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Joint | May 13, 2014 | Committee Room | Revenue Laws Study

Full MP3 Audio File

Our members will please take their seats, we will get started. Senator Ford, sir, we would like to welcome you as an official voting member of the Revenue Laws Committee and appreciate you agreeing to serve. Yes, sir? [SPEAKER CHANGES] Thank you, ??. It's good to be here. [SPEAKER CHANGES] ?? come in here, we normally don't ?? their seats. If you want to allow them to sit down. [SPEAKER CHANGES] Which...the back row? [SPEAKER CHANGES] Yes, ma'am. Whatever you want to do, that would really control the way you ??. [SPEAKER CHANGES] We're going to offer the members of the committee who have already been seated. Our guest, if you would like to find seats here, you may. There's some on this wall over here. There's a few over here. Senator ??, sir, do you have any comments that you would like to make? [SPEAKER CHANGES] I would like to welcome Senator Ford to the committee and congratulate him, and we're certainly happy to have you with us as a full voting member. Welcome. [SPEAKER CHANGES] Members of the committee, I believe you received the minutes electronically. Is there a motion? Senator Gunn has moved. Second must, Representive Bally. All in favor will say Aye. [SPEAKER CHANGES] Aye. [SPEAKER CHANGES] All opposed, no. That's unanimous. The bill draft that was sent to you electronically includes all of the provisions that this committee has worked through for the last seven months. We're going to try to take it section by section. If there's any questions to staff only on that particular section, feel free to send forth those questions. There will be no amendments or no changes at this juncture. This role is through the first part. Part one. Jonathan, reduction for state net loss. [SPEAKER CHANGES] Yes, good morning. So this has been discussed before. I think you voted on it at the last meeting. It would do away with the state's current economic loss provision for corporate tax purposes and it would adopt a calculation that is similar to the federal calculation. Every other state has a similar provision. As I said, you have discussed that one before. [SPEAKER CHANGES] Members of the committee, any comments, any questions with respect to part one? Part two? Other income tax changes. Jonathan, I believe you have the lead on that also. [SPEAKER CHANGES] Correct. The primary change here is to correct a drafting error with respect to the Section 179 expense deduction. Specifically, if you look at your draft with respect to the investment limitation for 2013, a mistake was made that put that number in at 125,000 and it should have been 200. That mistake has been corrected here. [SPEAKER CHANGES] Members of the committee, any questions or any comments? Moving on to part three. Ms. Avrett, I believe you have the lead on that. Agricultural Exemption. [SPEAKER CHANGES] This is the provision that you all looked at a couple of different meetings. It hasn't changed from the last time that you saw it. The key thing that you did here was to make sure that the farming community, as well as the Department of Revenue, was clear in how to administer this going forward in the immediate future. The big substantive change that was made was that the $10,000 income limit that a farmer must meet to qualify for the exemption may be met through a three-year averaging. That was something that the farming community asked because of volatility in some years in their operations. I'd be happy to answer any questions. [SPEAKER CHANGES] Members of the committee, any questions? Senator McKissick. [SPEAKER CHANGES] One quick question, Ms. Avrett. As I recall, there was a substantial number of people that have those exemptions today that we anticipate not being eligible in the future. Which would in many respects decrease those numbers, as I recall, by as much as a half. The people that have them today are going to have to re-apply. Is there some...

. . . mechanism in place to notify those that currently have these certificates and exemptions that they need to reapply since in the past there’s never been a formal reapplication process. So that they are aware that what they’ve had in the past is now expired or at least has been extinguished and they have to re-qualify. [SPEAKER CHANGES] Miss Averitt [sp?] [SPEAKER CHANGES] Yes sir. The department of revenue is notifying those of those certificates as well as the Farm Bureau. So there is an education campaign that is out there at the moment. [SPEAKER CHANGES] Thank you. [SPEAKER CHANGES] Moving on to part number four, the pre-paid meal plan. Miss Averitt, I believe you have the lead on that, also. [SPEAKER CHANGES] Yes ma’am. This section we have continued to work with your colleges and universities on this substantively it has not changed. A few things have changed in the draft that you had before even from the one that we emailed you on Friday and that’s because after we sent this out on Friday UNC Charlotte wrote and said that they have a process in place where their food service contractor is actually the entity that remits the tax for them and they wanted to be able to continue to do that. It didn't seem to matter to this body whether who remitted the tax so long as the tax is remitted, and it is remitted in a timely manner, and it’s remitted when the receipts are received. Not some time into the future. So, on page nine, section 4.1 F, it just allows a reporting option for pre-paid meal plans, but all this does, there has to be an agreement in place, it does not change the timing of the remittance, it just changes who may remit it if the parties have a contract between them so saying. [SPEAKER CHANGES] Members of the committee, are there any questions, or any comments for Miss Averitt on section four? Moving on to section five. Miss Averitt on admissions tax. [SPEAKER CHANGES] The admissions tax, as you know, has had many different comments for the past several months. We've worked with the parties to come to resolution on many of those conflicts, the most outstanding conflict, I think where there is still uncertainty, is the timing of the remittance of the tax. There is some venues out there that would like to remit the tax, not when they receive the gross receipts, but when the event occurs. And of course, when the event occurs may be months after when the money is actually received. So at this point, the draft continues to follow the sales tax principles and also the general rule that is used by almost every state that taxes amusements, which is the person who receives it must remit it when the gross receipts are received. Some of the changed that we made in the draft to address different problems was in the exclusion of amenity. We had to make some technical changes there to comply with the streamline sales tax agreement. Also, in the definition of an entertainment activity there were many questions as to when is it an entertainment? If you have a conference and you have paid money to attend a conference and as part of that conference it includes your dinner and there happens to be someone playing the piano at that dinner. And so, what these things try to clarify is that the live performance has to be, the purpose of it has to be entertainment. So we were able to end a lot of those questions. We also provide in here on section B who the retailer is to provide that it’s the operator of the venue or it can be the facilitator, someone who sells tickets on the operator’s behalf if there’s an agreement between them. We use much of the language that we now have in our congregation statues for a facilitator they have to remit that money within 10 days of when they receive it, etcetera. As you will see on line 47 of page 11, we've allowed dual remittances so that if some instances the operator of the venue is allowed, if they so choose, to remit part of the tax and the facilitator can remit the other part. So we tried to accommodate the various business practices that are out there. And I’ll be happy to answer any questions. [SPEAKER CHANGES] Members of the committee, I believe you are just now receiving the summary which is hot off the press. So to catch up you’ll be on page two, on part number five. Are there any questions or concerns with the admissions? Mr. Starnes [sp?] [SPEAKER CHANGES] Thank you. For clarification I thought with most sales taxes, it was due at the end . . .

