by Rita L. Eng
On September 22, 2023, North Carolina Governor Roy Cooper announced that he will allow the budget, the 2023 Appropriations Act, to become law without his signature. The personal income tax rate has been lowered from 4.75% to 3.99% over a period of three years; and a new transportation commerce tax is imposed on for-hire ground transport services provided by for-hire ground transport service providers such as Uber, Lyft and taxi services. The franchise tax is capped at $500 on the first $1 million of a C corporation’s tax base; and taxed partnerships are allowed to have certain trusts and corporations as partners. For sales and use tax purposes, new exemptions are provided for continuing care retirement communities and breast pumps and breast pump accessories; sunset dates have been extended for certain sales to professional motorsports teams and qualifying airlines; and exemptions have been expanded pertaining to aviation as well as fuel and consumables used by boat transporting freight on inland and intracoastal waterways. For tobacco products tax purposes, the method of taxing snuff has changed from cost-based to weight-based so that snuff is taxed at 40¢ per ounce; and the tax base has been expanded to include alternative nicotine products. Further, a property tax exclusion is provided for a legacy airport; and the $50 privilege tax imposed on professionals is repealed. (L. 2023, H259, effective 07/01/2023, unless otherwise stated.)
Personal income tax rate reduction.
Effective for taxable years beginning on or after January 1, 2024, the personal income tax rate is gradually lowered from the current rate of 4.75% to 3.99% over three years. The rate would be 4.5% in 2024; 4.25% in 2025; and 3.99% for all tax years thereafter. The personal income tax rate may be further reduced between 2027 and 2034 if total general fund revenue meets specified trigger amounts.
Transportation commerce tax enacted.
Effective July 1, 2025, and applicable to for-hire ground transport services occurring on or after that date, a new transportation commerce tax is imposed on the gross receipts derived from each for-hire ground transport service provided by a for-hire ground transport service provider, which includes a transportation network company, such as Uber, Lyft, and taxi services. The rate of tax is 1.5% for an exclusive-ride service and 1% for a shared-ride service. The tax applies to the extent a passenger boards the vehicle in North Carolina regardless of whether the service is completed. The tax will be collected and administered in the same manner as the North Carolina sales and use tax so that it would be collected and remitted by the for-hire ground transport service provider and paid for by the customer.
Franchise tax cap.
Effective for taxable years beginning on or after January 1, 2025, and applicable to the calculation of franchise tax reported on the 2024 and later corporate income tax return, the franchise tax has been capped at $500 on the first $1 million of a C corporation’s tax base. A corporation will continue to pay $1.50 per $1,000 of its tax base that exceeds $1 million.
Taxed partnerships eligibility.
Effective for taxable years beginning on or after January 1, 2022, certain trusts and corporations have been added to the list of permissible owners of a partnership electing to be taxed at the entity level for the state and local tax (SALT) cap workaround: a trust if such trust does not have as a beneficiary any person other than an individual, an estate, a trust, or an organization described in IRC § 1361(c)(6); and an entity that is classified as a corporation for federal income tax purposes. For the 2022 taxable year, a partnership that could not make the election on its timely filed tax return may make the election by filing an amended return on or before October 15, 2023.
Sales tax exemptions and refunds.
Continuing care retirement communities—new exemption: Effective November 1, 2023, and applicable to sales occurring on or after that date, a sales tax exemption is provided for items other than alcoholic beverages sold by a provider of continuing care to its residents.
Breast pumps—new exemption: Effective November 1, 2023, and applicable to sales occurring on or after that date, an exemption is provided for sales of breast pumps, including repair and replacement parts, breast pump kits, and breast pump collection and storage supplies.
Aviation—exemption expanded: Effective November 1, 2023, and applicable to sales occurring on or after that date, the tax treatment of parts and accessories used in the repair and maintenance of certain aircraft has been aligned with the tax treatment of the repair and maintenance services for the same type of aircraft. The definition of a “qualified aircraft” has been modified to be an aircraft with a maximum take-off weight of 2,000 lbs. and above. Previously, a “qualified aircraft” was defined as an aircraft with a maximum take-off weight of more than 9,000 lbs. but not in excess of 15,000 lbs.
