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