1999 Tax Law Changes - Tax Incentives For New and Expanding Businesses
VII. TAX INCENTIVES FOR NEW AND EXPANDING BUSINESSES
Sunset Extended: The sunset for Article 3A, Tax Incentives for New and Expanding Businesses, was extended from January 1, 2002, to January 1, 2006. The Business Property Tax Credit, set out in G.S. 105-129.16 of Article 3B, continues to expire in January 1, 2002.
(Effective August 4, 1999; SB 1115, s. 1, S.L. 99-360)
G.S. 105-129.2 - Definitions: This section was revised to add three new definitions and to modify five of the existing definitions. The changes are as follows and become effective as noted after each definition:
Central administrative office: This definition in subdivision (2) was expanded so that the U.S. Airways' training center in Charlotte will qualify as a central administrative office. Subpart a. of the revised definition sets out the prior law, which is that a central administrative office is a corporate, subsidiary, or regional managing office. Subpart b. contains the expansion. It adds an auxiliary subdivision of an interstate passenger air carrier engaged primarily in centralized training for the carrier at its hub.
The prior definition was simply a cross-reference to the North American Industry Classification System (NAICS). That System did not define "central administrative office." The term was one example of a type of business included under the classification heading "551114 - Corporate, Subsidiary , or Regional Managing Offices." The new definition sets out the language of the NAICS classification heading as subpart a.
(Change in subpart a. effective August 4, 1999; expansion in subpart b. effective retroactively to January 1, 1999.)
Customer service center: Subdivision (3a) adds a new definition. The new term is "customer service center." The term is defined as an auxiliary subdivision of a telecommunications or financial services company, as defined by NAICS, that primarily provides support services to the company's customers by telephone to support products or services of the company. To qualify, at least 60% of all phone calls must be incoming. "Telecommunications or financial services company" is a broad reference that encompasses several NAICS headings. The definition was added so that this type of business can receive tax credits under Article 3A.
(Effective for taxable years beginning on or after January 1, 2000.)
Data Processing: The definition of this term in subdivision (4) was expanded. Prior to this change, the term had the same meaning as under the NAICS definition of "data processing." That definition was much narrower than was originally intended under Article 3A. The revised term includes the following industries in addition to data processing services:
- Computer systems design and related services · Software publishers
- Software reproducing
- On-line information services.
(Effective August 4, 1999.)
Electronic mail order house: Subdivision (5a) adds a new definition. The new term is "electronic mail order house." The term has the same meaning as the term "electronic shopping and mail order house" under NAICS. This type of business falls under classification code 454110 of NAICS. This definition was added so that QVC and any other similar business that meets the same qualifications could receive tax credits under Article 3A.
(Effective for taxable years beginning on or after January 1, 2000.)
Manufacturing: Subdivision (11) was amended to make the definition of "manufacturing" more closely coincide with the NAICS classifications. However, for North Carolina credit purposes, two industries that are included under the NAICS manufacturing classification are specifically excluded from the definition. The two are "quick printing" and "retail bakeries."
(Effective August 4, 1999.)
NAICS: Subdivision (11a) adds a definition of the acronym NAICS. NAICS stands for the North American Industry Classification System adopted by the United States Office of Management and Budget. The definition was added for convenience to avoid repeating the lengthy name of the System in each definition.
(Effective August 4, 1999.)
Warehousing: Subdivision (13) was amended to separate warehousing from wholesale trade and to make the definition of "warehousing" more closely coincide with the NAICS classifications. Under the revised term, warehousing consists of those industries in warehousing and storage subsector 493. The term "wholesale trade" was moved to new subdivision (14).
(Effective August 4, 1999.)
Wholesale trade: Subdivision (14) sets out a revised definition of "wholesale trade." Previously, wholesale trade was included with warehousing in subdivision (13). The two were separated because each is addressed in different sectors of NAICS. Under the revision, wholesale trade consists of those industries in wholesale trade sector 42.
(Effective August 4, 1999.)
(All definition changes are set out in SB 1115, s. 2, S.L. 99-360.)
G.S. 105-129.3 - Exceptions to Normal Tier Designations: Three new exceptions to the normal tier designations were added, a clarifying change was made concerning the determination of population growth, and a technical change was made. The three exceptions are for small counties and are set out in new subsection (e). They are:
- A county will be classified as Tier 1 if its population is less than 10,000 and more than 16% of its population is below the federal poverty level. Camden, Clay, and Jones Counties will become Tier 1 counties under this provision.