The month that you said in the event of these entertainment is due within ten days of the receipt.[SPEAKER CHANGES]I misspoke on that with the facilitator, if there is a facilitator that collects the money then they have to remit it to the retailer or to the state within 10 days after the end of the month. This is when there is an agreement between the two parties. [SPEAKER CHANGES]There is not a provision that every 10 days they have to ?? [SPEAKER CHANGES]No sir, no sir [SPEAKER CHANGES]Any other member of the committee? Ok we are going to move on to section 6 the service contracts ms. avery [SPEAKER CHANGES] Once again in this area we have been working very closely with the department and with the parties that have service contracts to take care of a lot of their administrative issues. one of the things we have down is to clarify how those service contracts are sourced. they are to use the sourcing principles that generally apply. ?? Reduce those payment amounts. Since 2003 there has been a dispute about the enforcements of these provisions, and there is some four billion dollars that is being held in escrow. The parties have through arbitration worked out an agreement. There are people here from the department of revenue who can shed more light if you would like on it. But the effect of that agreement is that much of that money will be released and in fact in your general fund revenue statement that was in your budget bill there was a provision actually for fiscal year 13-14 over collections due to disputed NSA payments of over 71 millions there was also another line for tobacco master settlement agreement payments of over 137 million. Those dollar amounts tie into this provision and tie into that settlement agreement that has been reached by 22 states with those participating manufacturers. Part of that term sheets settlement was that certain data would have to be cleared to a data clearing house. That could then be used to make sure that they states were diligently enforcing their provision. That is what that section does. We did contact folks and we have not heard anything back from anyone about it. Those are the changes of the excess tax provision. [SPEAKER CHANGES] Members of the committee are there any comments, questions or concerns? See none, part ten. Mr. ?? i believe that's. [SPEAKER CHANGES] Yes, part ten hasn't changed any. Its the collection divisions legislative proposals. The two the committee voted in favor of which was to require a tax compliance to hold an APC permit and also to increase funding from the collections fund for the use of locators service from 150,000-500,000 [SPEAKER CHANGES] no questions or comments from the committee, i see no hands. section 11 ms. griffen [SPEAKER CHANGES] this is the section that has to do with the central assessment of mobile telecommunications property an the department of revenue has worked very closely with the interested parties on this, and the only change to the section, this appeared in the clarifying and administrative changes draft that you had at the April 9th meeting, an the only change appears on page 30 in the definitions, it appears first on line 35 and then also on line 43 it previously just spoke with to tangible personal property owned by a mobile telecommunications company. but much of the property is actually leased, and so the language is added about the leasing of that property, and also on line 39 clarifying that this does not, the reference to tangible property doesn't include tangible property such as SCC licenses,those were just some clarifying changes that the mobile telecommunications companies wanted to make sure were in there and the department has signed off on all these changes. [SPEAKER CHANGES] questions from the committee, comments? May we move forward, section 12 Ms. Griffin. Privilege license tax changes [SPEAKER CHANGES] and there have been no changes to this particular provision since the last draft [SPEAKER CHANGES] the committee, Mr brolly [SPEAKER CHANGES] i want to ask a question this would reference page 35.

and the paragraph beginning in line 32 for 160A-211-2, subsection A, where it says, "city may levy an annual tax on each business operating within the city. The tax applies to each business location, does not apply to individuals employed by or affiliated." And I want to confirm that that means that the business would have to have a physical location within the city for that tax to apply. If, say for example, 139 businesses located in Wake County solicited businesses in a large city in the southern Piedmont, they would not be subject to a business privilege tax as they are now unless they actually rented space in Charlotte and opened a branch office, is that correct? [SPEAKER CHANGES] That is the intent. [SPEAKER CHANGES] Thank you madam chair. [SPEAKER CHANGES] Senator Barringer. [SPEAKER CHANGES] Thank you madam chair, I just have a couple of comments. I know that this will move through committee and they'll be changes made and in looking at the language, it says, "may not exceed $100." Well, I want to highlight that I think the "up to or may not exceed" is very important language because there's some municipalities that would like to collect less or more and I certainly, and I think many of us do, believe the best government's closest to the people and I want them to have that opportunity. The other concern I have is giving municipalities the opportunity to react to this and the effective date is a very important part of this and, as I said, I know this is going to move through committees and will be massaged, so I wanted to call those points to your attention. [SPEAKER CHANGES] Thank you ma'am, Senator Ford. [SPEAKER CHANGES] Thank you madam chair, question for staff is a clarifying question, madam chair I got a couple of these. The first one is on line 28, section 12.2A, there's a general statute 160A-211. Can you explain to me what that is? [SPEAKER CHANGES] Ms. Griffin. [SPEAKER CHANGES] Sure, 160A-211 is the current statute that authorizes cities to levy the privilege tax. So, what you see here in section 12.2 is that that statute is going to be repealed come July 1st, 2015 and replaced with the new statute that you see in 12.2B. [SPEAKER CHANGES] Senator Ford. [SPEAKER CHANGES] Thank you, ma'am, follow up. [SPEAKER CHANGES] Yes, sir. [SPEAKER CHANGES] Next question is on, I think it's line 43, but it starts at 37 which is the prohibition for cities. Number 3 is providing video programming tax under the general statute 105-164. For clarification purposes, is that video programmed, is that include video poker? [SPEAKER CHANGES] No. [SPEAKER CHANGES] Do you have a further- [SPEAKER CHANGES] Thank you, ma'am. [SPEAKER CHANGES] Yes, sir, thank you. Members of the committee are there further comments or concerns? Senator McKissick? [SPEAKER CHANGES] It's more of a comment than anything else, I do have some deep concerns about this particular provision of our bill that we're sitting for. I know it's an ominous bill so we're putting a lot into one package but I've seen some proposed legislation that would, in my mind, at least help offset the loss revenues that cities will receive. It was based upon the number of employees that businesses have. It looked like a fair and reasonable approach to, at least, addressing this projected revenue loss of about 40-45 million dollars for cities and towns throughout this state so I hope that, as this bill moves forward, that we will be open to working with the Leage of Municipalities and other stakeholders to try to come up with something to offset this significant revenue loss because if it has to be made up with increases in property taxes we'll get spreading it across other people in the community and that can have a, in some respects, a more aggressive impact. So I appreciate our approach towards trying to simplify this but in the process we need to be fair and reasonable in terms of offsetting some of these losses that are going to inevitably impact our communities. [SPEAKER CHANGES] Senator Rucho. [SPEAKER CHANGES] Thank you madam chairman and probably to respond to Senator McKissick's concern. Senator McKissick, we did get some recommendations from the league and we will continue to work with them to try to assist in their concerns and it will be an ongoing effort. Thank you. [SPEAKER CHANGES] Members of the committee, are there further comments on this particular section, section 12? Part 13, the license plate agency compensation, Heather, Heather ??

sp? = not sure if spelling is correct Yes ma’am. This provision has not changed since it was considered by the committee in April and this increases the compensation pay to LPA (sp?) or TAG (sp?) agents for the collection of property tax under the Tax and Tag Together Program by permanently adopting the transitional rate of a dollar six per transaction. [SPEAKER CHANGES] Members of the committee. The next section will be our technical, clarifying and administrative changes. Section 14. Ms. Griffin (sp?) [SPEAKER CHANGES] The changes to this are towards the end of the part and begin on page fifty. These are just some additional clean up type changes that sort of dribbled in after the last meeting mostly from the Department of Revenue. The first new section is 14.21, page fifty, beginning on line two and really the only change, this has to do with a report that people have to file when they have custody of tangible personal property for property tax purposes and the statute was missing a reference. Basically, the reporting requirement doesn't apply if you have custody of property that is exempt and that is inventories of contractors and, hold on, I just the other two left my brain, what they were. Sorry inventories owned by contractors/manufacturers and inventories owned by retailers and wholesale merchants and the reference to inventories owned by contractors was simply missing from the statute. That’s that 32A so the only request was to add 32A to the statute so it looks like more than it is and what we did is since we were amending the statute was to clean it up because as you see it was referring to reports and based on the repeal of subdivision one which was repealed in the eighties, there’s really only one report now in this statute. So there’s nothing new substantively here, there’s no substantive change all this does is clean up the statute and add a site that was missing. The next new section is 14.24 on line forty of the same page. This was requested by DOR (sp?) to solve a customer service issue with the new Tax and Tag system and all parties have signed off on this. And finally, the last section, section 14.25. This was a request of the unauthorized substances division at DOR (sp?) and one of, they had issues with being able to pursue the excise tax on meth because it doesn’t meet any of the definitions listed as you can see in one through three so they asked for language to be added where you can see eleven and twelve to be able to pursue the tax on those drugs. [SPEAKER CHANGES] Thank you staff (sp?). A lot of hard hours have gone in to the work on this bill with all of our staff. That takes us through the (inaudible) but we’re going to back up for just a second. We did have a request and it is in reference to part five, the admissions and they have two guests who have asked to briefly speak. There will be no action taken on this provision today but Mr. Richard Thigpen from general counsel at the Carolina Panthers and Mr. Billy Traurig with general council the Carolina Hurricanes. Gentlemen if you want to come to the microphone at the back of the room and share your time and make your comments. And if you will please just identify yourself when you before you begin, for the record. [SPEAKER CHANGES] I’m William Traurig with the Carolina Hurricanes and I want to thank you for the opportunity to speak today. For approximately ten years, myself and other members of the North Carolina Travel and Tourism Coalition have opposed changes to the admissions tax or the gross receipts tax to convert it to a sales tax on admissions because we were being singled out. Last year as part of the changes, as part of the broader package we did not oppose those changes because we realized we were not being singled out and that we needed to

