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Senate | May 25, 2016 | Chamber | Senate Finance

Full MP3 Audio File

With the members of the Finance committee and other members of the House and Senate, please take a seat, so we can begin our meeting. We've got some information today to share and [BLANK_AUDIO] Okay, how about that? Better? Thank you. Bob Rucho, co-chair of Senate Finance, then we have Senate sergeant at arms today that are helping us achieve our meeting today, Jim Hamilton, Steve Mackay/g, Becky Marek/g, Matt Urban. Thank you for your help, you'll help us make a very efficient meeting. Today we have pages and would you just stand up and raise your hand and if I mispronounce your name, help me. I have David Huffman, is from Steadmond, Senator Marydith, Louise Frank, Wilson Senator Barringer, Avery Hilbert. Wilmington, Senator Lee, McCall Hallen. Ocean Isle, Senator Rabon, Audrey Hill. Shallotte, Senator Pate, Emily Harmen. Lexington. Senator Bingham. Thank you very much I hoe your attendance at the general assembly is part of being the page program is enjoyable and hopefully enlightening to you. Members of the committee, we're gonna talk about bills today for discussion and share some knowledge so that everyone is brought up to date. These were discussed at length during the revenue laws meeting. And folks that didn't have the opportunity to attend revenue laws will have an opportunity to get this information out so that they can one, better understand it, two, get their questions answered which we will do on each part of the two bills that we set forward. Our first bill will be senate bill 569, market base sourcing and senator [INAUDIBLE] will present that along with some members of the staff. Senator [INAUDIBLE] welcome and the microphone is yours. >> Thank you Mr.chairman and we're going to go about this bill and two ways, I'm going to give a brief overview and then two members of staff are going to go through or explain two different important sections of the bill. What is market based sourcing and why is it important? I think that's where we should start, and this body has passed a single sales factor and we are moving towards that with our tax reform, single sales factor in that part of a tax reform is instrumental and helping industry specifically manufacturing industries that are in this day that are used this day. benefit from our tax scope .We also have service industrial in this date that don't really benefit from single sale factor so there is another part of the equation and that part of equation is market based sourcing. So market based sourcing does for the service industry but single sale factor does for the manufacturing industry. That's a point that you should take home. Another point that you should take home is this does not affect sales cut in any way so always get that question. How about sale nothing about sales in this bill, so we want you to grab those and hold on to those points, if this is simply the next logical step in moving forward for high tech industries in the state it encourages, it actually is an incentive for high tech in service industries to move to this day because then they can benefit from what we have to offer, market based sourcing is used in calculating income and franchise tax and again it does not affect sales tax computation, something that we really need to understand is how is this done and it's pretty simple as far as taxes go and that simplifies things and makes life easier for the folks at DOR as well as the industries that use it and if you look at the very first part of the bill you will see how this calculation begins, it's quite simple there is an apportionment and the apportionment is calculated by taking the total sales or receipts that the industry has in North Carolina and dividing

it by its total sales or receipts everywhere, so if you're doing $1,000 worth of sales and receipts in North Carolina service industry and your total everywhere is $10,000 you divide $1,000 by $10,000 and the answer is 10 so you're a portion left in this day is $10, you then use that and you plug it into your formula, when you end up with the end number there you multiply by that times times the state cooperate tax which will be when this is enacted 3%, if we don't hit the trigger and reach the 3 percent cooperate rate it will be enacted in 2018 but I honestly think that all cooperations will be paid 3% in 2018 and so we will use that for the number. And with that Mr. Chairman i'm going to ask Mike Hannah to come up and explain the one portion. When he finishes Jonathan Tart will explain the other portion. >> Members of the committee we're gonna allow the presentation to go forward and then we will respond to any questions as long as it takes us on this area. Mr. Hannistona. >> [SOUND] Thank you Mr. Chairman members of the committee. I'm Mike Hanniston at finance council, it has been my pleasure to have served in that position for the last five years Market based sourcing is exactly what Senator Rabon said. It is an incentive to bring high tech service and bio tech jobs in North Carolina by treating service companies, their taxation, in the same way that we impose tax on manufacturing companies. So how are we going to do that? [SOUND] >> We don't know.