Bill Summaries: H 985 TAX REDUCTION AND SIMPLIFICATION.

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  • Summary date: Apr 22 2013 - More information

    Part I. Reduce Individual Income Tax Rates

    Amends GS 105-134.2(a) to tax the following individuals at a rate of 6%: (1) married individuals who file a joint return and certain surviving spouses with taxable income up to $25,000; (2) heads of households with taxable income up to $20,000; (3) unmarried individuals with taxable income up to $12,500; and (4) married individuals not filing a joint return with taxable income up to $12,500.  Provides that surpassing the specified income level of each classification will result in a 7% tax rate.

    Repeals GS 105-134.6(b)(11) and (b)(22), subsections regarding specified deductions to taxable income.

    Repeals GS 105-151.12 (Credit for certain real property donations) and GS 105-151.26 (Credit for charitable contributions by nonitemizers).

    Part I is effective for taxable years beginning on or after January 1, 2013.

    Part II. Reduce Corporate Income Tax Rate

    Amends GS 105-130.3 (Corporations), establishing that the tax imposed on a C corporation's state net income is 6.4% (previously, a 6.9% tax was imposed after 1999; that language is now deleted), effective for taxable years beginning on or after January 1, 2014.  Effective January 1, 2015, the tax imposed on a C corporation's state net income will be amended to 5.9%.

    Repeals GS 105-130.34, Credit for certain real property donations, effective January 1, 2014.

    Part III. Replace Franchise Tax with a Lower Business Privilege Tax That Includes All Limited Liability Entities

    Amends Article 3 of GS Chapter 105 to repeal the franchise tax and replace it with a business privilege tax applicable to all businesses with limited liability. Renames Article 3 as Business Privilege Tax (was, Franchise Tax).

    Repeals the following sections:

    GS 105-114, Nature of taxes; definitions.

    GS 105-114.1, Limited liability companies.

    GS 105-120.2, Franchise or privilege tax on holding companies.

    GS 105-121.1, Mutual burial associations.

    GS 105-122, Franchise or privilege tax on domestic and foreign corporations.

    GS 105-122.1, Credit for additional annual report fees paid by limited liability companies subject to franchise tax.

    GS 105-125, Exempt Corporations.

    GS 105-127, When franchise or privilege taxes payable.

    GS 105-128, Power of attorney.

    GS 105-129, Extension of time for filing returns.

    Amends GS Chapter 105 by creating the following new statutes: GS 105-114.2, 105-114.3, 105-114.4, 105-114.5, 105-114.6, 105-114.7, 105-114.8, 105-114.9, 105-114.10, 105-116.2, 105-116.3, 105-116.4 and GS 105-125.1.

    GS 105-114.2, Definitions, providing the terms and definitions to be used in this article.

    Adds definitions for terms as they apply in amended Article 3. Includes a comprehensive definition for business entity as meaning any of the following: (1) a domestic corporation organized under GS Chapter 55 or a foreign corporation that has received a certificate of authority under that chapter authorizing it to do business in this state, (2) an electric membership corporation organized under GS Chapter 117, (3) a domestic liability company formed under GS Chapter 57C or a foreign limited liability company authorized under that chapter to do business in this state, (4) a domestic limited partnership or a foreign limited partnership authorized under Article 5 of GS Chapter 59, (5) a domestic limited liability partnership registered under Article 3B of GS Chapter 59 or a foreign limited liability partnership registered under Article 4A of that chapter, (6) a domestic or foreign limited liability limited partnership registered under GS 59-210, or (7) any other business organized to confer limited liability on one or more of its owners.

    GS 105-114.3, Nature of tax, establishes a privilege tax on business entities for the privilege of doing business in North Carolina in an organizational form that gives limited liability to one or more owners. Payment of the tax is a condition precedent of doing business in North Carolina. Establishes that each owner of a non-corporate business entity doing business in North Carolina is considered to be doing business in North Carolina.

    GS 105-114.4, Business privilege tax imposed, provides that the rate of the business privilege tax is $1.25 per $1000 of whichever is higher: (1) the entity's adjusted net worth tax base (as described in GS 105-114.5) or (2) the entity's investment tax base (as described in GS 105-114.6). Minimum tax payable is $200. Maximum tax for a holding company is $75,000.  Business entities are no longer subject to the business privilege tax after the taxable year in which the entity is dissolved.

    GS 105-114.5, Adjusted net worth tax base, provides criteria governing the determination of a business entity's adjusted net worth tax base and for determining exclusions in calculating certain business entities' tax liability under this article.

