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North Carolina adopts market-based sourcing

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On Nov. 8, 2019, North Carolina Gov. Roy Cooper signed legislation, S.B. 557, which enacts several changes including market-based sourcing for income tax apportionment, marketplace facilitator sales tax collection obligations, the expansion of the definition of “holding company” for franchise tax purposes, and an increase in the standard deduction for individual income taxpayers.1

Corporate income tax
Market-based sourcing
Perhaps the most notable legislative change is the enactment of market-based sourcing, effective for taxable years beginning on or after Jan. 1, 2020.2 For most taxpayers, receipts are sourced to North Carolina if the taxpayer’s market for the receipts is in the state.3 When the market for a receipt cannot be determined, reasonable approximation must be used.4 If the taxpayer is unable to situs a receipt using reasonable approximation, the receipt must be excluded from the denominator.5 The statute provides detailed rules for determining whether a taxpayer’s market for receipts is in the state.6

The sale of a service is now sourced to North Carolina if and to the extent the service is delivered to a location in the state.2 Receipts from intangible property that is rented, leased, or licensed are sourced to North Carolina if and to the extent the property is used in the state.8 Intangible property utilized in the marketing of a good or service to a customer is used in the state if that good or service is purchased by a consumer who is in the state.9 Intangible property that is sold is sourced to the state if and to the extent the property is used in the state.10 Specific provisions are provided for contract rights, licenses and other similar intangibles. All other receipts from the sale of intangible property are excluded from the sales factor.11 The rules generally are consistent with the relatively new Multistate Tax Commission model apportionment provisions.

Special provisions are enacted for electric power companies,12 wholesale content distributors13 and banks.14 Electric power companies apportion their income based on the average value of the real and tangible personal property that they own or rent and use in the state.15 A wholesale content distributor’s16 receipts from the regular course of its business, including advertising, licensing and distribution activities, but excluding receipts from the sale of real property or tangible personal property, are sourced to North Carolina if derived from a business customer whose commercial domicile is in the state.17 For banks, receipts are classified into ten discrete categories and are generally sourced based on the location of the property upon which the receipt is secured or to the location of the payor.18 Banks exclude a variety of receipts from the apportionment factor.19 The apportionment provision for pipeline companies is expanded to include the transportation of natural gas.20

State net loss apportionment election
For taxpayers with a state net loss carryforward into the 2020 taxable year, an election may be made on the 2020 tax return to continue utilizing the income-producing activity methodology rather than market-based sourcing.21 The election only pertains to the statutory subsection concerning sourcing of receipts from services, so changes to sourcing of intangibles or any other specific industry changes are not impacted by the election. Therefore, the election will benefit taxpayers whose apportionment factor is expected to increase under market-based sourcing, allowing them to continue utilizing the same service sourcing methodology employed when the losses were incurred. Once the election is made, the election is irrevocable and binding until the existing state net loss carryforward has been fully utilized or expires.22 New state net loss carryforwards generated in the 2020 taxable year and later years must be computed using market-based sourcing.23 The election will not impact the computation of the apportionment factor utilized in apportioning the net worth base for franchise tax.24

Sales and use tax
Marketplace facilitator nexus
Effective Feb. 1, 2020, marketplace facilitators meeting the threshold applicable to remote sellers will be required to collect and remit sales tax on behalf of all marketplace sellers.25 Therefore, a marketplace facilitator is required to collect and remit tax if it has gross sales in excess of $100,000 or 200 or more separate transactions in the previous or current calendar year.26 The requirement to collect and remit tax is applicable regardless of whether the market seller has a physical presence in the state.27

A marketplace facilitator is considered a person that contracts with marketplace sellers28 to sell its goods and/or services through its marketplace,29 collecting and processing payments or providing the ability to process payments.30

A marketplace facilitator is required to provide a monthly report to each marketplace seller detailing the gross sales sourced to the state and the number of transactions no later than ten days after the end of each calendar month.31 The legislation also provides liability relief to the marketplace facilitator if incorrect information was provided by the marketplace seller, absent an affiliated relationship or the facilitator also being the seller.32 Additionally, no class action can be brought against a marketplace facilitator on behalf of customers resulting from or in any way related to the overpayment of sales tax collected by the marketplace facilitator.33

Other facilitators
The statute providing for the state sales tax on accommodation rentals such as hotel rooms, residences or similar lodging facilities for occupancy by an individual is amended to include accommodation facilitators.34 An accommodation facilitator is considered a person that contracts with a provider of an accommodation to market the availability and accept payment or list the accommodation for consideration, with specific exceptions.35 A retailer, which is defined as the provider of the accommodation or an accommodation facilitator, has the responsibility to collect and remit any applicable sales tax on accommodations.36 Excluded from the definition of retailer are accommodation facilitators operated by or on behalf of a hotel or a hotel corporation, in which the tax collected should be sent to the hotel operator for remittance.37

