August 2024

Flagging Type Services Not Subject to Sales Tax: The North Carolina Department of Revenue (Department) recently issued a Private Letter Ruling addressing whether a taxpayer should charge sales tax in regard to flagging type services which include use of stop and slow paddles to flag traffic around the closed portion of a street where the taxpayer's customers are performing some type of road repair, maintenance, or construction. According to the facts in this Ruling, a typical job for the taxpayer would involve shifting traffic or closing a lane of traffic, and the taxpayer would use its own equipment such as cones, barrels, and signs to prevent drivers from entering the closed portion of a road which is the subject of the contractor's work. On each day, according to the Ruling, the taxpayer collects its equipment and reopens the road. In addition, the Ruling noted that the taxpayer provides a copy of an estimate, a service agreement, and an invoice for this type of work for the contractors. Further, the Ruling noted that a plan is developed by an employee of the taxpayer with specific training and certification and the job is staffed by employees with various certifications; and, importantly, the Ruling further states that taxpayer's employees and temporary employees have control over the taxpayer's equipment at all times. Based upon these facts, the Department concluded in this Ruling that the receipts from this particular service by the taxpayer for its construction customers are not subject to sales and use tax. The Department noted that to qualify as a taxable lease or rental, North Carolina law requires a transfer of possession or control of the tangible personal property; whereas, in this particular situation, the taxpayer's employees maintain control and possession of the items owned by the taxpayer and used for the flagging services. Further, the Department noted that this particular type of service is not included in the definition of taxable repair, maintenance, and installation services; nor is this type of service otherwise subject to North Carolina sales and use tax. The Department did note that while the service itself is not subject to the sales and use tax, the taxpayer must pay the appropriate sales and use tax on the items it uses to provide the service; and the taxpayer must maintain records establishing its sales and use tax liability including the appropriate tax paid on items so used to deliver such service. More information can be found here.

July 2024

Sales/Use Tax Exemption for Mill Machinery and Parts/Accessories: The North Carolina Department of Revenue (Department) recently issued a Private Letter Ruling pertaining to whether certain items are considered exempt from the sales and use tax as mill machinery or mill machinery parts or accessories. In this redacted Ruling, the Department was asked to determine the exempt status with respect to a contractor who was under contract to construct a facility and provide certain equipment to a taxpayer which in turn would utilize the facility as a manufacturing plant for the assembly and sale at the facility of certain products. The items to be purchased by the contractor and provided to the taxpayer included electrical equipment, a compressed air system, electrical power distribution equipment, and HVAC equipment. In this Ruling, the Department describes how those items would be used in the manufacturing plant pursuant to information provided by the taxpayer. For the reason set forth in this Ruling, the Department determined that the contractor may purchase mill machinery or mill machinery parts or accessories for use in the performance of the construction contract with the taxpayer exempt from the sales and use tax. The Department further determined in this Ruling that the compressed air system and the HVAC equipment qualified for such mill machinery or mill machinery parts or accessories exemption, but the electrical equipment and the electrical power distribution equipment did not qualify, all for the reasons set forth in that Ruling. More information can be found here.

May 2024

Taxable Digital Audiovisual Work: The North Carolina Department of Revenue (Department) has recently issued a Private Letter Ruling pertaining to whether certain live, not pre-recorded, audio/video entertainment accessible through the taxpayer's website is subject to the North Carolina sales tax. Although the facts in this Ruling are highly redacted, the Department ultimately concluded that the fees paid for accessing the taxpayer's website are subject to the sales tax. In rendering such a conclusion, the Department noted that the sales tax applies to "certain digital property" which includes "specified digital products" and which in turn include "digital audiovisual works." Further, the term "digital audiovisual works" includes a series of related images, that when shown in succession, impart an impression of motion, together with accompanying sounds, if any, and that is transferred electronically. The Department concluded that the live video and video content on the taxpayer's website meets the definition of digital audiovisual work because it provides a series of related images, that when shown in succession, impart an impression of motion, together with accompanying sounds and is transferred electronically. More information can be found here.