- A county will be designated one tier below the level it would otherwise have if its population is less than 50,000 and more than 18% of its population is below the federal poverty level. Alleghany, Ashe, Beaufort, Cherokee, Perquimans, Scotland, Vance, and Yancey Counties will move from Tier 2 to Tier 1 under this provision. Bladen, Hoke, Jones, Madison, Pamlico, and Pasquotank Counties will move from Tier 3 to Tier 2 under this provision. Duplin, Greene, and Watauga Counties will move from Tier 4 to Tier 3 under this provision.
- A county will be designated as Tier 3 if its population is less than 25,000 and it would otherwise have a Tier 4 or Tier 5 designation. Polk and Currituck Counties will move from Tier 5 to Tier 3 under this provision.
The clarifying change is in subsection (b1). The change makes it clear that estimates certified by the State Planning Officer are to be used in determining population as well as population growth.
The technical change is in subdivision(e)(1). The change made a grammatical correction to the subdivision as enacted by Chapter 360 of the 1999 Session Laws.
The exception made by the 1998 General Assembly to the tier designations is effective for taxable years beginning on or after January 1, 1999. That change, which added subsection (d), gives an industrial park that is located in two counties and meets certain conditions the lower of the enterprise tiers of the two counties in which the park is located. At least one-third of the park must be located in the county with the lower tier, the park must be owned by the two counties or a joint agency of these counties, and the county with the lower tier designation must have paid for at least half the park.
(New exceptions in subsection (e) effective for taxable years beginning on or after January 1, 2000; SB 1115, s. 2, S.L. 99-360; clarifying change on population effective August 4, 1999; SB 1115, s. 2, S.L. 99-360; technical change effective July 21, 1999, HB 162, s. 64, S.L. 99-456; 1998 exception in subsection (d) effective for taxable years beginning on or after January 1, 1999; SB 1569, s. 1, S.L. 98-55.)
G.S. 105-129.3A - New Requirements for Development Zones: Two new conditions were added that must be met for an area to qualify as a development zone, one of the existing conditions was clarified, a notice to affected cities was added, and the length of time a designation is effective was reduced. The two new conditions are set out in subdivisions (a)(4) and (a)(5). Under subdivision (a)(4), either the percentage of the population in each census tract or census block group that is below the poverty level must be greater than 10% or each tract or block in which the percentage does not exceed 10% must be next to a tract or block in which the percentage exceeds 20%. Under subdivision (a)(5), no census tract or census block group can be located in more than one development zone.
The existing condition that was clarified is in subdivision (a)(1). The change makes it clear that each census tract or census block group must be located in whole or in part in the primary corporate limits of a city that meets the population threshold. Some cities have satellite corporate limits as well as primary.
The new notice requirement is in subsection (b). Under the new requirement, a taxpayer who applies to the Department of Commerce for designation of an area as a development zone must notify each city that is part of the proposed zone.
The change to the length of time a designation is effective is also in subsection (b). Under the change, a designation of an area as a development zone is effective for 24 months following the designation. Before the change, a designation was effective for 48 months. Despite this reduction, a designation made in 1998 or 1999 remains effective until January 1, 2001.
(All changes effective for applications filed on or after August 1, 1999; SB 1115, s. 2, S.L. 99-360.)
G.S. 105-129.4 - Eligibility and Forfeiture Changes: This statute was amended to do the following:
- · Expand the types of businesses that are eligible to claim a credit under Article 3A.
- Make a conforming change in subsection (a) to the list of eligible businesses. · Impose three new conditions for eligibility.
- Specify when the new technology commercialization credit is forfeited.
- Clarify that a conversion or consolidation of a business is a reformulation of the same business.
- Exempt the new credit for contributing to a development zone project from the eligibility requirements that generally apply to the other Article 3A credits.
Expansion: Subsection (a) was expanded to include two new types of businesses. One of these is a customer service center located in a Tier 1 or 2 area. The other is an electronic mail order house that creates at least 250 new jobs and is located in Tier 1 or 2. The electronic mail order house addition was made specifically for QVC. An electronic mail order house creates at least 250 new jobs if it hires at least 250 additional full-time employees to fill new positions at the house in the two-year period ending on the last day of the taxable year the taxpayer first claims an Article 3A credit. The expansion of this section is effective for taxable years beginning on or after January 1, 2000.
Conforming Change: Subsection (a) was also revised to make a conforming change. The change is the separation of the category "warehousing or wholesale trade" in subdivision (a)(5) into two categories. The two categories are "warehousing" in (a)(5) and "wholesale trade" in new (a)(6). The two are separated here because they were separated in the definition section, G.S. 105-129.2.
