Have there been any notable recent developments concerning state and local taxation in your state, including any regulatory changes or case law?
In response to South Dakota v. Wayfair, the North Carolina Department of Revenue issued a directive stating it would begin enforcing existing law and would require remote sellers to collect and remit sales and use tax beginning November 1, 2018 if they had gross sales in excess of $100,000 or 200 or more separate transactions sourced to the state on an annual basis (North Carolina Department of Revenue SD-18-6).
In addition, the question of when North Carolina may constitutionally impose an income tax on a trust is currently pending before the U.S. Supreme Court. The court will decide whether a state may, consistent with due process, impose a tax on the undistributed income of a trust based on the residence of a beneficiary in the state (North Carolina Department of Revenue v. The Kimberley Rice 1992 Family Trust).
What primary and secondary legislation governs the collection and remittance of taxes in your state?
The Revenue Act, contained in Subchapter I of Chapter 105 of the North Carolina General Statutes, governs most state taxation. One exception is the unemployment insurance tax, which is contained in Chapter 96 and administered by the Division of Employment Security within the Department of Commerce. The Machinery Act, Subchapter II of Chapter 105, governs property taxation in North Carolina. Subchapter VIII governs local sales and use taxes, but is coordinated with Article 5 of Subchapter I, the North Carolina Sales and Use Tax Act.
What government authorities (at both state and local level) are charged with the collection and administration of taxes, and what are the extent of their powers?
The North Carolina Department of Revenue is charged with the responsibility of collecting the state’s tax revenue and administering the state’s revenue laws. Local governments lack authority to impose a tax absent authorization from the North Carolina General Assembly. The General Assembly has authorized local governments to impose property taxes, which are collected and administered by local taxing units. The department is charged with the duty of exercising general and specific supervision over the valuation and taxation of property throughout the state. The General Assembly has also authorized cities and counties to impose local sales and use taxes, which are collected and administered by the department.
How would you describe the balance between taxes collected at state and local level?
Most taxes are collected at the state level, including local sales and use taxes. The major exception is property taxes, which are collected at the local level.
Tax year and filing deadlines
What is the prescribed tax year in your state and what filing deadlines apply?
For the individual income tax, corporate income tax and corporate franchise tax, the tax year is the same as the taxpayer’s tax year for federal purposes. The filing deadline is the 15th day of the fourth month following the close of the tax year.
For sales tax, the filing period is either monthly or quarterly, depending on the amount of tax liability. Monthly returns are due by the 20th day following the month covered by the return, and quarterly returns are due by the last day of the month following the end of the quarter.
How competitive is your state in terms of taxation in relation to other states? What is the government’s general policy and approach to taxation?
North Carolina currently has the lowest corporate income tax rate in the nation, among the states that impose a corporate income tax. North Carolina has adopted the single sales apportionment factor to apportion the corporate income and franchise tax base. In addition, the property tax is generally regarded as relatively low in comparison to other states. The Tax Foundation’s 2019 Business Climate Index ranks North Carolina 12th best overall and third best for corporate tax.
Corporate income and franchise taxes
How is taxable income determined in your state? To what extent is the state income tax base aligned with the federal income tax base?
The North Carolina corporate income tax is imposed on “state net income,” which is the taxpayer’s federal taxable income determined under the Internal Revenue Code, adjusted for statutory additions and deductions and, for multistate corporations, allocated and apportioned. North Carolina does not allow consolidated returns (unless authorized by the secretary of revenue) and corporations must file on a separate entity basis.
How is in-state income apportioned for multi-state businesses? Does your state regulate transfer pricing?
Most corporations apportion their income by the single sales factor. Exceptions include:
- railroad companies;
- telephone companies;
- motor carriers; and
- air and water transportation corporations, which have special formulas.
A corporation may request the use of an alternative apportionment formula if it believes the statutory formula subjects a greater portion of its income to tax than is attributable to its business in the state.
