North Carolina budget expands, extends tax cuts and exemptions

Late last month, the North Carolina legislature ratified House Bill 259 through a veto-proof supermajority vote, as Gov. Roy Cooper did not sign the bill. The appropriations bill includes changes to income, franchise, and sales and use tax provisions.

The bill also creates a new transportation commerce tax that will apply to gross receipts derived from for-hire ground transport service providers, such as Uber, Lyft, and traditional taxi services.

Income tax changes

Personal income tax rate

Currently, North Carolina personal income tax statutes provide for annual reductions in the tax rate from 4.99% in 2022 to 3.99% for tax years beginning after 2025. House Bill 529 provides for further annual income tax rate reductions in 0.5% increments for tax years beginning in 2027 to a floor of 2.49%, presuming annual state General Fund collection amounts are achieved.

Taxed partnerships

Partnerships that elect to be taxed at the entity level may now have partners that are trusts if such trust’s beneficiaries are comprised of only individuals, estates, trusts, and Subchapter S corporations. Partnerships that were unable to make the Taxed Partnership Election for tax year 2022, but are now eligible to make the election as a result of the law change, may amend their timely filed partnership return until Oct. 15, 2023, to make the election.

Franchise tax changes

The bill provides for a higher flat $500 minimum tax on the first $1 million of tax base for C corporations. The portion of a C corporation’s franchise tax base that exceeds $1 million will continue to be taxed at a rate of $1.50 per $1,000 of tax base. Currently, the flat minimum franchise tax for C corporations is $200.

Subchapter S corporations will continue to be subject to a lower flat $200 minimum tax on their first $1 million tax base. The portion of an S corporation’s franchise tax base that exceeds $1 million will continue to be taxed at a rate of $1.50 per $1,000 of tax base.

These changes are effective for taxable years beginning on or after Jan. 1, 2025, and applicable to the calculation of franchise tax reported on the 2024 North Carolina income tax year corporate income tax return.

Sales and use tax changes

Sales tax exemption for continuing care retirement communities

HB 259 will exempt the sales of items by a provider of continuing care to its residents, other than sales of alcoholic beverages. “A provider of continuing care must pay sales and use tax on the purchase price of an item that is exempt from tax under this subdivision as if the provider is the user of the item,” the bill states. “As a result, the provider of continuing care is not required to pay sales or use tax if the purchase would be exempt if purchased for use, not resale, by the provider.”

North Carolina General Statute (N.C.G.S) Section 58-64-1 defines continuing care as follows:

“The furnishing to an individual other than an individual related by blood, marriage, or adoption to the person furnishing the care, of lodging together with nursing services, medical services, or other health related services, under a contract approved by the Department in accordance with this Article effective for the life of the individual or for a period longer than one year. ‘Continuing care’ may also include home care services provided or arranged by a provider of lodging at a facility to an individual who has entered into a continuing care contract with the provider but is not yet receiving lodging.”

This exemption becomes effective Nov. 1, 2023, and applies to sales occurring on or after that date.

Sales tax exemption for breast pumps

N.C.G.S. Section 105-164.3 exemptions have been expanded to include sales of breast pumps, breast pump kits, and breast pump collection and storage supplies. The exemption applies to items designed and marketed to be used with the breast pump.

Items such as bottles, traveling bags or carrying accessories, cleaning supplies, nursing bras and similar items, and creams are not exempt unless sold as part of a kit.

Expand aviation sales tax exemption

The definition of a “qualified aircraft” in N.C.G.S. Section 105-164.3(197) will be updated from “more than 9,000 pounds but not in excess of 15,000 pounds” to “2,000 pounds and above.” This change will align the parts and accessory exemption with the labor exemption for the same types of aircraft.

This exemption becomes effective Nov. 1, 2023, and applies to sales occurring on or after that date.

Extend sunset on exemption for aviation and jet fuel for commercial airlines

The sales tax exemption on fuel sold to an interstate air business for use in a commercial aircraft in N.C.G.S. Section 105-164.13 will be extended through Jan. 1, 2029. It was set to expire Jan. 1, 2024.

Expanded sales tax exemptions on boats used to transport freight

The bill expands sales tax exemptions for “fuel and consumables used by boats transporting freight on inland and intracoastal waterways.” It updates the definition of boat operators in N.C.G.S. Section 105-164.13 to include “watergoing vessels” that engage in “the transport of freight in intrastate, interstate, or foreign commerce, whether on the high seas, intercoastal waterways, sounds, or rivers.” The bill also grants exemptions to “the transport of passengers for hire exclusively on the high seas.”

This exemption becomes effective Nov. 1, 2023, and applies to sales occurring on or after that date.

Other tax changes

Transportation commerce tax

The bill creates a new excise tax that will apply to gross receipts derived from each for-hire ground transport service provided by a for-hire ground transport service provider, e.g., Uber, Lyft, and traditional taxi services. The tax rate is 1.5% for exclusive ride services and 1% for shared ride services.

The new tax applies to subject services occurring on or after Jan. 1, 2025.

What does CohnReznick think?

The bill largely expands taxpayer-friendly individual income tax rate reductions that have previously been enacted, as well as provides for new and expanded sales tax exemptions.

This new legislation provides significant changes to corporate and partnership taxpayers doing business in North Carolina. As such, it is important for such businesses to review these changes and consider their implications. We recommend you consult with your tax advisor to confirm how these new changes might impact your business.

Contact

John Iannotti, CPA, Partner, State and Local Tax (SALT)

469.669.7506

Suzanne Wilson, CPA, Director, State and Local Tax (SALT)

404.250.4044

Jason Gajramsingh, CPA, Senior Manager, State and Local Tax (SALT)

312.508.5911

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