Home Builders Notch Legislative Win with Passage of Changes to State Sales Tax Law

NCHBA Team

NCHBA lobbyists Steven Webb, Mike Carpenter and Tim Minton on the floor of the State Senate as the General Assembly’s Short Session draws to a close.                      (Photo Credit – NCHBA)

No single piece of legislation passed by the North Carolina General Assembly this year will have a bigger impact on home builders and remodelers than HB 1030 (2016 Appropriations Act).  The finance portion of this legislation contains a number of important tax law changes that modify the taxation of repair, maintenance and installation (RMI) services, which became effective on March 1 of this year.

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What Builders Need to Know About the New North Carolina Sales & Use Tax

North Carolina residents and businesses will being paying sales tax on repair and maintenance services this week, and professionals in the building and remodeling industry need to be aware of how the new state levy may effect them.

Effective March 1, 2016, the 4.75% general State sales tax, and the applicable local sales tax, will apply to the sales price (or the gross receipts) derived from repair, maintenance, and installation services with respect to tangible personal property. This change expands the sales tax to certain services that were previously not subject to it. In addition, effective March 1, 2016, a second change relates to the sales price of tangible personal property where the retailer makes a separate charge for labor for installation. Where the sales tax is now due on labor for installation (see below), it does not matter that the installation charge is or is not stated separately.
These changes do NOT impose the sales tax on ALL construction labor, as some have claimed. Rather, the sales tax is extended to labor performed only under certain LIMITED circumstances.

North Carolina Home Builders Association (NCHBA) Executive Vice President and General Counsel Mike Carpenter
prepared a memo to help NCHBA members understand the upcoming changes, outlining the following:

  • How the changes apply to residential construction from a builder’s perspective, including when sales tax may be due.
  • How about contracts entered into prior to March 1, 2016?
  • What position NCHBA took on this legislation when it was being considered?

Download the NCHBA Memo on the Sales Tax Changes HERE.

Source: NCHBA

North Carolina House Overwhelmingly Rejects Senate’s Sales Tax Redistribution Proposal

Rally

Representatives Jason Saine and Bill Brawley (at podium) join other House members last week at a bipartisan rally to oppose the Senate’s Sales Tax Redistribution proposal.

The North Carolina House last week overwhelmingly rejected a Senate substitute to HB 117, the ‘NC Competes Act,’ because of language that would redistribute a larger portion of locally generated sales tax revenue statewide, likely forcing metropolitan counties like Mecklenburg to raise property taxes and fees to make up the difference.

The Senate’s proposal for a 50/50 Sales Tax Distribution between point of sale and county population was included in the economic development bill along with provisions to fund the JDIG job incentives program, expand data center tax incentives, and extend for four years the airline fuel tax exemption for American Airlines.

But the ‘compromise’ language on sales tax redistribution (the original Senate proposal redistributed 80% of local sales taxes statewide, compared to 25% under current law) was opposed by business leaders and elected officials from North Carolina’s largest metropolitan counties, who traveled to Raleigh last week to speak against the bill.  Continue reading

General Assembly Approves Tax Reform Plan as End of Session Nears

AccountingEarly last week, leaders in the North Carolina House and Senate joined Governor McCrory in Raleigh to announce an agreement on legislation they termed “historic and meaningful Tax Reform” that will spur economic development and ensure enough money is available to provide for public services. Republicans said implementing the plan would move the state’s overall business tax climate from 44th in the U.S to 17th, as determined by the Washington, D.C.-based Tax Foundation.

Here are the details of the approved plan:

Personal Income Tax:

  • Reduces and simplifies the 3-tiered state personal income tax from the current maximum rate of 7.75% and minimum rate of 6% to 5.8% in 2014 and 5.75% in 2015.
  • Increases the standard deduction for all taxpayers, applied to the:
    • ​First $15,000 of income for those married filing jointly;
    • First $12,000 of income for heads of household;
    • First $7,500 of income for single filers;
  • Retains the state child tax credit and increases it for families making less than $40,000;
  • Offers a $20,000 combined maximum deduction for mortgage interest and property taxes;
  • Makes charitable contributions fully deductible;
  • Protects all Social Security income from state taxes.

Corporate Income Tax:

  • Reduces the corporate income tax from 6.9% to 6% in 2014 and then to 5% in 2015 a 29% rate reduction.
  • If the state meets revenue targets (i.e. if tax revenue grows due to a growing economy), the corporate income tax will drop to 4% in 2016 and 3% in 2017.

Other Highlights:

  • Makes no changes to franchise tax laws – that issue and others will be studied during the interim between sessions;
  • Extend the state sales tax to certain service contracts and tickets to certain attractions (movies, live shows, etc.) beginning Jan. 1;
  • Caps the state gas tax;
  • Eliminates North Carolina’s death tax;
  • Caps sales tax refund for Nonprofits at $45 million per year

With Tax Reform done and a deal on the budget wrapped over this past weekend, the General Assembly is heading into what is almost certainly its final week. REBIC and our partner associations are continuing to press for the passage of key regulatory reform legislation, and will keep you appraised of any progress as the session nears its conclusion.

You can download the Tax Reform legislation HERE.

Here’s a summary of the plan’s fiscal impact.

Here’s a summary on the impact on taxpayers at various income levels.