April 2024

Updated Approved E-File Software Products: The North Carolina Department of Revenue (Department) has recently updated the approved listing of products that meet the requirements for electronic filing with the Department relative to individuals, corporations and franchises, partnerships, and estates and trusts. Those approved products are set forth in this updated listing, although such publication states that the Department does not endorse or promote any specific products. That updated listing can be found here.

March 2024

Tax Credits Involving Partnership: On March 15, 2024, the North Carolina Department of Revenue (Department) issued an Important Notice addressing tax credits involving partnerships. In that Notice, the Department stated that in September 2018, the Department issued an Important Notice concerning tax credits involving partnerships, but very recently the North Carolina Business Court issued decisions addressing tax credits involving partnerships. Those Business Court decisions, as referenced in this Notice, are McCabe v. N.C. Department of Revenue (April 3, 2023) and N.C. Farm Bureau Mutual Insurance Company v. N.C. Department of Revenue (April 3, 2023). The Department goes on to state in such Notice that considering the Business Court decisions, the 2018 Important Notice is withdrawn, and the Department will administer the law consistent with those decisions. The Department further states that this Notice is effective as of March 14, 2024, and that any questions about this Notice may be e-mailed to the Department at the e-mail address set forth in the Notice. More information can be found here.

February 2024

2024 Excise Tax Rate for Motor Fuels: The North Carolina Department of Revenue (Department) recently released a Memorandum setting the excise tax rate for motor fuels and alternative fuels for the period of January 1, 2024, through December 1, 2024. The Department states in this Memorandum that the excise tax rate for such fuels will decrease from 40.5 cents to 40.4 cents per gallon or gallon equivalent. The Department states that the inspection tax will remain at .0025 cents per gallon or gallon equivalent. Contact information is included in this Memorandum for any questions. More information can be found here.

January 2024

Interest Rates Increased for 2024: The North Carolina Department of Revenue (Department) recently announced that the interest rate from January 1, 2024, through June 30, 2024, will be eight percent, which is an increase from the seven percent rate that was applicable from July 1, 2023, through December 31, 2023. The Department noted that interest rates shown in that announcement do not apply to the International Fuel Tax Agreement (IFTA). In a separate announcement, the Department set the interest rate for IFTA at ten percent for the period from January 1, 2024, through December 31, 2024, an increase from the eight percent that was applicable for the period from January 1, 2023, through December 31, 2023. More information can be found here and here.

November 2023

Upcoming Seminar Events: The North Carolina Department of Revenue (Department) has recently announced several tax seminars for taxpayers to better understand their tax obligations with respect to North Carolina. Included among these announcements by the Department are the following: sales and use tax basics seminar to be held November 29, 2023, which will assist participants in better understanding their sales and use tax obligations to the Department; business tax essentials seminar scheduled for November 30, 2023 which will cover basic requirements to help a North Carolina business understand the laws and regulations necessary to be a compliant business; and federal and state estimated individual income taxes seminar scheduled for December 7, 2023 so as to help participants gain a better understanding of their federal and state estimated income tax obligations. These seminars are free to the participants. More information regarding these particular seminars can be found here, here, and here.

October 2023

Online Seller Seminar: The North Carolina Department of Revenue (Department) has recently published information pertaining to an upcoming seminar that will assist online sellers who are engaged in business in North Carolina. Areas of discussion within the seminar will include such topics as sellers with physical presence in North Carolina; remote sales to North Carolina; marketplace facilitators and marketplace sellers; as well as applying for a North Carolina Sales and Use Tax Account ID if necessary. This seminar is scheduled for November 8, 2023, and registration and related information can be found here.