North Carolina regulates transfer pricing. If the secretary of revenue finds that a corporation’s intercompany transactions lack economic substance or are not at fair market value, the secretary may redetermine the corporation’s state net income by adjusting intercompany transactions or, if those adjustments are not adequate, by requiring a combined return of all members of the affiliated group that are conducting a unitary business.
How is nexus determined for corporate income tax purposes?
North Carolina imposes a corporate income tax on all C corporations doing business in the state. The term “doing business” is defined broadly by regulation as the operation of any activity for economic gain. The regulation further provides that corporations that are partners in partnerships or joint ventures operating in North Carolina are considered to be doing business in the state.
Is affiliate nexus recognized in your state? If so, to what extent? Has there been any notable case law in this area?
North Carolina has no specific statutory provision regarding affiliate nexus for corporate income tax purposes. The Department of Revenue interprets doing business broadly and views an agency relationship or ownership interest in a partnership, joint venture, or limited liability company operating in North Carolina as sufficient to create nexus.
What are the applicable corporate income tax rates?
For taxable years beginning on or after January 1, 2019, the corporate income tax rate is 2.5%.
Exemptions, deductions and credits
What exemptions, deductions, and credits are available?
There are several exemptions from the corporate income tax, including organizations exempt from federal income tax under the Internal Revenue Code and insurance companies paying the gross premiums tax.
Additions and deductions to federal taxable income are required to compute state net income. Deductions include interest from obligation of the United States and dividends treated as received from sources outside the United States, net of related expenses, to the extent included in federal taxable income. Several of the deductions relate to decoupling provisions and have related additions.
Many of the tax credits available to corporations have been repealed or expired. One exception is the tax credits for historic rehabilitation, which may be claimed against the corporate income tax. A taxpayer that qualified for a tax credit which has expired or sunset may continue to take any remaining installments or carryovers, assuming the statutory requirements are met.
What filing requirements and procedures apply? Are there special filing requirements for groups of company?
Every corporation doing business in the state must file a return. Consolidated returns are not permitted except as directed or allowed by the secretary of revenue. Any corporation filing a consolidated return for federal purposes must determine its state net income as if a separate federal return had been filed.
Corporate franchise tax If your state imposes a corporate franchise tax, please stipulate:
(a) The applicable tax base.
The franchise tax is imposed on the greatest of:
- the apportioned net worth base;
- 55% of the appraised value for property tax purposes of all the corporation’s real and tangible personal property in the state; or
- the total actual investment in tangible property in the state.
Net worth is defined as the corporation’s total assets without regard to the deduction for accumulated depreciation, depletion, or amortization less total liabilities, computed in accordance with generally accepted accounting principles or the method of accounting the corporation uses for federal income tax purposes. The net worth calculation is then subject to several statutory adjustments. The net worth base is apportioned by the same apportionment formula that the corporation uses for corporate income tax purposes.
(b) Tax rates.
The tax rate is $1.50 for each $1,000 of the corporation’s tax base, subject to a minimum tax of $200.
(c) Any exemptions or deductions.
There are several exemptions from the franchise tax, including organizations exempt from federal income tax under the Internal Revenue Code and insurance companies paying the gross premiums tax.
There is a deduction from the net worth base for accumulated depreciation, depletion, and amortization as determined in accordance with the method used for federal tax purposes. In addition, a creditor corporation may deduct the amount of indebtedness owed to it by an affiliate to the extent the indebtedness was added to the net worth base by the debtor corporation.
(d) Filing formalities.
The franchise tax is reported on the same form as the corporate income tax.
Does your state impose a corporate franchise tax? If so, is it imposed in lieu of or in addition to corporate income tax?
Yes. It is imposed in addition to the corporate income tax.
Personal income taxes
How is taxable personal income determined in your state?
For residents, “North Carolina taxable income” is the taxpayer’s adjusted gross income determined under the Internal Revenue Code, adjusted for statutory additions and deductions. Among the adjustments are an election to deduct either a North Carolina standard deduction amount or a North Carolina itemized deduction amount. For 2019, the standard deduction amount for married taxpayers filing jointly is $20,000. The itemized deduction includes:
- a charitable contribution component;
- a mortgage expense and property tax component (which is limited); and
- a medical and dental expense component.