Do our part for the state. However, we’ve had some unintended consequences on that. And the issues that have come up are the timing for the filing and the remittance of the tax. North Carolina Sales and Use tax law allows some discretion for some entities to request permission from the secretary to file the taxes on an accrual basis which is basically what we did with the Gross receipts tax by paying after the events and this bill takes away that option. The accrual basis is in keeping with generally accepted accounting principles and how we file and remit our taxes in accordance with IRS income tax regulations. Tickets to us are different than tangible personal property because when you purchase a piece of personal property you receive it, you get to enjoy it as soon as you receive it. A ticket is just a piece of paper or nowadays even a barcode on a phone that gives you admission to the event. The entertainment is what we’re selling and the entertainment, that product is not delivered until the time of the event. And at that point, that is where we believe the taxable transaction takes place, similar to a layaway? sale at Walmart when someone goes in and pays over time it is my understanding that a transaction is not taxable until the product is actually received by the customer. The other issue that we run into is that the change because ticketing systems are so different than Point of Sale systems is that ticketing systems are based around each event. They’re not based around a single transaction. So the reports that we get out of our ticketing systems are extremely complicated and include line items that you may not think of events but we treat as events for tracking and accounting purposes such as open practices, hockey camps, season ticket holder events, other things that are not taxable but they also include up-sales for parking, t-shirts, merchandise, some of which are non-taxable, some of which the tax is paid by another entity. If we had to pay on a monthly basis as the moneys come in because of the complications that we’ve got and the vast number of events that we have which could be up to and above 250 line items per day, we would have to hire additional full-time staff; at least 1 to 2 people in our 3 different ticket offices and at least 1 person in the accounting department just to keep up with this tax and make sure that we are trying to track it and remit it properly and that would be a manual transaction - manual entry which obviously would be subject to errors and then when the department of revenue comes in to audit, the amount of time if I’ve got to hire 2-3 full time people, the amount of time to audit would be extremely burdensome. Whereas, if at the end of an event, the end of a month when you come in to audit, we could provide you with a report that is for the event and all the events in the month and the return for the month and it could be very easily be matched and our audits have in the past lasted approximately one to two days, I believe, versus an extreme length of time. We appreciated the time and hope that you’ll understand and make this change for us. [SPEAKER CHANGES] Thank you sir. Are there members of the committee that would like to have questions for the gentleman? Senator Hartsell. [SPEAKER CHANGES] Thank you madame chair. Let me just simplify this, are you telling me that under gap principles, the sale of the ticket occurs when the event occurs? [SPEAKER CHANGES] Yes sir. [SPEAKER CHANGES] Thank you. [SPEAKER CHANGES] Mr. ??. Well actually I wanted to ask the same question but with different words. So you're saying that you do not recognize the revenue until the event occurs. [SPEAKER CHANGES] That is correct. [SPEAKER CHANGES] Mr. ?? [SPEAKER CHANGES] How do you... [SPEAKER CHANGES] I’m sorry, go ahead Mr. ??, yes sir. [SPEAKER CHANGES] How do you handle people who buy season ticket. Do you wait until the last game of the season before the tax is paid on that. I mean... [SPEAKER CHANGES] No we allocate those as each game occurs. For the games in October, we pay the taxes for those games in the month of November as they’re due. So it is spread out as the games occur. And that is how we also recognize the revenue for gap purposes and IRS purposes. [SPEAKER CHANGES] Senator Behringer. [SPEAKER CHANGES] Thank you Madame Chair. I’m a season ticket holder with you folks and so we have the opportunity..

Do Trey change our plans and all of that? How is that handled under this system? [SPEAKER CHANGES] The system is difficult to operate. Changes can change the value in your plan if you come in and want to swap seats and end up with tickets that are more expensive. The taxable rate could go up, or it could go down. You could get different tickets, and we also have people changing seats mid-season, as well as before the season once their plans are paid for. [SPEAKER CHANGES] Quick follow up. My interest is to comment. I like efficiency in business, and so I'd like for us to work with these folks to try to figure out an efficient way. [SPEAKER CHANGES] ??, a quick question, sir? [SPEAKER CHANGES] Yeah, and that's this. You're speaking on behalf of the hurricanes. But, you're not speaking on behalf of everything that's hold over at TNC. TNC, they have concerts that sells tickets year out, because I bought them. [SPEAKER CHANGES] That is correct. [SPEAKER CHANGES] So I just want to make sure we're just talking only about the hurricanes as it relates to what you are speaking to, because holding money for year and not paying it is a whole different thing. What period of time are you proposing that you look at as this window that begins at a certain date and ends at a certain date, and as to conforms to a physical year, the hurricanes, is it conforming to a calendar year. What precise time-frame are you specifically indicating would be fairer and more reasonable than remitting it in the 30-days intervals? [SPEAKER CHANGES] Because our ticketing systems are matched up between the hurricanes and the other events, and it is all one report that we get from the different systems, from the one system from the different offices, to separate and handle them in a different manner would add and have us give the same burden that we would have if we had to do it for the hurricanes just on a slightly smaller scale. [SPEAKER CHANGES] Follow-up. SO you're saying you would propose this not just for the hurricanes, but for all events that are held at TNC, then? And, I guess if we're talking about TNC, we're also talking about all the other entertainment venues in the state, including the due-pack, which is over at my district in Durham. Is that what you're saying? I'm open to trying to do it in a way that makes sense. I'm just trying to make sure that I'm aware of what it is that you're asking, and it sounds like for everything at TNC, which could also affect everything in the state that's similar. [SPEAKER CHANGES] It is because it would put all the venues on a similar footing, and all of them have similar issues that might be slightly different in flavor, but all of us has similar issues throughout the state, and I've heard from many of my counterparts throughout the state that they are concerned about this as well [SPEAKER CHANGES] Thank you, sir. Members of the committee, as you can see this is rather complicated. It is the intent of the chairs that we will re-visit this issue at a time in the future. It came to us late. We appreciate you being here, sir. [SPEAKER CHANGES] Thank you. [SPEAKER CHANGES] Mister ?? Sir, do you have anything else you would like to add at this time? [SPEAKER CHANGES] Very briefly if I may. Thank you very much for the opportunity. What we're really looking for is, as the sales taxes expanded and put into place for different businesses, that you just consider how these different businesses operate, what their models are like, and work with them to make it efficient. The goal is certainty of tax, to make sure for the department of revenue, and for the tax-payer, that everybody knows what a man is due when the tax is remitted. In our business, it's really not known until the event has occurred, and so that's why we asked for this. [SPEAKER CHANGES] Thank you, sir. Senator ??, sir, do you have a comment? Okay. We're going down our agenda. We have an issue that is the taxation of vapor cigarettes, and Miss Finnel, that is...She's going to give us an overview and then we have some guests in the back. Miss Finnel, if you would move forward. [SPEAKER CHANGES] Good morning. This is a new issue we have not talked about yet, but it will be a very brief presentation. I'm going to talk to you briefly about vapor products, or e-cigarettes. So, I didn't actually know a lot about these before I started this presentation, although I've seen them around and you've probably seen them around. So, what are these products? These are a new product that has probably been around for five years, but they're becoming increasingly popular, and this is a product that actually...