September 2023

Proper Sourcing of Contract Manufacturing Service Fees: The North Carolina Department of Revenue (Department) has recently published a redacted version of Private Letter Ruling 2023-02, dated June 20, 2023, that addresses a taxpayer's question as to the proper sourcing of contract manufacturing service fees received by the taxpayer for North Carolina income tax purposes. Essentially, the taxpayer provides manufacturing services to a related multinational company, for which the taxpayer is paid various fees for such services. The taxpayer's manufacturing facilities are located in North Carolina, but the taxpayer has employees conducting business activities in a number of other states. The service fees paid to the taxpayer by the related company were approved by the IRS pursuant to a current Advance Pricing Agreement. The taxpayer receives raw materials necessary for production from the related party and uses those raw materials for manufacturing the agreed upon semi-finished and finished products to the specifications set forth in the agreement between the taxpayer and the related company. Upon completion of the manufacturing process, the taxpayer moves the products from the manufacturing facility to a temporary warehousing facility where the products await distribution as coordinated by the related company. Final sale and delivery of the product is not handled by the taxpayer but rather by the related company; and the manufacturing service fees are not dependent upon the market success or failure of the product or on the volume of the product sold. In response to the question raised by the taxpayer as to the proper sourcing of the service fees the taxpayer receives for such manufacturing activities, the Department stated that based upon its review of the information provided and the pertinent North Carolina laws, the service fees should be sourced to North Carolina if the finished product is ultimately delivered by a related entity to a customer located in North Carolina, regardless of the F.O.B. terms; and that if the ultimate destination cannot be determined, then the service fees should be sourced to North Carolina where the manufacturing services are performed. The Department discusses in this Ruling the justification for such determinations. More information can be found here.

August 2023

Interest Rate Through December 31, 2023: The North Carolina Department of Revenue (Department) issued a notice that the interest rate to be in effect during the six-month period beginning July 1, 2023, through December 31, 2023, will continue to be seven percent. The Department in this notice stated that such a rate applies to refunds and assessments but does not apply to the International Fuel Tax Agreement. Tax rates for prior periods are also set forth in this notice. More information can be found here.

July 2023

Reminder As to Installment Payment Agreement Possibility: The North Carolina Department of Revenue (Department) has continued to publish Important Information regarding situations where a taxpayer is unable to pay the tax liability in full. According to the published Important Information, the Department may be able to establish a payment installment agreement for tax liabilities if the taxpayer has received a Notice of Collection from the Department. However, if an installment payment agreement request is submitted and the taxpayer has not received a Notice of Collection, the request will not be processed according to the Department. Other information needed to submit an installment payment agreement request can be found here.

June 2023

2023 Motor Carrier Seminars: The North Carolina Department of Revenue (Department) recently announced that it has partnered with the Federal Motor Carrier Safety Administration, the North Carolina Division of Motor Vehicles, and the North Carolina State Highway Patrol, to present Motor Carrier Seminars on July 18, 19, and 20, 2023, at locations designated in the announcement. The Department stated that there is no cost to attend, but registration is required. The seminar location and registration information in the announcement can be found here.

May 2023

Retroactive Legislation Impacting Taxed Partnerships: On April 4, 2023, the North Carolina Department of Revenue (Department) issued an Important Notice addressing legislation recently enacted on April 3, 2023. That legislation includes several key provisions that enhance North Carolina's recently enacted pass-through entity (PTE) tax. The Department stated in this Notice that several of these recently enacted provisions will affect the 2022 Tax Returns, and further the purpose of this Notice is to provide an overview of those key retroactive changes. The Department then addressed several of such changes such as the expanded Taxed Partnership eligibility, changes to the instructions for the 2022 Partnership Return, changes expanding the individual income tax credit for taxes paid in another state by a PTE, and information as to amending a 2022 Tax Return in order to make the election to be a Taxed Partnership. More information can be found here.

April 2023

New Quarterly Off-Highway Use Refund Claims: On March 31, 2023, the North Carolina Department of Revenue (Department) issued an Important Notice addressing recent legislative changes to the filing frequency for refund claims of tax-paid motor fuel used for off-highway use under North Carolina laws. According to the Notice, the law previously provided for an annual refund claim for tax-paid motor fuel used for off-highway purposes. Effective January 1, 2023, this Notice states that North Carolina law allows a person who purchased and uses motor fuel for a purpose other than to operate a licensed highway vehicle, to file a quarterly refund claim for excise tax paid during the preceding calendar quarter. According to this Notice, the Department has published a new form on its website for filing quarterly off-highway refund claims, and such form can be accessed through the contact information in that Notice. More information can be found here.

