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North Carolina Senate Passes Franchise Tax Relief Bill

May 21, 2019, 4:40 PM

Companies doing business in North Carolina would receive more tax relief under bills advancing in the legislature.

The state Senate passed a bill (S.B. 622) late May 20 that would ease franchise taxes, among other changes. Similar provisions were included in the budget bill (H.B. 966) that passed the House earlier this month.

Businesses already have benefited from recent reductions in the corporate income tax rate approved by the state’s Republican-led legislature. For 2019, North Carolina’s rate is 2.5%, lowest among the states that levy such taxes.

Cutting the state franchise tax is one of the North Carolina Chamber of Commerce’s priorities, but it remains to be seen if such relief will come this year because the governor is generally opposed to additional tax cuts for corporations.

Tiered Reduction

For most businesses in North Carolina, the current franchise tax levy is $1.50 for every $1,000 of net worth. The minimum tax currently is $200.

The pending bills would lower the rate to $1.30 from $1.50 for every $1,000 of net worth next year, and then to $1.00 in 2021. The measures also would eliminate one of the two alternative franchise tax bases.

Gary Salamido, chief operating officer and acting president of the North Carolina Chamber, said the franchise tax “is an onerous and regressive tax on North Carolina businesses that discourages them from investing in our state.”

The pending tax code changes that would “unburden businesses, allowing them to create new jobs, give back to their communities and bolster local and regional economies,” he said.

Jamal Little, a spokesman for Gov. Roy Cooper (D), said that “businesses need a strong workforce more than they need additional tax breaks for corporations and the wealthy.”

“To achieve that Governor Cooper would rather invest in higher teacher pay along with stronger public schools, community colleges and universities and he looks forward to real budget negotiations with the legislature,” Little said in a May 21 email. He declined to say whether the governor would veto the bills.

Provisions at Risk?

William W. Nelson, a partner with Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan LLP in Raleigh, said the “phased one-third reduction in the franchise tax rate, as the first step towards the expressed goal of its total elimination, as well as the elimination of one of the alternative bases, are consistent with the larger tax reform effort the legislature has pursued over the last several years.”

But Nelson said the franchise tax reduction will be at risk in budget negotiations between lawmakers and the governor, which will also involve Medicaid expansion and other issues. Since the 2018 election, Republicans no longer hold a veto-proof majority in the legislature.

In addition to the franchise tax reductions, both S.B. 622 and H.B. 966 would use market-based sourcing for apportioning multistate corporate income, raise the standard personal income tax deduction, and require online marketplace facilitators to collect and remit sales taxes.

To contact the reporter on this story: Andrew M. Ballard in Raleigh, N.C. at aballard@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Karen Saunders at ksaunders@bloombergtax.com

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