Business Incentive Changes in Recent North Carolina Legislation
- October 01, 2015
The North Carolina General Assembly passed two significant pieces of legislation affecting corporate activity, expansion and new investment in North Carolina.
First, the General Assembly passed the state budget appropriation bill, House Bill 97, which was signed by Governor McCrory on September 18, 2015.
Second, the General Assembly passed the North Carolina Competes Act, House Bill 117, which was signed by Governor McCrory on September 30, 2015.
Corporate Tax Changes in the Budget Bill
Rate Reduction Trigger
House Bill 97 provides for the reduction of the corporate income tax to 3% effective for the tax year commencing the following January 1 if the amount of the General Fund tax collections in a given fiscal year exceeds $20,975,000,000.
Single Sales Factor Apportionment
House Bill 97 phases in single sales factor apportionment over the next three years. All corporations will apportion their income using single sales commencing with tax year 2018.
Franchise Tax Base
House Bill 97 modifies the franchise tax by converting the capital stock, surplus and undivided profits base to a net worth base. Under the bill, “net worth” is a corporation’s total assets (without regard to the deduction for accumulated depreciation, depletion or amortization) less its total liabilities as determined in accordance with generally accepted accounting principles (GAAP). If the corporation does not maintain its books and records using GAAP, then its net worth would be determined in accordance with the method of accounting it uses for federal income tax purposes, as long as that method fairly reflects its net worth.
Tax Incentive Changes in the North Carolina Competes Act
House Bill 117 significantly enhances the Job Development Investment Grant (“JDIG”) program. It provides an additional $5 million in grant cap for the period beginning July 1, 2015 and ending December 31, 2015. Thereafter, the grant cap will be calculated on a calendar year basis, and for 3 years the annual cumulative project cap is increased from $15 million to $20 million. This $20 million project cap is split into semi-annual cap limitation periods of $10 million, with any unused portion of the first semi-annual period rolling over into the second.
House Bill 117 also requires local recruitment and offered incentives for projects applying for JDIG support in Tier 3 areas. It further requires maintenance of employment levels in North Carolina at the greater of employment on the date of the JDIG grant application or the date of the award.
House Bill 117 also creates an additional $15 million of annual JDIG project cap be available for high-yield projects, requiring an investment of at least $500 million in private funds and creation of at least 1,750 new jobs in North Carolina. High-yield projects may qualify for a grant term of up to 20 years, instead of the customary grant term of up to 12 years. Additionally, the amount of the high-yield project grant awarded would be increased up to 100% of the withholdings for eligible positions regardless of the tier designation of the site location. No portion of the withholdings would be allocable to the Utility Account, as with other JDIG grants.
House Bill 117 amends the local funding match formula for One NC grants. The state may match as high as $3 for every $1 of local funds in Tier 1 areas (least developed), subject to program caps. For Tier 2 (moderately developed) areas, the match formula is capped at $2 of state funds for every $1 of local funds. For Tier 3 (highly developed) areas, the match formula is capped at $1 for every $1 of local funds.
Datacenters not engaged in internet publishing as that term is defined under existing statutes were exempt from sales tax on machinery and equipment used in qualifying facilities until those statutory provisions expired on July 1, 2015. Under the prior provisions, such machinery and equipment was subject to a privilege tax similar to the 1% tax on mill machinery, parts and accessories.
House Bill 117 creates a new set of tax incentives for datacenters qualifying under its provisions. Effective January 1, 2016, sales of electricity and datacenter support equipment for use in a qualifying datacenter will be exempt from sales tax.
A qualifying datacenter is one that (a) satisfies the Department of Commerce wage standards and health insurance requirements and (b) involves an aggregate investment of at least $75 million in private funds over a five-year period any time after January 1, 2012. The Secretary of Commerce must make a written determination that a datacenter is a qualifying datacenter for the exemption to apply.
Datacenter support equipment is specifically defined as property that is capitalized for tax purposes and used for the purposes defined in the statute. This change also allows colocation datacenters to combine the investment of an operator with the investment of tenants to qualify for the exemption.
House Bill 117 provides that sales of aviation gasoline and jet fuel to interstate air carriers for use in commercial aircraft are exempt from sales tax effective January 1, 2016.