NC Tax Law Changes: Revenue Laws Study Committee Cindy Avrette, Research Division, NCGA October 22, 2008

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1 NC Tax Law Changes: Revenue Laws Study Committee Cindy Avrette, Research Division, NCGA October 22, 2008

2 Biennium at a Glance 2007 Fiscal Year $1.54 billion surplus 3 rd year in a row Net tax reductions for FY = $87.5 million Net tax reductions for FY = $147.5 million 2008 Fiscal Year Surplus < than last several years $90 m ahead of forecast Net tax reductions for FY = $18.7 million Net tax reductions for FY = $79.1 million

3 General Trend Towards More income tax exemptions and deductions More sales tax exemptions and exceptions New tax credits Sunset extensions of credits and refunds New property tax exclusions

4 Structural Tax Changes Sales Tax 6.75% sales tax rate 4.75% State & 2% local (October 1, 2009) County option sales tax of.25% Personal Taxes Three income tax brackets (6% to 7.75%) Refundable Earned Income Tax Credit (5%, 2009) Gift tax repealed (1-1-09)

5 Income Tax Law Changes New Deductions 529 Plan (2007) Increased maximum amount Removed income limitations until 2011 Firefighter/Rescue Squad (2007) Manufactured Home Community sold to MHC Owners (2008) New Credits WOTC (2007) Adoption (2007) Long Term Care Insurance (2007) Donation of funds to a nonprofit (2007) or to a unit of government (2008) for use by it to obtain renewable energy property

6 Sales Tax Changes 2007 Exemptions Commercial fishing Baked goods sold in thrift stores Baler twine School instructional material included in holiday if $300 or less Four-year phase-out of tax on electricity, piped natural gas, and fuel $40 million 2008 Changes Sales Tax Holiday for Energy Star products Lower tax rate on baked goods sold by artisan bakers Exempt Interior design services Sales tax refund for certain nonprofits affiliated with UNC Clarify 501(c)(3) sales tax refunds

7 Sales Tax Changes 2007 Exemptions Commercial fishing Baked goods sold in thrift stores Baler twine School instructional material included in holiday if $300 or less Four-year phase-out of tax on electricity, piped natural gas, and fuel $40 million 2008 Changes Sales Tax Holiday for Energy Star products Lower tax rate on baked goods sold by artisan bakers Exempt Interior design services Clarify 501(c)(3) sales tax refunds Sales tax refund for certain nonprofits affiliated with UNC

8 Economic Incentives 2007 Changes Analytical services Software publishers Railroad intermodal facilities Datacenters Aircraft manufacturers R&D businesses JDIG cap extended 2008 Changes Extended sunsets Increase QBV tax credit cap Sales tax refund for solar electricity generating materials manufacturing Machinery refurbishers JDIG cap extended

9 Sunsets Extended Aviation Fuel Sales Tax Refunds Credit for R&D Credit for Low-Income Housing Credit for Mill Rehabilitation Credit for State Ports Credit for Small Business Employee Health Insurance Benefits Credit for Film Industry

10 2007 Property Tax Changes Increased income eligibility limit for homestead exclusion from $20,500 to $25,000, effective July 1, 2008 Created homestead circuit breaker program for low-income elderly and disabled taxpayers, effective July 1, 2009 Added working waterfront property & aquatic species farm to PUV program

11 2008 Property Tax Changes More frequent revaluations PUV program expanded to include wildlife conservation Exemption for leasehold interest in exempt property used for affordable housing Homestead exclusion for disabled veterans and spouses Exclusion for heavy equipment rentals (local option GR tax) Lower valuation of lowincome housing developments Exemption for free samples of prescription drugs 80% reduction in valuation of solar energy electric systems

12 Most Notable Changes in 2008 Sales tax New exemptions New holiday Small Business Protection Act Corporate tax IRC update Minor changes Franchise Tax PTP Multiple sunsets extended Personal taxes Increase in earned income tax credit Miscellaneous credits and deductions Repeal gift tax Property tax Homestead exclusion for veterans Wildlife conservation included in the PUV program