>> We don't know. >> [LAUGH] >> Now we know. >> Now we wanna know >> [LAUGH] Market based sourcing a common method [LAUGH] >> [LAUGH] >> A common methodology for calculating the amount of income tax the corporation pays to a state is used in 23 other states, so it is a very common method. Singe sales factor of portion as Senator Rabon said we already have enacted in this state it will help manufacturers put market based sourcing as the second part of the equation as he said. We're going to provide an incentive to North Carolina based companies that have investments in property and workforce here to entice them to come here to invest and also create jobs. An example, corporation A based in North Carolina, they are a service company under current North Carolina law if they provide services to customers that are located in Virginia and let's state there's $100 in sales. That $100 will be subject to income tax, Corporate tax in North Carolina because the people are here, the equipment is here so North Carolina assumes that the service should be sourced to North Carolina. This's where the service work is performed, that's under current law. So Corporation A will pay more North Carolina tax. If we have market based sourcing the service income is going to be taxed to where the customer is. The idea is to parallel the treatment of the sale of widgets that manufacturers sell, so the widgets are sold to Virginia let's say, services need to be sourced to Virginia and taxed based upon where they set the benefit of the service is realized, so if we adopt market based sourcing, cooperation A will pay less North Carolina tax because those services service income will be sourced to Virginia where the customer is not where the work is performed, so in summary you've already enacted single sales factory portion that's going to help North Carolina manufacturers, it will bring jobs here and investment here. Market based sourcing will reduce taxes for North Carolina based service companies with investments and equipment and workers here. The service company will not obtain the benefits of single sale factor apportionment unless we have market based sourcing, they will pay more tax under the current North Carolina statue even with single sale apportionment, we have to have market based sourcing along with single sales factor apportionment. Market based sourcing has been adopted by most States that have single sale factor apportionment, 23 States in all. You will hear some stories about market base sourcing, some misinformation, some disinformation First of all, the multi state tax commission, is a commission to

provide assistance to States to come up with statures that are uniform across the country, this are guidelines only. The guidelines of the department of revenue used as required by the statute are guidelines only, they are suggestions and this guidelines can be customized and will likely be customized to help North Carolina company, why would we need to reinvent the wheel, nothing wrong with using the MTC guidelines, North Carolina is an associate member of the MTC, and they actively participate in committees on the MTC. The general assembly, taxpayers and others will have plenty of time a year and a half to comment on any proposed rules that arise as a result of the enactment of market based sourcing prior to January 1st 2018, market based sourcing is used for income and franchise tax only, it does not impact sales tax 23 states including Connecticut just two weeks ago, one more thing, part of the MTC guidelines for market based sourcing is something called the audience factor, the audience factor is used to determine the amount of income tax that large broadcasting companies or small companies should pay in the state based upon the number of viewers there audience factor parallels market based sourcing because it taxes those programs and that programming based upon where the customer, the client, the viewer is watching television or radio and audience factor is used in 18 other states. >> Okay and I think generating any additional comments and then or you wanna move to the next >> Mr chairman let's move on >> Okay I think Jonathan Tart Also members, if you all go through the bill summary and describe the physical impact to you and i'll use that with my fiscal memo that's in the back of your bill draft. And I think there's previous memos that might say market based sourcing is a related concept to the single sales factor in the Senate that you passed last year and for a multi state company that deals in products like a manufacturer or a retailer, that singe sales factor is a [INAUDIBLE] because the amount of the multi state income we tax will no longer be determined by how much of their jobs and capital investments are in our state. Instead it means that how much of their income we tax will be based on how much of their products are delivered to the consumers in North Carolina. Without regard to whether they employ their capital in jobs to produce those products. And so with single sales factor for those companies, is an incentive because it means that if they increase their employment in the state, if they increase their capital investment in the state. It no longer corresponds to an increase in how much of their income we tax. That's what single sale factor does for those companies. However, single sale factor under current law does not offer the same incentive if you're a multi-state company that provides the service. Because you sales factor is not calculated the same way under current law. If you're in services your sales factor is not based on how much of your services are used by North Carolina consumers. Instead your sales factors is based on how much of your activity to perform the services is conducted in North Carolina. And that's actually measured in practices by your labor costs in North Carolina and your capital costs in North Carolina. So if you're performing services, single sales factor is more of a deterrent to creating jobs in North Carolina than an incentive. Because under current law it means if you increase your employment, if you increase your labor cost in the state to