Tax Provisions in the North Carolina 2019 Appropriations Act

By William W. Nelson

This Alert summarizes the more significant tax provisions included in House Bill 966, the 2019 Appropriations Act (the “Bill”). The Bill, a Conference Committee measure reconciling the House and Senate budget proposals, was passed by the General Assembly on June 27th and presented to the Governor. The Governor promptly vetoed the Bill, setting the stage for either a veto override by the General Assembly or a compromise measure. Accordingly, as of the date of this Alert, it is uncertain whether or in what form the tax changes discussed below will be enacted. A previous Alert summarized the tax provisions of the House and Senate budget proposals.

Provisions covered in this Alert: 

Personal Income Tax Changes

Increase in Standard Deduction

The Bill would increase the standard deduction for the 2021 and later tax years. The standard deduction would increase from $20,000 to $21,000 for joint filers, from $15,000 to $15,750 for heads of households and from $10,000 to $10,500 for single filers and married couples filing separately. These are slightly higher increases than those in the House and Senate proposals.[1]

Qualified Charitable Distributions

The Bill would conform to federal tax rules regarding qualified charitable distributions from an IRA by taxpayers over age 70 ½. Under federal law, a taxpayer who is at least 70 ½ may exclude from income up to $100,000 in IRA charitable distributions.[2]  North Carolina currently decouples from this provision. As a result, a taxpayer claiming the federal exclusion must include the distribution in North Carolina income and may then claim a charitable contribution deduction as part of the taxpayer’s North Carolina itemized deduction.[3] The Bill would unwind this decoupling and conform to the federal law (income exclusion/no deduction), effective for the 2019 and later tax years.[4]

Deduction for Scholarship Awards for Children with Disabilities

In 2017, North Carolina enacted a provision permitting individual taxpayers to deduct amounts deposited into a Personal Education Savings Account from federal adjusted gross income in computing North Carolina taxable income.[5] The Bill would combine awards under the Personal Education Savings Account program with awards under the Children with Disabilities Grant program into a new “Personal Education Students Account” program. The Bill would amend the deduction from federal AGI enacted in 2017 to refer to the new combined program, thus expanding the scope of the deduction. This change would be effective for the 2020 and later taxable years.[6]

Franchise Tax Changes

Rate Reduction

The Bill would reduce the rate of tax on each $1,000 of franchise tax base from $1.50 to $1.29 for the 2020 franchise tax year and to $0.96 for the 2021 franchise tax year. These rate reductions, which are slightly greater than those in the House and Senate proposals, would be part of a planned phased elimination of the franchise tax. Electric power companies and their affiliates would remain subject to the $1.50 rate until 2027 at which time they would be taxed at the same rate imposed on other corporations (i.e., $0.96 under the Bill).

Elimination of Alternative Tax Base

The Bill would eliminate one of the two alternative franchise tax bases. Under current law, the tax is computed on the higher of the following bases: apportioned balance sheet net worth, actual investment in tangible property in the state and 55% of the appraised value of the taxpayer’s property as determined for property tax purposes.[7] The Bill would eliminate the 55% of appraised value base, effective for the 2020 franchise tax year.[8]

Holding Company Definition

The two franchise tax changes discussed above would apply to holding companies as well as other corporations. A holding company currently is defined as a corporation that has no assets other than the stock of controlled subsidiaries or that receives more than 80% of its gross income from controlled subsidiaries.[9] Under current law, the franchise tax on the apportioned net worth of a holding company is capped at $150,000.[10] The Bill follows the Senate proposal by including a narrowly targeted expansion of the definition of a holding company to include an intangible holding company wholly-owned by a manufacturing company that generates more than $5 billion in revenue from manufacturing and that includes the investment in the holding company in its own net worth tax base.[11]

Apportionment Changes 

Market-based Sourcing

The Bill would finally enact market-based sourcing for purposes of apportioning the corporate income and franchise tax bases, effective in 2020. Under market-based sourcing, receipts would be sourced to the location of the taxpayer’s market. If the market cannot be determined, the receipts would be sourced based on a method of reasonable approximation. If the source of a receipt cannot be reasonably approximated, the receipt must be excluded from the denominator of the apportionment fraction.[12]

Service receipts generally would be sourced to the place where the services are delivered. Intangible license receipts generally would be sourced based on where the intangible is used. A marketing intangible would be considered to be used in North Carolina to the extent the marketed products are purchased by North Carolina customers. Receipts from the sale of an intangible would be sourced based on where the intangible is used.[13]

