United States: North Carolina Legislature Enacts Omnibus Budget Over Governor's Veto

At a Glance...

 The North Carolina Legislature passed S.B. 99, an omnibus budget act, on June 12, 2018, overriding a previous veto by Governor Roy Cooper.  S.B. 99 modified the Current Operations Appropriations Act of 2017 and addressed an expansive array of tax items, and includes changes to North Carolina's individual and corporate income tax statutes, as well as changes to sales and use, excise, property, and estate and trust income taxes.1 Additionally, on June 26, 2018, North Carolina enacted S.B. 335, amending certain provisions of S.B. 99.

Implementing federal tax reform

The omnibus bill includes a number of corporate income tax provisions in response to federal changes in the Tax Cuts and Jobs Act ("TCJA").  S.B. 99 updates the North Carolina reference to the Internal Revenue Code ("IRC"), to define "Code" as the IRC as enacted as of February 9, 2018; thereby incorporating the income tax provisions of the TCJA.  

Importantly, however, S.B. 99 decouples North Carolina from several significant provisions of the TCJA.  Under S.B. 99, North Carolina has decoupled from the deferral of gain and exclusion of gain for assets invested in an Opportunity Fund under IRC §1400Z-2, the transition tax under IRC §965, the deduction associated with foreign derived intangible income ("FDII") under IRC §250, and the inclusion and deduction for global intangible low-taxed income ("GILTI") under IRC §951A and IRC §250.

With respect to the one-time transition/repatriation tax, North Carolina decouples from both the tax on deferred foreign income, as well as the reduced rate applicable to certain liquid and illiquid assets under IRC §965.  Under N.C. General Statute section 105-130.5 as revised by S.B. 99, taxpayers are required to add to federal taxable income the amount deducted under IRC §965(c).  North Carolina further requires taxpayers to deduct from federal taxable income any amount included in federal taxable income under IRC §965, thereby completely decoupling from the transition/repatriation tax.  

Although S.B. 99 does not expressly decouple from the 100% bonus depreciation provision in the TCJA, North Carolina already had enacted legislation that decoupled from all federal bonus depreciation allowed under IRC §168(k). For tax years beginning in 2010, North Carolina requires taxpayers to add back 85% of the amount deducted under IRC §168(k) or IRC §168(n) to federal taxable income, and permits taxpayers to deduct 20% of the add-back in each of the first five taxable years following the year of the add-back.  S.B. 99 does not address or update the North Carolina bonus depreciation modifications in effect prior to the TCJA.  Accordingly, North Carolina will continue to require the initial add-back of 85% of any bonus depreciation claimed for federal income tax purposes with deductions equal to 20% of the disallowed federal deduction allowed over the first five taxable years after the add-back.  Taxpayers that invest in property with a useful life longer than five years will still benefit from the interplay between the full expensing allowed for federal purposes and North Carolina's decoupling scheme.

North Carolina's bonus depreciation adjustment is somewhat unique in that North Carolina does not permit readjustment of the depreciated property's basis.  North Carolina therefore requires taxpayers to use the adjusted basis of the property as determined for federal income tax purposes (which would be zero under 100% bonus depreciation), even though the property continues to be depreciated over time for North Carolina income tax purposes.  North Carolina's method of decoupling from federal bonus depreciation could therefore result in the recognition of gain for North Carolina purposes upon disposition of bonus depreciation property in excess of the amount that the economics of the investment in the property would justify.

Notably, North Carolina has not decoupled from the federal interest expense limitations under IRC §163(j).   S.B. 99  does not address any of the ambiguities of how the business interest expense deduction under IRC §163(j) is to be computed for North Carolina return purposes; such as whether the deduction must be computed on a separate-company, rather than on a consolidated basis.

Sales factor sourcing

Under current law, North Carolina considers "other sales" to be in North Carolina if any of the following occur: (1) the receipts are from real or tangible personal property located in North Carolina (including receipts from incidental services sold as part of, or in connection with, the sale of tangible personal property in North Carolina); (2) the receipts are from intangible property to the extent the intangible property received within North Carolina; or, (3) the receipts are from services and the income producing activities are in North Carolina. 

The technical corrections to the budget under S.B. 335 retain the current law with respect to sourcing receipts from intangibles. The omnibus bill, prior to corrections, would have amended the sourcing of intangibles to be sourced to North Carolina if the intangible property were "used" in North Carolina. This would have been a departure from the prior standard of sourcing receipts from intangible property that are received from sources within North Carolina, and would have represented a market-based method for sourcing intangibles.  The correction enacted by S.B. 335 removes this market-based method from the provision for sourcing other receipts.  