… creates a vapor from nicotine suspended in a liquid and so it is not exactly the same as cigarettes but it’s similar. So here’s some examples of some vapor or e-cigarette products. They usually consist of a few common components. There’s going to be a mouthpiece, there’s going to be a cartridge to contain the liquid that contains the nicotine and there’s usually a battery and an atomizer. And the battery fuels the little mechanism that atomizes the liquid, or vaporizes the liquid, to be inhaled. Some of these products also light up at the end so they sort of look like cigarettes, but not all do. And as you can see, some of them look just like cigarettes and some of them look like other things. Some people call them hookah pipes, although they’re not actually hookahs. They’re different items, so this is sort of what we’re talking about. So what’s really happened with this? We've actually had some recent Federal action on this. A lot of states were waiting to decide what to do with taxation to decide what the Feds were going to do ‘cause the Feds could have gone a couple of different ways. But in 2009, the Federal government enacted the Family Smoking Prevention and Tobacco Control Act and the purpose of this act was to subject new products to FDA regulation. So for example, vapor cigarettes, nicotine gels, they’re dissolvable. They’re little tablets that you can now dissolve on your tongue that have nicotine in them. In April 2014, the FDA finally adopted proposed rules that would subject these new products to the following restrictions: minimum age and ID for purchase, registering the product and reporting its ingredients, and marketing restrictions on the product. So, a little more detail of what they actually did was they actually said, this is a tobacco product under Federal law. Some folks feel that this isn’t really a tobacco product. There’s not actually tobacco in it. For the most part, it’s nicotine and the fact that people like to cite, which I find very interesting, is that you can actually get nicotine from products other than tobacco. For example, eggplants apparently have nicotine in them. Who knew? But the FDA has indicated that they want to continue to look at the continuum of nicotine delivery products, so they’re really looking at the nicotine products, not just tobacco as it is. So again, a little more information on the regulation of tobacco products, so now that these vapor products are tobacco products, again here’s a list of the restrictions they will now be under: they can’t be adulterated or misbranded, they can’t have modified risk descriptions. So for example, you can’t call them light cigarettes or light e-cigarettes. You can’t give out free samples, you have to have a premarket review and, again, a minimum age for purchase. So you look at what the state did. The state was ahead of the Feds on this issue. Last year, you may recall, the state actually adopted a law to prohibit the sale of vapor products to minors. It’s a class two misdemeanor for anyone to distribute these products to individuals under 18. Retailers must post a sign and no vending machines may be allowed to use these products unless they’re in a restricted area. This became effective August 1, 2013. 33 states adopted similar provisions but as you know, now the Feds have stepped in so now no one under 18 across the country can purchase these products. So this is why we’re here. We’re here to talk about tobacco taxes. So here’s a brief overview of Federal and state tobacco taxes. As you can see, the Feds have a lot more categories about how they tax tobacco products but us here in the state, we basically have two broad categories. We tax cigarettes at 45¢ per pack and we tax OTP at 12.8% of price. So OTP is basically everything else: cigars, snuff, chaw, all that stuff is OTP and it’s taxed based on the purchase price. So right now, vapor products don’t fall under the definition of cigarettes or OTP, so they are not subject to the tax. They are subject to sales tax but they’re not subject to a specific tobacco tax. So that’s part of what this draft is about. Other states, like I said, for the most part, were waiting to see what the Feds were going to do before they decided to tax it. We do have one state which taxes vapor products. They taxed it at their OTP rate which, as you can see, is quite a bit higher than ours. That’s 95% of wholesale rate. Other states have come up with some proposals. They haven’t enacted them yet. For example, South Carolina had proposed 5¢ per milliliter of the product sold. Governor Christie of New Jersey just indicated that he wants to tax them like cigarettes and he’s going to tax them the equivalent of $2.70 per pack, which is New Jersey cigarette tax. Washington State has also had a house finance committee approve of 75% tax on the e-cigarettes. So these are some of the options are here. You actually have a proposal in front of you that’s very similar to the South Carolina proposal. So what it would do is tax vapor products at 5¢ per milliliter of consumable material. So that’s your liquid that’s in your cartridge that’s in your e-cigarette or your vapor product. So per milliliter, it is 5¢. If you sell less than a whole milliliter, it’s a portion of that tax. It’s very similar to the motor fuels tax or the tax on liquor

...And wine, so it’s a per milliliter volume tax. Now it’s gonna be administered as OTP. It’s not gonna be administered as a cigarette tax. Now the reason why that‘s important is now cigarettes can only go through the wholesale model in the state, so they first come into the wholesaler and the wholesaler pays the tax on the cigarettes. For OTP, the entity that first acquires the product in the state pays the tax, so either the retailer or the wholesaler can pay the tax. Now one note on that, for OTP products, there is a licensing program, so the wholesale dealer or retail dealer that first touches that OTP must be licensed, that’s gonna be the same for vapor. Now there is still only going to be one license, it’s going to be an OTP, tobacco or vapor product license. But some retail dealers only sell vapor so they’re not currently licensed. So if you’re a vapor dealer, this will require you to be licensed. So there will be some new licensees under the act. There’s also no discount for vapor allowed in this bill. There’s a two percent discount for cigarettes and OTP. This goes back to the days of stamping. There used to be a discount allowed for stamping. That discount has remained in the law even though there is no stamping. So this does not extend that discount for filing timely to the vapor. The proposal also has a provision that’s not related to taxes. And this is about restricting vapor in our prisons, our state confinement facilities and the local jails. This is basically the parallel provisions to tobacco. It goes in and clarifies, that where tobacco is not allowed in these places, you’re also not allowing the vapor. So in state facilities, it states that you may not use these products on the premises. There are exceptions, for religious use, and used by employees and visitors as long as they are locked in the vehicles outside of the premises. The treatment for local facilities your sheriff’s jail is slightly different. It’s actually a class 1 misdemeanor to either give vapor to an inmate or to possess a vapor product. We have shared this with DPS and the Sheriff’s association. They don’t have a position on it, but to our understanding, is that these products aren't currently allowed anyway. But, we are clarifying that they are prohibited in these prisons and jails. So that’s it. I’d be happy to answer any questions. Madam Chair: Members of the committee, questions for our staff? Senator McKissick. Senator McKissick: A couple of questions, okay? First when we first start talking about a millimeter, is that equivalent to one refill on an electronic cigarette? Is that the volume that it actually holds? Speaker: One of the issues with vapor is that there are many different manufacturers and there’s a lot of different products. So it’s not a unit, it is a unit that is recognized, but depending on what product you use, you could use a different amount. So it’s not like cigarettes where it’s very standardized. So if you recognize a unit of volume, you can recognize however they’re selling it, but we don’t know what a standard unit at this point is. Because it’s sort of all over the place at this point. Senator McKissick: Follow up if I could? Madam Chair: Follow up Senator McKissick. Senator McKissick: I've seen a Reynolds’ product which I guess was on sale, in Colorado today and in one other state I do believe. Now would that...do you know whether in fact that product and the way it is packaged and sold, if that one refill that they gave you, is that a milliliter or are you familiar with that at all or... Speaker: I’m not sure what the Reynold’s product, I believe our, we’re gonna have a presentation, and I believe it is sold in two... Madam Chair: Sorry. Speaker: That’s okay. They are sold in milliliters, so whether its five milliliters or ten milliliters, we would be able to tax it at that amount. I cannot tell you with any certainty which product has how many milliliters in it. So they are sold on a volume...there is a provision in the bill that requires all manufacturer’s invoices to state the total amount in milliliters of consumable material. So that is where it’s gonna be taxed at. The retailer is not going to need to sit there a figure out how many milliliters there are. Madam Chair: Senator McKissick, we have a guest from, David Powers, from the Reynold’s and I believe he’s gonna be prepared to answer all of those technical questions for you. McKissick: Okay. Maybe what I’ll do is hold all of my questions to that time Madame Chair. It would be fine if you can recognize me after his presentation. Madam Chair: That might be a good...yes sir. McKissick: Thank you. Madam Chair: Is there other questions from the committee for Ms. Fennel? If not, Mr. Powers, if you would like to come up. You may remain there but you’re welcome to come up front. Do you have an overhead? You may come up here if you would like to. I think it’s just easier with your overhead from this point. Members of the committee, [our guest??] David Powers and ... [Cut off]