Special Industry Rules

The Bill includes special rules for sourcing the receipts of broadcasters. Specifically, broadcasters would source their receipts by reference to where their actual advertising and licensing customers are located, based on the commercial domicile of a business customer and the billing address of an individual customer. For income tax purposes, broadcasters would be required to source at least 2% of their licensing and advertising revenues to North Carolina, and, for franchise tax purposes, they would be required to source at least 2% of their net worth franchise tax base to North Carolina.[14]

The Bill also contains special market-based sourcing rules for banks, generally intended to preserve their treatment under current law, and special apportionment rules for natural gas pipeline and electric power companies.[15]

Loss Corporations

While market-based sourcing generally provides a tax benefit to a company that has a significant in-state presence and a significant out-of-state market, it has the opposite effect if the company is operating at a loss, since a smaller portion of the loss will be apportioned to the state. To mitigate the impact of market-based sourcing on loss corporations, the Bill would permit a corporation with a state net loss at the end of 2019 to elect to continue to source its receipts from services under the income producing activities test of current law until its losses are used up or expire. The election would apply only for income tax purposes, and the franchise tax net worth base would be apportioned as if the election had not been made.[16]

Administrative Rules

The Department of Revenue (the “Department”) issued proposed market-based sourcing rules in 2017, dependent on future enactment of proposed market-based sourcing legislation. The Bill would make these proposed rules effective beginning in 2020, but directs the Department to amend the proposed rules to reflect the ways in which the Bill differs from the legislation proposed in 2017. The Department would be directed to submit the amendments to the Rules Review Commission by October 21, 2019.[17]

Sales Taxation of Marketplace Facilitators


The Supreme Court’s decision in South Dakota v. Wayfair, Inc.[18] permitted states to require remote sellers to collect sales and use taxes on sales to in-state customers. Shortly after the Wayfair decision was released, the Department issued a directive announcing that it would begin requiring a remote seller to collect North Carolina sales tax if the remote seller had more than $100,000 in North Carolina sales or at least 200 separate sales transactions sourced to North Carolina.[19] The General Assembly codified the directive in a technical corrections bill earlier in the session.[20]

Most of the large online retailers were already collecting sales tax voluntarily or because they had physical nexus with the state, and it is believed that the states’ best option for collecting significant new sales tax revenues following Wayfair is to require online marketplace providers to collect tax on sales made over their platforms by small third party sellers who individually fall below the $100,000/200 transaction threshold. The General Assembly considered requiring marketplace providers to collect taxes on facilitated sales in 2017, but the bill was not enacted.[21]

Treatment of Marketplace Facilitators

The Bill would extend sales tax collection responsibility to marketplace facilitators. The Bill would define a marketplace facilitator as a person who (1) owns or operates a physical or electronic platform or other marketplace on which the items of another person (the “marketplace seller”) are listed or made available for sale and (2) facilitates the sales of the marketplace seller’s items. The Bill follows the Senate proposal in providing that facilitation includes collecting or processing payments or making payment processing services available.[22] The House proposal would have extended the concept of facilitation to include transmitting an offer or acceptance.[23]

Under the Bill, a marketplace facilitator would be required to collect sales tax on all facilitated sales if it satisfied the $100,000/200 transaction threshold for the current or preceding calendar year. Direct sales by the facilitator as well as facilitated sales by marketplace sellers would be counted to determining whether this threshold was met.[24]

The House proposal provided that the marketplace seller would be treated as a wholesaler with respect to sales made over the facilitator’s platform and so would not be required to collect tax on the sale.[25] This provision was intended to provide a reporting mechanism that would allow the Department to distinguish the marketplace seller’s direct sales from those made through a marketplace facilitator. Some marketplace facilitators were concerned that this provision could subject them to liability if they were treated as having purchased the marketplace seller’s items. The Bill follows the Senate proposal in excluding this provision.


