the facility.
'* Although the refund applies to both sales and use taxes, use taxes are due only to
the extent that the taxpayer has not paid a sales tax on the materials in another
jurisdiction.
form of commerce in this State, the purchase of building materials and supplies. For both of
these reasons, it is possible that a court could strike down the sales tax refund provision as
violating the Commerce Clause.
R Income. Franchise, and Gross Premiums Tax Incentives. Before 1996, North Carolina
had made little use of tax incentives to lure businesses to the State. The General Assembly
created the William S. Lee Quality Jobs and Business Expansion Act (Bill Lee Act) in 1996
effective beginning with the 1996 tax year. The Act is a package of State tax incentives,
primarily in the form of tax credits for investment in machinery and equipment and certain
real property, job creation, worker training, and research and development. Most of the Bill
Lee Act credits are set to expire January 1, 2006. Shortly following the enactment of the Bill
Lee Act, the General Assembly enacted numerous other tax credits targeting recycling
facilities, business and energy property, historic rehabilitation, and low-income housing.
The State also has a number of tax credits available to businesses engaging in specific
activities, some of which predate the mid-1990s. Many of these credits appear to be
vulnerable to a decision such as that issued in Cuno^ The remainder of this memo will
analyze these credits taking into consideration the issues raised in Cuno.
1. Bill Lee Act .-Ml of the credits under the Bill Lee Act are similar to the Ohio credits and
therefore appear to be \ulnerable to constitutional attack based on the reasoning in the Cuno
decision. In order to be eligible for credits under the Bill Lee Act, a taxpayer must engage
in certain actixities in this State. The credits allowed under the act are applied against the
income, franchise, or gross premiums tax. All of the credits under the Act, with the possible
exception of the credit for increasing research and development expenditures, are similar to
Ohio's in\estmcnt lax credit in that they allow a credit for business activities that occur in-
State but not for identical activities that occur out-of-State. As with the Ohio investment tax
credit, "the economic effect ... is to encourage further investment in-state at the expense of
development in other states and ... the result is to hinder free frade among the states."
Several of the credits under the Bill Lee Act raise additional concerns in that receipt of the
credit is conditioned on another independent factor that also appears to violate the
Commerce Clause. The inherent problem with the credits relating to investment in cenfral
administratu e or aircraft property (G.S. 105-129.12) and to substantial investment in other
property (G.S. 1 05- 1 29. 1 2A), (that they encourage in-State investment at the expense of out-
of-State inxestmeni). is compounded by the fact that these two credits also require the
creation and maintenance of new jobs in this State. In effect, in order to be eligible for these
credits, the taxpa> cr must not only decide to invest in more property in this State, but must
also increase operations at those facilities.
The analysis regarding the credits for increasing research and development expenditures is
more complex than the analysis for other credits under the Act. There are two research and
development credits, the original credit that is set to expire in 2006 and the new credit,
which goes into effect May 1, 2005. The new research and development credit is similar to
the other Bill Lee .Act credits and will be vulnerable to a Cuno attack for the same reasons.
The original research and development credit, however, is allowed to a taxpayer that
increases research and development expenditures regardless of where those new
expenditures are made. At first glance, the original credit would appear to survive under the
reasoning laid out in Cuno because the taxpayer receives the benefit of the credit regardless
of where the increase in research and development expenditures occurs. However, the
manner in which this credit is calculated is problematic. The amount of the credit allowed is
equal to 5% of the State's apportioned share of the taxpayer's expenditures for increasing
research and development. Therefore, two companies subject to tax in North Carolina that
have identical increases in expenditures could receive very different credits based on the
cumulative percentage of research and development performed in this State. At the extreme,
one taxpayer could receive a tax credit equal to 5% of increased expenditures whereas the
other taxpayer could receive no credit at all. Even though its discriminatory tax effect is
smaller than that of the new credit or the other credits of the Bill Lee Act, the original credit
may still be vulnerable under the reasoning in the Cuno decision because it clearly
encourages further research and development expenditures in this State at the expense of
further expenditures in other jurisdictions.
2. Tax Incentives for Recycling Facilities. The credits regarding large and major recycling
facilities appear to be vulnerable to constitutional attack based on the reasoning in the Cuno
decision. Eligibility for these credits is based upon the taxpayer making a substantial
investment in a facility and creating new jobs within an enterprise tier one area in this State.
If the taxpayer satisfies these requirements, the taxpayer is eligible for a credit equal to a
percentage of the cost of machinery and equipment purchased or leased for use in the
facility. As with the Bill Lee credits and the Ohio investment tax credit, this credit is
problematic in that the clear purpose is to encourage investment in this State at the expense
of development in other jurisdictions. Further, as with those credits, this credit lowers the
overall pre-existing tax burden of companies that invest in-State rather than out-of-state.
