“Technical” Revenue Laws Changes in North Carolina

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On June 21, 2012, the North Carolina General Assembly enacted its annual updates and so-called technical revisions of the revenue laws. Session Law 2012-79.

Affiliated Corporations. GS 105-130.2(a) is amended to add a definition of “affiliate” for all corporate income tax purposes. Originally, the corporate tax part referred to affiliate in two places: GS 105-130.6, which authorized correcting non-arms-length pricing between affiliates, and GS 105-130.5, listing the North Carolina adjustments to federal taxable income. Two of those adjustments were and still are adjustments for pricing corrections for affiliate transactions under GS 105-130.6 (now GS 105-130.5A). The adjustment section did not have to define affiliates because it incorporated GS 105-130.6.

When the General Assembly repealed GS 105-130.6, and adopted in its place GS 105-130.5A, the new section defined an affiliated group as requiring more than 50 percent voting control. As under prior law, this definition should have served for the related adjustments section, because the adjustments section merely incorporated the adjustment made for affiliated non-arms-length transactions under GS 105-130.5A (in lieu of forced combination).

By introducing a new general purpose definition of affiliate that is not the same as the definition in GS 105-130.5A, the General Assembly has potentially expanded the DOR’s authority to adjust corporate taxable income, or at least introduced an ambiguity into the law, which may serve the same purpose. The definitions differ in that the new general definition that will apply for purposes of the adjustments section refers only to “control” undefined, while affiliation in GS 105-130.5A specifies more than 50 percent voting control.

Voluntary Combined Returns. Second, the law makes changes coordinating with previously enacted Session Law 2012-43, addressing combined returns. That law forbids the DOR to force combinations until it adopts an administrative rule explaining the grounds for forced combination.

The new law amends GS 105-130.14 to assume such a rule will be adopted. Further it makes clearer that North Carolina is moving to allow voluntary combinations, whether or not the taxpayer’s facts would require forced combination under the DOR’s standards, whatever they may be. As a result, at the present time, corporations probably can file combined returns in North Carolina if it can get the DOR to agree under undefined standards, but the DOR cannot force combinations until it issues satisfactory administrative rules.

This is nearly the best of both worlds for corporate taxpayers; the only thing better would be for the General Assembly to allow voluntary combinations, but that would require the General Assembly to define the grounds for combination, which up to now it has tried to get the DOR to do for it.

Sales Tax on Promotional Gifts. GS 105-164.12C is added to reduce sales and use taxation on vendors. It relieves from use tax the tax on the cost of goods given away free to customers in cases of food vendors and other vendors where the gift is conditioned on the purchase of another item. Otherwise free product remains subject to the use tax. This subject has been previously addressed in court cases.

Aircraft Use Tax. GS 105-164.14 is amended to make clear that an airplane that does not depart or land in this state is not subject to the use tax on lubricants, repair parts and accessories. This appears to be a legislative solution to assertions that the DOR had made that interstate carriers had to include “overfly” miles in the computation of miles traveled in the state. If the DOR had succeeded, it could have dramatically increased the liability of air carriers for this use tax.

Separately Stating the Sales Tax. GS 105-164.7 allows a retailer to include the sales tax in the sale price, and not separately state it in the receipt, if the retailer “displays a statement indicating the sales price includes the tax.” This is not exactly in conflict with GS 105-164.9, but leaves the two in tension. That section forbids a retailer to advertise that it will absorb the sales tax.

No doubt retailers sometimes want to hide the sales tax and sometimes want to clearly state it separately, so that the price of the product will seem lower. This change seems to let the retailer choose which, but apparently on an all or nothing basis. There is no standard for how the display statement must be made. Obviously, it can be more or less prominent, depending on the needs of the retailer.