Directive CD-98-4

Subject:Doing Business
Tax:General Business Franchise Tax
Statute:G. S. 105-114 and G. S. 105-122
Issued By:Corporate, Excise, and Insurance Tax Division
Date: November 19, 1998

This directive clarifies the issue of nexus for franchise tax purposes. A corporation has nexus for franchise tax if it is doing business in this State, as defined by G.S. 105-114(b)(3). That subdivision defines doing business as "[e]ach and every act, power, or privilege exercised or enjoyed in this State, as an incident to, or by virtue of the powers and privileges granted by the laws of this State."

Public Law 86-272 does not apply to the franchise tax. That federal law prohibits a state from imposing an income tax on income derived in the state by a corporation if the corporation's only activity in the state is the solicitation of sales of tangible property. As stated in G. S. 105-114(a), the franchise tax is a privilege tax or an excise tax, not a tax on income. Thus, a corporation that is protected from the payment of income tax under Public Law 86-272 is not protected from the payment of franchise tax.

A corporation that is subject to franchise tax but not income tax due to Public Law 86-272 is to apportion its capital stock, surplus, and undivided profits base by use of the apportionment formula that would have applied to the corporation's business income if that income had been subject to income tax. In computing the amount due under the formula, the sales factor is to be computed without regard to Public law 86-272.

If you have questions about this directive, you may call the Corporate Tax Division of the North Carolina Department of Revenue at 919-814-1163. You may also write to the Division at P.O. Box 871, Raleigh, N.C. 27602-0871.