    GS 105-114.6, Investment tax base, establishes that the entity's investment tax base is the entity's investment in real and tangible personal property in this state as of the end of the entity's taxable year. The value of an entity's investment in property is the consideration for the property subject to four adjustments, including the addition of improvements to the property, and a deduction for indebtedness on the property or on an improvement to the property.

    GS 105-114.7, Exclusions in calculating tax, specifies and describes certain exclusions for certain entities that can be used in the calculation of tax liability for this section.  These exclusions include provisions concerning (1) disregarded LLCs, (2) no tax tiering, (3) investment companies, and (4) short-year adjustments.

    GS 105-114.8, Determination of ownership after certain transfers, provides how to determine ownership of capital interests when certain asset transfers have taken place. Also provides how ownership of tax-free distributions are calculated for tax purposes.

    GS 105-114.9, Apportionment by multistate business entities, provides that an entity doing business in North Carolina and in one or more other states must apportion its net worth to North Carolina. Establishes rules for apportioning income to North Carolina in various situations for such entities or corporations.

    GS 105-114.10, Return and payment, provides that the tax imposed by proposed GS 105-114.4 is due when the return is due, on or before the 15th day of the fourth month following the end of the business entity's income year. Provides guidelines for requesting an extension for filing and the signing of the return.

    GS 105-116.2, Distribution in lieu of local privilege license tax, replaces local privilege license tax revenues with a portion of the state business privilege tax. Provides that each year the Secretary must distribute to cities the net proceeds of tax collected under the preceding year, pursuant to GS 105-114.4, at a rate of $0.10 per $1,000. Specifies the procedures for distribution and that the share of proceeds will be based on a per capita basis according to the most recent annual population estimates.

    GS 105-116.3, Compensating privilege tax on seller that is not a registered retailer, establishes that an annual privilege tax is imposed on a person who sells tangible personal property, digital property, or services at retail to a consumer that is not a registered retailer or entity if that person (1) is not registered as a retailer under Article 5 of this chapter and (2) the person reported gross sales of at least $5 million on its most recent federal income tax.  If imposed, the tax is a percentage of the retailer's gross receipts from sales in North Carolina. The rate is the same as the combined rate under GS 105-164.3. Tax is in addition to any charged under GS 105-114.14.

    GS 105-116.4, Compensating privilege tax on unregulated electric power producer, establishes that an annual privilege tax is imposed on a person that meets all of the following: (1) produces electric power by using the public waters of North Carolina and sells the electricity it produces, (2) is not subject to regulation by the NC Utilities Commission, and (3) received at least $5 million in gross receipts during the preceding calendar year from its sale of electric power.  The tax is a percentage of the person's gross receipts from sales of the produced electric power. The rate is the same as the combined rate under GS 105-164.3. Tax is in addition to any charged under GS 105-114.14.

    GS 105-125.1, Exempt business entities, provides that the following entities are exempt from the privilege tax: (1) a business entity exempt from federal income tax under the Code; (2) an insurance company subject to tax under Article 8B of this chapter; (3) a single-member limited liability company that is disregarded for federal income tax purposes if the single member is a corporation and the disregarded limited liability company's net worth and property is included in that of its single member; and (4) a real estate mortgage investment conduit, as defined in section 860D of the Code.

    Directs the Secretary of Revenue to distribute $45 million to cities in accordance with GS 105-116.2. Provides that the above sections of Part III are effective for taxable years beginning on or after January 1, 2015, and applies to taxes due in that year or a subsequent year.

    Amends GS 55-1-22, Filing, service, and copying fees, deleting references to an annual paper or electronic report in lieu of specifying just an annual report with no fee to submit the report (was, $25 for paper report and $18 for electronic report). Deletes reference to the fee for annual reports being nonrefundable.

    Amends GS 55-16-22, Annual report, reorganizing the majority of language through GS 55-16-22(d), providing clarifying language that simplifies and specifies exactly which types of business entities must submit annual reports and the information that must be included in each annual report.  Establishes a firm due date for annual reports, the 15th day of the 4th month following the close of the entity's fiscal year.  Clarifies the requirements and expectations in cases where the Secretary deems an annual report to be incomplete.  Deletes GS 55-16-22(e -h).  Makes technical and conforming changes.

    Amends GS 57C-1-22(a)(25),  GS 59-35.2(a)(18), GS 59-1106(a)(22), changing the associated fees for the required annual reports of these sections to "No fee."

    Repeals GS 105-122.1 (Credit for additional annual report fees paid by limited liability companies subject to franchise tax).