New Conditions: Subsections (b2), (b3), and (b4) contain the three new conditions for eligibility. The three conditions are health insurance for employees, a good environmental record, and a good occupational safety and health (OSHA) record. These conditions are effective for taxable years beginning on or after January 1, 2000, and apply to credits for which applications are first filed on or after that date.
First New Condition: Under subsection (b2), each taxpayer claiming a credit for creating jobs or a credit for worker training must provide health insurance for each position for which a credit is claimed. In addition, a taxpayer eligible for one of the other Article 3A credits, such as investing in machinery and equipment, must provide health insurance for all full-time employees at the location with respect to which the credit is claimed. Any installment of a credit expires if the taxpayer ceases to provide health insurance.
Second New Condition: Under subsection (b3), a taxpayer who applies for an Article 3A credit is eligible for the credit only if the taxpayer has a good environmental record. Having a good environmental record means that, when the taxpayer applies for a credit, there is no pending administrative, civil, or criminal enforcement action against the taxpayer based on alleged significant violations of an environmental program administered by the Department of Environment and Natural Resources and there has been no final determination of the taxpayer's responsibility for one of these violations within the last five years.
Third New Condition: Under subsection (b4), a taxpayer who applies for an Article 3A credit is eligible for the credit only if the taxpayer has a good OSHA record. Having a good OSHA record means that, when the taxpayer applies for a credit, there are no outstanding citations against the taxpayer for a serious violation of the Occupational Safety and Health Act at the business location for which the credit is claimed and the taxpayer has not had a serious violation of the Act at that location within the last three years.
Forfeiture: Revised subsection (d) specifies when the new technology commercialization credit, set out in G.S. 105-129.9A, is forfeited. A taxpayer forfeits that credit if it fails to meet the level of investment required for the 15% credit or it fails to meet the terms of its licensing agreement with the research university. A taxpayer that meets the investment requirement for the 15% credit, but not the 20% credit, forfeits the difference between the 20% credit and the 15% credit. A taxpayer who forfeits the technology commercialization credit also forfeits any job credits or worker training credits claimed with respect to that credit.
Reformulation: Subsection (e) was amended to clarify that consolidations and conversions constitute a reformulation of the same business for purposes of the credits under Article 3A. Reformulations of the same business do not create new eligibility for Article 3A tax credits. This clarification applies to consolidations and conversions effective on or after December 15, 1999.
Exception: New subsection (f) sets out the exception for contributing to a development zone project. That credit is not subject to the new and existing eligibility requirements set out in this section.
(Conforming change in (a)(5) and (a)(6) and new subsection (f) effective August 4, 1999; SB 1115, s. 2, S.L. 99-360; clarifying change to subsection (e) effective December 15, 1999; SB 835, s. 5.2, S.L. 99-369; all other changes effective January 1, 2000; SB 1110, s. 3, S.L. 99-305 and SB 1115, s. 2, S.L. 99-360.)
G.S. 105-129.5 - Tax Election and Cap Changes: This statute was revised to make three changes. The first change allows all tax credits in Article 3A to be claimed against the gross premiums tax. Before this change, only the credit for investing in central administrative office property could be claimed against the gross premiums tax.
The second change establishes special allocation provisions for the new technology commercialization credit, which is set out in G.S. 105-129.9A. The special provisions allow a taxpayer who claims that credit to divide the credit between the taxes against which it is allowed. Thus, the typical corporate taxpayer could divide the credit against its franchise and income tax liability. A taxpayer who divides this credit among tax types must designate on the return on which the credit is first claimed the percentage of the credit to be taken against each tax type. This election is binding. Allowing a taxpayer to divide a credit among tax types is contrary to the restrictions that apply to all other credits under Article 3A. Under those restrictions, a taxpayer can choose to apply an Article 3A credit against either its corporate income tax liability or its franchise tax liability, but it cannot apply part of the credit to one and the rest of the credit to the other.
The third change establishes an extended carry-forward period for the new technology commercialization credit, which is set out in G.S. 105-129.9A. The carry-forward period for this credit is 20 years. This is the same period that is allowed for the credit for large investments. The carry-forward period for all other credits allowed under Article 3A is five years.
(Application of all credits against gross premiums tax effective for taxable years beginning on or after January 1, 1999; SB 1115, s. 2, S.L. 99-360; changes concerning technology commercialization credit effective for taxable years beginning on or after January 1, 2000; SB 1110, s. 4, S.L. 99-305.)