The Bill would require a marketplace facilitator to furnish marketplace sellers with monthly information about the gross sales and number of transactions with respect to marketplace facilitated sales made by or on behalf of the marketplace seller and that are sourced to North Carolina. The Bill follows the Senate proposal in providing the marketplace facilitator flexibility as to how this information is provided.[26]

Protective Provisions

The Bill would protect marketplace facilitators from class action lawsuits brought on behalf of customers alleging overcollection of tax by the facilitator on facilitated sales.[27] In addition, the Bill generally follows the House proposal in providing relief to marketplace facilitators that fail to collect the proper amount of tax due because of incorrect information supplied by the marketplace seller.[28] While the House proposal would have authorized the Department to compromise the facilitator’s liability in such a case, the Bill would forbid assessments against the facilitator and make the marketplace seller liable for the tax (assuming it has nexus with the state). No relief would be available, however, if the marketplace seller is also the facilitator or an affiliate of the facilitator.[29]

These provisions would become effective September 1, 2019.[30]

Sales Taxation of Accommodation Facilitators

General Rules

The Bill would clarify the rules regarding the rental of accommodations through accommodation facilitators. The Bill would expand the definition of “accommodation facilitator” to cover persons who list accommodations for a fee as well as persons who accept payment or credit card information from renters. The term also would be amended to specifically include real estate brokers.[31]

The Bill follows the Senate proposal in providing that each of the facilitator and the provider of the accommodation would be required to collect tax on that portion of the rental payment it collects.[32] Thus, with respect to any given rental, either the provider, the facilitator or both may be considered the retailer. In a change from the Senate proposal, however, the Bill adds that the provider is considered the retailer in any case where the person who collects payment either cannot be determined or is someone other than the provider or the facilitator.[33]

 Special Rules for Hotel-related Facilitators

The Bill also follows the Senate proposal in including a special provision applicable to accommodation facilitators that are operated by or on behalf of a hotel owner, operator or franchisor and that facilitates rentals solely for the related hotels (e.g., These facilitators are not considered retailers required to collect tax even if they collect all or a portion of the payment for the accommodation. Instead, as under current law, these facilitators would send the tax due on the sales price they collect to the provider (i.e., the related hotel) for remittance to the Department.[34] 


 The Bill also follows the Senate proposal by providing that all accommodation facilitators must file an annual report with the Department containing information about rentals facilitated during the year. The report would be due by the end of March of the following year. The Bill would clarify that the Department may not disclose a report except for disclosures authorized by statute.[35]

These provisions would become effective September 1, 2019.[36]

Non-Shareholder Contributions to Capital 

The federal Tax Cuts and Jobs Act (TCJA) repealed a long-standing provision of the Internal Revenue Code excluding from the gross income of a corporation contributions to the capital of the corporation made by a government entity.[37] Because of this change, government incentive grants, which were previously excluded from income, became taxable at the federal level. North Carolina did not decouple from this TCJA change and thus reduced the value of its own state and local government incentive grants.

The Bill would allow corporate and individual taxpayers to deduct grants from the state’s Job Maintenance and Capital Development Fund, Job Development and Investment Grant Program and the One North Carolina Fund in computing their state net income. These changes would be effective for amounts received under an economic incentive agreement entered into after 2018. [38]  

Sunset Extensions

The Bill would extend until January 1, 2024 the following provisions, currently scheduled to sunset on January 1, 2020:

  • The historic rehabilitation tax credits.[39] 
  • The sales tax exemption for aviation gasoline and jet fuel sold to an interstate air business for use in commercial aircraft.[40]
  • The sales tax exemption for sales of engines, engine parts, service contracts and repair, maintenance and installation services and certain other items to a professional motorsports racing team or sanctioning body or to persons providing engines to a professional motorsports racing team.[41]
  • The refund for sales taxes paid by a professional motorsports racing team or sanctioning body on aviation gasoline and jet fuel.[42]
  • The refund for 50% of the sales taxes paid by a professional motorsports racing team on tangible personal property (other than tires or accessories) that comprise a part of a professional motorsports vehicle.[43]

The Bill would also add a new provision permanently authorizing the Revenue Laws Study Committee to review any tax provision scheduled to sunset within one year to determine whether the sunset should be extended.[44]

Insurance Tax Changes

Prepaid Health Plans

Legislation enacted in 2015 required Medicaid and Health Choice fee-for-service programs to transition to a managed care model.[45] Under a new waiver approved by the Centers for Medicare and Medicaid Services, the state will pay commercial and nonprofit health plans a monthly capitation fee to cover Medicaid and Health Choice services for their enrollees beginning November 1, 2019.