Amendments also are made to provisions concerning the sales tax on entertainment activities and service contracts. The entertainment activity statute changes the “facilitator” terminology to “admission facilitator.”38 An admission facilitator is defined as a person who accepts payment of admission charges for an entertainment activity, but who is not the operator of the venue where the entertainment activity occurs.39 Similarly, the service contracts statute is amended to amend the “facilitator” language to “service contractor facilitator.”40 A service contractor facilitator is defined as a person who contracts with the obligor of a service contract in order to market the service contract and who accepts payment from the purchaser for the service contract.41

Franchise tax The legislation amends the definition of a “holding company” for North Carolina franchise tax purposes. Previously, at least one of two conditions needed to be met for a company to be considered a holding company. These two conditions remain unchanged and are:

  1. The company has no assets other than its ownership of corporations more than 50% owned; and
  2. The company receives more than 80% of its gross income from corporations more than 50% owned.42

Applicable for tax years that start on or after Jan. 1, 2020,43 the definition of a holding company has been expanded, to include a third alternative condition, as follows:
  1. The company’s owned copyrights, patents, or trademarks represent more than 80% of its total assets, or it receives royalties and/or license fees that account for more than 80% of its gross income, and is 100% directly owned by a corporation that meets all three of the following:

    1. Is a manufacturer under NAICS codes 31-33;
    2. Generates revenue of more than $5 billion for income tax purposes from goods that it manufactures; and
    3. Includes in its net worth an investment in a subsidiary that owns copyrights, patents, or trademarks.44

Accordingly, a company now has to meet only one of three conditions to qualify as a holding company for North Carolina franchise tax purposes. North Carolina holding companies have a maximum cap on franchise tax that is set at $150,000.45

Individual income tax For tax years beginning on or after Jan. 1, 2020, the legislation increases the standard deduction by 7.5% to the following amounts based on the taxpayer’s filing status:
Filing Status Standard Deduction
Married filing joint $21,500
Head of Household $16,125
Single $10,75046


Commentary The enactment of this bill marked the end of a very lengthy and controversial legislative session. The provisions contained in the bill were originally included in a broader budget package, H.B. 966, which the governor previously vetoed. Following the governor’s veto of H.B. 966, the House successfully voted to override the Governor’s veto, but the Senate failed to override the veto. The legislature subsequently passed similar tax reform legislation contained in S.B. 557 and S.B. 578. Efforts to approve a budget that included tax measures broke down, however, and resulted in piecemeal legislation with continued vetoes by Governor Cooper.

S.B. 578, which was vetoed on Nov. 8, 2019, contained several proposed changes to the franchise tax rate including rate reductions for both C corporations and S corporations to be phased in between 2020 and 2027, as well as special rate provisions for electric power companies. North Carolina’s comparatively low corporate income tax rate of 2.5% has given the governor apprehension to lower other business taxes or to extend proposed or expanded tax credits for businesses.

The change to market-based sourcing is a major development for North Carolina that has been anticipated for several years. In doing so, North Carolina has adopted a delivery approach to sourcing receipts from services, straying from the “benefit received” methodology employed by several other states. For several years, the legislature has tried to transition from the income-producing activity methodology to market-based sourcing without success. In 2015, legislation was enacted to require informational reporting by certain taxpayers which was intended to provide the North Carolina Department of Revenue and the legislature with detailed information on the impact market-based souring would have on corporate income and franchise tax collections.47 In 2016, legislation was enacted that directed the Department to draft market-based sourcing rules based on proposed legislation.48 The rules were adopted and approved in early 2017, but they were not added to the administrative code. The recent legislation directs that the rules be added to the administrative code and apply to tax years beginning on or after Jan. 1, 2020.49 However, some modifications to the rules are necessary due to recent legislative changes.

The state net loss election is a novel alternative to alleviate the impact of the conversion to market-based sourcing for taxpayers with state net loss carryforwards. Other states which have enacted significant changes to their income taxing regimes (typically when shifting from separate to combined reporting) have opted to provide a deduction to taxpayers based upon the net impact the change had on net deferred tax assets or liabilities. The state net loss election will have a significant impact on the complexity of the return and may present some unique challenges in accounting for the election under ASC 740. Further, corporate taxpayers that do not have state net loss carryforwards and pass-through entities may seek to challenge the validity of this election, as these taxpayers will not be able to obtain a benefit that other corporate taxpayers in a state net loss position will be able to utilize. Lastly, the legislation does not address any specific transitional computation to be used in the taxable year in which the state net loss is fully exhausted, which may present planning opportunities.

Following the national trend, North Carolina will now require businesses that meet the definition of marketplace facilitator to register, collect and remit North Carolina sales tax on sales made through their marketplace platform. All businesses making remote sales into the state, whether directly or via an online marketplace will now need to be aware of North Carolina’s economic nexus thresholds for sales tax. Retailers making sales through a marketplace facilitator will also need to determine which party is responsible for sales tax collection and remittance on such sales.

The expansion of the definition of “holding company” for franchise tax purposes should allow more companies to take advantage of the $150,000 maximum tax on holding companies. Thus, opportunities may exist to reduce the North Carolina franchise tax liability for applicable taxpayers.

North Carolina continues to follow national trends by enacting market-based sourcing and marketplace facilitator legislation. However, the state has yet to follow the trend of eliminating its franchise tax and continues to have divisive debates over the proper way to fund teachers’ pay and Medicaid. With 2020 being an election year, more debate on these issues is expected.




1. S.L. 2019-246 (S.B. 557), Laws 2019.
2. N.C. GEN. STAT. § 105-130.4(l).
3. Id.
4. Id.
5. Id.
6. N.C. GEN. STAT. § 105-130.4(l)(1)-(6).
7. N.C. GEN. STAT. § 105-130.4(l)(4).
8. N.C. GEN. STAT. § 105-130.4(l)(5).
9. Id.
10. N.C. GEN. STAT. § 105-130.4(l)(6).
11. Id.
12. N.C. GEN. STAT. § 105-130.4(s3). 19 (1938).
13. N.C. GEN. STAT. §§ 105-130.4(l1); 105-130.4A.
14. N.C. GEN. STAT. §§ 105-130.4(l2); 105-130.4B.
15. N.C. GEN. STAT. § 105-130.4(s3).
16. A wholesale content distributor is defined as a broadcast television network, a cable program network, or any television distribution company owned by, affiliated with, or under common ownership with any such network. N.C. GEN. STAT. § 105-130.4A(a)(3).
17. N.C. GEN. STAT. § 105-130.4A(b).
18. N.C. GEN. STAT. § 105-130.4B.
19. N.C. GEN. STAT. § 105-130.4B(b). Banks exclude the following from the numerator and denominator of the receipts factor: (i) receipts from a casual sale of property; (ii) receipts exempt from tax; (iii) the portion of receipts realized from the sale or maturity of securities or other obligations that represents a return of principal; (iv) receipts in the nature of certain dividends subtracted from federal taxable income or dividends excluded for federal tax purposes; and (v) the portion of receipts from financial swaps and other similar financial derivatives that represent the notional principal amount that generates the cash flow traded in the swap agreement.
20. N.C. GEN. STAT. § 105-130.4(s2).
21. N.C. GEN. STAT. § 105-130.4(t3).
22. Id.
23. Id.
24. N.C. GEN. STAT. § 105-122(c1).
25. N.C. GEN. STAT. §§ 105-164.4J; 105-164.8(b)(10).
26. N.C. GEN. STAT. § 105-164.4J(a).
27. N.C. GEN. STAT. § 105-164.4J(b).
28. A “marketplace seller” is person that sells or offers to sell items through a marketplace regardless of any of the following: (i) whether the person has a physical presence in the state; (ii) whether the person is registered as a retailer in the state; (iii) whether the person would have been required to collect and remit sales and use tax had the sales not been made through a marketplace; and (iv) whether the person would not have been required to collect and remit sales and use tax had the sales not been made through a marketplace. N.C. GEN. STAT. § 105-164.3(20d).
29. A “marketplace” is a physical or electronic place, forum, platform, application or other method by which a marketplace seller sells or offers to sell items, the delivery of or first use of which is sourced to North Carolina. N.C. GEN. STAT. § 105-164.3(20a).
30. N.C. GEN. STAT. § 105-164.3(20c).
31. N.C. GEN. STAT. § 105-164.4J(c).
32. N.C. GEN. STAT. § 105-164.4J(d).
33. N.C. GEN. STAT. § 105-164.4J(f).
34. N.C. GEN. STAT. § 105-164.4F.
35. N.C. GEN. STAT. § 105-164.3(1a). Note that an accommodation facilitator also has the same liability and responsibility under city and county room occupancy taxes. N.C. GEN. STAT. §§ 153A-155(c); 160A-215(c).
36. N.C. GEN. STAT. § 105-164.4F(b1).
37. N.C. GEN. STAT. § 105-164.4F(c).
38. N.C. GEN. STAT. § 105-164.4G.
39. N.C. GEN. STAT. § 105-164.3(1c).
40. N.C. GEN. STAT. § 105-164.4I.
41. N.C. GEN. STAT. § 105-164.3(38c).
42. N.C. GEN. STAT. § 105-120.2(c)(1), (2).
43. This change applies to the calculation of franchise tax reported on the 2019 and later corporate income tax returns.
44. N.C. GEN. STAT. § 105-120.2(c)(3). Net worth is determined under N.C. GEN. STAT. § 105-122(b).
45. N.C. GEN. STAT. § 105-120.2(b)(1).
46. N.C. GEN. STAT. § 105-153.5(a)(1).
47. S.L. 2015-241 (H.B. 97), S.L. 2015-268 (H.B. 259), Laws 2015.
48. S.L. 2016-94 (H.B. 1030), Laws 2016.
49. S.L. 2019-246 (S.B. 557), § 3.(f).



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