perform service you will see a corresponding increase in how much of your income we tax, so that's why most all states that adapt the single sales pattern/g incentive make sure they [INAUDIBLE] it up to a market base calculation in that sales factor instead of one that's production based, instead one is based on labor cost. So, that's what Senate bill 869 does, is provide that market base calculation of the sales factor so that for no company if they increase their presence in North Carolina through jobs and investments will result it in a corresponding increase in how much of their income you tax, so that's pretty much what the bill does in Section one and if you look at the physical memo in the bill summary on page two there in bold, they sort of give you a fashion of representation of how your tax in multi-state companies when you are using singles sales factor combined with it's market based calculation. You're taxing them based on the amount of the consumption of their

products and services in North Carolina. Not based on the amount of their cost incurred. So that's section one. Section two specifically defines what this North Carolina market place for the broadcast companies. Under broadcast there's create and produce the TV shows we watch. They put advertising in them and then they receive licensing fees from your cable and satellite companies. And sometimes internet streaming services who then offer them to us as consumers. So the last [UNKNOWN] like a dish network and opposite to us is a concern and under this bill the percentage of income that we would touch for them would be based on the consumers in North Carolina or the viewers in North Carolina based on the viewers in North Carolina that are watching the program, they licensed. So that's section two of the bill, the funds of the market places is for them. Section three of the bill that deals with banks. States often have a separate set of a portion of rules for banks cuz they just have a multitude of different types of transactions. This board just kind of files where there's a portion of rules all for banks, be naturality this retains the status quo that they use already under current law and so that means that the North Carolina base [INAUDIBLE] don't really see a change at all from this they would have a circumstance just like every other company would if you adopt to this bill that would mean that in no case would you have a company where if they put more jobs in the state if they increase the percentage of the their jobs in the state or increase the amount of their capital in the state would it correspond to an increase in how much of your income, how much of their income we taxed? That's what the bill does, the remainder of the bills is more administrative in nature, it rewrites and cleans up the current appointments statute also includes your provision regarding rules at the department of revenue. Now if you turn back to the front I can touch on the fiscal impact. The bill is effective in 2018 which works well with single sales factor which is also effective in 2018, and we expect that they will increase revenues in the 1890 fiscal year by approximately $10 million and there'll be a partial year impact of about five million increase in 1718 and so make no mistake with this bill there are winners and losers and the principle of this bill when you look at that fiscal impact from a global perspective is you're giving a tax rate to companies that call North Carolina home for their jobs and most of their investment and you're paying for it by collecting more taxes from out of state companies that don't call North Carolina home but use it more as a market rather than a place to work so that's why you're gonna have some offsetting impact in the bill and actually ends up with an increase as you see there. Mr. Chairman I think that covers it. >> Senator Rabin. Thank you Sir. Thank you Mr. Chair, as we conclude I would say that we started off by setting this impact at service industries to power the banks, Time Water Cable of North Carolina have all signed off on this bill and they are in agreement with it, the broadcasting companies have not so I'm sure that we will be hearing from them and discussing that item so Mr. Chairman that ends my presentation. >> Okay well if you will remain up here and Mr Harner and Mr. Tart any questions, let's try to respond to any questions any member has Senator McKissick. >> And I guess this will go to you [UNKNOWN]. If you could help me out with something. In terms of the broadcast companies and broadcast industry, of course Senator Ray indicated that they've not all kinda been on this legislation as of yet. But it's my understanding that for For someone who can pick your companies and even [UNKNOWN] like direct TV and with the other company you named [UNKNOWN] it's hard to be able to identify the precise customers that they would have here in North Carolina. They can probably provide you with data relating to the number of customers or subscribers they might have within a certain region or within a country but not discretely say within North Carolina so you can really identify with pin point accuracy who is being served and it looks as if the way definition is meant re-written for broadcast companies act with the particularly challenging and hence so far raging implication in terms of these fees that they would pay underneath this new formula, can you help me with that? >> I can answer that for Senator McKissick. >> Sure. >> Thank you. My calendar said that 22 or 23 states and Virginia soon to be added to that list already use that method If they can be determined in 23 states, it can be determined in 24 states without a whole lot of extra effort.