For non-residents, the taxpayer’s “North Carolina taxable income” is computed in the same manner and then multiplied by a fraction—the denominator of which is total modified gross income and the numerator of which is the amount derived from North Carolina sources and attributable to the ownership of any interest in real or tangible personal property in the state, derived from a trade or business conducted in the state or derived from gambling activities in the state.
Part-year residents compute their North Carolina taxable income similar to non-residents, except the numerator includes all modified gross income derived from all sources while the individual was a resident of the state.
Under what circumstances is an individual deemed resident in your state for personal income tax purposes?
A “resident” is defined as anyone who is domiciled in the state at any time during the taxable year or who resides in the state for other than a temporary or transitory purpose. An individual who is present in the state for more than 183 days during the taxable year is presumed to be a resident. A resident who moves from the state is considered a resident until they have both established a definite domicile elsewhere and abandoned any domicile in North Carolina.
What are the applicable personal income tax rates?
For taxable years beginning on or after January 1, 2019, the tax rate is 5.25%.
Exemptions, deductions and credits
What exemptions, deductions, and credits are available?
The adjustments to federal adjusted gross income include several deductions, including a deduction for taxpayers that are allowed a federal child tax credit under the Internal Revenue Code.
Individuals are allowed a credit for taxes paid to other states or counties, subject to statutory limitations.
What filing requirements and procedures apply?
Every resident that has gross income under the Internal Revenue Code that exceeds the North Carolina standard deduction amount must file a return.
Non-residents that meet this standard must file if they also have North Carolina source income.
Returns are due on or before April 15 for calendar-year taxpayers and by the 15th day of the fourth month following the close of the fiscal year for other taxpayers.
For taxable years beginning on or after January 1, 2019, taxpayers that are granted an automatic extension of time to file a federal income tax return are granted an automatic extension to file the North Carolina return. The taxpayer must certify on the state return that they were granted a federal extension.
What obligations are imposed on the employer in relation to the collection and remittance of state personal income taxes (eg, withholding)?
Employers are required to deduct and withhold from the wages paid to employees the state income taxes payable by the employee on the wages. Employers must file returns and pay taxes either quarterly, monthly, or semi-weekly, depending on the amount of withholding. Withholding agents who fail to withhold or pay are liable for the taxes and subject to penalties.
Sales and use taxes
What goods are subject to sales and use tax in your state (at both state and local level)?
North Carolina imposes a sales tax on retail sales of tangible personal property and specifically enumerated digital property and services.
What is the state sales tax rate?
The general rate is 4.75%.
What is the range of local sales tax rates levied in your state?
The local rates range from 2% to 2.75%.
What goods are exempt from sales and use tax?
There are numerous statutory exemptions from the sales and use tax. In addition, there are several partial exemptions. For example, food (except for prepared food and other specifically enumerated items) is taxable at a reduced rate of 2%.
Are any services taxed?
Yes, specifically enumerated services are taxed. Taxable services include service contracts and repair, maintenance, and installation services to tangible personal property and real property. Taxable services also include:
- the lease or rental of tangible personal property;
- the rental of an accommodation;
- dry cleaning;
- telecommunications services;
- prepared telephone calling services;
- video programming;
- satellite digital audio radio;
- admission charges; and
- prepaid meal plans.
What filing requirements and procedures apply?
Sales and use tax returns are due either monthly or quarterly, depending on the amount of tax liability. Monthly returns are due by the 20th day of the month following the month of the return. Quarterly returns are due by the last day of the month following the end of the quarter. State and local taxes are reported on the same return.
How is the value of property assessed for tax purposes in your state? Which types of property are subject to tax?
