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North Carolina House Votes to Reject Some CARES Act Tax Changes

June 23, 2020, 1:44 AM

North Carolina is looking to avoid a revenue hit from federal pandemic tax relief provided to businesses.

The state House of Representatives passed a bill (H.B. 1080) Monday under which the state would opt out of taxpayer-favorable provisions of the CARES Act, a $2 trillion federal relief law enacted in March. H.B. 1080 passed on a vote of 98-21.

The North Carolina Senate still needs to consider the bill, which includes a broad range of tax provisions. The bill would decouple North Carolina tax law from a temporary increase of the federal tax code Section 163(j) limit on deductions for business interest payments to 50% from 30% of adjusted taxable income.

A number of states have or are expected to opt out of elements of the federal pandemic relief provided to businesses under the CARES Act because of the drain on their revenues that conformity would bring. New Mexico and New York are among the jurisdictions that have recently decoupled from certain provisions.

The pending legislation also would decouple North Carolina from CARES Act changes related to the treatment of net operating losses, loan forgiveness, and charitable giving.

“The Legislature’s decision to decouple from the CARES Act tax relief provisions is not surprising,” said William W. Nelson, a partner with Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan LLP in Raleigh, N.C. “Full conformity would have generated refund opportunities for taxpayers that would accelerate the drain on state revenues.”

While adopting all of the relief likely would have been expensive, Nelson said, adding: “Conforming to the increased interest deduction provision alone would likely have been manageable.”

Marketplace facilitators of food delivery services, such as Grubhub Inc., Uber Eats, DoorDash Inc., and Postmates Inc., would have to collect and remit local meal taxes under H.B. 1080 as well. States are ramping up audits on food delivery service providers in their hunt for revenue.

The pending bill also would clarify that North Carolina’s marketplace collection trigger of $100,000 or 200 transactions a year only applies to remote businesses. Those with a physical presence have to collect on all sales.

Other provisions in the legislation would clarify that sales taxes on digital property apply to digital code and align franchise tax adjustments for affiliated indebtedness with income tax add-backs.

To contact the reporter on this story: Andrew M. Ballard in Raleigh, N.C. at aballard@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Yuri Nagano at ynagano@bloombergtax.com