Some of those states that do that are California, Georgia, New York, Connecticut and I will say to you that the broadcasting industry has a big presence therefore they want to have a consumer based present there because in those places, that lowers their taxes. >> It's audience factor. >> Correct. >> That's it, yeah. Not having a large presence in North Carolina and following what Mike said Since says they do not, they would prefer not to have an audience factor here because if the work is done in New York, California or Connecticut, North Carolina current loss is the taxes are due in New York, California or Connecticut, that does make sense to you, our current ;aw encourages companies not to come here and establish a base but to stay somewhere else and pay no taxes in North Carolina. >> The follow up that could. >> Follow up sir. >> Senator Raven it will be an opportunity today to hear from those in the motion picture associations to hear their take on this [CROSSTALK] >> We will find an opportunity if time avails today or at another time, but they you'll have an opportunity to hear from them also but maybe we've got a lot of work to do between now and two, today is getting some discussion but it doesn't end the discussion we will continue providing some insight. >> Well thank you Mr chair both of you, I mean I think it's important that we kind of work through this detail because there are unintended consequences I do understand that there are 23 states doing it, I don't know if those are the only 23 states doing Doing approximately this way >> Yes sir >> So I don't know what the other 50 States, what the other 27 are doing. So, perhaps, we can work it through, there's a win win that will be great >> Senator Raven >> Thank you, as we started off, [COUGH] this is a hand in hand, if If you will the single sales factor and the 16 state micro [INAUDIBLE] the 16 states that do have single sales factor. >> 18 states >> 18, thank you [CROSSTALK] >> Most of them are using [INAUDIBLE] >> 23 single sales factor 18 audience factor, and then we are working with the banks, the banks are saying it and I guess like you see is try to work with this broadcasters well. >> Yes Mr Tack has some additional to help you with that question. >> Well, there are 18 states that use this concept in this bill based on the percentage of view That are worse in the programs, they licensed to companies like this network. So you talking about like a disney or NBC universal that would create content, license it to the satellite and cable companies who didn't offer it to us typically within subscriptions. So the pursues of income they will be tasked on is based on percentage of viewers that are watching the programs they licensed Licensed to companies like Charter cable or Dish network. That's the concept that is used in those other states that you mentioned. Bottom line that will cause them to pay substantial more taxes than they paid now. It's probably enough to almost offset the tax bracelets you got in here for the companies that win For the companies that win, it would be significant. So you can understand that they would have concern about it. The way that some states do it is to stay out of taxing based on where the consumers are located. They would tax it based on where dish is located, for example. So if the license programs the dish who's based in Colorado and then offers the program to us We won't tax it. Cuz this is actually located in Colorado. So in this method you looking at where the ultimate consumers or ultimate viewers are and they would say ultimately goes to that mediator. But in the other way you may just do it based on where the mediator is located, where the dish is located. Does that make sense, where dish network is located? >> It does make sense. It is my understanding of the it was hard to dis aggregate and identify potential users in North Carolina which was a problem. >> Yeah they had said that as Senator [INAUDIBLE] said they do use the very same method it would be the same information similar information that they use in the other states. >> Senator Mckissick and members of the committee before we proceed on to some additional questions let me share a little information with you particularly on the broadcasting area, in December 28th of 2012 a private letter ruling was sent from the governors office, the tax payer, and the department of revenue, now what a private letter ruling is when a tax payer asks to a certain treatment the department of revenue agrees saying we will follow that way, now private revenue letter rulings are generally private

at some point in the general assembly those private letter rulings and there are tens of thousands of them should be made public because everyone should be treated the same if your in the same industry but on December the 28th, private letter ruling was established for the broadcasting industry an it basically allowed for the apportionment for the state of North Carolina's corporate tax would be based on where a contract was signed okay, so if a contract was signed in California or New York or elsewhere there would be no package liability to the state of North Carolina, and all the tax liability is gone from the state And therefore the members of the broadcasting association they know about five or six of them monthly billion dollar corporations, we were able to curve out a very nice deal and in that situation and I heard Mr Tack do some work evaluating what the facts are behind and then they looked at 2014 with this companies that were part of being a broadcasting association and during that year I think of six companies actually generated $200 billion in revenue in that $40 billion in profit. It's based on percentages, North Carolina is roughly 3% because of the ten million people that we have. The taxable income that would have been come to North Carolina, would have been $1.2 Billion times 6.9% or whatever it is now as far as the corporate tax is concerned, from some of the discussion that we've learned the total tax liability for the all the corporations is point 03% roughly three million dollars, so all six companies are paying a total of $3 million in total because of the fact that private letter ruling was sent out and approved, it's a matter of looking and seeing what's fair to everybody, now Mr Tack or Mr Hannah, has there ever been