Cities and counties do not possess the authority to levy a tax except as authorized by the North Carolina General Assembly. The General Assembly has authorized each county and city to levy a property tax. All property generally must be assessed at its true value, and taxes must be uniformly levied by the counties and cities. The property tax is imposed annually on the assessed value of taxable property at the applicable rate.
All property, real and personal, is subject to tax unless it is excluded from the tax base or exempted by a statute enacted by the North Carolina General Assembly under its authority to classify property for taxation.
What is the state property tax rate?
There is no state property tax.
What is the range of local property tax rates levied in your state?
Each year the local taxing authorities establish tax rates depending on their budgetary needs and other considerations, which cannot exceed any constitutional or statutory limitations. The rates vary considerably.
Exemptions and deductions
What exemptions and deductions are available?
Pursuant to its authority to classify property for taxation, the General Assembly has excluded various classes of property from the tax base. In general, intangible property is excluded. Non-business personal property is excluded. Non-business property does not include motor vehicles, boats, airplanes, and mobile homes. Special classes of property may be either wholly or partially excluded.
The General Assembly has authorized other classes of property to be taxed at a reduced valuation, including farm products. In addition, the General Assembly has authorized other property, including agricultural land, horticultural land, forest land, and wildlife conservation land, which meet statutory requirements to be taxed at “present use” valuation rather than “true value.” Deferred taxes are due when the property loses its eligibility due to a disqualifying event. Finally, the General Assembly has exempted other specially designated classes of property from taxation.
Except as specifically provided by statute, owners claiming an exemption or exclusion must file either a single or an annual application.
What filing requirements and procedures apply?
All property must be listed annually by the owner. Most real and personal property is assessed locally. The property of public service companies, which include railroads, electric power companies, and telephone companies, is centrally assessed by the North Carolina Department of Revenue. The department has general and specific supervisory authority over the valuation and taxation of all property in the state.
Real estate transfer tax
How is the transfer of real estate taxed in your state (including tax base, rates, exemptions, and filing formalities)?
An excise tax is imposed on every instrument conveying any interest in real property. The tax is imposed on the transferor. The rate is $1 on every $500 of the value conveyed. Transfers by governmental units are exempt. Other exemptions include transfer by operation of law, lease for a term of years, will, intestacy, gift, merger, conversion, consolidation, or an instrument securing indebtedness. Transfers where no consideration in property or money is due or paid by the transferee are also exempt. The transferor must pay the tax to the register of deeds in the county in which the real estate is located before recording the instrument.
Unclaimed and abandoned property
Reporting and remittance
Describe your state’s regime for reporting and remitting unclaimed and abandoned property. How is the value of such property calculated? How assertive is your state in enforcing its rights to unclaimed property?
The North Carolina state treasurer administers North Carolina’s unclaimed property laws.
Holders of unclaimed property are required to report and remit unclaimed property on an annual basis. Reports are due by November 1 for all holders other than insurance companies, who must file by May 1 of each year. Requests for extension are permitted.
The treasurer is authorized to contract with third parties to conduct audits, but contingent fee audits and any other method that may impair an auditor’s independence are prohibited by statute.
Excise and other indirect taxes
What excise taxes are levied in your state, including applicable goods, rates, and filing formalities?
Excise taxes imposed by North Carolina include a tax on tobacco products, alcoholic beverages, unauthorized substances, dry cleaning solvents, solid waste disposal, motor fuels, and the severance of energy minerals.
The excise tax on tobacco products is imposed on cigarettes, other tobacco products, and vapor products. The rate of tax on cigarettes is 2.25 cents for each cigarette. The rate of tax on other tobacco products is 12.8% of the cost price of the product. The rate of tax on vapor products is 5 cents for each fluid milliliter of consumable product.
The excise tax on alcoholic beverages is imposed on beer, wine, and liquor. The rate of tax on beer is 61.71 cents for each gallon of malt beverage. The rate of tax on wine is 26.34 cents for each gallon of unfortified wine and 29.34 cents for each gallon of fortified wine. The rate of tax on liquor is 30% of the sales price, which is statutorily defined to include freight, bailment, and other charges.