G.S. 105-129.6 - New Application Information and Fee Increase: This statute was amended to make two changes. The first change requires a taxpayer who applies for the new tax credit for contributing to a development zone project to provide specific information to the Secretary of Commerce about who will fill jobs in the development zone. The information includes the number of jobs to be created, the number of full time positions expected to be filled by employees residing in the development zone, and the number of jobs that are expected to be filled by employees residing in a census tract or census block that has more than 20% of its population below the federal poverty level. This change is in subsection (a).
The second change revises the fee structure for applications for certification of eligibility for a tax credit. Under the revised structure, the $75 per application fee is deleted and is replaced with a $500 per application fee that applies only to credits claimed in a Tier 3, 4, or 5 area. A maximum fee of $1,500 per taxpayer per year is established. No fee applies to an application for a credit in a Tier 1 or Tier 2 area. One-fourth of the fee is to be retained by the Secretary of Commerce and the remaining three-fourths is to be transferred to the Secretary of Revenue to be used to administer and audit the Article 3A credits. The change to the fee structure is in subsection (a1).
(Effective for applications filed on or after September 4, 1999 (30 days after the bill became law), SB 1115, s. 2, S.L. 99-360.)
G.S. 105-129.7 - New Information Required with Tax Return: This section was revised to designate the existing language as subsection (a) and to add a new subsection (b). New subsection (b) sets out the information a taxpayer must provide with its tax return to substantiate an Article 3A credit it claims. The information is to be in the form prescribed by the Secretary, signed by the taxpayer, and included with the return on which each installment or carryforward is claimed. Information to be provided includes:
- The location of jobs and investment, including the tier designation and whether it is in a development zone. The place of residence of an individual prior to filling a position for which a credit is claimed, indicating the tier and development zone designation of that place.
- The type of business with respect to which the credit is claimed and the wage standard information.
- For purposes of the large investment credit, the amount of the investment requirement that has been met to date.
- Qualifying information required for the jobs credit, the machinery and equipment credit, the worker training credit, the central administrative office credit, and any other credit allowed under Article 3A.
(Effective January 1, 2000; SB 1115, s. 2, S.L. 99-360.)
G.S. 105-129.8 - Enhanced Jobs Tax Credit in Development Zone: This statute was amended in 1998 to give an enhanced jobs tax credit for jobs created in a development zone. The credit for a job in a development zone is $4,000 more than the amount the credit would otherwise be for the tier level of the development zone. The change is first effective for the 1999 tax year.
(Effective for taxable years beginning on or after January 1, 1999; SB 1569, s. 1, S.L. 98-55.)
G.S. 105-129.9 - Changes to Credit for Investing in Machinery and Equipment: This section was revised to make three changes - a technical change, a conforming change due to the addition of the new technology commercialization credit in G.S. 105-129.9A, and a requirement to provide additional information with an application for this credit. The technical change, in subsection (a) changes the heading to the subsection to "General Credit" and corrects singular references to machinery equipment to plural references. The conforming change, in new subsection (a1), recognizes that a taxpayer may be eligible for both the credit for investing in machinery and equipment provided in this section and the new technology commercialization credit in G.S. 105-129.9A when the taxpayer invests in new machinery and equipment. The subsection prohibits a taxpayer from taking both a credit under this section and under the new technology commercialization credit in G.S. 105-129.9A with respect to the same machinery and equipment. The third change, in subsection (b), requires a taxpayer to submit additional information with an application for certification for this credit. The additional information is specific documentation supporting the taxpayer's calculation of the eligible investment amount.
(Technical change from singular to plural in subsection (a) effective August 4, 1999; SB 1115, s. 2, S.L. 99-360; other changes effective for taxable years beginning on or after January 1, 2000; SB 1110, S.L. 99-305.)
G.S. 105-129.9A - New Technology Commercialization Credit: This new statute was enacted to provide a tax credit for Dupont. Other taxpayers that meet the requirements of the statute will also be eligible for the tax credit. The new statute provides two alternative credits to the credit in G.S. 105-129.9 for investment in machinery and equipment. The credit is to be taken in the year the machinery and equipment are placed in service.
A taxpayer qualifies for a credit of 20% of the excess of the taxpayer's eligible investment amount over the threshold for Tier 1 (zero), Tier 2 ($100,000), or Tier 3 ($200,000) if all of the following conditions are met:
- The new machinery and equipment are directly related to production based on technology developed by and licensed from a Research I or Research II university.