any type of situation where this kind of tax treatment is available to any other tax payer? >> My Chairman, I'm not aware of any other tax payer that has a private letter ruling that allows income to be a portion where a contract is signed. >> So this private letter ruling pretty much allows a special curve out that has been taken an opportunity to utilize for the past roughly for years where a total tax liability of three million dollars and likely is from what was discussed earlier, it's important to know that if indeed, the audience factor was in place which is exactly what many other states do, and the ones that are audience factor, has been achieved [UNKNOWN] in states, there is a tax advantage. In North Carolina, that's not a tax A\advantage cuz many of those companies do not have businesses and large holding here. They just use our market. So, during the discussion, it's important for us to understand that what we're trying to do with the tax system is make it fair and simple. And in doing so, audience factor, is a fair and simple way of accomplishing this and that's why it's part of the bill. And again, I share this information with you to make sure that all the factor/g on the table, to make sure we're treating all of the corporations in North Carolina fairly and apparently we get the trigger so next year there will be 3% corporate tax rate in the state of North Carolina. That being said, we'll continue our discussion and I had Senator Ford is the next one. >> Thank you Mr. Chairman for that great lead in. Mr.Chairman [INAUDIBLE] I have a question for as relation some comment that you had made earlier about winners and losers, that triggered something for making you re-visit the losers in this market base sourcing piece of legislation. >> Yes sir you led that from whole and general if you had somebody to pay more at least somebody that uses North Carolina more as a market for the goods and services they sold the delivered products to consumers in a North Carolina market place but they spent more to employment and capital producing those goods and services outside of the state so that will be the

losers once that use North Carolina more as a market rather than a place for jobs and investment. Winners are gonna be ones that have more higher percentage of jobs and they do use the market, follow up? >> Thank you Mr chairman one last quick follow up, I see the physical impact that you are having included in our package but I want Mr Tack can you put that in context with the single sales factor, we You are combining the two and I agree with it and I support single sales factor and I agree conceptually with market based sourcing but your fiscal impact only lists market based sourcing, do you have information available to put both of those in context? >> Well I can So this are just sensing affair single cells gactor that has just has been an ad to revisit the law, this would compare just the changing calculation for the sales factor but this word I reduce the overall cost of single sales factor by about ten million dollars but a single sales factor Ultimately had a cost [UNKNOWN] went fully enacted down the line and about 70 million. >> Let's follow up. >> Follow up. >> That's what I was trying to pull back from my memory and I couldn't but if you could combine the two and then send that out I would appreciate understanding the whole physical impact Of market based sourcing as well as single source factor- >> We'll have staff take care of that for all members of the committee and actually for members of the House and Senate too, okay. >> Senator Clark. >> Thank you Mr chairman, when you spoke about that private letter ruling I must I must admit I was so at none plused - >> It just sounds - >> None plus. It made no sense. What was the rational for the approval of that private letter ruling. [SOUND] >> It's so private we don't know [LAUGH] >> [LAUGH] It was decision made between the Governors office and the Department of Revenue and the taxpayer. At some point this things should be made public, a lot of them are done behind the scenes for whatever reason but they should be public. >> And [BLANK_AUDIO] This committee or the chairs have been working in plan to continue to work on making all such private letter rulings public and posted on the department of revenues website so that everyone can see them And can see them in the future. >> Senator Clark, I didn't mean to make light of your question >> Not a doubt. >> No one has made privilege to know why those rulings are made but they are made between the tax payer, the governor's office in that case and the department of revenue Maybe at some point we can get some answers to all your question. >> Mr Chariman, I hear a question. >> Yes? >> Just clarify this, can you give us the date of that letter again when you're saying the governor's office? >> That letter was December 28, 2012, okay, Senator Clark you're all set? Okay I'm good, Senator Davis Davis and then Senator Tillman. >> Thank you Mr. Chairman, I just like to address Senator McKissick's fears, I have been a customer of Direct TV for over 20 years and amazingly 240 months in a row they found out where I lived, they send me a bill [LAUGH] >> And so I dare say that they're [INAUDIBLE_AUDIO], they know where their customers are, thank you. >> Thank you, Senator Tillman. >> Thank you Mr. Chairman, to go back to Senator Ford's question about the fiscal impact of joining these two bills were contendum hopefully we got one in the row and hopefully the other The other one Senator to be. But what I read from our fiscal note figures that the combined net loss or gain would be with the market base sourcing, we gonna have an impact it looks like of about 10.8 [INAUDIBLE_AUDIO] and on the plus side, but I But I believe our [INAUDIBLE_AUDIO] was a negative 70 so Megan it, [INAUDIBLE_AUDIO] in my reading this right that we may have a $68 million net with the two. >> Your theory is absolutely right, we may not be rise in recollection of the 70 but you're right I will need to verify what is out there and what may have been a little bit higher had time to think about that. We had the data on and we do have the number. It will be noted just as you said sir. >> Follow up. Follow up is that although you might see a negative on the 60 or $70 million dollars the net net down the road we can't determine.