Who has all the answers to the technical questions (SPEAKER CHANGES) Thank you madam chair, Senator Raven, and members of the committee. I really appreciate the opportunity to come here and talk with you today. My name is David Powers, I’m vice president of government relations for RAI services company, you know us better as RJ rentals tobacco company as well as RJ rentals vapor company. I’m pleased to be able to give you a quick overview of a consumer product which is now a fast growing segment of the general tobacco category. E cigarettes or vapor cigarettes and vapor products. E cigarettes in general have these common features: they contain nicotine derived from tobacco pharmaceutical grade is suspended in a liquid generally made of pharmaceutical grade propylene glycol and glycerin. The liquid is heated, typically by battery, and when the consumer draws on it, it produces a vapor, not a smoke. No tobacco is burned, e cigarettes are smoke free. The products on the market currently are made in China, with one notable exception, the e cigarette that is made by RJ rentals vapor company, Vuse. Vuse is currently being marketed in Colorado and Utah, and will be sold nationwide later this summer, actually next month. Vuse is different from any other e cigarette currently on the market for a few reasons. One is the only digital vapor cigarette designed and assembled in the United States. Cartridges are made using high speed machinery, and filled not by hand, by machinery. Vuse, unlike many cigarettes on the market, is a closed system, meaning not only does it not need to be refilled, it is designed to prevent reuse. The Vuse cartridge only works with a Vuse battery, so you can’t put a separate cartridge on our battery, or vice versa. Vuse cartridges are designed to minimize the possibility of any leaks, and to be tamper resistant, and choke hazard resistant. Vuse is currently manufactured in Kansas, we’re looking at expansion opportunities, especially here in North Carolina. Studies show that e cigarettes have the potential to significantly reduce risk, primarily because they do not expose the consumer to tobacco smoke which is the chief risk component of traditional cigarettes. E cigarettes present less risk than traditional cigarettes, but they still contain nicotine, which is addictive. The legislature was absolutely right last year when you passed, with our support, legislation ensures minors cannot buy these products. Because e cigarettes are different from traditional cigarettes, it makes sense that they should be taxed differently than traditional cigarettes or other tobacco products. So this is what e cigarettes are, and this is what vapor products are, they produce vapor, not smoke. No tobacco is burned, they’re smoke free. They’re not traditional cigarettes, and they are certainly not like other tobacco products, cigars, chewing tobacco or snuff. They simply don’t fit any of the traditional categories of tobacco products because they’re a totally new kind of tobacco derived product. What we’re asking this committee to do, is to establish by statute a new category of tobacco derived products, e cigarettes, vapor cigarettes, and vapor products which reflects the risk difference between e cigarettes and traditional tobacco cigarettes and other tobacco products. Again, I want to thank you for your time, I am willing to take any questions. I have some colleagues from rentals in a more technical and legal areas that can answer some questions also, so thank you very much for your time, and I appreciate the opportunity to be here. (SPEAKER CHANGES) Thank you Mr.Powers and if you’ll just remain right there, I think one of the questions that’s just come up to the chair, are you asking to be taxed in this respect (SPEAKER CHANGES) I promise you you’ve never heard me or probably anybody else in any industry stand up and ask for their product to be taxed, but yes ma’am, we are. (SPEAKER CHANGES) Thank you sir. Members of the committee, I believe in your handout you will see that there is generates revenue, new revenue of 2.1 million 14-15, about 5 million in 15-16. Members of the committee, are there questions? Senator Starn, Representative Starn, sorry. (SPEAKER CHANGES) Thank you. The tax that goes on this, it’s on the, do you pay sales tax on the electronic cigarette when you buy it, and then this new

Representative [Starns?]: The other tobacco product tax is up based on the refill cartridges... Speaker B: Well, Representative, the real reason we’re here today. The one state that taxes is Minnesota and they do it as a percentage of wholesale price. They do it at a very high rate which we’re very much against because we want to encourage smokers to try this product. We don’t want to create distance in it for them to try it. But one thing they do, the product comes in two forms. This is a singles use electronic cigarette. The cartridge is equivalent to about a pack of cigarettes. The battery is rechargeable, a recharger’s in this packet. If you tax this based on wholesale price, you’re actually taxing the battery, as well as they consumable liquid. The cartridge is only liquid. So we feel like it’s a much more sensible and fair excise tax to tax the consumable part of the product. Which is why we feel like it should be taxed based on that liquid volume. But yes it would be separate; five cents per milliliter, accessed on the invoice at the original, by the original purchaser, on the product. Unnamed male: Follow up... Madam Chair: Follow up? Representative Starns? Representative Starns: Hold up the one that we’re taxing. Speaker B: Actually both. This is a cartridge that replaces, that goes on this to replace the cartridge when it’s used up. Representative Starns: On the actual cigarette part you hold in your hand, when you purchase that. There’s a sales tax... Speaker B: There is a sales tax on it just like on many others. Representative Starns: And then there’s the other, the tobacco product tax applies as well. Speaker B: No, not today. Not today. That’s what we’re... Representative Starns: But under this legislation, it would be? Speaker B: Yeah. Yes sir. Representative Starns: One final technical question; Madam Chair: Representative Starns. Starns: Many smokers choose their cigarettes based on the taste and the flavor. Do electronic cigarettes have a taste or a flavor? Speaker B: We’re currently marketing two products. One is, this is menthol, just like menthol cigarette and the other one’s tobacco flavored. That’s what we’re...there’re many different flavors on the market. We’re marketing these two in Colorado and Utah. Madam Chair: Senator Mckissick? Senator [Mckissick?]: A couple of questions, sir. And first, it’s good to see you again. Speaker B: It’s good to see you Senator. Mckissick: I’m just curious. This milliliter question I had earlier. I guess your typical refill there is one milliliter. Is that what that is? Speak B: Our cartridge is about half a milliliter. McKissick: Half a milliliter. Speaker B: But other cartridges range to a milliliter and maybe even a little more. One reason we chose this measure is because many systems which are what they call open systems where you can go buy a bottles of refillable liquid, come in 30 milliliter, maybe 50 milliliter bottles. And we feel like this captures all products, on the market at the same rate, fairly at the same rate. Mckissick: Quick follow up Madam Chair? Madam Chair: Yes sir? Mckissick: Based upon your projections, in terms of migration from traditional cigarette products, to the new electronic cigarettes, if we were to look out over a five year window of time, based upon where we stand today, what percentage of your market do you think will make that transition from traditional cigarettes to the electronic? Speaker B: For us, it’s really hard to judge because we've only been selling in two states for a very few months. I really don’t think I can make a qualified answer on that. I do feel like this category. I've seen conservative growth estimates of 70 percent a year in this category. Now how that translates to us, like I say, we’re a very new product on the market> There’s been electronic cigarettes on the market for several years. This time next year, I’d have a lot better idea about that or even six months from now, after we've got some experience on a national level selling it. But first our company’s concern, I really couldn't say with any certainty. Madam Chair: Senator [Baranger?]? Baranger: If I can make one comment Madam Chair. Madam Chair: Yes, sir? Baranger: That simply this; I support the idea of us moving forward with this legislation. I think it’s a good idea. I think in the long run, it behooves us all if we move people from traditional cigarette products to electronic cigarettes. It exposes people to less of a harmful impact that you get from cigarette smoke because you have the vapor involved and it is a decreased, health risk in cost as well. So, I think it’s a great idea as well. The thing I think we need to be mindful of is as we move forward and I think this five cent per milliliter is a good point perhaps to start. I don’t know where that should be a year or two down the road. And I don’t think there’s any way for us to know where it ought to be today. I do think there’ll be... [Cut off]

