United States: North Carolina Enacts Significant Income, Franchise And Sales Tax

On September 18, 2015, North Carolina Governor Pat McCrory approved legislation enacting significant changes to the taxation of corporations and individuals. Most of the tax legislation is contingent upon other legislation successfully becoming law. Changes to the North Carolina corporate income tax make it more likely that a tax rate cut from 4 percent to 3 percent will occur in the near future. In addition, changes to the calculation of state net income, new limitations on qualified interest for certain indebtedness, and the gradual implementation of a single sales factor apportionment formula have been adopted. Likewise, the calculation of the franchise tax base has changed. The bill also introduces a reduction in the overall individual income tax rate and the amount of the standard deduction. The sales tax base will expand to include new rules around repair, maintenance and installation services, along with major changes to the definition of retail trade. Finally, the legislation enacts a new article that provides for a tax credit for qualified expenses incurred to rehabilitate historic structures.1

Corporation Income Tax

Corporate Income Tax Rate Reduction

Previous versions of the North Carolina tax law concerning the level of the corporate income tax rate effectively connected the enacted rate to certain revenue targets of the North Carolina General Fund. 2 On July 28, 2015, the Office of the Governor notified the public that General Fund revenues had achieved the level necessary for the corporate income tax rate to be reduced from 5 percent to 4 percent, effective on January 1, 2016. 3 H.B. 97 codifies this change and also makes changes to the rate reduction trigger. When net General Fund tax collected in any fiscal year exceeds $20,975,000,000, the tax rate will decrease to 3 percent effective for the tax year beginning the following January. 4

Consistent with the procedure that resulted in the reduction of the corporation income tax from 5 percent to 4 percent, a rate reduction to 3 percent must be communicated to taxpayers by the Secretary of Revenue. Previously, the rate reduction trigger was only tied to the 2015 or 2016 fiscal years.

Changes to State Modifications

Effective January 1, 2016, changes have been made to the state addition and subtraction modifications used to arrive at state net income before apportionment. An addition modification is required for the amount of net interest expense to a related member. 5 Net interest expense is defined as "the excess of the interest paid or accrued by the taxpayer to a related member during the taxable year over the amount of interest from a related member includible in the gross income of the taxpayer for the taxable year." 6 However, a corresponding subtraction modification has been added for qualified interest expense paid to a related member. 7 The term "qualified interest expense" is defined as the "net interest expense paid or accrued to a related member in a taxable year not to exceed 30 percent of the taxpayer's adjusted taxable income." 8 The 30 percent limitation does not apply if at least one of the following exceptions is available:

  • The related member is subject to tax in North Carolina;
  • The related member pays a net income tax or gross receipts tax to another state on such interest income; or
  • The related member is organized in a foreign country that has a comprehensive income tax treaty with the United States, and that country taxes the income at the same or greater rate than the North Carolina rate; or
  • The related member is a bank. 9

Additionally, the following subtraction modifications have been eliminated:

  • Amortization in excess of depreciation allowed for sewage or waste treatment plants;
  • Depreciation of emergency facilities acquired prior to January 1, 1955;
  • Reasonable expenses in excess of deductions allowed for reforestation and cultivation of commercially grown trees;
  • Eligible income of an international banking facility;
  • Marketing assessments on tobacco grown in North Carolina;
  • Investment earnings of certain trusts;
  • Payments received from the Hurricane Floyd Reserve Fund; and
  • Payments received from the Disaster Relief Fund of the Office of State Budget and Management. 10

Certain provisions related to allowable expenses related to nontaxable dividends have been changed. 11 The new legislation clarifies that the amount that is disallowed for expenses associated with dividends that are not taxed cannot exceed 15 percent of the amount of the dividends while effectively eliminating certain higher allowed amounts for bank and electrical holding companies.

Elimination of Bank Privilege Tax

The bank privilege tax is repealed effective July 1, 2016. 12 This tax is imposed on banks operating in North Carolina at a rate of $30 for each $1,000,000 of total assets. The annual returns are due on July 1.