But we know it's gonna bring businesses here and it's gonna be good. So we will reap tremendous benefits on the plus side with companies coming here and others that are staying here. So i believe the final thing will be a big plus in the end. So I want projection. >> Senator Waddell. >> Thank you Mr, Chair. I'm concerned about the various citizens that will be be affected by this and I'm looking at here you have the definition of broadcaster, it can be a person that provides audio visual programming to customers, is there any time that this persons will be texted thrice and I said because we have a lot and maybe this people are exempt the Internet, television coming up we also have cable broadcast that comes up where you have individuals who have their own programs, their own businesses so are they going to be coming under this tax space also? [BLANK_AUDIO] This provision will only impact pretty much large and multi state companies if you got a smaller company like that they would not apportion income if they are here it would all be subject to tax in North Carolina anyway. [BLANK_AUDIO] [INAUDIBLE] I think Mr chair you did a good job of pointing out some of the fairness issues here I think we all agree there's some fairness issues. The question is how we accurately administer the audience factor and just getting back to Senator McKisssick's issue, there's no problem for subscribers like Senator Davis, the problem with accuracy comes in not being a subscriber and this is page three line 32 if you don't have access to a list of subscribers the tax payer shall reasonably approximate the receipts and so what that means is that these broadcasters have to guess at how many people are watching the shots, now the access to information that they have on that is basically the [INAUDIBLE] information, the problem with the [INAUDIBLE] and information is that it only attracts in metro-polythene areas it doesn't stop at a state line so, for Charlotte Nelson can tell you as a broadcaster how many people in the Charlotte metro [INAUDIBLE] which goes well in I know are watching this show, but obviously a plus or minus margin of error there. And senator you spoke to the number of states that have adopted the audience factor. That's a unique situation here in North Carolina that would make it very difficult for these businesses to accurately approximate the tax. Well, here's my question, we have included two industries within this bill, the banking industry and the broadcast industry and we've both been loving the revenue. To take year and half and study how this should apply to all other industries which tells me that we have the answer on how to do banking and how to do broadcasting but we're not confident in our answer for literally every other industry, given that there are some queer problems with the broadcasting section, everyone seems to be on the same page with the section. Why not include the broadcasting with his 1.5 years that the department of revenue has to consider and think about how to solve this problem. If we're including in this bill, that means we are telling the department of revenue don't touch it we've solved it, I don't think we have solved it is very hard that when the department of revenue consider the broadcast industry along with every other industry in the state? >> Mr chairman, may I answer? >> Please Senator Rabin. >> First we are not telling we are not really saying that Senator What we're saying, is we're not in total agreement with the private letter rolling/g, we think that may not have been forthright and upfront to begin with and we need to start taxing and collecting our taxes in another way. That's one part of your statement/question. The other part is this, the state lines in North Carolina are no more difficult to define then they are in Georgia and Tennessee. >> They have a common border. >> They are certainly not as difficult to define as they are in Washington DC, New York and Connecticut, all of which can define and very easily their viewing audience is the recipients of their services. I think using difficult to define that simply doesn't hold water and where the industry has a problem they are supposed to reasonably approximate and if they reasonably approximate in 23 other states, I will accept their reasonable approximation in North Carolina. Mr [UNKNOWN] you have some additional information regarding the audience factor and how it's done other sates and therefore why