March 2023

Individual Income Tax Refunds Being Issued: The North Carolina Department of Revenue (Department) issued a statement on March 10, 2023, that the Department officially began issuing 2022 Individual Income Tax refunds on that date. The Department further stated that taxpayers may begin receiving refunds through the mail and through direct deposit during the week of March 13, 2023. More information can be found here.

February 2023

Individual Income Tax Season Began February 2, 2023: The North Carolina Department of Revenue (Department) recently announced that the tax filing season for individual income tax purposes began February 2, 2023. The Department noted that taxpayers who file state tax returns electronically will now receive acknowledgments. The Department did note that even though it is accepting returns as of February 2, it will be early March before it begins processing and validating return information and issuing refunds. The Department also noted that, because of Emancipation Day, a 2022 calendar year income tax return filed on or before April 18, 2023, will be considered as timely filed. More information can be found here.

January 2023

Interest Rates Set for January 1, 2023, through June 30, 2023: On December 1, 2022, the North Carolina Department of Revenue (Department) published a press release regarding the interest rate that will be applied to overpayments of tax and assessments of tax. That interest rate for the period from January 1 through June 30, 2023, is 7 percent, an increase from the previous amount of 5 percent. More information can be found here.

October 2022

Phase 2 Business Grants Issued: On October 3, 2022, the North Carolina Department of Revenue (Department) recently mailed checks to more than 3,900 North Carolina businesses awarded under Phase 2 of the Business Recovery Grant Program. According to the announcement, this Program provides payments to eligible North Carolina businesses that suffered significant economic loss during the COVID-19 pandemic. (See our April 25, 2022, newsletter.) The announcement referenced that Phase 2 of the program greatly expanded eligibility for businesses including gyms and fitness centers, as well as professionals such as barbers and cosmetologists, with the application period ending on June 1, 2022. The grant amount is a percentage of the economic loss demonstrated by the eligible businesses, and applicants that were not approved will be notified by mail. More information can be found here.

September 2022

Student Loan Forgiveness Currently Considered Taxable Income: On August 31, 2022, the North Carolina Department of Revenue (Department) published an announcement stating that at the present time, student loan forgiveness excluded from federal income under Internal Revenue Code (Code) Section 108(f)(5) is currently considered as taxable income in North Carolina. In that regard, the Department notes that as part of the American Rescue Plan, Congress enacted Section 108(f)(5) of the Code to expand the types of student loan forgiveness that would not be treated as taxable income for purposes of federal income tax. However, the Department notes that the North Carolina General Assembly did not adopt Section 108(f)(5) of the Code for purposes of the state income tax and, therefore, student loan forgiveness excluded under that Code Section is currently considered taxable in North Carolina. According to this announcement, the Department is monitoring any further enactments by the General Assembly that could change the taxability of student loan forgiveness in North Carolina. More information can be found here.

August 2022

Temporary Reduction in Late Payment Penalty: On June 30, 2022, the North Carolina Department of Revenue (Department) published an Important Notice addressing legislation that was passed in the 2021 General Assembly. Effective July 1, 2022, that 2021 legislation changed the calculation of the Failure to Pay Tax When Due Penalty. That penalty is imposed if a taxpayer does not pay the amount of tax that is owed to the Department by the due date of the applicable return, and such penalty is a percentage of the net tax that the taxpayer did not pay by the due date of that return. Pursuant to that 2021 legislation, the General Assembly, according to this Notice, enacted legislation to change the calculation of the penalty from the current flat rate of 10% to a graduated rate, effective July 1, 2022. However, the Notice further states that on June 29, 2022, Governor Cooper signed into law a continuance of the current penalty rate of 10% through December 2022; then temporarily reducing that penalty rate to 5% from January 2023 to June 2024; and then reintroduces the graduated penalty rate in July 2024. The Notice sets forth a table summarizing these changes, and further states that any questions regarding this Notice can be addressed through the Department's Customer Interaction Center at the contact information within the Notice. More information can be found here.