    Amends GS 105-228.90(a), making technical and conforming changes.

    Repeals GS 105-256.1 (Secretary and deputies to administer oath).

    Amends GS 105-259(a), making technical and conforming changes.

    Effective January 1, 2015. The subsection repealing GS 105-122.1 of  this section applies to returns due on or after April 15, 2015, for taxable years beginning on or after January 1, 2015. The remaining sections apply to annual reports due on or after January 1, 2015.

    Part IV. Replace the Gross Receipts Privilege Tax on Amusements and Movies with the State and Local Sales Tax

    Repeals GS 105-37.1, Live entertainment and ticket resales, GS 105-38.1, Motion picture shows, and GS 105-40, Amusements--Certain exhibitions, performances, and entertainments exempt from tax.

    Enacts new GS 105-164.4(a), establishing a privilege tax at the general rate of 4.75% to be applied to admission charges to entertainment events and activities including live performances, movies or audiovisual work, museums, cultural sites, gardens, shows, or exhibits.  Provides when the tax applies in regards to the resale of tickets.

    Adds an additional subdivision to GS 105-164.13, which exempts the sale, use, storage, or consumption of certain tangible personal property, digital property, and services from the sales and use tax imposed by Article 5, GS Chapter 105, to include an exemption for admission charges to a festival or other recreational activity sponsored by a nonprofit that is exempt from tax under Article 4 of GS Chapter 105, lasts no more than seven consecutive days, uses all the proceeds exclusively for the entity's nonprofit purpose and sponsors no more than two such activities during a calendar year; an event held and sponsored by an elementary or secondary school; or a commercial agricultural fair that meets specified requirements.

    Part IV becomes effective July 1, 2014, and applies to sales made on or after that date and to gross receipts received on or after July 1, 2014, from admissions purchased on or after that date. Gross receipts received on or after July 1, 2014, from admissions purchased before that date are taxable under GS 105-37.1 or GS 105-38.1.

    Part V. Repeal Special Interest Exemptions and Preferential Rates in Sales Tax and Expand Sales Tax Base to Include Service Contracts

    Amends GS 105-164.3, to add definitions for the following terms as they apply in Article 5 (sales and use tax): (1) alteration, repair, maintenance, cleaning, and installation services; (2) service contract; and (3) short-term lease or rental.

    Amends GS 105-164.4, Tax imposed on retailers, providing that, in regards to GS 105-164.4(4a), the general rate of tax, 4.75%, applies to gross receipts derived from sales of electricity to a residential property. As used in this subdivision, residential property means property where the predominant use is for residential purposes. Amends GS 105-164.4 to add (10), establishing that the general rate of tax applies to specified tangible personal property services, including service contracts; alteration, repair, maintenance, cleaning, or installation services; and specified short-term leases or rentals.

    Amends GS 105-164.13, Retail sales and use tax, providing that service contracts or alteration, repair, maintenance, cleaning, or installation services are exempt from the tax imposed  in this Article if they are provided for tangible personal property exempt from tax under this Article or under GS 105-164.13(32).

    Repeals GS 105-164.13(11a), (13c), (27), (28), (30), (49), and (50), all subsections  dealing with tax exemptions for specified personal property, digital property, and services.

    Repeals GS 105-164.13C (Sales and use tax holiday) and GS 105-164.13D (Sales and use tax holiday for Energy Star-qualified products).

    Amends GS 105-467(b), making conforming changes.

    Part V becomes effective July 1, 2014, and applies to sales made on or after that date.

    Part VI. Reduce State Sales Tax Rate from 4.75% to 4.25% over Two Years

    Amends GS 105-164.4, Tax imposed on retailers, providing for a 4.5% general sales tax rate (was, 4.75%), effective July 1, 2014, and then for a 4.25% tax rate, effective July 1, 2015.

    Part VII. Transitional Provision, Savings Clause, and Effective Date

    Amends GS 105-237.1(a)(6), providing that the Secretary can compromise a taxpayer's liability for tax when  the taxpayer is a retailer or consumer and the assessment is for sales or use tax which failed to be collected or paid on an item that first became taxable under that article on or after July 2, 2014. A good faith effort to comply with sales and use tax laws is required for the compromise.

    Provides that this act does not affect the rights or liabilities of the state, a taxpayer, or another person arising under a statute amended or repealed by this act before the effective date of its amendment or repeal, nor does it affect the right to any refund or credit of a tax that accrued under the amended or repealed statute before the effective date of its amendment or repeal.


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