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Defining “Doing Business” In North Carolina

Position: NCCBI opposes efforts by the North Carolina Department of Revenue to expand, by rule-making, the meaning of the term “doing business” for purposes of corporate income tax liability.  Such proposed rule-makings effect a tax increase by administrative fiat, and without permission of the North Carolina General Assembly. The taxing power is the sole prerogative of the General Assembly and should not be usurped by administrative agencies.

NCCBI supports the legislative enactment of a statutory physical presence standard for what constitutes “doing business” in North Carolina for tax purposes. Such a standard is consistent with existing state and federal law limiting the taxing powers of states, and will avoid costly and protracted litigation concerning North Carolina’s taxing power. A more expansive definition of the term “doing business” would frustrate the economic growth of North Carolina by impairing the ability of existing North Carolina companies to obtain capital and undermining North Carolina’s existing reputation as a state dedicated to the maintenance of a favorable business climate.

Explanation: Traditionally, North Carolina has attempted to impose corporate income tax only on companies that have a physical presence in this State. In 1992, the North Carolina Department of Revenue, by administrative rule-making, expanded the class of companies subject to taxation in North Carolina to include companies that had licensed the use of intangible assets in North Carolina, including trademarks, trade names, computer programs, and copyrights.  The 1992 rule foreshadowed still more aggressive efforts by the Department in 1996, and again in 1998, to tax companies with interests in North Carolina as ethereal as loans to North Carolina residents and security interests in property located in North Carolina. The Department’s steady march from taxation based on physical presence to its new, legally untested, “economic presence” standard was halted in both 1996 and 1998 by a broad coalition of companies alarmed by these bureaucratic efforts.  At the request of concerned parties, the North Carolina General Assembly in 1998 directed its specially constituted Revenue Laws Study Commission to review the issue of when a company is “doing business” in North Carolina and to recommend appropriate action.

The Department of Revenue’s efforts to tax companies based on their “economic interests” in this State are flawed in three important ways. As an initial matter, by expanding the scope of state taxing authority through administrative fiat, the Department attempts to usurp the legislative power of the General Assembly and implement a tax increase without a vote of the people’s popularly elected representatives. A study by the North Carolina Office of State Budget and Management shows that the rule-making proposed by the Department in 1998 alone would increase taxes and related compliance costs by some $62 million per year. Such a tax increase should plainly be beyond the prerogative of administrative agencies, and if implemented at all, should be based on solemn deliberation by the legislature.

The new tax rules proposed by the Department of Revenue also pose a significant threat to North Carolina’s stature as a national center for economic development that is well known for its favorable business climate. By extending revenue agents’ reach, the Department’s proposed “economic presence” taxing standard would discourage national lenders and other types of investors from loaning money to North Carolina businesses or collateralizing other transactions with property in North Carolina. Under the proposed rules, such lenders who would otherwise have no taxable connection to North Carolina could become liable for millions in taxes and incur substantial compliance cost simply because of their willingness to provide financial support to growing Tar Heel firms. Just as important, the “economic presence” taxing standard proposed by the Department of Revenue would place North Carolina among a clear minority of states that aggressively assert the right to tax companies with no physical presence within their borders. Such “tax aggressor” states are plainly not the jurisdictions where new and expanding businesses will want to invest.

Finally, the “economic presence” taxing rules sought by the Department of Revenue press the limits of the constitutional authority to tax established under both state and federal law. Any attempt to impose a new “economic presence” taxing standard would place North Carolina at the precipice of constitutional boundaries on taxation and would undoubtedly provoke protracted and expensive litigation testing the power of the State to reach business interests only remotely connected to North Carolina. In this regard, the aggressive taxing policy promoted by “economic presence” advocates could easily subject North Carolina to the same types of multimillion dollar tax refund judgments won by intangibles taxpayers and state and federal retirees in recent months.

NCCBI therefore supports legislative enactment of a statutory physical presence standard that maintains North Carolina’s traditional rule for determining when businesses are “doing business” in this state. A statutory physical presence standard will:

  • Provide North Carolina businesses with a stable, predictable, fair and economically competitive business climate.
  • Avoid costly and protracted litigation testing the constitutional limits of the state’s ability to tax companies on an economic presence nexus theory.
  • Provide a bright-line test to promote fair and even-handed imposition of the North Carolina corporate net income tax.
  • Stop the Department of Revenue from attempting to bypass the Legislature to effect a tax increase and keep the law-making in the General Assembly. Prevent the Department from increasing the cost of borrowing and doing business in the state and causing a chilling effect on the State’s business climate, economic competitiveness and future economic growth.

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Continue N.C. Budget Reform
Contingent Fee Audits
Property Tax Exemptions For Construction In Progress And Product Samples
Machinery Tax And Sales Tax
Change The Net Economic Loss (Nel) Carryover
Remove Credit Balances From The Definition Of Unclaimed Property
Remove Inventories From Franchise Tax Base
Sales Tax Discount
Single Sales Factor
Proposed Model Unclaimed Property Act
Allow an R&D Credit for the Actual Amount of N.C. Expenditure

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