For example, the “market” for sales of services would be in North Carolina if the service is delivered to a location in North Carolina.  And the market for sales of intangible property would be in North Carolina if the intangible property is used therein.⁴  If the market cannot be determined by application of the rule for the specific receipt type, S.B. 622 would require a reasonable approximation.  And if reasonable approximation isn’t possible, then the receipts would be excluded from the sales factor altogether.

S.B. 622 would leave key terms undefined, such as “delivered” in the context of a service.  Notably, in 2017 the North Carolina Department of Revenue approved market-based sourcing regulations, but those rules were never approved by the Rules Review Committee and therefore did not become effective.⁵ Perhaps those 2017 regulations—or new regulations—would be used to fill in gaps left by S.B. 622’s proposed language. 

S.B. 622 would also provide special rules for broadcasters, banks, and electric power companies.

• For broadcasters, the rules for determining the market for receipts would depend on the receipt type and underlying broadcast.  For example, advertising gross receipts and license fees for audio or video programming in release would be sourced to North Carolina based on an audience factor, which generally would be the viewing audience located in North Carolina over the total viewing audience.
• For banks, the rules for determining the market for receipts would also depend on the receipt type. The proposed legislation provides specific rules for determining the market for receipts such as interest, fees, and penalties from secured or unsecured loans; net gains from the sale of loans; ATM fees; and net gains from the sales of credit card receivables.  
• Unlike other taxpayers, an electric power company would apportion its income using a single property factor, which would be computed as a fraction with the average value of real and tangible personal property owned or rented in North Carolina in the numerator, and all real and tangible personal property owned or rented and used everywhere in the denominator.

Franchise tax rate reduction

S.B. 622 would lower the franchise tax rate currently set at $1.50 per $1,000 of taxable base (0.15%) to $1.30 in 2020 (0.13%) and then $1.00 in 2021 (0.1%).  The franchise tax rate for electric power companies would be lowered to $1.00 per $1,000 of taxable base (0.1%) beginning in 2027. 

In addition to the rate reduction, the proposed legislation would remove the appraised value of real and tangible property tax base from the franchise tax computation.  By removing this base, the franchise tax would be imposed on the greater of the net worth base or the actual investment in North Carolina tangible property base. 

Sales and use tax changes

S.B. 622 would require marketplace facilitators to collect and remit sales tax when the marketplace facilitator’s sales sourced to North Carolina during the previous calendar meet either of the following: (1) gross sales in excess of $100,000, or (2) 200 or more separate transactions. A marketplace facilitator would be considered the retailer of each marketplace facilitated sale it makes and must comply with the same requirements and procedures as all other registered retailers.  A marketplace facilitator must report to each marketplace seller for whom it makes marketplace facilitated sales the gross sales sourced to North Carolina and the number of separate transactions sourced to North Carolina on behalf of the marketplace seller, due within 10 calendar days of the end of each calendar month.

S.B. 622 would revise the statute addressing accommodation rentals, as well as the definition of an accommodation facilitator.  As revised, “an accommodation facilitator” is a person who contracts, either directly or indirectly, with a provider of an accommodation to either: (1) market the accommodation and accept payment or collect payment information for the rental of the accommodation; or (2) list the accommodation for rental on a forum, platform, or other application for a fee or other consideration.  The accommodation facilitator would be considered the retailer and would be subject to collection and remittance obligations if the accommodation facilitator collects payment or a deposit for the accommodation at the time of the reservation.  An accommodation facilitator would be required to file an annual report by March 31 of each year for accommodation rentals for which it is not considered the retailer.

Reed Smith takeaway

S.B. 622’s market-based sourcing proposal is not entirely surprising.  Many, including North Carolina Secretary of Revenue Ronald Penny,⁶ have acknowledged that the General Assembly is likely to eventually enact market-based sourcing.

The proposed language in S.B. 622 suggests that market-based sourcing generally—and the Department’s 2017 proposed regulations specifically—raised questions for certain industries.  Indeed, the 2017 proposed regulations did not contain special rules for certain industries, whereas S.B. 622 contains special rules for broadcasters, banks, and electric power companies.⁷   

Reed Smith will continue to track the progress of S.B. 622. If you have any questions about how the proposed market-based sourcing provisions or other proposals in S.B. 622 may impact your company, please contact one of the authors or the Reed Smith State Tax attorney with whom you typically work.

1. Gloria Thompson is a non-attorney consultant at Reed Smith and a former Senior Vice President and State and Local Tax Director at Wells Fargo and Wachovia.
2. S.B. 622, 2019-2020 Gen. Assemb. (N.C. 2019).
3. N.C. Gen. Stat. § 105-130.4(i), (l)(3).
4. As currently in effect, N.C. General Statute section 105-130.4(i) requires receipts from intangible property to be sourced to North Carolina if they are “received from sources within this State”.
5. Available at www.ncdor.gov.  The proposed rules were issued under North Carolina H.B. 1030, enacted on July 14, 2016.  While H.B. 1030 did not enact market-based sourcing, the legislation set forth proposed statutory language for market-based sourcing and permitted the Department to publish proposed rules following the public notice and comment process in the absence of enacted law.
6. See Insight: Reed Smith’s Relationships: Ronald Penny, Secretary of Revenue, N.C. Dep’t of Revenue, BNA News, Mar. 14, 2018, available at www.bna.com.
7. In addition to the market-based sourcing rules approved by the Department in 2017, separate rules for financial institutions were circulated in draft form in 2017, as well.  These proposed regulations for banks drew largely from the Multistate Tax Commission model regulation for financial institutions, with certain adjustments such as for apportioning trading income.  These rules, however, were not approved by the Department.

Client Alert 2019-097