Phase-In of Single Sales Factor Apportionment

Historically, North Carolina has utilized an apportionment formula consisting of a property factor, a payroll factor, and a double-weighted sales factor. 13 The new legislation makes changes to the weighting of the apportionment formula, which will be phased in over a three-year period. Effective for tax years beginning in 2016, the sales factor will be triple-weighted. 14 For tax years beginning in 2017, the sales factor will be quadrupleweighted. 15 Effective for tax years beginning on or after January 1, 2018, North Carolina will utilize a single sales factor. 16

Market-Based Sourcing Disclosure Requirement

Initial versions of H.B. 97 reflected the proposed enactment of market-based sourcing for sourcing certain service and intangible revenue, in place of the current pro rata cost of performance regime. With the economic impact of such a change uncertain, the enacted version of H.B. 97 includes a provision to perform an economic study on the effects of making such a change. 17 Taxpayers that have more than $10,000,000 of apportionable income and an apportionment factor of less than 100 percent will need to disclose certain information based upon 2014 tax year activity. 18 This information is required to be filed on the date that the 2015 corporation income tax return is originally due, without regard to extensions. 19 Specifically, a taxpayer will be required to report what its sales factor would have been if it had been required to calculate its sales factor using market sourcing based upon model market sourcing principles and regulations drafted by the Multistate Tax Commission. 20 It is important to note that taxpayers that fail to provide this report when due are subject to a civil penalty of $5,000. 21

Franchise Tax Base Changes

Effective for tax years required to be filed on or after January 1, 2017 (the 2016 year report), substantial changes will be made to the calculation of franchise tax due for most taxpayers. Instead of referencing "issued and outstanding capital stock, surplus and undivided profits" to describe the tax base applicable to Schedule C of the corporate tax return, the new law references "net worth." 22 Net worth is defined as total assets less total liabilities, without regard to accumulated depreciation, depletion, or amortization (in accordance with generally accepted accounting principles (GAAP)), as adjusted by several modifications. 23 The following changes to the adjustments allowed to the franchise tax base have also been enacted:

  • A deduction for accumulated depreciation, depletion and amortization in accordance with the method used for federal income tax purposes; 24
  • The adjustment for billings in excess of cost (which were considered deferred liabilities) has been eliminated; 25
  • The addition modification for affiliated indebtedness has been clarified, so that the addback is required if the indebtedness exists between corporate and noncorporate entities;26 and
  • The language allowing a deduction for "definite and accrued legal liabilities" has been removed. 27

The North Carolina franchise tax rate will remain at $1.50 per $1,000 of taxable value. 28 However, the minimum tax that applies to all taxpayers has been increased from $35 to $200. 29 Additionally, the maximum franchise tax applicable to holding companies has been increased from $75,000 to $150,000. 30

Individual Income Tax Reductions

Effective for tax years beginning on or after January 1, 2016, the North Carolina standard deduction amount has been increased from $15,000 to $15,500 for taxpayers with married filing jointly/surviving spouse filing status, from $12,000 to $12,400 for heads of household and from $7,500 to $7,750 for single and married filing separately taxpayers. 31 Also, effective for years beginning on or after January 1, 2015, medical and dental expenses allowed as a deduction for federal income tax purposes are allowed for North Carolina purposes without the overall limitation on itemized deductions as provided under the Internal Revenue Code. 32 Finally, effective for tax years beginning on or after January 1, 2017, the tax rate for individuals will be lowered from 5.75 percent to 5.499 percent. 33

Expanded Sales Tax Base

The new legislation clarifies the definition of a real property contractor to exclude any person engaged in retail trade. 34 The definitions section of the sales tax statutes has also been amended to add the definition of repair, maintenance and installation services, which include keeping tangible personal property or a motor vehicle in proper working order, as well as associated calibration, restoration, troubleshooting and installation activities (except for installation or application of tangible personal property by a real property contractor pursuant to a real property contract). 35