Senator Powers: ...significant migration of the market. And I believe that there are significant revenue losses that we will experience in terms of traditional income that we would receive from cigarettes. We’re looking at four five cents a pack. And one of those cartridges is equivalent to a multitude of packs. Unnamed committee member: Actually it’s about one pack. Powers: About one pack; so you’re moving from forty five cents to five cents. So that will have impact upon us when we do our budget projections for loss revenues: so you’re moving from forty five cents to five cents. Is it fair to move in some direction that’s consistent with what the difference is between the products....Absolutely? And I think it’s meritorious to do so. I just don’t know if five cents is where it needs to stay: it’s a good starting point. So I applaud the industry for its research and for its advances in technology, and hope that this legislation moves forward and will at least have some basis to look out in a couple of years and see what we’re doing and seeing if it needs adjustment. Unnamed committee member: Thank you Senator. Senator Powers: Thank you Madam Chair: Thank you Mr. Powers and members of the committee. Are there other questions for Mr. Powers or his colleagues? If not, sir you may be excused. Thank you. Members of the committee, you have the bill before you, the draft proposal. Are there questions for our staff or, again for Mr. Powers’ staff? This is the Tax Vapor prohibits in jails. Senator [Roucho?], a motion sir, Are you prepared for a...? Sen. [Roucho?]: I think so. Madam Chair: Senator Rabun? Senator Rabun: Yes, Madam Chair, I was going to make a motion when we wrapped up at the end to put everything into that one omnibus bill. At that time do we need to do that ahead of time or I think that would be proper just when we wrap up at the end of the day, go into one bill if I may. Madam Chair: Okay. Are there any further questions on the vapor tax? Miss Carney? Ms. Carney: Why do we need to roll these two together? Why can’t we just have it separately...Just a question? Sen. Rabun: What I was, my plan was after we finish today, was because we’re going into and in the interest of time in a shorten the session, rather than have several bills, I was going to move that we wrap everything into one omnibus bill and send those to finance and work through it that way. Ms. Carney: Madam Chair...? Madam Chair: Yes, Ms. Carney? Ms. Carney: I understand that we roll a lot of bills together up here, but we’re getting these two in here today before we go into session and, are these two tied similarly? Are we going to be able to support both? Sometimes people want to vote for one but they don’t want to vote for the other. And these are two new bills that are before us today... Madam Chair: Ms. Carney, I’m gonna give you an option; we have the vapor cigarette proposal before us. Chair moves that we give the vapor tax favorable recommendation. Are there any further questions or comments? If not, all in favor of the vapor tax draft will say Aye. Committee: Aye. Madam Chair: All opposed, no. [Silence] Madam Chair: I think that’s unanimous. We still have the option to roll all of the bills together but we have a clean vote on the vapor tax. Our fifth item is Single Sales Factor. Jonathon Tarp sir, if you would like to discuss that. Jonathon Tarp: so you have a proposal in your packet and I’ll just start with that first before we go over those slides. This is a proposal that would increase the weight of the sales factor and the corporate [proportionate?] formula. The increase would be from two times the sales factor to four times the sales factor. And I briefly pointed to the physical memorandum mentioned; found this in your packet, is it? Physical memorandum on the back... [Cut off]

...So that you will see, what occurs there with you revenues. For the fiscal year of 13-14, there will not be an impact. For 14-15, there would be a reduction in general fund revenues of 10.2 million dollars; and then in fiscal year 15-16, 23.4 million reductions going out to about 28-29 million in the out years. So, that’s the proposal. Again to increase the weight of the sales factor does not actually go to a formula that would only use the sales factor. We've talked about singles sales factor apportionment at a previous meeting, so today I’ll just briefly talk about that corporate apportionment process again to refresh your memory. We’ll talk about the proposal a little more and then if you have any questions, I’ll try to answer them. [Speaker changes] Movement to the committee on Singles Sales Factor, any questions? I’m, sorry. I am so sorry. I got ahead of you. Well, it’ll be a brief overview, perhaps not that brief. [Laughter from the committee] [Speaker changes] Make it brief. Yeah, maybe. Well, federal law, if you remember. Federal law prevents states from taxing all the multi-state corporations’ income. If they could do that, then potentially you’ll have one dollar being taxed up fifty times, by fifty different states. So corporations calculated an apportionment percentage. They multiply their income, by this apportionment percentage to determine how much of their income is subject to tax in a given state. In North Carolina we also use this same percentage to apportion the franchise tax base. As model legislation from years back, years ago, I suggest states do this in a certain way to so that you have uniformity. That suggested method is that you would use three factors; and those three are the percentage, of the corporation’s property, payroll and sales in the state. So mathematically that is stated as your property factor plus your payroll factor, plus your sales factor divided by three. So in that formula each of the factors has equal weight. The sales factor in particular, since we’re talking about that has the weight of one third in the formula. Now over the years, states have started increasing the weight of the sales factor in this formula; some going all the way to using only the sales factor and they've done this as an economic development tool. North Carolina followed suit in 1989. We increase the weight of our sales factor to double weight. So after that change, it meant that the sales factor counted as much in the formula as the property and payroll factor combined, and counted as one half. So we moved from having a formula where the sales factor had one third influence to one where it was one half. And that’s where we stand today. Under this proposal you would increase the weight to four times. So, now you have six factors, with the sales factor making up four parts of it. You end up with a 4/6 ratio or 2/3’s. So if you adopt this proposal you would have gone from a formula that counts as a sales factor one third, in the old days, current law counts as one half. Now it would make up two thirds of the formula. Now the economic development argument can be made in a fairly simple hypothetical. If you assume you have all of your property and payroll in state, but all of your sales outside the state, under the old formula you would have had one third of your income subject to tax here. Under current law, you would have half of your income subject to tax here, and if you made this change to four time’s sales factor, you would only have one third of your income subject to tax here. So what you’re saying to states, I guess that kind a states that argument, folks that would make the case for this would say, “Come and invest your property and your payroll in North Carolina. If you do so, we’re going to reduce the influence that your property and payroll investment has and determining how much your tax bill is going to be." That’s the argument they’ll make. Now I have a couple of slides here. I guess they’re a little more detailed, but really I've illustrated the concept to you in that simple hypothetical. That hypothetical was just not very realistic because if you have all your property and payroll in North Carolina it’s very unlikely you’re not gonna have some sales here. This really is, the concept is really no different. You just, in this slide you have...

… property and payroll here, and 20 percent of your sales. This assumes the tax payer had a thousand dollars in taxable income. And on the left you have North Carolina with a double-weighted sales factor, and we assume you have another state that just has the standard, original form of just the one third weight, and you see at the end of the day at a 5 percent tax rate, North Carolina offers some savings to that tax payer because we have double-weighted sales, versus the sales factor only counting a third in the former. Under this proposal today, you would increase it to four times sales, and this tax payer would enjoy additional tax savings in that scenario. And now, a lot of states that have moved to single sales factor have done this in a sort of I guess fractional steps where they continue increasing the weight until ultimately they’re just using the sales factor only, and so you see some states going up 60 percent, 70 percent, or they continue using the fractions. It’s the same thing until they get to 100 percent sales factor. And then finally I have an example up here that shows you what would happen if you had a 100 percent sales factor, based on that same example, and you see that tax continues to go down. Down from 20 dollars, I think, in the original one, down to 10 dollars here. So the argument for single sales factor is definitely primarily an economic development one. Folks will argue that it encourages investment in job creation in North Carolina, again because you deemphasize their property payroll factors and the apportionment. They also point out that it rewards these companies that increase their property payroll here, and it exports the tax burden to out-of-state companies that use the state as a market rather than as a location for their jobs and investment. The other argument is the consistency argument. North Carolina does allow single sales factor apportionment for some tax payers already. They include excluded corporations, which are defined as building contractors and security dealers, loan companies and companies that receive more than half their income from intangibles, public utilities and capital intensive corporations. Now there are definitely some arguments against single sales factor or against continuing to take this progression of increasing the weight with the sales factor. You’ll hear them argue that this is not an effective economic development tool, it’s just a trend, and ultimately states just follow the trend – everybody does it – until the only winner’s really the companies that you’re just giving the tax ?? away. That’s an argument you’ll hear. They’ll argue that it arbitrarily picks winners and losers, and it is true that if you adopt this, there will be winners and losers. Not everybody wins. Some will pay more. And it’s pretty easy to see in the formula, if your sales are higher than your property and payroll ratios, you’re going to pay more because the sales factor’s being emphasized more in the formula. And then finally they will argue that it ignores why businesses pay tax in the first place. They’ll make the point “Well the property employees in the state equals a demand for more government services, so you should be taking that into consideration when you do the apportionment.” And one last argument they’ll point out is that it does not help the majority of North Carolina corporations. The majority of corporations don’t apportion at all. It’s because the majority are small companies that are just 100 percent North Carolina. They don’t do business outside of the state, so they don’t have anything to apportion. It’s just all tax tier. In case you’re wondering what our neighbor states do, Virginia has gone to a double-weighted sales factor with the option of single sales factor for manufacturing and retail companies. South Carolina has now adopted single sales factor. Tennessee is double-weighted sales and Georgia also has gone to single-weighted sales factor. And that’s all I have. [SPEAKER CHANGES] Members of the committee, are there questions? Mr. Starns. [SPEAKER CHANGES] What other states do a four-times sales factor? [SPEAKER CHANGES] I couldn’t tell you the other states right off hand that do a four-times sales. There are some that do triple-weighted and some have gone that step. It usually is a process where they’re intending to go to using the sale factor only, and you may see them take steps from using four-times sales factor up to six-times and on up. I saw one state here that has gone to 90 percent and then they’re going to 95 percent sales factor before they get there, but usually they’re just doing that as a phase-in process. I don’t know of any that just…