The Bill would extend the insurance company gross premiums tax to prepaid health plans (and thus exempt such plans from corporate income and franchise taxes). The tax would be applied at a rate of 1.9% on the gross capitation payments the plan receives from the Department of Health and Human Services for services provided to enrollees in the State Medicaid program or the NC Health Choice program in the preceding calendar year. Refunded capitation payments would be allowed as a deduction. Prepaid health plans would also become subject to the insurance company regulatory charge. These changes would become effective October 1, 2019.[46]

Insurance Regulatory Charge

The Bill would maintain the insurance company regulatory charge at its current rate of 6.5% for the 2020 calendar year.[47]

Taxation of Out-of-State Businesses and Workers Engaged in Disaster Relief

The Bill generally follows the Senate budget proposal’s relief provisions for out-of-state businesses and nonresident employees that enter the state temporarily to help restore critical infrastructure following a declared disaster at the request of a critical infrastructure company. A majority of the states have enacted similar relief provisions. Eligible businesses and employees would be exempt from the corporate and individual income taxes, the franchise tax, the unemployment tax and the requirement to obtain a certificate of authority to transact business. The Bill differs from the House and Senate proposals in not providing relief from workers' compensation requirements and in providing that a nonresident business forfeits the benefit of the relief provisions if it does not timely provide certain information to the Department after the conclusion of its disaster-related work in the state. These provisions would be effective for disasters declared after the date the Bill becomes law.[48]

Reenactment of Mill Rehabilitation Credits

North Carolina previously offered “mill rehabilitation” credits to taxpayers rehabilitating income- and non-income-producing certified historic structures that were part of a vacant manufacturing facility. These credits expired in 2015. The Bill would reenact a limited-scope mill rehabilitation credit applicable to a specific rehabilitation project involving an income-producing property formerly used as a railroad station. The credit would be available in 2021 and 2022 and would then expire.[49]  

Property Tax Exemption for Antique Cars 

The owner of a vehicle registered with the Division of Motor Vehicles as an “historic vehicle” and that meets certain other requirements is eligible for a maximum property tax valuation of $500.[50] To be eligible for registration as an historic vehicle, the vehicle must be at least thirty-five years old.[51] The Bill follows the House proposal in lowering the age requirement, thus expanding the class of vehicles eligible for the property tax benefit. While the original House proposal would have lowered the age requirement to twenty-five years, the Bill lowers it only to thirty. This provision would be effective for historic vehicle plates issued pursuant to applications made on or after July 1, 2019.[52]

For more information about the Alert, please contact a member of Smith Anderson’s Tax Group, business lawyers who understand taxation.

[1] See Bill, §41.1.

[2] See IRC §408(d)(8).

[3] See N.C. Gen. Stat. §§105-153.5(c2)(3) and 105-153(a)(2)a.

[4] See Bill, §41.2.

[5] See N.C. Gen. Stat. §105-153.5(b)(12).

[6] See Bill. §8A.9.(h) and (j).

[7] See N.C. Gen. Stat. §§105-120.2(b)(2) and 105-122(d)(2).

[8] See Bill, §41.3.(a).

[9] See N.C. Gen. Stat. §105-120.2(c).

[10] See N.C. Gen. Stat. §105-120.2(b).

[11] See Bill, §41.3.(a).

[12] See Bill, §41.4.(a).

[13] See id.

[14] See Bill, §41.4.(b).

[15] See Bill, §41.4.(a) and (c).

[16] See Bill, §41.4.(a) and (d).

[17] See Bill, §41.4.(f).

[18] 585 U.S. ___; 138  S. Ct. 2080 (2018).

[19] See Directive SD-18-6.

[20] See S.L. 2019-6, §5.2; N.C. Gen. Stat. §105-164.8(b)(9).

[21] See S.81(2017).

[22] See Bill, §41.5.(a).

[23] See H. 966 (4th ed.), §41.5.(a).

[24] See Bill§41.5.(c).

[25] See H. 966 (4th ed.), §41.5.(c).

[26] See Bill, §41.5.(c).

[27] See id.

[28] See id.

[29] See id.

[30] See Bill, §41.5.(q).

[31] See Bill, §41.5.(d).

[32] See Bill, §41.5.(e).

[33] See id.

[34] See Bill, §41.5.(e).

[35] See id..

[36] See Bill, §41.5.(q).

[37] See IRC §118.

[38] See Bill, §41.6.

[39] See Bill, §41.7.(a).

[40] See Bill, §41.8.(a).

[41] See Bill, §41.9.(a).

[42] See Bill, §41.9.(b).

[43] See id.

[44] See Bill, §41.11.

[45] See S.L. 2015-245.

[46] See Bill, §9D.19.

[47] See Bill, §29.1.

[48] See Bill, §41.10.(p).

[49] See Bill, §41.7.

[50] See N.C. Gen. Stat. §105-330.9.

[51] See N.C. Gen. Stat. §20-79.4(b)(94).

[52] See Bill, §40.14.


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