The new legislation also clarifies that the general sales tax rate of 4.75 percent applies to gross receipts derived from repair, maintenance, and installation services. 36 Additionally, it eliminates the exception from tax for gross receipts derived from a service contract for tangible personal property sold at retail that is or will become a part of real property. 37 The definition of a retailer has also been amended to exclude any person that solely operates as a real property contractor or a person whose only business activity is providing repair, maintenance, and installation services where the person's activities do not meet the definition of a retail trade. 38 Further, the newly enacted definition of retail trade means a trade in which the majority of revenue is from retailing tangible personal property, digital property, or services to consumers. The term specifically includes North American Industry Classification System (NAICS) sectors 44 and 45, buying goods for resale, and rendering services incidental to the sale of merchandise. 39

The sales tax provisions become effective March 1, 2016 and apply to sales occurring on or after that date and to gross receipts derived from repair, maintenance and installation services provided on or after that date. 40

Historic Preservation Tax Credit

The legislation creates Article 3L, which provides for a tax credit for expenses incurred for rehabilitating historic structures and applies to expenses incurred on or after January 1, 2016. 41 The new law provides for a credit of 15 percent (10 percent for expenses over $10,000,000 for income-producing structures) of expenses, with different qualifying criteria and application structures depending upon whether such structures produce income. 42 Development tier and target investment bonuses of 5 percent each may also apply if eligibility requirements are met. 43 The credit is allowed against corporate franchise tax, income tax or the gross premiums tax, but the taxpayer must make an election against which tax it chooses to utilize. 44 It is important to note that this credit can be utilized against 100 percent of the taxpayer's chosen liability, after all other tax credits for which the taxpayer is eligible have been applied, with the ability to carry over the unused portion of the credit for up to nine succeeding years. 45 Article 3L will expire for qualified expenditures incurred on or after January 1, 2020. 46


These changes begin to bring an end to one of the lengthiest legislative sessions in recent North Carolina history. Two other bills, H.B. 117 and H.B. 943, must also become law before January 1, 2016 for most of the tax law changes contained in the "budget bill" (H.B. 97) to become law. 47 These bills contain various incentive changes and a state bond offering. Both bills are widely expected to be signed as part of an overall budget compromise that permitted the budget bill to become law, which allowed the state to begin operating under the new budget, rather than via continuing resolutions. The Governor has been presented H.B. 117 which significantly expands the ability of the state to offer incentives to large relocation projects. The legislation expands the Job Development Incentive Grant and the North Carolina One Fund for specified "high yield" projects. The state has lost a number of high-profile automotive and high-tech competitive relocation efforts in recent years. In addition, the bill includes sales tax exemptions for airlines and data centers. H.B. 943 also has been presented to the Governor for signature.

The proposed reduction to the corporation income tax rate "when" (not "if") a revenue target is met, and the implementation of personal income tax relief in targeted areas reflects the state's continuing desire to de-emphasize income taxes as a significant source of revenue to the state. The eventual adoption of a single sales factor formula, and the modernization of some aspects of the franchise tax calculation are reflective of trends seen around the country.

The failure to switch to market-based sourcing for sales of items other than tangible personal property is viewed by many as a disappointment, particularly for those taxpayers that would benefit from a lower North Carolina apportionment factor under such a regime. The informational disclosure requirement with respect to a potential change in the sales factor sourcing rules calls to mind the recent efforts by the state of Maryland in gathering information in an attempt to determine whether combined reporting would be beneficial to the state.48 Disclosure efforts in this area have been critiqued as burdensome to corporations, and often do not provide valuable information with respect to effects on revenue. This informational disclosure requirement may be problematic from an accuracy perspective because the information is only being requested for one tax year from a subset of taxpayers. Sales amounts are closely tied to the general economic environment, which change substantially from year to year. Further, due to the North Carolina legislature's history of considering major tax reform primarily in non-election years, it may be 2017 before the issue of market-based sourcing is again addressed.