Fuel and consumables used by boat transporting freight on inland and intracoastal waterways—exemption expanded: Effective November 1, 2023, and applicable to sales occurring on or after that date, the exemption applicable to sales of fuel and other tangible personal property for use or consumption by ocean-going vessels traveling on the high seas has been expanded to include vessels engaged in the transportation of freight in intrastate, interstate, or foreign commerce when in the intracoastal waterways, sounds, or rivers.
Professional motorsports teams exemptions—sunset dates extended: The sunset date of the sales and use tax exemption for the following sales to professional motorsports racing teams or a related member of the team for use in competition in a sanctioned series has been extended from January 1, 2024 to January 1, 2028: the sale, lease, or rental of an engine; the sales price of or gross receipts derived from a service contract on, or repair, maintenance, and installation services for, a transmission, an engine, rear-end gears, and any tangible personal property that is purchased, leased, or rented and that is exempt from sales tax; the gross receipts derived from an agreement to provide an engine, where the agreement does not meet the definition of a “service contract” but may meet the definition of a “lease or rental”; and an engine or a part to build or rebuild an engine for the purpose of providing an engine under an agreement to a professional motorsports racing team or a related member of a team for use in competition in a sanctioned race series.
Professional motorsports teams refunds—sunset dates extended: The repeal dates for the annual sales and use tax refunds paid by the following taxpayers have been extended as follows: from January 1, 2024 to January 1, 2029 for motorsports teams, sanctioning bodies or a related member of such a team or body for aviation fuel used to travel to or from a motorsports event in North Carolina; and from January 1, 2024 to January 1, 2028 for professional motorsports teams or a related member of a team for tangible personal property other than tires or accessories that comprise any part of a professional motorsports vehicle.
Qualifying airlines exemption—sunset date extended: The sunset date of the sales and use tax exemption for sales of aviation gasoline and jet fuel to an interstate air business for use in a commercial aircraft has been extended from January 1, 2024 to January 1, 2029.
Tobacco products tax.
Snuff: Effective July 1, 2025, and applicable to sales or purchases occurring on or after that date, the method of taxing snuff has changed from cost-based to weight-based so that snuff is taxed at 40¢ per ounce and a proportionate rate on all fractional parts of an ounce. The tax will be computed based on the net weight as listed by the manufacturer on the package in accordance with federal law. “Snuff” is defined as a tobacco product consisting of finely cut, ground, or powdered tobacco that is not intended to be smoked.
Alternative nicotine products: Effective July 1, 2025, and applicable to sales or purchases occurring on or after that date, alternative nicotine products will be subject to tax at the rate of 10¢ per container containing up to 20 units, and at the rate of 1/2¢ per unit for any amount in a container containing over 20 units. An “alternative nicotine product” is defined as a noncombustible product that contains nicotine, whether natural or synthetic, but does not contain tobacco and is intended for human consumption, whether chewed, absorbed, dissolved, ingested, or by other means. This term does not include a vapor product or any product regulated by the U.S. Food and Drug Administration.
Property tax exclusion for a legacy airport.
Effective for taxes imposed for taxable years beginning on or after July 1, 2024, a property tax exclusion is provided for 50% of the appraised value of real and personal property located at a qualifying airport that is customarily used for aviation purposes at the airport or for commercial activities typically located at and associated with airport activities. A qualifying airport is an airport that: (1) is designated as a legacy airport by the North Carolina Department of Transportation; (2) is a general aviation airport; (3) is located within the corporate limits of a municipality; and (4) had an economic output of $850 million or more, as published in the Division of Aviation of the North Carolina Department of Transportation’s biennial economic impact study dated January 2023.
Privilege tax on professionals repealed.
Effective for taxes imposed for taxable years beginning on or after July 1, 2024, the $50 state privilege tax imposed on the following professionals has been repealed: (1) attorney-at-law; (2) physician, a veterinarian, a surgeon, an osteopath, a chiropractor, a chiropodist, a dentist, an ophthalmologist, an optician, an optometrist, a massage and bodywork therapist, or another person who practices a professional art of healing; (3) professional engineer; (4) registered land surveyor; (5) architect; (6) landscape architect; (7) photographer, a canvasser for any photographer, or an agent of a photographer in transmitting photographs to be copied, enlarged, or colored; (8) real estate broker; (9) real estate appraiser; (10) person who solicits or negotiates loans on real estate as agent for another for a commission, brokerage, or other compensation; (11) funeral director, an embalmer, or a funeral service licensee; and (12) individual licensed under the Home Inspector Licensure Act.
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