Heat waves fail to slow TEI's technical activities: state & federal budgets, cost sharing & audit issues the focus of Institute's summer efforts.

• Position: Tax Executives Institute

Summertime livin' may be easy for some, but TEI's committees continue to roll out submissions ranging from comments on North Carolina legislation, to a letter on IRS funding, to a supplemental piece on the cost sharing regulations. In addition, collaborative efforts are underway with the Internal Revenue Service to revise and update its LMSB Division's Joint Audit Planning Process.

North Carolina Legislation

TEI filed comments with legislators from the North Carolina Senate and House Finance Committees negotiating the tax provisions of the State's budget bill (S.B. 202), recommending changes to a bill that would expand the State's franchise tax to pass-through entities and result in the creation of multiple layers of taxation on the same franchise values. The June 27 letter also argued for the removal of a provision that would implement a "throwback rule" increasing corporate income taxes for taxpayers selling tangible products from locations in North Carolina to States in which they have no income tax reporting obligations.

Like many States, North Carolina has experienced a precipitous drop in tax revenue as a result of the worldwide economic downturn. At the same time, requests for state services continue to rise, spawning large state budget deficits. "The difficult financial situations faced by many States makes continued vigilance in the area of state tax legislation increasingly important," noted TEI's 2008-2009 Vincent Alicandri.

States around the country have acted to close their budget gaps through a combination of cuts in state services and tax increases. Often these changes do not take the form of an increased tax rate, but rather an expansion of the tax base. The budget bill working its way through the North Carolina legislature follows that path by including a number of provisions designed to expand the number and types of entities required to pay certain taxes and to subject more income of multistate corporations to tax in the State.

Under current law, entities treated as partnerships and disregarded entities for federal income tax purposes are exempt from North Carolina's franchise tax. Provisions in S.B. 202 would 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. The bill would also create multiple layers of taxation on the same franchise values in tiered pass-through entity structures since...