1 H.B. 97, Laws 2015.

2 N. C. GEN. STAT. § 105-130.3C.

3 SL No. 2013-316. For further discussion of this rate reduction, see GT SALT Alert: North Carolina Lowers Corporate Income Tax Rate, Now the Lowest Top Corporate Rate in the United States.

4 N. C. GEN. STAT. § 105-130.3C(a).

5 N. C. GEN. STAT. § 105-130.5(a)(25).

6 N. C. GEN. STAT. § 105-130.7B(b)(3).

7 N. C. GEN. STAT. § 105-130.5(b)(28).

8 N. C. GEN. STAT. § 105-130.7B(b)(4).

9 N. C. GEN. STAT. § 105-130.7B(b)(4).a-d.

10 N. C. GEN. STAT. § 105-130.5(b)(6), (7), (12), (13), (15), (18), (19), (22) (repealed).

11 N. C. GEN. STAT. §§ 105-130.6A; 105-130.5(c)(5) (repealed); N. C. GEN. STAT. § 105-130.5(b)(3a), (c)(3).

12 N. C. GEN. STAT. § 105-102.3 (repealed).

13 N. C. GEN. STAT. § 105-130.4(i).

14 Id.

15 Id.

16 Id.

17 H.B. 97, § 32.14A.

18 H.B. 97, § 32.14A(a), (b).

19 H.B. 97, § 32.14A(e) (referencing N. C. GEN. STAT. § 105-130.17(b)). Note that the 2015 corporation income tax return itself can be extended. The restriction on extension only applies to the disclosure requirement.

20 H.B. 97, § 32.14A(b), (c).

21 H.B. 97, § 32.14A(e)

22 See generally N. C. GEN. STAT. §§ 105-120.2; 105-122.

23 N. C. GEN. STAT. § 105-122(b). To the extent a corporation does not use GAAP, net worth is computed using the federal income tax calculation used by the taxpayer as long as the method fairly reflects the corporation's net worth for purposes of the franchise tax.

24 N. C. GEN. STAT. § 105-122(b)(1).

25 N. C. GEN. STAT. § 105-122(b)(1a) (repealed).

26 N. C. GEN. STAT. § 105-122(b)(2).

27 N. C. GEN. STAT. § 105-122(b)(1).

28 N. C. GEN. STAT. § 105-122(d).

29 Id.

30 N. C. GEN. STAT. § 105-120.2(b)(1).

31 N. C. GEN. STAT. § 105-153.5(a)(1).

32 N. C. GEN. STAT. § 105-153.5(a)(2).c.

33 N. C. GEN. STAT. § 105-153.7(a).

34 N. C. GEN. STAT. § 105-164.3(33a)

35 N. C. GEN. STAT. § 105-164.3(33d).

36 N. C. GEN. STAT. § 105-164.4(a)(15).

37 N. C. GEN. STAT. § 105-164.4I(c).

38 N. C. GEN. STAT. § 105-164.3(35)(b).

39 N. C. GEN. STAT. § 105-164.3(35b).

40 H.B. 97, § 32.18.(h).

41 N. C. GEN. STAT. §§ 105-129.100 et seq.

42 N. C. GEN. STAT. §§ 105-129.100; 105-129.101.

43 N. C. GEN. STAT. § 105-129.100(a)(2), (3).

44 N. C. GEN. STAT. § 105-129.103(a). It should be noted that a pass-through entity can qualify for the credit as long as certain basis requirements are met. N. C. GEN. STAT. § 105-129.100(b).

45 N. C. GEN. STAT. § 105-129.103(c).

46 N. C. GEN. STAT. § 105-129.105.

47 H.B. 97, § 32.21A.

48 Despite the disclosure study (encompassing the 2006-2010 tax years) showing some level of financial benefit to the state under combined reporting, Maryland has not adopted combined reporting to date.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.