State and Local Tax Alert – 2013 NC Tax Reform

December 20, 2013 by Nancy Drummond, CPA and Catherine Ardrey, CPA

Companies headquartered or operating in North Carolina may be interested in important changes in tax law as a result of the 2013 Tax Simplification and Reduction Act. Important changes to note are highlighted in this article.

Corporate Tax

The legislation:
• reduces the corporate income tax rate from 6.9% to 6% in 2014 and to 5% in 2015. The rate would be further reduced to 4% during the 2016 tax year and to 3% for post-2016 tax years provided that specified revenue growth targets are reached
• extends the research and development credit to January 1, 2016, but allows other incentives to sunset as scheduled, including the credit for investment in renewable energy property (January 1, 2016)
Sales Tax Changes

The bill’s changes to North Carolina sales tax statutes are effective for tax years beginning on or after January 1, 2014 unless otherwise noted. Click here for more information on Sales Tax Changes.

Admission Charges
• Imposes a privilege tax on a retailer at the 4.75% general state and applicable local and transit rates of sales tax to admission charges to an entertainment activity listed below:

A live performance or other live event of any kind
A motion picture or film
A museum, a cultural site, a garden, an exhibit, a show, or a similar attraction or a guided tour at any of these attractions

• This does not include a school sponsored event held at an elementary or secondary school, commercial agricultural fairs, festivals or recreation activities lasting no more than seven consecutive days and sponsored by a nonprofit entity, youth athletic contests sponsored by a nonprofit entity, and state attractions.

Service Contracts on Tangible Personal Property
• Imposes a privilege tax on a retailer at the 4.75% general State and applicable local transit rates of sales and use tax on the sales price of a service contract. A “service contract” is defined as a warranty agreement, a repair contract, or a similar agreement or contract by which the seller agrees to maintain or repair tangible personal property
• Provides an exemption for service contracts for tangible personal property exempt from sales and use tax (except motor vehicles) and for transmission, distribution, or other network asset contained on utility-owned, right-of-way, or easement and where an item purchased by a professional motorsports racing team for which the team may receive a sales tax refund
• Provides an exemption from sales and use tax for an item used to maintain or repair tangible personal property pursuant to a service contract if the purchaser of the contract is not charged for the item

Electricity
• The current rates charged on electricity sold to a commercial laundry, pressing and dry-cleaning establishment and amounts charged on the gross receipts from sales of electricity are repealed. Sales of electricity are now subject to the combined general rate of tax of 7.00% on the gross receipts derived from sales of electricity billed on or after July 1, 2014.

Piped Natural Gas
• The exemption from sales and use tax is repealed as of July 1, 2014. Sales of piped natural gas are now subject to the combined general rate of tax of 7.00% on the gross receipts derived from sales of piped natural gas billed on or after July 1, 2014.

Economic Incentive Refunds –Motorsports Teams
• The sunset date for refunds of sales and use tax paid in conjunction with fuel and other qualifying purchases by a professional motorsports team, a motorsports sanctioning body, or a related member of such a team or body has been extended to January 1, 2016. Effective July 23, 2013.

Sales and Use Tax Holiday
• The sales tax holiday for certain clothing, school supplies, school instructional materials, computers, computer supplies and sports or recreational equipment has been repealed as has the tax holiday for Energy Star Products. These changes are effective July 1, 2014.

Personal Income Tax Changes
The legislation:
• replaces the graduated personal income tax rates with a flat tax of 5.8% during the 2014 tax year and 5.75% for post-2014 tax years (currently the personal income tax rates range from 6% to 7.75%);
• increases the standard deduction amount to $15,000 for joint filers (currently $6,000), $12,000 for heads of household (currently, $4,400), and $7,500 for single taxpayers and married taxpayers filing separately (currently $3,000);
• limits itemized deductions to charitable deductions, personal residence interest, and real property taxes, but cap the deduction amounts for personal residence interest and real property taxes at $20,000. There would be no limit on charitable deductions; and
• repeals the personal exemption (currently $2,500) and numerous other deductions, including $50,000 deductions for net business income. Other deductions, including the deduction for Social Security benefits, would be retained;
• eliminates the deduction of retirement income and severance wages (NOTE: remaining intact, North Carolina does not tax certain retirement benefits received by retirees of the State of North Carolina and its local governments or by United States government retirees, including military);
• caps the gas tax until June 30, 2015 at 37.5 cents per gallon;
• expands the sales tax to include “entertainment activities,” which include admissions charges for live performances, movies and museums;
• imposes a sales tax on certain service contracts, specifically warranty arrangements, maintenance agreements, repair contracts or other contracts to maintain or repair tangible personal property.
Except as noted, these changes are effective for taxable years beginning on or after January 1, 2014.
Estate Tax
• The act would repeal the estate tax, which is currently imposed at a maximum rate of 16%.
This change is effective for taxable years beginning on or after January 1, 2013.

Farmer Exemptions
• A “qualifying” farmer is now defined as a farmer who has annual gross income of $10,000 or more from farming operations for the preceding calendar year. The definition includes a dairy operator, a poultry farmer, an egg producer, a livestock farmer, a farmer of crops, and a farmer of an aquatic species. The legislation still provides an exemption from sales and use tax for specific items purchased by a qualifying farmer and for use by the farmer in the planting, cultivating, harvesting, or curing of farm crops or in the production of dairy products, eggs, or animals. Other exemptions have been repealed. New Section G.S. 105-165.13E includes the exemptions.

Except as noted, these changes are effective for taxable years beginning on or after January 1, 2014.

No Changes

• Business Franchise Taxes (remains $1.50 per $1,000 of the largest of three bases : (i) capital stock, surplus and undivided profits, (ii) investment in tangible personal property in North Carolina; or (iii) appraised valuation of tangible property in North Carolina)
• Secretary of State Annual Report Fees

Since every tax situation is different, consider contacting Elliott Davis or your tax advisor for company-specific tax guidance. These tips should not be used or relied upon in regard to any particular situation or circumstances without first consulting the appropriate advisor.

For more information, contact Nancy Drummond 864.552.7177 or Catherine Ardrey 704.808.5220.