North Carolina’s governor on November 8, 2019, signed into law Senate Bill 557 that:
The governor vetoed a separate bill (Senate Bill 587) to reduce the franchise tax rate and modify film credits.
Read Senate Bill 557 [PDF 259 KB]
Senate Bill 557 adopts market-based sourcing rules for sales of other than tangible personal property effective for tax years beginning on or after January 1, 2020.
Receipts will be attributed to North Carolina if the taxpayer's market for the receipts is in the state. If the market for a receipt cannot be determined, the state or states of assignment must be reasonably approximated. If a taxpayer cannot ascertain the state or states to which receipts of a sale are to be assigned through the use of a method of reasonable approximation, the receipts must be excluded from the denominator of a taxpayer's sales factor.
The new law establishes the following rules for assigning a taxpayer's receipts to North Carolina:
All other receipts from a sale of intangible property must be excluded from the numerator and denominator of the sales factor.
Senate Bill 557 has special provisions for a taxpayer with a state net loss balance as of the end of its 2019 tax year. These taxpayers may elect to apportion receipts from services based on the percentage of the income-producing activities performed in North Carolina (i.e., using the prior method of apportionment). The election must be made on the 2020 tax year return and in the form required by the Secretary, including any supporting documentation. The election is binding and irrevocable until the earlier of the tax year in which the existing state net loss balance is fully used or all of the existing state net loss balance has expired. A taxpayer must apportion receipts from services in accordance with the market-based sourcing rules for tax years beginning on and after the tax year that the existing state net loss is fully utilized. The “state net loss balance” is the total amount of state net losses for tax years beginning before January 1, 2020, and available for carryforward to tax years beginning on or after January 1, 2020. A state net loss created in a tax year beginning on or after January 1, 2020, must be determined using the market-based sourcing rules.
Senate Bill 557 also adopts specific apportionment rules for various industries, including pipeline companies, electric power companies, wholesale content distributors, and banks:
Senate Bill 557 requires marketplace facilitators (as defined) to collect and remit sales tax on sales they facilitate, effective February 1, 2020 if in the previous or current calendar year, the marketplace facilitator exceeds $100,000 in gross sales or has 200 or more separate transactions. A marketplace facilitator that meets the threshold is considered to be the retailer of each marketplace-facilitated sale it makes and is liable for collecting and remitting the sales and use tax on all such sales.
A marketplace facilitator is required to collect and remit sales tax regardless of whether a marketplace seller for whom it makes a marketplace-facilitated sale has a physical presence in North Carolina or otherwise is required to register with the Department of Revenue.
A marketplace facilitator and a marketplace seller may enter into an agreement with each other regarding the fulfillment of the requirements under the marketplace law, except that an agreement may not require a marketplace seller to collect and remit sales and use tax on marketplace-facilitated sales.
A marketplace facilitator is defined as:
A person that, directly or indirectly and whether through one or more affiliates, … [l]ists or otherwise makes available for sale a marketplace seller's items through a marketplace owned or operated by the marketplace facilitator [and] … [c]ollects the sales price or purchase price of a marketplace seller's items or otherwise processes payment [and/or] [m]akes payment processing services available to purchasers for the sale of a marketplace seller's items.
Senate Bill 557 also:
Under North Carolina law, franchise tax payable by a corporation that is classified as a “holding company” is limited to $150,000, when the company is paying on its net worth base. If the “holding company” definition is not met, there is no limitation.
Senate Bill 557 adds a third condition to the definition of a holding company for franchise tax purposes effective for tax years beginning on or after January 1, 2020, and applicable to the calculation of franchise tax reported on the 2019 and later corporate income tax returns.
Under prior law, a company had to meet at least one of two conditions to be a considered a holding company. Under the new law (as revised), a holding company will also include an entity that owns copyrights, patents or trademarks that represent more than 80% of its total assets, or receives royalties and license fees that represent more than 80% of its gross income, if it is 100% directly owned by a corporation that meets all of the following conditions: (1) it is a manufacturer, as defined by NAICS codes 31 through 33; (2) it generates revenues in excess of $5 billion for income tax purposes from goods that it manufactures; and (3) it includes, in its net worth, an investment in a subsidiary that owns copyrights, patents or trademarks.
Dual notices: The Department must update its electronic tax systems to store and recognize power of attorney registrations so that notices generated by the Department are simultaneously sent to both the taxpayer and the person designated in the taxpayer's power of attorney registration. By January 31, 2020, the Department is to report to the Joint Legislative Oversight Committee on General Government on its progress in updating its electronic tax systems.
Review of expiring tax provisions: The Revenue Laws Study Committee may review any tax provision set to sunset within one year of the beginning of the next regular session of the General Assembly to determine whether the sunset needs to be extended.
For more information, contact a KPMG State and Local Tax professional:
About corporate income and franchise tax provisions
Adam McLamb | +1 (704) 371-8216 | email@example.com
Nikki Emanuel Jarrell | +1 (704) 335-5344 | firstname.lastname@example.org
About the marketplace-facilitator changes
Nicole Umpleby | +1 (704) 335-5586 | email@example.com
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.