In addition, a major recycling facility that is accessible by neither ocean barge nor ship and
that transports materials to the facility or products away from the facility is eligible for a
reinvestment credit equal to its additional expenses due to its inability to use ocean barges or
ships. Although the reinvestment credit appears similar to the Ohio property tax exemption
in some ways, there are significant differences. First, this is an income tax credit rather than
a property tax exemption and thus can offset preexisting liability if the taxpayer was already
doing business in the State. The Sixth Circuit in Cuno found there to be a "fundamental
difference" between tax credits that offset pre-existing income tax liability and exemptions
that allow a taxpayer to avoid liability for new property. Second, receipt of the reinvestment
credit requires that the taxpayer invest at least $300 million in the facility in this State and
that the facility create at least 250 new jobs. The taxpayer must then have additional
expenses related to infrastructure improvements or addition facility costs before the taxpayer
is eligible for the credit. Receipt of this credit therefore clearly requires a substantial and
ongoing presence in this State. As with the other credits discussed so far, the credit is
vulnerable to attack under the Cuno reasoning because the purpose is to encourage
investment in this State at the expense of development in other jurisdictions.
3. Business and Energy, Historic Rehabilitation, and Low-Income Housing Tax Credits.
The credits in Articles 3B, 3D, and 3E of Chapter 105 of the General Statutes are more
difficult to analyze than either the Bill Lee Act credits or the recycling facility credits.
Although more limited in scope than Ohio's investment tax credit, these credits are similar to
the Ohio incentive in that a credit against existing tax liability is allowed to a taxpayer that
undertakes certain activities in this State but not if the activity occurs in another state. All of
these credits arguably are facially discriminatory in that they offer a credit for activity that
occurs in-State but do not offer a credit for the exact same activity when it occurs out-of-
State. The Supreme Court has held that legislation that may appear to be facially
discriminatory may still be upheld if it advances "a legitimate local purpose that cannot be
adequately served by reasonable nondiscriminatory alternatives." New Energy Co., 486 U.S.
at 278. See also Maine v. Taylor, All U.S. 131, 106 S.Ct. 2440 (1986). Although the tax
credits contained in these Articles clearly advance legitimate local purposes such as historic
rehabilitation, the provision of low-income housing, and the use of renewable energy, it is
clear that there are other reasonable nondiscriminatory alternatives available. These
alternatives could include direct subsidies for these activities or exemptions of relevant
property from the property tax.
On the other hand, one could argue that these statutes are not facially discriminatory in that
in-State and out-of-state businesses are treated alike and that the statutes do not encourage
in-State investment at the expense of out-of-state development. When a statute is not
facially discriminatory it must be subjected to "a sensitive case-by-case analysis of purposes
and effects," to determine if the provision "will in its practical operation work discrimination
against interstate commerce." West Lynn Creamery, 512 U.S. at 201. The purpose of these
statutes does not appear to be encouraging economic activity in this State at the expense of
activity in other states, but rather providing an incentive for solving a specific local problem.
For example, the intent of the credit for low-income housing is add new affordable housing
in this State, not to shift low-income housing from another state to this State. It is unclear at
the present time whether these credits would be found to have the effect of working
discrimination against interstate commerce.
It is very unclear how most of these credits would fare under the reasoning applied in the
Cuno decision. Although one cannot with certainty state how a court would rule on this
issue, these credits appear to be less vulnerable to attack under the court's reasoning in Cuno
than either the Bill Lee Act credits or the tax credits for recycling facilities. One possible
exception to this general statement is the newly enacted credit for construction of renewable
fuel facilities.'^ Unlike the other credits in these Articles, this credit involves an on-going
business operation rather than a discrete, one-time investment in property. For that reason, a
court relying on the reasoning laid out in Cuno is probably more likely to find this credit to
be similar to the Ohio investment tax credit and thus to violate the Commerce Clause by
encouraging in-State investment at the expense of out-of-State investment.
4. Other Corporate Income Tax Credits. North Carolina also has numerous other corporate
income tax credits that may be vulnerable under the reasoning in Cuno. Many of the
arguments regarding the constitutionality of these credits are the same as the arguments
thoroughly discussed above. The following points will briefly state whether the specific
credits appear to be fairiy vulnerable to attack like the Bill Lee Act credits, fairly safe from
attack, or whether the credit's vulnerability is very uncertain.
'^ G.S. 105-129.16D was enacted in S.L. 2004-153. It becomes effective with the
2005 taxable year and expires as of January 1, 2008.
a. G.S. 105-130.22, Credit for construction of dwelling units for handicapped
persons. The reasoning that applies to the tax credits for low-income housing is equally
applicable here. This credit appears to be less vulnerable to attack than the Ohio investment
tax credit or the Bill Lee Act credits or recycling facility credits. However, this credit could
not be described as "safe."
b. G.S. 105-150.25, Credit against corporate income tax for construction of
cogenerating power plants. The reasoning that applies to the Bill Lee Act credits and the
recycling facility credits appears to be most appropriate here. This credit encourages
economic development in this State at the expense of the same development in other states.
c. G.S. 105-130.28, Credit against corporate income tax for construction of a
renewable energy equipment facility. The reasoning that applies to the Bill Lee Act credits
and the recycling facility credits appears to be most appropriate here. This credit encourages
economic development in this State at the expense of the same development in other states.
d. G.S. 105-130.34, Credit for certain real property donations. The reasoning
that applies to the tax credits for historic rehabilitation appears to be most appropriate here.
