On November 8, 2019, North Carolina Governor Roy Cooper signed Senate Bill 557 (Bill), which includes provisions affecting various taxes. The key changes to North Carolina's tax laws made by the law include the adoption of market-based sourcing rules for apportionment purposes, the enactment of marketplace facilitator provisions for purposes of the state's sales and use tax, the expansion of the definition of a holding company under the state's corporate income tax, and the increase to the state's personal income tax standard deduction.

On the same day, the Governor vetoed Senate Bill 578, which included provisions that would have reduced the rate of, and make other changes to, North Carolina's franchise tax.

Corporate income tax

For purposes of determining the sales factor, gross receipts from sales of tangible personal property are currently sourced to North Carolina if the property is delivered or shipped to a purchaser within North Carolina. Gross receipts from the sale of intangible personal property, however, are attributed to North Carolina if they are received from sources within North Carolina. Gross receipts from the sale of services (including the sale of electricity) are attributed to North Carolina based on whether the location of the income-producing activity is in North Carolina. Generally, the Bill amends N.C.G.S. Section 105-130.4 and enacts market-based sourcing for all gross receipts effective for tax returns filed for the 2020 tax year.¹ Under the Bill, all apportionable income for an electric power company is apportioned based on the average value of real and tangible property owned or rented and used in North Carolina.² The Bill also includes specific market-based sourcing rules for wholesale distributors, banks, and pipeline companies.³

The Bill includes a provision to allow a taxpayer with a North Carolina net loss balance as of the end of the 2019 tax year to elect on its 2020 return to apportion the gross receipts from the sale of services based on its income-producing activities performed in North Carolina (as under prior law).⁴

The General Assembly previously directed the North Carolina Department of Revenue to adopt and submit rules regarding the implementation and administration of market-based sourcing to the Rules Review Commission. The Bill directs that these rules be entered into the North Carolina Administrative Code and that the rules be applied to returns filed for tax years beginning on or after January 1, 2020.⁵

Sales and use tax

The Bill requires marketplace facilitators to collect and remit sales tax if either the sales sourced to North Carolina for the previous or current calendar year exceed $100,000, or there are 200 or more separate transactions.⁶ This requirement applies to sales occurring on or after February 1, 2020.

North Carolina holding company — definition for franchise tax purposes

Under current North Carolina law, a "holding company" is defined as any corporation that satisfies at least one of the following conditions: (1) it has no assets other than ownership interests in corporations in which it owns, directly or indirectly, more than 50% of the outstanding voting stock or voting capital interests; or (2) it receives during its tax year more than 80% of its gross income from other corporations in which it owns directly or indirectly more than 50% of the outstanding voting stock, voting capital interests, or ownership interests.⁷ A holding company is subject to an overall cap on the total amount of the franchise tax that can be imposed that is not available to other corporations subject to the tax.⁸

The Bill adds another alternative condition to the definition found in N.C.G.S. Section 105-120.2(c). Effective on or after January 1, 2020, a corporation is a holding company if it satisfies one of the two previous conditions, or (3) the value of certain intangible assets (i.e., copyrights, patents, or trademarks) is more than 80% of its total assets or its income from these intangibles is more than 80% of its gross income. To qualify as a holding company under this third condition, the corporation must (i) be 100% owned by a manufacturer with over $5 billion in revenues from the goods it manufactures; and (ii) have a net worth that includes in its investments a subsidiary that owns these types of intangibles.⁹

Personal income tax

The Bill amends N.C.G.S. Section 105-153.5(a)(1) to increase the North Carolina income tax standard deduction amount for all taxpayer filing statuses. The deductions are increased as follows:

• Married, filing jointly/surviving spouse               $21,500
• Head of household                                                  $16,125
• Single or married, filing separately                      $10,750

This change is effective for tax years beginning on or after January 1, 2020.¹⁰

Implications

Taxpayers should consult with their tax advisors and preparers regarding how the Bill and compliance with reporting requirements will affect past or future transactions.

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ENDNOTES

¹ Bill, Sections 3.(a) and (g).

² Id., Section 3.(a).

³ Id., Sections 3.(a), (b) and (c).

⁴ Id., Section 3.(a).

⁵ Id., Section 3.(f).

⁶ Id., Section 4.(c).

⁷ N.C.G.S. §105-120.2.

⁸ See id. §105-120.2(b).

⁹ Bill, Section 2.(a).

¹⁰ Id., Section 1.(a).