- The machinery and equipment are placed in a Tier 1, 2, or 3 area.
- The eligible investment amount is at least $10 million for the taxable year.
- The taxpayer is committed to invest at least $150 million in Tiers 1, 2, or 3 by the end of the fourth year after the year in which the taxpayer first places machinery and equipment in service.
- No more than nine years have passed since the first taxable year the taxpayer claimed a credit with respect to the same location.
The taxpayer qualifies for a credit of 15% of the same amount if it meets all of these conditions with one exception. The exception is that the amount of investment committed by the taxpayer during the four-year period is $100 million instead of $150 million.
The calculation of "eligible investment amount" is different under this credit than under the credit in G.S. 105-129.9 for investing in machinery and equipment. This section allows a taxpayer to have a net Statewide reduction in machinery and equipment and still qualify for the credit. This is because this section allows certain machinery and equipment that has been taken out of service to be counted as if it were still in service. For purposes of the base year calculation, any machinery and equipment that has been disposed of in the past three years will not be removed from the calculation if either of the following apply:
- It was transferred to another taxpayer, it is still in service, and the taxpayer to whom it was transferred is not eligible to claim a credit with respect to that machinery and equipment.
- It was taken out of service at a location other than the location with respect to which the taxpayer claims the credit and it was used in a business that is not competitive with the business with respect to which the taxpayer claims the credit. A determination of whether two businesses are in competition must be made by the Attorney General's Office.
G.S. 105-129.4(d) sets out new forfeiture provisions for this credit. G.S. 105-129.5 sets out new provisions for dividing this credit among income and franchise tax liability and for a 20-year carryforward.
(Effective for taxable years beginning on or after January 1, 2000; SB 1110, S.L. 99-305.)
G.S. 105-129.10 - Changes to R&D Credit: This statute was amended in 1998 to provide a State counterpart to the federal alternative tax credit for research and development. The new alternative credit is equal to 25% of the State's apportioned share of the federal alternative credit. The new alternative credit first takes effect in tax year 1999. The 1999 General Assembly changed the new alternative tax credit for research and development as well as the general credit for research and development by making their existence independent of the continued existence of their federal counterparts. These two credits are now available for State purposes regardless of whether they are available for federal purposes. If the federal credits expire, the State credits are calculated as if the federal credits had not expired.
(Change making credits independent of federal credits effective August 4, 1999; SB 1115, s. 2, S.L. 99-360; alternative research and development credit effective for taxable years beginning on or after January 1, 1999; SB 1569, s. 1, S.L. 98-55.)
G.S. 105-129.11 - Worker Training Credit Revised: This statute was rewritten in 1998 to simplify the credit. The rewrite incorporated requirements moved from G.S. 105-129.4, deleted the requirement that the Department of Community Colleges certify that the worker training is eligible for the credit, and deleted the limitation of the credit to 50% of eligible expenditures. The revised credit applies to wages paid during training and excludes wages paid for on-the-job training. The revised credit first takes effect in tax year 1999.
(Effective for taxable years beginning on or after January 1, 1999; SB 1569, s. 1, S.L. 98-55.)
G.S. 105-129.13 - New Credit for Contributing to Development Zone Project: This new statute sets out a new credit. The new credit is for contributions of cash or property made by a taxpayer to a development zone agency for an improvement project in a development zone. A development zone agency must be certified as such by the Department of Commerce. The credit is equal to 25% of the amount donated. If the agency does not use the contribution for the project, it must repay the contributor the unused amount with interest. The credit is not taken in the taxable year in which the contribution is made. Instead, it is taken in the taxable year that begins during the calendar year in which the application for the credit becomes effective.
In addition to the application for certification required from the Department of Commerce, the taxpayer must also make application to the Department of Revenue on or before April 15 of the year following the calendar year in which the contribution was made. The total amount of credit available to all taxpayers is $4 million. The Secretary will calculate the total amount of credit claimed from all applications filed. If the total exceeds $4 million, the credit will be allocated among the qualifying applicants based on their percentage of the total credit claimed.
The credit is forfeited if the development zone agency uses the funds for any purpose other than an approved project. A taxpayer is ineligible for the credit if the taxpayer has one of the relationships described in IRC § 267(b) with the agency or is under common control with an affiliate of the agency. Additionally, no credit is allowed if the taxpayer receives anything of value in exchange for the contribution.
(Effective for contributions made in taxable years beginning on or after January 1, 2000; SB 1115, s. 2, S.L. 99-360.)