NC Tax Law Changes:NC Tax Law Changes:20072007--20092009

Revenue Laws Study CommitteeCindy Avrette, Research Division,NCGAOctober 22, 2008

Biennium at a GlanceBiennium at a Glance

2007 Fiscal Year $1.54 billion surplus

3rd year in a row

Net tax reductionsfor FY 07-08 =$87.5 million

Net tax reductionsfor FY 08-09 =$147.5 million

2008 Fiscal Year Surplus < than last

several years

$90 m ahead offorecast

Net tax reductionsfor FY 08-09 =$18.7 million

Net tax reductionsfor FY 09-10 =$79.1 million

General Trend TowardsGeneral Trend Towards ……

More income tax exemptions anddeductions

More sales tax exemptions andexceptions

New tax credits

Sunset extensions of credits and refunds

New property tax exclusions

Structural TaxStructural Tax ChangesChanges20072007--20092009

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Gift tax repealed (1-1-09)

Income Tax Law ChangesIncome Tax Law Changes

New Deductions

529 Plan (2007)

Increased maximumamount

Removed incomelimitations until 2011

Firefighter/RescueSquad (2007)

Manufactured HomeCommunity sold toMHC Owners (2008)

New Credits

WOTC (2007)

Adoption (2007)

Long Term CareInsurance (2007)

Donation of funds to anonprofit (2007) or to aunit of government (2008)

for use by it to obtainrenewable energyproperty

Sales Tax ChangesSales Tax Changes

2007 Exemptions Commercial fishing Baked goods sold in

thrift stores Baler twine School instructional

material included inholiday if $300 or less

Four-year phase-out oftax on electricity, pipednatural gas, and fuel 2007 – 2010 $40 million

2008 Changes Sales Tax Holiday for

Energy Star products Lower tax rate on

baked goods sold byartisan bakers

Exempt Interior designservices

Sales tax refund forcertain nonprofitsaffiliated with UNC

Clarify 501(c)(3) salestax refunds

Sales Tax ChangesSales Tax Changes

2007 Exemptions Commercial fishing Baked goods sold in

thrift stores Baler twine School instructional

material included inholiday if $300 or less

Four-year phase-out oftax on electricity, pipednatural gas, and fuel 2007 – 2010 $40 million

2008 Changes Sales Tax Holiday for

Energy Star products Lower tax rate on

baked goods sold byartisan bakers

Exempt Interior designservices

Clarify 501(c)(3) salestax refunds

Sales tax refund forcertain nonprofitsaffiliated with UNC

Economic IncentivesEconomic Incentives

2007 Changes

Analytical services

Software publishers

Railroad intermodalfacilities

Datacenters

Aircraft manufacturers

R&D businesses

JDIG cap extended

2008 Changes

Extended sunsets

Increase QBV tax creditcap

Sales tax refund forsolar electricitygenerating materialsmanufacturing

Machinery refurbishers

JDIG cap extended

Sunsets ExtendedSunsets 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 EmployeeHealth Insurance Benefits

Credit for Film Industry

2007 Property Tax Changes2007 Property Tax Changes

Increased incomeeligibility limit forhomestead exclusionfrom $20,500 to$25,000, effective July1, 2008

Created homesteadcircuit breaker programfor low-income elderlyand disabled taxpayers,effective July 1, 2009

Added workingwaterfront property &aquatic species farm toPUV program

2008 Property Tax Changes2008 Property Tax Changes

More frequentrevaluations

PUV program expandedto include wildlifeconservation

Exemption for leaseholdinterest in exemptproperty used foraffordable housing

Homestead exclusion fordisabled veterans andspouses

Exclusion for heavyequipment rentals (localoption GR tax)