it couldn't be done in North Carolina? >> Yes thank you Mr. Chairman. The MTC guidelines have some very specific useful rules for determining reasonable approximation and those rules are well founded and I believe that they will be away for any industry to use reasonable approximation. Reasonable approximation will apply to not only to broadcasters but also But to any other industry that runs into difficulty in determining what it's factor will be in North Carolina. >> Follow up then is a MTC guidelines we used in the working through on Duke and Tim Warner and the others that may have been at least provided some direction to the department of revenue. Am I correct? >> That's correct. >> Okay, I've got senator Jackson the last question. Senator [UNKNOWN] >> Thank you Mr.Chairman. Two things, one to focus on. I guess I'll start with a comment on this concept of not identifying a no/g >> A lot of us have been in positions of buying ads before in different markets. Those type of things. I have never seen one of these committees not being able to tell me, how many individuals of what age range, they come to mass specific district in those and purchasing those and that's pretty rural area. That's what coming in. I would seriously doubt that they can't provide their marketers and others with exactly how and where the demographics of the individuals I will be advertising to when and they are trying to collect revenue. Aside from that, the question I really wanna focus on, back to this letter in this day and the question just to make sure I've got it right, the December 28th 2012, first makes me a little nervous cuz suddenly something happen three days after Christmas here and I was right in the transition of governor, we were getting for a new governor to come on in January, as were coming in four year term. We're changing administration in that time period. And this looks a whole lot like to me like the last thing out the door before I was still here let's be sure I get this letter out. Because I've been around a lot of state agencies and three days after Christmas and I've not necessarily seen a lot of work going on and a ruling that would have this much impact potentially on the budget of the state wasn't a casual, one more thing, let me make sure I get that done for the administrative tasks. So I just want to kinda get that focus when it occurred and the magnitude of what occurred makes me very nervous as to the reasoning behind it. >> Thank you. Other questions members of the committee? Senator Hartsell. >> Thank you Mr. chair. And I'm a little late coming to this radio, rodeo I should say. Radio that's interesting. >> We're talking about broadcast. Let's go right ahead. >> I'm a little confused though you've indicated a number of other states have adopted this methodology. Not sure who they are [INAUDIBLE] that none of that matters. But do they have the same definitions. For the various factors that are involved? We are very similar to some states. We are different from other states. I have looked at Alabama, Georgia and Illinois and a couple more. Mr Hanif has looked at quite a few. And he can add some light to that. >> Mr Hanif please. Respond to Senator Hartsell's question. >> Thank you Mr. chairman. Yes our definitions are very similar to several of the other states. >> Senator Hartsell. >> But there are dissimilar from other states as well. Is that- >> Just to be clear. There is some customizing. Every state might act very differently. We get a recommendation through the MTC. But some of the times is customized so I'm not sure, you know our law on one thing in North Carolina maybe slightly different than what Virginia or South Carolina may have >> That's really the vices of my question, it concerns because this is a technology area that's routinely changing, still changing, whether we broadcast or otherwise and the tracking of it is similar to when dealing with streamline sales facts and other kinds of things in terms of sourcing. I question whether or not we're talking about wholesale or retail and anyone you use a term like reasonable approximation although it may be dealt with in other states. That in it of itself without having a bright line is, in my judgement,

just a guarantee of litigation. >> Mr. Hunel? >> The purpose or the reason of approximation was to allow taxpayers who have some differences or trouble in calculating their apportionment factor. And so it is purposefully broad. The MTC guidelines are out there to help taxpayers and to help the department of revenue get through reasonable approximation. And so it is very common to see that another state [BLANK_AUDIO] Senator Hudson. >> But if you're reasonably approximating and you don't have bright lines, does that not open the potential for an entity to simply approximate the way they choose to approximate. That's my concern. You talking about guidelines and all these other things bride lines you're going to a number of customers while some of these are wholesale customers , some are retail customers. That's my concern. I'm concerned with the definitions that's all. >> I think the wholesale customer and the people that might transfer when the broadcasters sell it to Time Warner or however they get it. It appears like the industry is going more directly to the consumer. The end person at whether Senator Davis or myself with just beyond that point towards the children which is my kind. I'm sorry. >> I'm sorry, it's the whole industry, it's moving towards the consumer end of it, and that's what falls in line with market base sourcing because that's where the actual service is utilized and that's how it would work now and it appears as if it's going into the future in that same way, because that's where the industry is going, direct sale. >> But my concern is I'm not sure that's well defined n this legislation. >> Thank you Senator Hartsell. All right, members of the committee additional