[0:00:00.0] Their standard is four times summer trip awaited. [SPEAKER CHANGES] Follow up Mr. ?? [SPEAKER CHANGES] The slides shows you have the winners and the losers, give me an example the tops of industries or businesses in North Carolina that would benefit the most from this. Is this gonna be a manufacturer because and the reason is because they are property intensive, they have heavy property investment and may have a lot of payroll. So, there are the ones that typically benefit manufacturers. And the one as far as the losers, a service company could definitely be a loser because the way resource the services revenue if they could have more of their sales outside the state in a lot of circumstances and they could pay more. [SPEAKER CHANGES] Follow up Mr. ?? [SPEAKER CHANGES] But it would be safe to say the majority of North Carolina businesses would be losers under this formula that is not correct there are about 85 to 90% corporations would not be impacted. Again, this is primarily because mostly just about 100% North Carolina companies they don’t approach, out of the remaining population if you just look at the existing records with no assumption that they are gonna have increase property payroll investment you have about 6,000 that would pay more and about 3,000 that would pay less. [SPEAKER CHANGES] Senator ??. [SPEAKER CHANGES] Thank you Mam, Jonathan wanna say thank you for your presentation and really appreciate and respect the fact that you included the pros & cons of the single factor and what we are considering here in the state. Our question for you again relates to give me the reductions in revenues again so I can make sure that get clarify and I will make sure I understand it? [SPEAKER CHANGES] Sure, if the revenue sort of confront that drop and then you got lot of ?? but in 2013-14 you would not have any impact and that’s because is not a fact until the 2015. Fiscal year 2014-15 there would be a 10.2 million dollar reduction and 2015-16 a 23.4 million dollar reduction, 2016-17 a reduction a 28.4 and in 2017-18 reduction of similarly 29.2 million dollars. [SPEAKER CHANGES] Senator ?? [SPEAKER CHANGES] Just simplifying this, it sounds me like this is beneficial if we want to attract manufacturers, our manufacturers want to expand this is beneficial. [SPEAKER CHANGES] Correct and in most cases that will be correct there is standing that’s most of them is correct. [SPEAKER CHANGES] Miss. Carney. [SPEAKER CHANGES] Thank you madam, that is more just of a comment rather than questions. I’m not sure why we are having this discussion today to move this forward in short session and this is the members all of us when we are looking at shorter just in the state and of revenues to the 400 plus million dollars and yeah this is the bill that’s gonna target just about 3,000 businesses in our state and we have got teachers that are screaming for a pay increase. Now, when we compare the other states around us that are move into the double way or single sales or whatever and we are gonna go to the quadruple. I’m not sure that this is the right time for us to be doing this to take a hit 10 million next year and then 20 million going forward and revenues. So, I guess I’m perplexes to why this is before us today, why this is a long session discussion that we should be having going forward as we see the sales tax, the sales tax increases and the cuts that have been implemented by the general assembly going forward to give those time to see where we are gonna be in the revenues coming forward in 2014-15 and 2015-16. I’m just not sure I mean if I was manufacturing company that might be appealing but for my employees if South Carolina is doing quite a few things that North Carolina has eliminated they are jumping on the back where I can expanding amenities in their state so I might go there if it’s the double, I don’t understand why we have to do this today and for that reason Senator ?? I was saying bundling these I can’t support this today but I could support the ??. [SPEAKER CHANGES] Senator ?? [0:04:59.9] [End of file…]

A comment here Miss Manager. Thank you. I think there has been discussions with Secretary Decker and I think its documented that in fact she has found that we may have already lost one or two manufacturing opportunities in recruitment due to this law. So, as we try to recruit manufactures in our state, I think its important that we try to have the best tools our there. [SPEAKER CHANGES] Senator Jones. [SPEAKER CHANGES] Thank you, Madam Chairman. In terms of the committee, I'd like to comment, if I may. So, then that makes a good point. Secretary Decker would be here today, but she couldn't get back in town. She basically said boldly, she supports this effort and the effort to recruit manufacturing jobs. If you look at manufacturing jobs in North Carolina, as in most states they have had a decline in manufacturing. Yet, they are some of the best jobs because of the multiplier effect of someone's widget will help add to a manufacturing facility and therefore it creates many new jobs. That is our goal to try to create a rock solid manufacturing base here in North Carolina. We worked hard on the tax policy, we reduced the rates, both personal and corporate. We've seen some very positive results because of it. 220 Thousand jobs created over the last three years. We've seen a significant reduction in unemployment. If we remember of this general assembly is to stimulate economic growth and stimulate private sector jobs. And, our goal will be a bit picky. We don't need anymore $9 an hour jobs, because nobody can take care of a family. No. We want the ones that are $14, or $25, or greater. That's what this does when it recruits manufacturing jobs into, not specifically into the urban areas, but into the rural areas. Which is something we're trying to get across this state. By, coming forward now, what we're actually trying to do is keep the momentum going, so we can continue creating those good jobs that have already come our way. We are one of the leading states of creating jobs. In doing so, this can bring it forward. It can be continued to be [??] in both the house and the finance committee. It becomes part of our overall package to sell North Carolina, not only to businesses that come here, but even more importantly, to keep the North Carolina businesses here. When we can attract them here, because there is less than a tax burden on the purchase of land, or property, or buildings, or capital investment. Also, rewarding North Carolinians businesses that actually hire North Carolinian employees. That is a great step forward, that's what we want to be known for, there are a number of states already looking at us from across the country, looking at us already and this is another step in that direction. I would urge this committee to support this. It can further discussed and debated in both house and senate finance, but this is another positive as we move forward in creating economic growth in jobs. Thank you. [SPEAKER CHANGE] Representative Blust. [SPEAKER CHANGE] I have a question about the physical impact. I think under our tax reform last year we are going to have a possible further reduction of the corporate rate if certain revenue targets are hit. On physical impact, are these assuming the current corporate rate, or are these assuming a further reduction in the rate and then, wouldn't that affect the numbers in future years, if the rates reduced? [SPEAKER CHANGE] The numbers are based, since this proposal was in effect, starting with the 2015s, last year. The numbers are based on the tax rate in effect for 2015, which is a 5% rate. Since the rate reductions are contingent, it does not include any provision for that temporary rate cuts. If those rate cuts were to occur, the impact would be reduced, because the rates lower. [SPEAKER CHANGE] Follow up Representative Blust. [SPEAKER CHANGE] When you're doing these calculations, do you use some sort of dynamic system? Are you anticipating that if we do this there might be more jobs in the future, more manufacturing. Therefore, that additional economic activity will generate.