June 2022

Marketplace Facilitator Private Letter Ruling: Earlier this year, the North Carolina Department of Revenue (Department), through its Sales and Use Tax Division, issued a private letter ruling addressing the question of whether a certain taxpayer would be considered as a marketplace facilitator within the facts presented to the Department. Under those facts, the taxpayer created a business-to-business online platform to enable participants to list their parts inventories on the internet and allow customers to place orders for those parts through the platform. According to the ruling, the taxpayer owns and administers the electronic infrastructure of the platform and provides the necessary support to enable participants to connect with the platform. This website can be accessed only by qualified customers with log-on credentials; and, once logged on, the customers may review and order inventory according to the terms of the website. Customers using the website have two payment options, either by establishing an account or by providing credit card information. In response to the question of whether the taxpayer is a marketplace facilitator, the Department first reviewed North Carolina law regarding marketplace facilitators, and then concluded that the taxpayer is a marketplace facilitator which makes marketplace facilitated sales in North Carolina. The Department noted that North Carolina provides a two-part definition of a marketplace facilitator, with the first being that the person lists or otherwise makes available for sale a marketplace seller's items through a marketplace owned or operated by the marketplace facilitator; and second, the person collects the sales or purchase price, processes payments, or makes payment processing available. The Department concluded that this taxpayer satisfied both parts of this definition. More information can be found here.

May 2022

Information Regarding New Deduction for Certain Military Retirement Pay: On May 3, 2022, the North Carolina Department of Revenue (Department) issued an Important Notice addressing North Carolina's new deduction for certain military retirement pay and survivor benefit plan payments. As stated in this Notice, a 2021 legislative act contained a provision that allows eligible retired members of the Armed Forces of the United States to deduct certain military retirement pay when calculating the North Carolina taxable income beginning tax year 2021; and such law also allows eligible beneficiaries of the Survivor Benefit Plan to deduct certain of the Plan payments beginning tax year 2021. Specifically, the Notice states for taxable years beginning on or after January 1, 2021, North Carolina allows a deduction for the following payments received during the taxable year from the United States government: (a) retirement pay for service in the Armed Forces to a retired member that has served at least 20 years and who is medically retired under Federal law, as well as (b) payments of a Plan to a beneficiary of a retired member who is eligible to deduct retirement pay under this new North Carolina law. The Notice also contains various frequently asked questions, as well as contact information for assistance. More information can be found here.

April 2022

Phase 2 of the Business Recovery Grant Program Begins May 2, 2022: On April 12, 2022, the North Carolina Department of Revenue (Department) issued a press release regarding the Department's plans to launch applications for Phase 2 of the Business Recovery Grant Program (Program) on Monday, May 2, 2022. The application deadline is June 1, 2022. The press release stated changes are being made to the Program's eligibility criteria allowing many additional businesses to qualify for these grants. According to the release, the Program will issue a payment to an eligible North Carolina business that suffered an economic loss of at least 20 percent during the pandemic; the grant amount is a percentage of the economic loss demonstrated by the eligible business or $500,000, whichever is less. The release further states that many businesses excluded from Phase 1 are eligible to apply in Phase 2 and, in addition to COVID-impacted businesses in the hospitality industry such as restaurants and hotels, the Program will now be open to other businesses affected by the pandemic, with a list of eligible businesses included in the release. Further, the release stated two types of grants will be available to eligible businesses for Phase 2: (i) a hospitality grant available to eligible arts, entertainment, or recreation businesses, as well as eligible accommodation or food service businesses such as a hotel, restaurant, or bar (NAICS Code 71 and 72); and (ii) a reimbursement grant available to eligible businesses not classified in NAICS Code 71 or 72. A business's previous receipt of a grant award from certain federal programs will not make it ineligible for a reimbursement grant. Other terms and conditions for applying for the Program grants are set forth in the Department's release. More information can be found here.