This credit appears to be less vulnerable to attack than the Ohio investment tax credit or the
Bill Lee Act credits or recycling facility credits. However, this credit could not be described
as safe.
e. G.S. 105-130.36, Credit for conservation tillage equipment. The reasoning
that applies to the tax credits for renewable energy property appears to be most appropriate
here. This credit appears to be less vulnerable to attack than the Ohio investment tax credit
or the Bill Lee Act credits or recycling facility credits. However, this credit could not be
described as safe.
f G.S. 105-130.37, Credit for gleaned crops. This credit makes no distinction
as to whether the activity occurs in-State or out-of-State. This credit is not vulnerable under
the reasoning in the Cuno decision.
g. G.S. 105-130.39, Credit for certain telephone subscriber lines. This credit
seeks to compensate a taxpayer for added burdens placed on the taxpayer by the State.
Because the credit compensates the taxpayer for a burden placed on the taxpayer by the
State and does not favor in-State economic interests over out-of-State interests, this credit is
not vulnerable under the reasoning in the Cuno decision.
h. G.S. 105-130.41, Credit for North Carolina State Ports Authority wharfage,
handling, and throughput charges. This credit raises issues regarding the State's role as
market participant as opposed to being a market regulator. Since this credit involves the
application of the State's tax code, the State is acting more in a role as a market regulator
than as a market participant. Under this interpretation, this credit would be vulnerable under
the Cuno reasoning since the State is clearly encouraging in-State economic interests at the
expense of out-of-State economic interests. In addition, other reasonable nondiscriminatory
alternatives exist. The State could, as a market participant, provide a direct subsidy for
exports through the State Ports.
i. G.S. 105-130.43, Credit for savings and loan supervisory fees. This credit
seeks to compensate a taxpayer for added burdens placed on the taxpayer by the State.
Because the credit compensates the taxpayer for a burden placed on the taxpayer by the
State and does not favor in-State economic interests over out-of-State interests, this credit is
not viilnerable under the reasoning in the Cuno decision.
j. G.S. 105-130.44, Credit for construction of poultry composting facility. The
reasoning that applies to the tax credits for renewable energy property appears to be most
appropriate here. This credit appears to be less vulnerable to attack than the Ohio
investment tax credit or the Bill Lee Act credits or recycling facility credits. However, this
credit could not be described as safe.
k. G.S. 105-130.45, Credit for manufacturing cigarettes for exportation. This
credit is not vulnerable to attack under the reasoning in the Cuno decision because the credit
does not favor in-State economic interests over out-of-State economic interests. However,
this credit could be vulnerable under the Commerce Clause under other theories."^ This
credit is allowed for exports to foreign nations or to United States possessions or United
States commonwealths that are not states. It is unclear how United States possessions and
non-state commonwealths should be treated for purposes of analysis under the Commerce
Clause. It is also unclear whether this credit would violate the Commerce Clause's provision
stating that the federal goverrmient has the power to "regulate trade with foreign Nations...".
U.S. Const., art. I, § 8, cl. 3.
1. G.S. 105-130.46, Credit for manufacturing cigarettes for exportation while
increasing employment and utilizing State Ports. This credit is vulnerable to attack under
the reasoning in the Cuno decision. This credit differs from the other credit for
manufacturing cigarettes for exportation in several key ways. First, this credit requires the
taxpayer to create 800 new jobs in North Carolina and to maintain those jobs for up to 12
years to take full advantage of the credit. Second, this credit requires the taxpayer to make
some use of the State Ports, although no percentage is specified. For these reasons, the
credit is vulnerable to attack under the reasoning in the Cuno decision because it favors
in-State economic activity over out-of-State economic activity and it requires a substantial
ongoing economic investment in this State. It is also unclear whether this credit would
violate the Commerce Clause's provision stating that the federal government has the power
to "regulate trade with foreign Nations. . .". U.S. Const., art. I, § 8, cl. 3.
m. Article 3G of Chapter 105, Tax Incentives for Major Computer
Manufacturing Facilities. This credit is vulnerable to attack under the reasoning in the Cuno
decision. The credit is similar to Ohio's investment tax credit in that it allows a credit for
business activities that occur in-State but not for identical activities that occur out-of-State.
As with the Ohio investment tax credit, "the economic effect ... is to encourage further
investment in-state at the expense of development in other states and ... the result is to
hinder free trade among the states." The credit raises additional concems because receipt of
the credit is conditioned on another independent factor that may violate the Commerce
'° In addition, questions have been raised as to whether this provision would violate
certain federal trade agreements such as NAFTA or GATT. The same issues arise
with respect to G.S. 105-130.46, discussed later in this memo.
Clause. The inherent problem with the credit is compounded by the fact that the credit also
requires the creation and maintenance of new jobs in this State. In effect, in order to be
eligible for these credits, the taxpayer must not only decide to invest in more property in this
State, but must also increase operations at those facilities. Additionally, the credit requires
an investment of at least $100 million in real and personal property in the State.
Bridgeport National
Bindery, Inc.
OCT. 2007
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