North Carolina enacts market-based sourcing, adopts marketplace facilitator rules, and more
North Carolina enacts market-based sourcing, adopts marketplace facilitator rules, and more
On November 8, 2019, the North Carolina Governor signed S.B. 557 into law. These new rules (i) enact market-based sourcing rules for corporation income tax purposes; (ii) make various changes to the allocation and apportionment of income for specific industries; (iii) add a sales and use tax requirement for marketplace facilitators; (iv) expand the definition for a holding company for franchise tax purposes; (v) increase the standard deduction for individual income tax purposes; and (vi) make other technical and minor corrections.
H.B. 399 was also signed into law on November 1, 2019, which allows an income tax deduction for amounts received as a JDIG, JMAC, or OneNC grant, among other changes.
The governor also vetoed S.B. 578, which would have lowered the franchise tax rate, and would have eliminated one of the three alternative franchise tax calculations.
Corporation Income and Franchise Tax
Market-Based Sourcing - Effective for taxable years beginning on or after January 1, 2020, North Carolina has adopted market-based sourcing rules for allocation and apportionment purposes. Specifically, S.B. 557 revised North Carolina corporate income tax law to provide that “receipts are in this State if the taxpayer's market for the receipts is in this State.” Unless an exception applies, a taxpayer’s market for receipts is in North Carolina if the following applies:
- In the case of sale, rental, lease, or license of real property, if and to the extent the property is located in the state.
- In the case of rental, lease, or license of tangible personal property, if and to the extent the property is located in the state.
- In the case of sale of tangible personal property, if and to the extent the property is received in the state by the purchaser.
- In the case of sale of a service, if and to the extent the service is delivered to a location in the state.
- In the case of intangible property that is rented, leased, or licensed, if and to the extent the property is used in the state. Intangible property utilized in marketing a good or service to a consumer is considered to be used in the state if that good or service is purchased by a consumer who is in the state.
- In the case of intangible property that is sold, if and to the extent the property is used in the state.
S.B. 557 includes a “throw-out” rule for the sales factor. If the market for a receipt cannot be determined, they must be reasonably approximated. In a case where a taxpayer cannot ascertain the state or states to which receipts are assigned using reasonable approximation, the receipts must be excluded from the denominator of a taxpayer’s sales factor.
For taxpayers with 2019 net loss balance, G.S. Section 105-130.4(t3) provides an election to apportion receipts from services based on the percentage of its income-producing activities performed in North Carolina. The election must be made on the 2020 tax year return and must be in the form prescribed by the Secretary of Revenue and contain any supporting documentation the Secretary of Revenue may require. The election is binding and irrevocable, until the existing net loss balance is fully utilized or has expired. Note that this election does not apply to franchise tax apportionment under G.S. Section 105-122(c1).
North Carolina’s S.B. 557 also specifically addresses market-based sourcing for wholesale content distributors and banks by adding the new Sections 105-130.4A and 105-130.4B. S.B. 557 also modifies sourcing for pipeline companies and adds specific rules for electric power companies.
Expansion of Definition of Holding Company – For North Carolina franchise tax purposes, S.B. 557 expands the definition of “holding company” to include corporations that own copyrights, patents, or trademarks that represent more than eighty percent of its total assets, or receives royalties and license fees that represent more than 80 percent of its gross income, and it is 100-percent directly owned by a corporation that meets all of the following conditions:
- Is a manufacturer, as defined by NAICS codes 31 through 33.
- Generates revenues in excess of five billion dollars for income tax purposes from goods that it manufactures.
- Includes in its net worth, as determined under G.S. Section 105-122(b), an investment in a subsidiary that owns copyrights, patents, or trademarks.
For companies that now meet the modified definition of a holding company, their franchise tax is effectively capped to $150,000. According to the Legislative Analysis Division, the purpose of the holding company cap is to prevent the taxation of assets that are included in the net worth of the subsidiary, and indirectly in the net worth of the parent company by virtue of its investment in the holding company.
The change to holding companies is effective for tax years beginning on or after January 1, 2020, and is applicable to the calculation of franchise tax reported on the 2019 and later corporate income tax returns.
