United States

North Carolina General Assembly overrides veto of two-year budget bill

INSIGHT ARTICLE  | 

The North Carolina General Assembly passed a $23 billion budget bill for the 2017-2018 and 2018-2019 fiscal years over the veto of Gov. Roy Cooper. The North Carolina House undertook the final vote to override the veto on June 28 after the senate had voted to do so the day prior.  Senate Bill 257, now Session Law 2017-57, went into effect on July 1, 2017. The bill includes several taxation and revenue law changes that have multiple effective dates.

It was reported that the governor based his decision to veto the bill, in part, due to the reductions in the corporate income tax rate and the subsequent loss in revenue that could have been used for other purposes. The bill immediately lowers the rate of tax for C corporations from the current 4 percent rate to 3 percent in tax years beginning on or after Jan. 1, 2017. Effective for tax years beginning on or after Jan. 1, 2019, the tax rate would drop another half of a percent to 2.5 percent.

The budget bill also lowers the personal income tax rate from the current 5.499 percent to 5.25 percent, effective for tax years beginning on or after Jan. 1, 2019. The standard deduction would also increase for tax years beginning on or after Jan. 1, 2019.  Single taxpayers and those that are married filing separately would see an increase of $1,250 in their standard deduction, to $10,000. Married taxpayers filing jointly would receive a $2,500 increase to $20,000 while those filing as head of household would see their standard deduction increase by $1,000, to $15,000.  Meanwhile, the bill would repeal the child tax credit effective in tax years beginning on or after Jan. 1, 2018 and replace it with a corresponding deduction.  The deduction would total $2,500 for those making up to $40,000 and then begin to phase out as personal income increases. The child tax deduction would phase out completely for those making in excess of $120,000.

Other important tax changes included in the 2017-2018 budget include:

  • A change in the franchise tax for S Corporations. S corporations would pay a flat rate of $200 on the first $1 million of franchise tax base.  The franchise tax would be applied at the rate of $1.50 per $1,000 of its franchise tax base that exceeds $1 million. This change is effective for tax years beginning on or after Jan. 1, 2019 for the franchise tax paid on the 2018 income tax filings.
  • A repeal of the privilege tax on mill machinery effective July 1, 2018. Previously, sales of “mill machinery” used in manufacturing and certain industrial processing activities have been exempt from sales and use taxes but subject to a privilege tax of 1 percent, up to a maximum of $80 per item. The budget bill would repeal the privilege tax and reaffirm “mill machinery” as exempt from sales and use tax. The bill will also commission a study of the current regulations and guidance of the North Carolina Department of Revenue as to what should be classified as “mill machinery” and which activities should be exempt manufacturing or industrial processes, per the intent of the statute. The statute, as amended by the budget bill, expressly includes exemptions of the following:
    • Sale of mill machinery, parts, or accessories to a manufacturing industry or plant or a contractor or subcontractor performing a contract in such a location;
    • Sales of cranes and their support systems, port and dock facilities, rail equipment, and material handling equipment to recycling facilities;
    • Sales of capitalized equipment and parts sold to a company primarily engaged in research and development of tangible personal property, software, engineering, life sciences or industrial machinery refurbishment;
    • Sales of machinery, equipment, and parts used to facilitate unloading or processing of bulk cargo at a location in a ports facility in order to deliver the cargo to manufacturing facilities;
    • Sales of machinery, equipment, and parts to metals extractors and metal fabricators;
    • Sales of ready-mix concrete mills, their repair, and any replacement parts.
       
  • A sales and use tax exemption for sales of equipment, accessories and parts, and their repairs for items sold to an applicable “large fulfillment facility” effective July 1, 2017. A “large fulfillment facility” requires a $100 million investment over five years in a facility that is primarily used for receiving, inventorying, sorting, repackaging, and distributing retail products for fulfillment of customer orders.
  • A sales tax refund for owners of a qualifying “transformative project” (as defined in N.C.G.S. section 143B-437.51(9a)) receiving a grant under the North Carolina Job Development Investment Grant Program. This provision becomes effective July 1, 2017.

Takeaways

It has been reported that the governor based his decision to veto the bill, in part, due to the reductions in the corporate income tax rate. The governor argued that these reductions in the corporate income tax rate resulted in revenue reductions that could have been used for other purposes, namely education and infrastructure. House Speaker Tim Moore and Senate Leader Phil Berger countered that the tax cuts help the middle class. 

Notably, the budget bill did not contain provisions implementing market-based sourcing of sales revenues. Just one year ago, the general assembly passed legislation that required the department to submit a proposal regarding the implementation and administration of a market-based sourcing methodology no later than Jan. 20, 2017.

A week prior to the passage of the budget bill, the general assembly passed, and the governor signed, a revenue laws technical changes bill, now Session Law 2017-39. That bill updated North Carolina’s statutory conformity date with the Internal Revenue Code as enacted as of Jan. 1, 2017 and the Streamlined Sales and Use Tax Agreement as amended as of Dec. 16, 2016.  Other technical changes were made to the text of a wide range of revenue statutes but are expected to have only minor impact on taxpayers.

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