questions. Senator Clark. >> Thank you Mr. Chairman. Earlier it was mentioned that the combination of market based resourcing and single sales factor what result, can you hear me? >> Yes. >> Okay, what result in a net negative revenue of the state. Is that correct? >> No. >> Yes sir. Just a static look at the historical attached returns sales factor that we calculated when you passed that legislation and added it against the positive impact of about 10 million and this specific change for some companies and how you calculate the sales factor would be a net loss of what I can remember to be about 60 or 70 million. >> Okay so in that sense a net loss for the state in revenue. >> Yes sir. >> Okay, we are told that we should accept that because we're going to have more companies coming into the state, is that correct? >> I think what you're asking is that the $70 million, since we had already voted on it is already built into our numbers into the future. The only thing new that's adding now is the fact that single sales factor has already been there, now market base sourcing has a roughly $10 million difference so the minus 70 you're describing is already built into the numbers of the future, that's done, that's been passed. All we're really looking at now is the fact that you're gonna see roughly an additional $10 million in revenue. >> Now as a citizen of state, ultimately we say we're doing this because we want to bring in more companies into the state and- >> Juggling more jobs. >> Correct. But I think I understand that we're saying we really don't know how many additional companies to expect or how many jobs we like create? Is that correct? >> Well, it's not correct because what you're saying is everything we've done in the last four years of economic growth, Both taxation regulatory form. We created 400,000 new jobs. And all I'll say to you now, is if we have an additional next step in transitioning, Senator Rabon/g talked about into another area that will incentivize service businesses, high tech businesses to come to North Carolina because it's advantageous for them to be To be here. Wouldn't the next be or the next logical acceptance that you're gonna create new jobs? We've already seen it done in the past now we're seeing it into the future. >> Sounds good senator Rucho/g but that's not what i said. But i'm trying to determine is my additional job creation we might achieve as a result of taking these additional steps. And how do we project what they might be. >> We would be encouraging high tech and service companies to move to the state because we have a favorable environment for them to live and domicile themselves in this state and work under. Does that answer your question? It is favorable for them to be here. It is more favorable for a company to be here Be a part of our state and a part of our local communities than it is for an industry that is not into the state, simply to sell a product here, so those are the looser. The winners are the ones in the high-tech, the biotech and the service

industry that are in the state along with Along with large banks and this and that, so if you want your benefit from this come to North Carolina. We will get you sunshine at 70 degrees, 260 of 365 days a year. That's what we signed. >> I agree with you 100% Senator. All I want to know or have an idea of to what extent we might expect the growth. Tell you how many. >> There's no way we're speculating that [INAUDIBLE] speculation. >> That would be serious speculating. >> Yeah. >> Well I don't like to speculate, I'd like to have a clear understanding and it's to what might happen? >> [CROSSTALK] >> Senator Tillman. >> Senator Clark, my dear friend over there on the other side. >> Yes, Senator Tillman. >> We could't speculate how many jobs our tax reform was going to bring To bring when we started four years ago but we do know that the steps we've taken already, whether it's number one two or three, depending on the survey you want, in the nation and economic growth and job growth. Now if all that is done that,do you think that we're gonna put two pieces of legislation. One is already passed and one debate pass, that would turn them around and send them away No. It's going to increase it, we know for sure. I can't tell you, unless you've got a crystal ball, you can't either. How many jobs? We can't guarantee you a thing, but I know this, our tax reform will strive by 33 states, the tax reform, the last two or three years. One state passed it, North Carolina, and it's been Been great for jobs at economic growth so we do know that, that's the only parameter we got. >> Okay, any additional questions, we took all of our time discussing this but it was well worth it, we had good questions and will remain to have good questions, we'll go forward. The next meeting that A meeting that we'll have next week I believe will be, well hopefully will do some additional finance and then we will have half hour, forty five minutes, hour whatever is necessary to discuss the tax issue. Just ran out of time today, thanks for your indulgence and We'll be prepared on email to know when the next financial meeting will occur. The meeting's adjourned. [BLANK_AUDIO]