March 2022

Estimated Tax Interest Relief for Farmers/Fishermen: On February 25, 2022, the North Carolina Department of Revenue (Department) issued an Important Notice informing eligible farmers and fishermen of a recently enacted law that affects an exception to the requirement to make estimated tax payments for the tax year 2021. Under this new North Carolina law, signed in February 2022, the Department will not assess estimated tax interest on any farmer or fisherman if the individual files a North Carolina individual income tax return and pays the tax shown due on the tax return by April 15, 2022. According to this Important Notice, this relief is being provided due to the later-than-usual signing of the North Carolina budget, which caused a delay in the opening of the 2022 North Carolina tax filing season. As such, a farmer or fisherman who has a tax year ending on December 31, 2021, may have difficulty electronically filing their 2021 North Carolina individual income tax return by March 1, 2022, the normal deadline for filing that tax return. This estimated tax interest relief for a farmer or fisherman is automatic if the individual files the 2021 individual income tax return and makes the full payment shown on that return by April 15, 2022. More information can be found here.

February 2022

Motor Fuels and Alternative Fuels Tax Rate For 2022: The North Carolina Department of Revenue (Department) recently issued a Memorandum stating the motor fuels and alternative fuels tax rate for the period of January 1, 2022 through December 31, 2022, will be 38.5 cents per gallon or gallon equivalent. The previous rate for 2021 was 36.1 cents per gallon. The Department also states in this Memorandum the inspection tax will remain at .0025 cents per gallon. More information can be found here.

January 2022

Application Process for Business Recovery Grants: On December 16, 2021, the North Carolina Department of Revenue (Department) announced the Department will begin accepting applications for Business Recovery Grants on December 16, 2021. The Business Recovery Grant Program, according to this announcement, will issue a one-time payment to eligible North Carolina businesses that experienced significant economic loss during COVID-19. The application period closes January 31, 2022 and the Department will administer the Program. There are two types of grants that will be available to eligible businesses that suffered an economic loss of at least 20 percent during the pandemic: (i) a hospitality grant will be available to eligible arts, entertainment, or recreation business, as well as an eligible accommodation or food service business such as a hotel, restaurant or bar – referencing North American Industry Classification System (NAIC) Code 71 and 72; and (ii) a reimbursement grant will be available to an eligible business not classified in NAICS Code 71 and 72 and that did not receive funding from other relief programs, including the Paycheck Protection Program, COVID-19 Job Retention Grant, and the EIDL Advance. The amount of the grant is a percentage of the economic loss demonstrated by the eligible business or $500,000, whichever is less. Eligible business owners may apply online at www.ncdor.gov. More information can be found here.

October 2021

Impact of Certain Federal Laws On North Carolina Individual Income Tax: On October 8, 2021, the North Carolina Department of Revenue (Department) issued an Important Notice addressing the question of whether certain federal legislation enacted in late 2020 and early 2021 impacted the computation of the North Carolina individual income tax. In that regard, the Department noted that on December 27, 2020, the federal Consolidated Appropriations Act, 2021 was signed into law, and that March 11, 2021 the federal American Rescue Plan Act of 2021 was also signed into law. The Department noted that those federal laws excluded specific items of income from the federal definition of gross income as of May 1, 2020, such as certain financial assistance to individuals and businesses impacted by COVID-19. The Department also states that the North Carolina General Assembly each year considers whether to adopt the current Internal Revenue Code (Code) to make certain tax definitions and calculations of adjusted gross income consistent between the Code and the North Carolina tax statutes. However, the Department pointed out that even though the General Assembly is still in session, it has not so far enacted the changes to the Code as it was enacted as of March 11, 2021 or later; and, as a result, taxpayers whose federal adjusted gross income excluded items of income that would otherwise be included in taxable income as of May 1, 2020, must add back that excluded income when calculating the North Carolina taxable income unless the General Assembly later adopts those federal exclusions. According to this Notice, examples of excluded income would include the Economic Injury Disaster Loan grants, certain Small Business Association loan payments, and the first $10,200 of 2020 unemployment benefits which are not subject to federal income tax. The Notice then provides a guide as to how to include the federally excluded income in the calculation of the North Carolina taxable income. Additionally, the Notice provides contact information at the Department if taxpayers have questions about this Notice. More information can be found here.