The sourcing methodology for receipts from real and tangible property was revised by S.B. 99 to specifically provide that receipts from real or tangible personal property include receipts from incidental services sold as part of or in connection with the property.  Such incidental service language was not included in the prior version of N.C. General Statute section 105-130.4(l).  

The budget retains North Carolina's method of sourcing receipts from services based on the location of the taxpayer's income-producing activities.  S.B. 99 clarifies the term "income-producing activity" under section 105-130.4 to mean an activity directly performed by the taxpayer or its agents for the ultimate purpose of generating the sales of the service. The additional language further provides that receipts from services, where the income-producing activities are performed within and outside of North Carolina, are attributed to North Carolina in proportion to the ratio of the income-producing activities performed in North Carolina to the total income-producing activities performed everywhere. 

During an interview with Reed Smith, Secretary Ronald Penny was hopeful that market-based sourcing would be enacted in North Carolina for sales other than tangible personal property. Although S.B. 99 would have enacted market-based sourcing for intangibles, the technical corrections to the budget retained sourcing for intangibles under current law, such that market-based sourcing ultimately was not achieved through S.B. 99 for any type of receipt.2 

Rate changes

S.B. 99 included a decrease of the corporate tax rate from 3.0% to 2.5%, and the personal income tax rate from 5.499% to 5.25% effective for 2019.  

S.B. 75, effective June 28, 2018, will submit a ballot question to voters in the November 2018 general election that will determine whether the North Carolina Constitution will be amended to reduce the maximum corporate income tax rate from 10% to 7%.  Therefore, even if the rate reduction to 2.5% is not permanent, should voters pass the lowered constitutional cap, the corporate income tax rate would not exceed 7%.

Other business tax updates

S.B. 99 fulfilled its designation as an omnibus budget, making the following myriad changes to North Carolina business taxes:

  • General Statute section 105-228.4A was amended to provide that the tax on captive insurance companies does not apply to foreign captive insurance companies. 
  • The procedure for filing an amended return upon receipt of a federal determination was updated to require the filing of an income tax return reflecting each change or correction from the federal determination.  
  • Amended General Statute section 105-263 to add a new subsection, which grants a taxpayer an automatic extension to file North Carolina income and franchise tax returns when the taxpayer has been granted an automatic extension for federal income tax purposes.
  • Added General Statute section 105-241A, which provides guidance for filing returns electronically.

Sales tax updates

The bill also makes the following changes to North Carolina sales tax provisions:

  • Provides a sourcing principal specifically for renewals of licenses prewritten computer software.
  • Defines the term "property management contract".
  • Includes a specific exemption for security or monitoring services for real property.
  • Updated the permissible extension of time for filing sales and use returns to allow returns to be filed more than 30 days after the regular due date at the discretion of the Secretary.

Notably absent from the omnibus bill is anything addressing economic nexus in response to the recent Wayfair decision.  An economic nexus bill was proposed in North Carolina last year but did not pass. Secretary Penny said at the time that "that bill was one that our General Assembly felt passionate about, or at least some of the members did, because they want to position us to be ready to collect taxes once Quill is overturned." The Department of Revenue has indicated that it is reviewing the Supreme Court's decision and will be publishing additional information regarding the decision in the near future.

Footnotes

1 Notably, S.B. 99 is generally effective June 12, 2018, the date of enactment.  However, some provisions have specific effective dates, while there is a "catch-all" date of July 1, 2018 for those provisions not otherwise specified.   The tax updates, including the IRC conformity date update to February 9, 2018 as detailed below, for the most part, fall under the catch-all effective date.  This raises a couple of issues: (1) the IRC §965 repatriation tax was a tax year 2017 item for most taxpayers; thus, given the effective date, it seems North Caropna's changes decouple from IRC §965 would not apply to any taxpayers; and (2) for some other corporate income tax changes made by S.B. 99 (e.g., changes to the sales factor sourcing rules, and decouppng from GILTI/FDII treatment), an effective date of July 1, 2018 would result in two different tax treatments for taxpayers with fiscal year ends.

2 See Insight: Reed Smith's Relationships: Ronald Penny, Secretary of Revenue, N.C. Dep't of Revenue, BNA, (Mar. 14, 2018) available at https://www.bna.com/insight-reed-smiths-n57982089898/.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions