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S.A.L.T. Select Developments: North Carolina

Baker Donelson's S.A.L.T. Select Developments will identify important state and local tax developments from North Carolina.

State and local taxes impact almost every taxpayer. S.A.L.T developments in any one jurisdiction can be frequent and sometimes confusing. Where multiple jurisdictions are involved, staying current with state and local tax developments can be overwhelming for any taxpayer.

To assist you with staying current on a periodic basis, Baker Donelson's S.A.L.T. Select Developments will identify one or more recent state and local tax developments from North Carolina.

October 2022

Phase 2 Business Grants Issued: On October 3, 2022, the North Carolina Department of Revenue (Department) recently mailed checks to more than 3,900 North Carolina businesses awarded under Phase 2 of the Business Recovery Grant Program. According to the announcement, this Program provides payments to eligible North Carolina businesses that suffered significant economic loss during the COVID-19 pandemic. (See our April 25, 2022, newsletter.) The announcement referenced that Phase 2 of the program greatly expanded eligibility for businesses including gyms and fitness centers, as well as professionals such as barbers and cosmetologists, with the application period ending on June 1, 2022. The grant amount is a percentage of the economic loss demonstrated by the eligible businesses, and applicants that were not approved will be notified by mail. More information can be found here.

September 2022

Student Loan Forgiveness Currently Considered Taxable Income: On August 31, 2022, the North Carolina Department of Revenue (Department) published an announcement stating that at the present time, student loan forgiveness excluded from federal income under Internal Revenue Code (Code) Section 108(f)(5) is currently considered as taxable income in North Carolina. In that regard, the Department notes that as part of the American Rescue Plan, Congress enacted Section 108(f)(5) of the Code to expand the types of student loan forgiveness that would not be treated as taxable income for purposes of federal income tax. However, the Department notes that the North Carolina General Assembly did not adopt Section 108(f)(5) of the Code for purposes of the state income tax and, therefore, student loan forgiveness excluded under that Code Section is currently considered taxable in North Carolina. According to this announcement, the Department is monitoring any further enactments by the General Assembly that could change the taxability of student loan forgiveness in North Carolina. More information can be found here.

August 2022

Temporary Reduction in Late Payment Penalty: On June 30, 2022, the North Carolina Department of Revenue (Department) published an Important Notice addressing legislation that was passed in the 2021 General Assembly. Effective July 1, 2022, that 2021 legislation changed the calculation of the Failure to Pay Tax When Due Penalty. That penalty is imposed if a taxpayer does not pay the amount of tax that is owed to the Department by the due date of the applicable return, and such penalty is a percentage of the net tax that the taxpayer did not pay by the due date of that return. Pursuant to that 2021 legislation, the General Assembly, according to this Notice, enacted legislation to change the calculation of the penalty from the current flat rate of 10% to a graduated rate, effective July 1, 2022. However, the Notice further states that on June 29, 2022, Governor Cooper signed into law a continuance of the current penalty rate of 10% through December 2022; then temporarily reducing that penalty rate to 5% from January 2023 to June 2024; and then reintroduces the graduated penalty rate in July 2024. The Notice sets forth a table summarizing these changes, and further states that any questions regarding this Notice can be addressed through the Department's Customer Interaction Center at the contact information within the Notice. More information can be found here.

June 2022

Marketplace Facilitator Private Letter Ruling: Earlier this year, the North Carolina Department of Revenue (Department), through its Sales and Use Tax Division, issued a private letter ruling addressing the question of whether a certain taxpayer would be considered as a marketplace facilitator within the facts presented to the Department. Under those facts, the taxpayer created a business-to-business online platform to enable participants to list their parts inventories on the internet and allow customers to place orders for those parts through the platform. According to the ruling, the taxpayer owns and administers the electronic infrastructure of the platform and provides the necessary support to enable participants to connect with the platform. This website can be accessed only by qualified customers with log-on credentials; and, once logged on, the customers may review and order inventory according to the terms of the website. Customers using the website have two payment options, either by establishing an account or by providing credit card information. In response to the question of whether the taxpayer is a marketplace facilitator, the Department first reviewed North Carolina law regarding marketplace facilitators, and then concluded that the taxpayer is a marketplace facilitator which makes marketplace facilitated sales in North Carolina. The Department noted that North Carolina provides a two-part definition of a marketplace facilitator, with the first being that the person lists or otherwise makes available for sale a marketplace seller's items through a marketplace owned or operated by the marketplace facilitator; and second, the person collects the sales or purchase price, processes payments, or makes payment processing available. The Department concluded that this taxpayer satisfied both parts of this definition. More information can be found here.

May 2022

Information Regarding New Deduction for Certain Military Retirement Pay: On May 3, 2022, the North Carolina Department of Revenue (Department) issued an Important Notice addressing North Carolina's new deduction for certain military retirement pay and survivor benefit plan payments. As stated in this Notice, a 2021 legislative act contained a provision that allows eligible retired members of the Armed Forces of the United States to deduct certain military retirement pay when calculating the North Carolina taxable income beginning tax year 2021; and such law also allows eligible beneficiaries of the Survivor Benefit Plan to deduct certain of the Plan payments beginning tax year 2021. Specifically, the Notice states for taxable years beginning on or after January 1, 2021, North Carolina allows a deduction for the following payments received during the taxable year from the United States government: (a) retirement pay for service in the Armed Forces to a retired member that has served at least 20 years and who is medically retired under Federal law, as well as (b) payments of a Plan to a beneficiary of a retired member who is eligible to deduct retirement pay under this new North Carolina law. The Notice also contains various frequently asked questions, as well as contact information for assistance. More information can be found here.

April 2022

Phase 2 of the Business Recovery Grant Program Begins May 2, 2022: On April 12, 2022, the North Carolina Department of Revenue (Department) issued a press release regarding the Department's plans to launch applications for Phase 2 of the Business Recovery Grant Program (Program) on Monday, May 2, 2022. The application deadline is June 1, 2022. The press release stated changes are being made to the Program's eligibility criteria allowing many additional businesses to qualify for these grants. According to the release, the Program will issue a payment to an eligible North Carolina business that suffered an economic loss of at least 20 percent during the pandemic; the grant amount is a percentage of the economic loss demonstrated by the eligible business or $500,000, whichever is less. The release further states that many businesses excluded from Phase 1 are eligible to apply in Phase 2 and, in addition to COVID-impacted businesses in the hospitality industry such as restaurants and hotels, the Program will now be open to other businesses affected by the pandemic, with a list of eligible businesses included in the release. Further, the release stated two types of grants will be available to eligible businesses for Phase 2: (i) a hospitality grant available to eligible arts, entertainment, or recreation businesses, as well as eligible accommodation or food service businesses such as a hotel, restaurant, or bar (NAICS Code 71 and 72); and (ii) a reimbursement grant available to eligible businesses not classified in NAICS Code 71 or 72. A business's previous receipt of a grant award from certain federal programs will not make it ineligible for a reimbursement grant. Other terms and conditions for applying for the Program grants are set forth in the Department's release. More information can be found here.

March 2022

Estimated Tax Interest Relief for Farmers/Fishermen: On February 25, 2022, the North Carolina Department of Revenue (Department) issued an Important Notice informing eligible farmers and fishermen of a recently enacted law that affects an exception to the requirement to make estimated tax payments for the tax year 2021. Under this new North Carolina law, signed in February 2022, the Department will not assess estimated tax interest on any farmer or fisherman if the individual files a North Carolina individual income tax return and pays the tax shown due on the tax return by April 15, 2022. According to this Important Notice, this relief is being provided due to the later-than-usual signing of the North Carolina budget, which caused a delay in the opening of the 2022 North Carolina tax filing season. As such, a farmer or fisherman who has a tax year ending on December 31, 2021, may have difficulty electronically filing their 2021 North Carolina individual income tax return by March 1, 2022, the normal deadline for filing that tax return. This estimated tax interest relief for a farmer or fisherman is automatic if the individual files the 2021 individual income tax return and makes the full payment shown on that return by April 15, 2022. More information can be found here.

February 2022

Motor Fuels and Alternative Fuels Tax Rate For 2022: The North Carolina Department of Revenue (Department) recently issued a Memorandum stating the motor fuels and alternative fuels tax rate for the period of January 1, 2022 through December 31, 2022, will be 38.5 cents per gallon or gallon equivalent. The previous rate for 2021 was 36.1 cents per gallon. The Department also states in this Memorandum the inspection tax will remain at .0025 cents per gallon. More information can be found here.

January 2022

Application Process for Business Recovery Grants: On December 16, 2021, the North Carolina Department of Revenue (Department) announced the Department will begin accepting applications for Business Recovery Grants on December 16, 2021. The Business Recovery Grant Program, according to this announcement, will issue a one-time payment to eligible North Carolina businesses that experienced significant economic loss during COVID-19. The application period closes January 31, 2022 and the Department will administer the Program. There are two types of grants that will be available to eligible businesses that suffered an economic loss of at least 20 percent during the pandemic: (i) a hospitality grant will be available to eligible arts, entertainment, or recreation business, as well as an eligible accommodation or food service business such as a hotel, restaurant or bar – referencing North American Industry Classification System (NAIC) Code 71 and 72; and (ii) a reimbursement grant will be available to an eligible business not classified in NAICS Code 71 and 72 and that did not receive funding from other relief programs, including the Paycheck Protection Program, COVID-19 Job Retention Grant, and the EIDL Advance. The amount of the grant is a percentage of the economic loss demonstrated by the eligible business or $500,000, whichever is less. Eligible business owners may apply online at www.ncdor.gov. More information can be found here.

October 2021

Impact of Certain Federal Laws On North Carolina Individual Income Tax: On October 8, 2021, the North Carolina Department of Revenue (Department) issued an Important Notice addressing the question of whether certain federal legislation enacted in late 2020 and early 2021 impacted the computation of the North Carolina individual income tax. In that regard, the Department noted that on December 27, 2020, the federal Consolidated Appropriations Act, 2021 was signed into law, and that March 11, 2021 the federal American Rescue Plan Act of 2021 was also signed into law. The Department noted that those federal laws excluded specific items of income from the federal definition of gross income as of May 1, 2020, such as certain financial assistance to individuals and businesses impacted by COVID-19. The Department also states that the North Carolina General Assembly each year considers whether to adopt the current Internal Revenue Code (Code) to make certain tax definitions and calculations of adjusted gross income consistent between the Code and the North Carolina tax statutes. However, the Department pointed out that even though the General Assembly is still in session, it has not so far enacted the changes to the Code as it was enacted as of March 11, 2021 or later; and, as a result, taxpayers whose federal adjusted gross income excluded items of income that would otherwise be included in taxable income as of May 1, 2020, must add back that excluded income when calculating the North Carolina taxable income unless the General Assembly later adopts those federal exclusions. According to this Notice, examples of excluded income would include the Economic Injury Disaster Loan grants, certain Small Business Association loan payments, and the first $10,200 of 2020 unemployment benefits which are not subject to federal income tax. The Notice then provides a guide as to how to include the federally excluded income in the calculation of the North Carolina taxable income. Additionally, the Notice provides contact information at the Department if taxpayers have questions about this Notice. More information can be found here.

For more information about state and local tax developments in North Carolina, please contact:

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