Senate Passes Tax Reform Compromise Plan

AccountingThe North Carolina Senate approved a substitute Tax Reform plan last week, with hopes of reaching an agreement with the House after both chambers return from the holiday weekend.  The plan is essentially a hybrid of the original Senate and House reform efforts, but a LONG way from the sweeping overhaul embraced by Senate President Pro-Tem Phil Berger and Matthews Senator Bob Rucho just two months ago. Here are the key points:

  • Eliminates North Carolina’s three-tiered personal income tax bracket system and replaces it with a 5.75% flat rate, about midway between the House and Senate proposals;
  • Caps mortgage interest and property tax deductions at $15,000 for all filers, the same as the Standard Deduction for married couples filing jointly. This is a reduction from the House proposal, which allowed a more generous $25,000 MID & Property Tax cap.
  • Allows unlimited charitable deductions, as the House proposal does;
  • No tax on Social Security benefits, as per the House plan;
  • Reduces the corporate income tax rate from 6.9% to 6.4% in 2014, and gradually phases it out completely by 2018. The House plan would have gradually cut it to 5.4%.
  • Gradually reduces the Business Franchise Tax, eliminates it by 2018;
  • Establishes an annual flat Business Privilege Tax of $3,500 for C Corps & $500 for all other business entities.
  • Modestly expands sales tax to service contracts, but not to labor; no tax on food or medicine.

The big question is still how much less revenue any Tax Reform effort will leave the state. The latest Senate proposal will cut more than $3.28 billion from the budget over the next 5 years, nearly double the amount cut by the House plan. Governor Pat McCrory has indicated his preference for a revenue-neutral plan, or at least something that comes close. So while the House and Senate appear to be coming closer on a plan, it’s still uncertain whether the final outcome would find acceptance in the Executive Mansion.

And then there’s the Mortgage Interest Deduction. While the latest Senate plan reinstates it, the $15,000 cap is far lower than the amount allowed by the House plan, which could mean a tax increase for significant numbers of North Carolina homeowners. We hope members of the General Assembly continue to look for ways to maintain the MID in its entirety, as this deduction is crucial to the still-recovering housing industry in our state.

You can review the latest Senate plan, along with helpful comparison charts, on the Finance Committee website.

NC House Approves Tax Reform Plan; Senate Up Next

legbuilding

In an unusual Friday morning session, the North Carolina House tentatively approved historic Tax Reform legislation by a vote of 72-32, setting up what could be a lengthy debate with the Senate over its own proposal.

HB 998 (Tax Simplification and Reduction Act) would eliminate North Carolina’s three-tiered personal income tax bracket system and replace it with a 5.9% flat rate. The bill provides a $25,000 combined maximum deduction for mortgage interest and property taxes, while deductions for charitable contributions remain unlimited. These deductions were increased from an earlier version of the bill, thanks to the hard work of the North Carolina Association of REALTORS (NAR), which lobbied aggressively to protect the Mortgage Interest Deduction (MID).

HB 998 also doubles the standard deduction and increases the child tax credit from $100 to $250 for families making less than $100,000. Social Security benefits are not taxed under the plan. It cuts business taxes by reducing the franchise tax by more than 10% and reducing the corporate income tax rate from 6.9% to 5.4%.

While HB 998 does expand sales tax to some services, the additional services taxed in the House plan are those that currently collect and remit sales tax revenue. It appears that the House is siding with the Governor’s wishes in not extending sales tax to essential goods such as medicine and food.

HB 998 will be on the House floor again Monday night for 3rd reading before heading over to the Senate where the fate of the bill (and tax reform in general) is still not known.  Once the House disposes of the tax reform bill, it will move on to the budget with the full Appropriations Committee meeting next Tuesday and then floor votes following on Wednesday and Thursday.

Source: North Carolina Home Builders Association (NCHBA)

Competing Tax Reform Plans Begin to Take Shape at General Assembly

AccountingTwo topics took center stage at the General Assembly last week: the budget and tax reform.

House Appropriations Subcommittees met every day this week to discuss the budget passed by the Senate last week.  The subcommittees are expected to continue meeting next week and the full House Appropriations Committee (and likely the full House) is expected to vote the week of June 10.

After weeks of speculation, both the House and Senate Finance Committees met Thursday morning to present three different tax reform plans.  The House plan, HB 998 (Tax Simplification & Reduction Act), sets a flat individual income tax rate of 5.9% and reduces the corporate income tax from 6.9% to 5.4% over five years. Filers who itemize could claim their Mortgage Interest Deduction and charitable contributions up to a cap of $25,000 (for joint filers), but NOT their local property taxes. The plan would also expand the state sales tax to the installation or servicing of tangible material goods, like car repairs, computer warranties, or furniture delivery, but reduce the rate from 6.75% to 6.65% in 2014.

The Senate Republican plan, SB 677 (NC Fair Tax Act), sponsored by Matthews Senator Bob Rucho, sets the individual income tax rate at 5.5% in 2014 and reduces it to 4.5% in 2016. It reduces the corporate income tax from 6.9% to 6% over 3 years.  It also dramatically expands the state sales tax to more than 100 new services, including accounting and legal services, health care, groceries and medicine.

A bipartisan tax reform plan discussed by the Senate Finance Committee earlier in the session was modified and presented to the Senate Finance Committee also. That bill, SB 394 (Lower Tax Rates for a Stronger NC Economy), reduces the sales tax rate from 6.75% to 6.5% beginning in 2014, sets the individual income tax rate at a flat 5.95%, and reduces the corporate income tax from 6.9% to 5.95%. REBIC is still evaluating the two Senate plans, and will have more comprehensive summaries of each later this week.

Gov. Pat McCrory released a statement last Thursday afternoon saying HB 998 and SB 394 are “closest to my position.” He said he agrees with the goal of reducing personal and corporate income taxes, but that he couldn’t support a plan that “turns too many North Carolinians into first-time tax collectors. For instance, we do not want to require a young adult mowing lawns over the summer to collect taxes for his or her services.” The Governor also stated that he is opposed to taxing food and medicine.

For a helpful comparison of the 3 plans, check out the WRAL website HERE.

Source: North Carolina Home Builders Association