The rate of the excise tax on unauthorized substances varies depending on the substance and how it is sold.
The excise tax on dry cleaning solvents is imposed at the rate of $10 for each gallon of halogenated solvent and the rate of $1.35 for each gallon of other solvents.
The excise tax on solid waste disposal is imposed at the rate of $2 for each ton of waste.
The excise tax on motor fuels is imposed at various rates.
The excise tax on the severance of energy minerals is imposed at various rates.
The excise taxes have various filing and reporting requirements. Some of these taxes, including the tobacco tax and the motor fuels tax, have licensing requirements.
Other indirect taxes
Are any other indirect taxes levied in your state?
A scrap tire disposal tax is levied on the sale of new tires at retail or the purchase of new tires for use in the state, including placement on a vehicle offered for sale or lease. A white goods disposal tax is levied on the sale of white goods at retail or the purchase of white goods for use in the state. These taxes are in addition to all other taxes.
A highway use tax is levied and must be paid when applying for a certificate of title for a motor vehicle.
Do any other taxes apply to businesses in your state? If so, please include applicable tax bases, rates, exemptions/deductions, and filing formalities.
Other taxes imposed by North Carolina include the following:
- A tax is imposed on freight line companies. The tax is imposed at the rate of 3% of gross earnings received from all sources within the state. Companies paying this tax are exempt from the property tax.
- A gross premiums tax is imposed on insurance companies. The tax is measured by gross premiums from business conducted in the state. The rate of tax depends on the type of insurance contract. In addition, North Carolina imposes a retaliatory premiums tax when another state imposes higher premiums taxes on North Carolina companies doing business in that state than are imposed on similar companies doing business in this state. If the tax applies, it is equal to the other state’s tax. Insurance companies subject to the gross premiums tax are exempt from the corporate income and franchise tax.
- A privilege tax is imposed on installment paper dealers. The tax is 0.277% of the total face value of the obligations purchased or sold. The tax does not apply to savings and loan associations.
- A privilege tax is imposed on loan agencies. The tax is $250 for each location of the business.
- A privilege tax is imposed on attorneys and other enumerated professionals. The tax is $50.
- A privilege tax is levied on motor carriers. The tax is imposed on the amount of fuel the motor carrier uses in its operations within the state. The rate of tax is the rate that applies to motor fuels.
These taxes have various filing and reporting requirements.
Does your state offer any tax incentive schemes to attract businesses and promote investment?
The North Carolina Revenue Act reflects several policy decisions designed to promote and attract investment in the state, including various sales and use tax exemptions. Currently, North Carolina’s corporate income tax rate is the lowest in the nation.
In addition, the state offers incentive programs that provide cash grants, including the Job Development Investment Grant and the One North Carolina Fund. Local grants and incentives may also be available.
What tax compliance procedures and best practices should businesses operating in your state be aware of?
Businesses should be aware of the major tax schedules in the state and the filing requirements. They should keep apprised of current developments, including legislative and administrative. With respect to the corporate income and franchise tax, businesses should know that there is the ability to petition the department for an alternative apportionment method if they believe the statutory method does not accurately reflect the amount of business done in the state. In addition, North Carolina is a separate entity state, and the state will scrutinize intercompany transactions in any corporate income tax audit. The department offers formal guidance in the form of private letter rulings, for which there is a fee. Informal guidance may also be available, depending on the topic. Finally, businesses should carefully review any notice or documentation received from the department to ensure they comply with any deadlines. Failure to timely respond can result in the loss of significant rights, including the ability to contest an assessment or adverse determination.
What strategic planning considerations should businesses operating in your state bear in mind to optimize tax efficiency?
Any company considering expanding or locating to North Carolina should carefully consider the tax consequences, including the corporate income and franchise tax rates and the availability of credits and incentives. In addition, because North Carolina is a separate entity state, state corporate income tax considerations will be different than federal. Other federal and state differences should also be considered in any planning or restructuring.