Comments on North Carolina legislation affecting taxation of business.

• Author: Stevens, Cathleen

June 27, 2009

On June 27, 2009, Tax Executives Institute filed the following comments with the Republican and Democratic leaders of the House and Senate Finance Committees of the North Carolina General Assembly concerning North Carolina Senate Bill 202, relating to a bill that would expand the State's franchise tax to pass-through entities and implement a "throwback rule" for taxpayers selling tangible products from locations in North Carolina to States in which they have no income tax reporting obligations. TEI's comments were prepared under the aegis of its State and Local Tax Committee, whose chair is Cathleen Stevens of Brunswick Corporation. Contributing substantially to the development of TEI's comments was Jamie S. Fenwick of Time Warner Cable. Daniel B. De Jong, TEI Tax Counsel, serves as legal staff liaison to the committee.

On behalf of Tax Executives Institute ("TEI" or "the Institute"), I urge the amendment of Senate Bill 202, which is currently being considered by the North Carolina legislature. While the bill broadly applies to all areas of North Carolina's budget, our letter focuses solely on certain sections of the bill that would affect the taxation of businesses. Specifically, we comment on those provisions that would expand the State's franchise tax to all entities with limited liability (Section 27B.2), and force corporations to include sales to states in which they are not subject to tax in their sales factors (also referred to as a "throwback" rule) (Section 27B.3). The amendments we propose in this letter fall into two categories: Technical corrections to the proposed statutory language, and substantive changes designed to avoid the enactment of ill-conceived tax policies.

Senate Bill 202 also includes provisions that would mandate combined reporting for unitary groups of corporations doing business in North Carolina. The absence of any comments on the combined reporting sections of Senate Bill 202 in this letter should not be construed as tacit support for or disapproval of those provisions. Historically, TEI has not taken a position for or against combined reporting, and we provide no opinion on that issue here.

Background

Tax Executives Institute was founded in 1944 to serve the professional needs of business tax professionals. Today, the organization has 54 chapters in North America, Europe, and Asia, including one in North Carolina. Our 7,000 members represent 3,200 of the largest companies in the world, many of which are either resident or do business in North Carolina. As the preeminent international association of business tax professionals, TEI has a significant interest in promoting sound tax policy, as well as in the fair and efficient administration of the tax laws, at all levels of government.

Franchise Tax on Business Entities

Under current law, the franchise tax applies only to corporations and limited liability companies that elect to be treated as corporations for federal income tax purposes. Section 27B.2 of the Senate Bill 202 ("the Bill") would amend Article 3 of Chapter 105 of the North Carolina General Statutes to expand the state franchise tax to all entities providing limited liability to their members or partners regardless of their treatment for federal and North Carolina income tax purposes. This represents a significant shift in North Carolina tax policy, which currently treats legal entities as taxable or not based on their...