Lower valuation of low-income housingdevelopments

Exemption for freesamples of prescriptiondrugs

80% reduction invaluation of solar energyelectric systems

Most Notable Changes in 2008Most Notable Changes in 2008

Sales tax New exemptions

New holiday

Small BusinessProtection Act

Corporate tax IRC update

Minor changes

Franchise Tax

PTP

Multiple sunsetsextended

Personal taxes Increase in earned

income tax credit

Miscellaneous creditsand deductions

Repeal gift tax

Property tax Homestead exclusion

for veterans

Wildlife conservationincluded in the PUVprogram

Earned Income Tax CreditEarned Income Tax Credit

Increase EITC 3.5% to 5% of

federal creditamount

$21 million

Effective 2009taxable year

Federal creditamount varies byhousehold size andincome; indexed

Gift Tax RepealGift Tax Repeal

Repeal gift tax

$17.5 million

Effective for giftsmade on or afterJanuary 1, 2009

Supported byNCBA & NCACPA

CN & TN onlystates left with gifttax

Small Businesses Come toSmall Businesses Come toRaleighRaleigh

Resulted in Specific LegislationResulted in Specific Legislation

Sales tax exemption for baked goodssold by artisan bakeries

Sales tax exemption for interior designservices

Small Business Protection Act

Revenue Laws to study several sales taxspecific issues

Small Business Protection ActSmall Business Protection Act

Provided certain protections related tosales and use tax obligations

Reduction of assessment

Waiver of penalties

Extended protection to verbal advicegiven by DOR

Gave DOR additional flexibility w/ offers& compromise

SBPA: QualificationsSBPA: 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

SBPA: AssessmentsSBPA: 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 7-15-08

Assessments identified prior to 7-15-08

Assessments collectable but not paid as of 7-15-08

Paid w/in 6 months, timely refund claim filed

SBPA: Verbal AdviceSBPA: Verbal Advice

Protection of written advice from DORextended to verbal advice from DOR 7-16-08: DOR records establish erroneous

advice given

1-1-09: DOR must document conversationswith taxpayers, whether in person or byphone, when specific advice requested

7-1-09: DOR document certain sales taxquestions

7-1-10: Record calls at TAC

SBPA: Offer & CompromiseSBPA: Offer & Compromise

Adjusted for inflation

Eliminated requirement that DOR obtainapproval from AG, unless in litigation

Provided DOR the authority to settle taxliability for less than that asserted to bedue when the collection of an amountgreater would produce an unjust resultunder the circumstances

Revenue Laws StudiesRevenue Laws Studies

Taxation of services necessary tocomplete sale of tangible personalproperty

Standards for distinguishing be/performance contracts and retailers

Distinction be/ food and prepared foodand its taxation

Homestead Exclusion forHomestead Exclusion forDisabled Veterans and SpousesDisabled Veterans and Spouses

Property tax exclusion = $45,000 is assessedvalue of permanent residence(Homestead Exclusion = $25,000)

No age requirement; disability requirement(Homestead Exclusion is age 65 or older or totally andpermanently disabled)

No income requirement(Homestead Exclusion = $25,000 for 2008; $25,600 for 2009)

Effective July 1, 2009

Wildlife ConservationWildlife Conservation -- PUVPUV

20 acres, capped at100 acres

5-year ownership

Study 3-year fiscalimpact on localgovernments –2015 NCGA

Wildlife habitatconservationagreement (WRC)

Classified underPUV whenagreement signed

July 1, 2010

Other Legislation in 2008Other Legislation in 2008

Special assessments as revenue for purposesof local government revenue bonds(SL 2008-165)

Procedure for Tax Class Actions(SL 2008-107)

Home Inspector Privilege Tax(SL 2008-206)

Resale of Tickets via Internet(SL 2008-158)

Toll Enforcement Authority Changes(SL 2008-225)

2008 Revenue Laws Proposals2008 Revenue Laws Proposals

Procedure for Tax ClassActions -

IRC Update -

Estate Tax Changes -

Modify Circuit BreakerProgram -

Modify ReappraisalSchedules -

Exempt Disaster AssistanceDebit Cards -

Corporate Tax Chg -

Franchise Tax

PTP

Technical Bill -

Supplemental PEG Support -

Short-Term Heavy EquipmentRentals -

Extend Sunsets on:

R&D -

State Ports -

Small Business EmployeeHealth Insurance Benefits-

Large RecyclingFacility -

What a Difference a Year Makes!What a Difference a Year Makes!

2007 Fiscal Year

$1.54 billion surplus

3rd year in a row

2008 Fiscal Year

Surplus < than lastseveral years

$90 m ahead offorecast

2009 Fiscal Year

Healthysurpluses of lastseveral years willnot be repeated