13 Earned Income Tax Credit Increase EITC 3.5% to 5% of federal credit amount $21 million Effective 2009 taxable year Federal credit amount varies by household size and income; indexed

14 Gift Tax Repeal Repeal gift tax $17.5 million Effective for gifts made on or after January 1, 2009 Supported by NCBA & NCACPA CN & TN only states left with gift tax

15 Small Businesses Come to Raleigh

16 Resulted in Specific Legislation Sales tax exemption for baked goods sold by artisan bakeries Sales tax exemption for interior design services Small Business Protection Act Revenue Laws to study several sales tax specific issues

17 Small Business Protection Act Provided certain protections related to sales and use tax obligations Reduction of assessment Waiver of penalties Extended protection to verbal advice given by DOR Gave DOR additional flexibility w/ offers & compromise

18 SBPA: Qualifications Annual gross receipts < $1.8 million Remitted S&U taxes collected No prior audit on issue GF effort to comply with S&U tax law; Incorrect application of one or more: Rate of tax that applies to food Distinction between retailer and performance contractor Distinction between incidental services and services necessary to complete sale of tpp Determination of whether a person is a manufacturer

19 SBPA: Assessments Amount of reduction in assessment Monthly GR up to $50,000, 98% reduction Monthly GR up to $100,000, 95% reduction Monthly GR up to $150,000, 90% reduction Limited retroactive application Assessments pending Assessments identified prior to Assessments collectable but not paid as of Paid w/in 6 months, timely refund claim filed

20 SBPA: Verbal Advice Protection of written advice from DOR extended to verbal advice from DOR : DOR records establish erroneous advice given : DOR must document conversations with taxpayers, whether in person or by phone, when specific advice requested : DOR document certain sales tax questions : Record calls at TAC

21 SBPA: Offer & Compromise Adjusted for inflation Eliminated requirement that DOR obtain approval from AG, unless in litigation Provided DOR the authority to settle tax liability for less than that asserted to be due when the collection of an amount greater would produce an unjust result under the circumstances

22 Revenue Laws Studies Taxation of services necessary to complete sale of tangible personal property Standards for distinguishing be/ performance contracts and retailers Distinction be/ food and prepared food and its taxation

23 Homestead Exclusion for Disabled Veterans and Spouses Property tax exclusion = $45,000 is assessed value of permanent residence (Homestead Exclusion = $25,000) No age requirement; disability requirement (Homestead Exclusion is age 65 or older or totally and permanently disabled) No income requirement (Homestead Exclusion = $25,000 for 2008; $25,600 for 2009) Effective July 1, 2009

24 Wildlife Conservation - PUV 20 acres, capped at 100 acres 5-year ownership Study 3-year fiscal impact on local governments 2015 NCGA Wildlife habitat conservation agreement (WRC) Classified under PUV when agreement signed July 1, 2010

25 Other Legislation in 2008 Special assessments as revenue for purposes of local government revenue bonds (SL ) Procedure for Tax Class Actions (SL ) Home Inspector Privilege Tax (SL ) Resale of Tickets via Internet (SL ) Toll Enforcement Authority Changes (SL )

26 2008 Revenue Laws Proposals Procedure for Tax Class Actions - IRC Update - Estate Tax Changes - Modify Circuit Breaker Program - Modify Reappraisal Schedules - Exempt Disaster Assistance Debit Cards - Corporate Tax Chg - Franchise Tax PTP Technical Bill - Supplemental PEG Support - Short-Term Heavy Equipment Rentals - Extend Sunsets on: R&D - State Ports - Small Business Employee Health Insurance Benefits - Large Recycling Facility -

27 What a Difference a Year Makes! 2007 Fiscal Year $1.54 billion surplus 3 rd year in a row 2008 Fiscal Year Surplus < than last several years $90 m ahead of forecast 2009 Fiscal Year Healthy surpluses of last several years will not be repeated