Previous Alerts dated April 17 and May 15 described the North Carolina draft tax legislation developed by the Revenue Laws Study Committee for introduction in the General Assembly’s short session, which began on Wednesday. The bill was introduced on Wednesday, May 16, as Senate Bill 715, and, on Thursday, May 17th, the bill passed the Senate Finance Committee with the following substantive amendments.
Sales Factor Apportionment. Under current law, for purposes of computing the apportionment sales factor, income from services is sourced under an “income-producing activities test.” As discussed in the two prior Alerts, the bill would codify existing administrative guidance regarding the application of this test.
One amendment adopted by the Senate Finance Committee would further refine the description of how the income-producing activities test is applied. Specifically, the amendment restates the test as follows: “Receipts from income-producing activities performed within and without this State are attributed to this State in proportion to the income-producing activities performed in this State to total income-producing activities performed everywhere that generate the sale of service.”
The purpose of the amendment appears to be to give equal weight to all income-producing activities so that receipts are apportioned to North Carolina based on the quantum, rather than the value or importance, of the activities performed here.
The amendment also clarified that receipts from the sale of tangible property, which are apportioned based on the location of the property, include receipts from incidental services sold as part of or in connection with the sale of the property.
Unrelated Business Taxable Income. The Tax Cuts and Jobs Act (“TCJA”) requires tax exempt organizations to increase their unrelated business taxable income by any amount paid or incurred by the exempt organization for qualified transportation fringe benefits, qualified parking or on-site athletic facilities.
The Senate Finance Committee adopted an amendment, effective for tax years beginning on or after January 1, 2018, decoupling from this federal change as it relates to parking facilities. Specifically, for North Carolina purposes, unrelated business taxable income would not include any amount paid or incurred for a parking facility that otherwise would be taxable under the new federal law.
Sales Tax Exemption for Membership Charges. Under current law, the sales tax on admissions does not apply to the portion of a membership charge that is allowed as a federal charitable deduction.
Under prior federal law, a taxpayer could deduct 80% of a payment to an institution of higher education that entitled the taxpayer to purchase tickets to athletic events at the institution’s athletic stadium. The TCJA eliminated this deduction. As a result, 100% of membership charges paid to university athletic booster clubs would be subject to the sales tax on admissions if the taxpayer were entitled to purchase tickets as a result of the payment.
The Senate Finance Committee approved an amendment that would specifically exempt such membership charges from the sales tax regardless of whether they were deductible for federal purposes. This provision would be effective upon enactment.
Repatriation Tax. As discussed in the April 17 Alert, the bill purports to decouple from the federal repatriation tax. The federal repatriation tax, added by the TCJA, includes two primary provisions. First, IRC section 965(a) requires the deferred foreign earnings of certain corporations to be included in the income of their U.S. shareholders. Second, IRC section 965(c) provides U.S. shareholders with a deduction to lower the effective tax rate on this income.
The bill successfully decouples from the income inclusion required by IRC section 965(a) but fails to decouple from the deduction allowed under IRC section 965(c), thus providing taxpayers with an unintended benefit. While the version of the bill approved by the Senate Finance Committee does not correct this oversight, it is expected that the bill will be further amended to specifically require an add-back of the deduction under IRC section 965(c) in computing state net income.
For more information about these or other provisions of the draft bill, please contact a member of Smith Anderson’s Tax group, business lawyers who understand taxation.