Male 1: Some tax revenue that might lower the fiscal impact? Male 2: No, our modeling is done by taking historical tax return data, and calculating what the change in tax liability would be if they had to use this proposal, versus what the formula was when they thought. Female: Senator [Rabin?]? Male 3: Thank you, Madam Chair. And going back, and thank you for the pros and cons. That was a very good presentation. I think, at a glance, that the pros do outweigh the cons, but thank you for putting them out there. And to pair up what Senator Rucho has said, and some other members, what we’re trying to do here is to move forward and create an environment for good manufacturing jobs in this state. It’s a shame to lose them because of minor glitches in our tax code, and the way we do business to our states to the south and to the west. And I think, in every session, Representative Carney, going forward, we need to prove to the businesses nationwide and worldwide, that we are focused and that we are on a path to make North Carolina not only competitive, but the best state to stay in and do business and maintain what we have and to come to and do business. And I think it’s very necessary for us to take this step and to move forward. Female: [???] Male 4: Thank you, Madam Chairman. I would just like to say I think in the last session, we did, as you all know, a very massive restruction of the tax code. And since at this point—And this sounds like a wonderful concept, but when you look at the bottom line of where we are at this point in history, we really should wait and put this on the back burner and see what our revenues are going to be, because this is going to cost revenue in the current budget situation. We don’t have a crystal ball, and I suggest we let this ride, and take it up in the long session. Female: Senator Hartsell. Male 5: First, Madam Chair, Jonathan, could you back up to the slide— Or I don’t know what they call it now – The one that discusses our surrounding states? Male 6: Yes sir. Male 5: Okay. As I understand it, what that does is illustrate the fact that our surrounding states are already farther along than we are, which puts us at a disadvantage comparatively to them now. Is that accurate or not? In terms of attracting, manufacturing, or those similar operations. Male 6: Senator Hartsell, I don’t feel comfortable answering that. I think it’s more of a policy question. I think that if I showed you data, I think you could find that it shows, on the whole, manufacturers tend to do fairly well under these changes. Male 5: That’s my— Female: Follow up, Senator Hartsell? Male 5: My point is, when you see single sales factor for South Carolina and Georgia, that means what we’re doing is an incremental movement toward single sales factor. We’re not going all the way. We’re simply going part of the way so that we can be more competitive with our surrounding states. Is that – In that particular area – Is that not correct? Male 6: That’s the argument that most advocates make, is that you want to increase the weight to attract business investment. Male 5: And for attracting— Female: Follow up. Male 5: And for attracting entities such as Google, or their server farms, Amazon, and all these others, single sales factor can be a significant element in drawing them to us. Female: Jonathan, are you prepared to answer, sir? Male 6: Well, if I can make a general comment. You know, a company that [??] comes to you and wants to make a large capital investment may like a single sales factor. Essentially it gets down to if they’re going to make this investment and they’re going to run their calculations, and they see that their property and payroll factor are going to be much higher than their sales factor, of course they’re going to want this change. Female: Members of the committee, further questions? We are on the single sale factor bill, so if you’re prepared. I’m waiting for a motion or a debate on this bill. Male 1[?]: Madam Chair, I am going to move again that we wrap all of this into the omnibus bill and—

00:00 and that was my earlier motion and I will make that motion again that we take what we got past we take this we wrap into the Omnibus bill and we move forward. [SPEAKER CHANGES] Mr rally. [SPEAKER CHANGES] yeah request information does the senator's motion include the vapor bill or is it just the single sales factor bill? [SPEAKER CHANGES] yes it was I'm sure I'd like to second it. [SPEAKER CHANGES] Ok you have a motion that the Omnibus bill that we'll be voting on to include the vapor tax portion of the bill and to also include the single sale factor that is the motion before you discussion on that motion Mr start. [SPEAKER CHANGES] Thank you well madam chair I think that we want to do the right thing in the right way at the right time and I'll do it by following these three rules it always serves our purpose but I declare while I think there's a lot of merit to doing the changing of sales form portion I'm not sure that now is the right time to do it and it concerns me that all this will become part of the Omnibus bill these are not minor tweaks or changes these are very significant changes this is major policy issue that I think it needs to be vetted outside of the big bill and I would hope that we would not roll them all into one bill because I don't think that it will get the discussion that it deserves I think it will detract from some of the other very important and good policy changes that we have in the revenue technical bill or the corrections bill so I hope that the committee will not roll them all into one bill and let this very major policy change stand on its own. [SPEAKER CHANGES] the committee the motion before you as we stand.. [SPEAKER CHANGES] Madam chairman. [SPEAKER CHANGES] representative Carney. [SPEAKER CHANGES] looking at Robert's roles may I offer that there's a motion to roll these into can I make a substitute motion that we take these the vapor and the tax bills.. [SPEAKER CHANGES] Miss Carney you can make a substitute motion. [SPEAKER CHANGES] then I make a substitute motion that we separate these two bills out from the Omnibus technical corrections bill that we've already voted on the vapor bill so I'm asking that we vote them separately. [SPEAKER CHANGES] We'll be sure then to understand your motion your motion is that we vote separately on the vapor bill and the sales tax factor those two will be separate votes is that your motion? okay ladies and gentlemen you know what the motions are you just heard the motion so I'm gonna ask you to raise your hand all in favor of the Carney motion will raise your hand.. [SPEAKER CHANGES] Excuse me madam chair I need some clarification and does that require a second [SPEAKER CHANGES] yes sir. [SPEAKER CHANGES] and [??] ah or Ney what the ramification of that vote are. [SPEAKER CHANGES] The first motion is that we will vote separately on the Omnibus bill, the vapor tax and the sales tax that would be three votes three separate votes there would be three separate bills that would be the consequence of the Carney motion. [SPEAKER CHANGES] Madam chairman. [SPEAKER CHANGES] senator [??] [SPEAKER CHANGES] Thank you madam chairman you know it's interesting because all this really does is it moves it forward so that the house [??] finance can further debate and understand all of these issues and to just to try to stype all the debate makes absolutely no sense we've got good progress moving forward it would be an absolute tragedy if we can't continue moving that ball forward some folks might like to have high unemployment rate but when you've seen it drop from ten point four to six point three percent that's progress ladies and gentlemen and we need to keep. 05:00

that momentum forward, and all we're doing, by Senator Raymond's original motion, was to allow this to be set forward into house and senate finance for additional debate, additional discussion, which it will definitely get. And I would urge every member to vote against Representative Carney's motion and get onto Senator Raymond's motion. [SPEAKER CHANGES] Representative B? on the Carney motion. [SPEAKER CHANGES] I just want to be sure. I mean, if we vote for the Carney motion, these bills- these will still be moving forward won't they? They'll just be moving forward in separate bills so that we can consider one and then consider the other, and the other so they're not mixed together. And a weakness in one might be made up by strength in another so I would just tend to favor the motion. I think we've had way too many optimist deals lately and I think some things have passed into law that would not have passed into law had they been considered on their own because they've been mixed together and I'm not pre-judging any of these particular bills, but as a legislator, I'd rather consider some of these important changes separately. And I'm not saying I won't favor them going forward, I may well, probably will. I'd like to keep them separate for now. [SPEAKER CHANGE] Mr. B? [SPEAKER CHANGE] Point of parliamentary inquiry, if the Carney bill passes, does that [SPEAKER CHANGE] The Carney motion passes [SPEAKER CHANGE] If the Carney motion passes, I'm sorry, does that preclude the vapor bill and/or will a portion of the bill be included in the omnibus bill in the finance committee? [SPEAKER CHANGE] No, it would not preclude, but they would be voted on individually opposed to a package, but all of the bills would be sent at the same time to the finance committee and therefore, they may all come out in one bill as opposed to three separate pieces. We have the Carney motion before us. All in favor of the Carney motion, Have you understand the motion? Any further question on that motion? Do you prefer to clarify on that motion? [SPEAKER CHANGE] The Carney motion all bills will go forth. Three separate bills. Is that what we're voting on now? [SPEAKER CHANGE] Yes sir, that's what the intent is. [SPEAKER CHANGE] Thank you. [SPEAKER CHANGE] All in favor of the Carney motion will raise your hand. All opposed will do likewise. The motion fails. We're back to the original motion from Senator Raymond. Sir would you like to read your motion? [SPEAKER CHANGE] Thank you madam chair. My motion was to wrap everything into the one bill including the vapor and the single sales before the vapor tax. [SPEAKER CHANGE] Committee the motion should there be discussion on that motion? If not, all in favor of Senator Raymond's motion will raise your right hand please. All opposed will do likewise. Motion carries. Instruction to our staff will be that the taxation of the vapor tax and the single sales factor will be incorporated into the omnibus bill. There would be a new summary and that bill will be eventually sent to the finance committee. We would need a motion to approve the final report. Mr. Brawley, all in favor will say aye. All opposed, no. With that, thank you for attending and we stand adjourned.