Sales and Use Tax
Marketplace Facilitators – S.B. 557 amended North Carolina’s economic nexus provisions to apply to both remote sellers (which originally became effective on November 1, 2018) and marketplace facilitators. The economic nexus threshold is gross sales in excess of $100,000, or 200 or more separate transactions, in the previous or the current calendar year. When calculating whether it exceeds North Carolina’s economic nexus thresholds, the marketplace facilitator must include its own sales, as well as all marketplace-facilitated sales.
Effective for sales occurring on or after February 1, 2020, S.B. 557 requires “marketplace facilitators” who meet the economic nexus thresholds to collect and remit sales tax on all “marketplace-facilitated sales.” A marketplace-facilitated sale is the sale of an item by a marketplace facilitator on behalf of a marketplace seller that occurs through a marketplace.
Similar to many states with marketplace schemes, North Carolina defines a marketplace facilitator as a person that, directly or indirectly does both of the following:
- Lists or otherwise makes available for sale a marketplace seller's items through a marketplace owned or operated by the marketplace facilitator.
- Does one or more of the following:
- Collects the sales price or purchase price of a marketplace seller's items or otherwise processes payment.
- Makes payment processing services available to purchasers for the sale of a marketplace seller's items.
A marketplace facilitator is considered a “retailer.” As such, it is required to comply with the same registration requirements, along with collection and remittance requirements, as any other retailer in North Carolina. Marketplace facilitators also follow the same provisions for the refund of any sales tax that a retailer would follow.
Within 10 days after the end of each calendar month, S.B. 557 requires marketplace facilitators to provide a report to each marketplace seller that contains the gross sales and the number of separate transactions that were made on behalf of the marketplace seller and that were sourced to North Carolina.
Also similar to other marketplace states, North Carolina includes a liability relief provision. The marketplace facilitator may be relieved of liability if it can demonstrate that the failure to collect the correct amount of tax was due to incorrect information from the marketplace seller, and that the marketplace facilitator did not receive “specific written advise from the Secretary [of Revenue] for the transaction at issue.” The liability relief provision does not apply if the marketplace facilitator and marketplace seller are affiliates.
Throughout the country recently, one of the topics discussed has been the ability of marketplace facilitators and marketplace sellers to agree to shift collection responsibilities to marketplace sellers, particularly in telecommunications industry. Along those lines, North Carolina specifically included a provision indicating that nothing in S.B. 557 should be construed to interfere with the ability of a marketplace facilitator and a marketplace seller to enter into an agreement with each other regarding the fulfillment of North Carolina’s marketplace requirements. However, an agreement may not require a marketplace seller to collect and remit tax on marketplace-facilitated sales.
Allowing an Income Tax Deduction for Amounts Received as a JDIG, JMAC, or OneNC Grant – Effective for taxable years beginning on or after January 1, 2019, H.B. 399 has expanded the allowable deductions to federal taxable income to include amounts received by a taxpayer from specified North Carolina economic incentives. Specifically, amounts received from the following programs can be deducted in calculating state taxable income to the extent they were included in federal taxable income:
- Job Development Investment Grant (JDIG) – A performance-based, discretionary incentive program that provides cash grants directly to new and expanding companies to help offset the cost of locating or expanding.
- Grants under the Job Maintenance and Capital Development Fund under G.S. Section 143B-437.012 (JMAC) – A discretionary incentive program that requires at least a $200,000,000 investment in capital improvements within a six-year period.
- One North Carolina Grant (OneNC) – Discretionary cash-grant program for competitive job-creation projects. Awards are based on the number of jobs created, level of investment, location of the project, economic impact of the project and the importance of the project to the state and region.
As a consequence of the federal tax reform commonly known as the Tax Cuts and Jobs Act of 2017, amounts received by state economic incentives were being included in federal taxable income. This state modification now removes the income received from these North Carolina incentives from North Carolina’s state taxable income so that the incentives’ purpose is not contradicted.
- After many failed attempts since the phase-in of single sales factor apportionment, North Carolina has finally enacted market-based sourcing. This change makes a significant impact on companies who generate revenue via services and intangible property.
- Following the trend of other states, North Carolina becomes the latest state to apply sales and use taxes on marketplace facilitators. This legislation will have an effect on both marketplace facilitators and marketplace sellers who sell through the marketplace platforms.