United States

North Carolina budget enacts changes to state income and sales taxes

TAX ALERT  | 

On July 14, 2016, North Carolina Gov. Pat McCrory signed House Bill 1030, enacting changes to the state corporate income tax, individual income tax, and sales and use tax.

Notably, for business taxpayers, the legislation writes proposed amendments to the apportionment and allocation statute to adopt a market-sourcing approach for sourcing sales other than sales of tangible personal property. The legislation does not enact changes to sales factor apportionment, but it does require the Department of Revenue to publish proposed rules on market based sourcing by Jan. 20, 2017, as if the proposed changes to the apportionment statute had been enacted. The proposed rules do not become effective until the General Assembly takes further action. Under the proposed changes to the statute, sales of services are included in the North Carolina sales factor numerator if and to the extent the services are delivered to a location in the state. The current law requires sales from services to be included in the sales factor numerator if the income producing activities are in North Carolina. There are similar proposed changes to the apportionment statute for banks. These proposed changes would adopt market-based sourcing principles for interest on loans, credit card fees and other similar types of receipts.

Other changes to the tax code include:

  • For individual income tax, an increase in the standard deductions for all types of filers, ranging from $500 to $1,000, effective for tax years beginning on or after Jan. 1, 2016.  There are similar increases scheduled to become effective for tax years beginning on or after Jan. 1, 2017.
  • The addition of more types of machinery eligible for the 1 percent or $80 maximum mill machinery rate, such as machinery used in waterborne ports, mining companies and metal fabrication companies, along with the corresponding sales tax exemption for such types of machinery.
  • The clarification on the types of repair, maintenance and installation services subject to sales tax to include these types of activities related to tangible personal property, motor vehicles, digital property and real property.
  • Additional exemptions for services subject to sales tax, such as self-service car washes, moving services, landscaping services and pest control services.

Takeaways

The proposed changes to North Carolina sales factor apportionment closely resemble the model regulation on market sourcing put forth by the Multistate Tax Commission in December 2015. However, the proposed changes are silent on many of the details, such as how to determine the extent a service is delivered to a location in North Carolina. These details must be further explained by the Department of Revenue in the proposed rules that it must publish by Jan. 20, 2017. Taxpayers with physical locations in North Carolina, as well as those who do business with North Carolina customers remotely, should review the proposed rules when published to determine how they will impact their future tax liabilities in the state. Taxpayers who purchase machinery and equipment in the state, or who purchase or provide repair, maintenance or installation services should review the enacted changes to determine the impact on their sales and use tax liabilities and collection responsibilities.

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