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House | June 7, 2016 | Chamber | House Finance

Full MP3 Audio File

[BLANK_AUDIO] Good morning and welcome to finance. I'm your chair and your host for this morning show. Representative Stan, Representative Brody. Do you have any remarks in the morning? >> [INAUDIBLE] >> I have sergeant- at-arms Regy Seals Marvin Lee, David laten, Joel Oston, Randy Wall. Thank you gentleman for being here. from [INAUDIBLE] is looking for his coat, apparently you're wearing it. [INAUDIBLE] you have it, I think [INAUDIBLE] may be jealous but good morning to you, we have a number of bills that we're gonna get through this morning and then we are also going to look at the present that the senate. >> Mr. Chairman? >> Yes I'm sorry. Yes mam. >> Those of us that are here on the back row cannot see her jacket can you please stand. >> [INAUDIBLE] if you would pleas, this is very nice, and when I say [INAUDIBLE] in [INAUDIBLE] that is a compliment, it's very nice yes. [LAUGH] We have a number of local bills to go through this morning that have been reported from our sub-committee favourably. First one up on the agenda is house bill 1017, Norwood Deannexations/Annexation. Representative Burab/g well you're here to present your bill. >> You're recognized sir. This is a PTS and it's before the body. >> Thank you Mr.chairman, just to run through the bill for the members, in section one of this bill adds in a five acre track of land of the time limits sets the smaller map that you have before you, this annexation is supported by the property owners. Its former fifth camp that was closed a number of years ago by annexing the property in the city limits. This will allow them to provide them with a sewer line, it's needed. Hopefully reopen that restaurant. Section II of the bill is de-axing/g close to 105 acres from the town of [INAUDIBLE] All of the 105 acres being dent DNX falls bellow the high water mark and you've got that on the larger maps is before. You all of that area in yellow 105 acres and this area was actually forced NX into the town limits. by the general assembly and by the town back in 2004 along with the surrounding community, the town limits which includes hundreds of other lake front properties but this particular properties are the only ones where the areas that those folks are actually being taxed at city property taxes for the property they lease below the high water mark and for their peers and for access to the lake and the only area just so you are clear is you probably seen that one area on the like this curved out, that is a Marina and it's the only area that's not being de-annexed and that was at the request of that local business who um they have a restaurant and a bar there, and if their DNX star county is close to being a dry county so they would certainly have a very negative impact on their business. They request to stay in so we were able to get that worked out and we certainly appreciate this committee's support of the bill. >> Representative [INAUDIBLE] >> Representative Jones. >> Mr.chair for a motion at appropriate time. >> [INAUDIBLE] raising their hand I believe thousand times sir. >> Mr.chair I move for a favorable report to the committee substitute for house bill 1017 and unfavorable to the original. >> We have a motion any other discussion? Seeing none all those in favor signify by saying aye. >> Aye. >> Those opposed [UNKNOWN] Bill does pass. Congratulations representative Burr. >> Thank you Mr. chairman. >> Thank you sir. >> Next up on our agenda house bill 1039, increase Sampson county occupancy tax. Representative Bill, representative Briston. I believe representative Briston you're here to present. Representative Bill, there you are recognized sir to present your bill, we have the bill before the committee. >> Thank you Mr.chair and committee members, what we have is a resolution from our county commissioners requesting authorization of [INAUDIBLE] tax for [INAUDIBLE] county and to create the money is gonna be used to create tourism development authority, any other question I will be glad to answer. >> Any questions for the bill sponsors? You're recognized. >> Thank you for the motion and appropriation. >> Now it would be a good time for that motion.

>> I move that we give house bill 1039 approved rating, favorable report. >> Thank you representative [INAUDIBLE] any of those wishing to speak on the motion? Seeing none all those in favor say aye, those oppose [INAUDIBLE] the the bill passes, thank you gentleman, congratulations. Next up house bill 1056 you add [INAUDIBLE] tax modification, representative [INAUDIBLE]. >> Yes sir, you're recognized, this bill has brought to us from south of committee so therefore that's the motion so it's part of the committee of [INAUDIBLE] county is made up of four municipalities jumps over to join [INAUDIBLE] over to [INAUDIBLE] is part of representative Stevens district so anyway [INAUDIBLE] and the county now form the occupancy tax district of [INAUDIBLE] and this being have asked to come on board that always do what is just allowing [INAUDIBLE] spend to join. [BLANK-AUDIO]. >> Representative [INAUDIBLE]. >> For a motion Mr.chair. >> You're recognize sir. >> Favorable report to house bill 1056 and we refer to the floor, we have the motion for us any other discussion, seeing none all those in favor [INAUDIBLE] say I, those opposed like [INAUDIBLE] the bill passes congratulations representative Zachary thank you, next [INAUDIBLE] agenda for this morning we will discuss the senate finance provisions that they have sent to us, over in the budget we'll recognize staff for their presentations. Staff, you are recognized. >> I think we'll start with Ms. Griffin >> Thank you Mr. Chairman. Members in your packet you have a couple of materials that I'll just point out so that you know what we're working off of you have a copy of the excerpted of the finance provisions from the senate budget, so you'll see the first page, it looks like the front page is a budget and then when you turn the page it goes to the finance provisions and then you also have a summary in your packet that I'll be walking through. There is also a front and back page chart, one page shows a Cisco comparison of the house to return the finance packages, the back of the chart summarizes the key related provisions of the senate budget and then there's also an additional handout that Jonathan has prepared on market base sourcing, so I'll just, we'll start staff will Mr.chairman with your permission we'll just walk through the provision. >> You may proceed. >> So turning to page 171 of the budget provision that you have, the first item is an increase in the standard deduction by $2,000 for over two years for married filling jointly tax payers and a comfortable amount for those head of household and single filers, this will begin with the 2016 tax year so we are looking at 1000 in 2016 and 1000 in 2017 for those married filling jointly. And to compare this to the house version of the budget you'll recall that the house version would increase the the standard deduction by the same amount let's spread that over four years and begins in 2017. The next item relates to the mail machinery tax, you'll recall in house budget, the house repelled the 1% 80 tax and created a sales tax exemption for all of those items currently receiving that 1%, 80 treatment It also provided for expansion and our clarification items, one being repair parts and accessories for ports facilities. Repair and replacement parts for ready mix concrete mills/g, added metal recycles and precious metal processors with a retroactive effective date. And the other item were the metal fabricators, that was the house provision. What the senate has done is only that ports provision, such that the parts and accessories for the equipment at a ports facility. It's already receiving the 1% AD treatment, would also get that treatment and it is retro active to 2013. Which is when the ports provision was initially put in place. The next item is the market based sourcing, and Jonathan can recap that. for us. >> Okay we've talked about market based sourcing quite a bit in

revenue laws over the [INAUDIBLE] is an incentive if with the job creation incentive with the way North Carolina does income [INAUDIBLE] for multi state corporations. Similar to what you did last year with single sales factor, that provided that incentive for companies that deal in dealing goods like manufactures. This deals with all of the topsy/g companies like service companies. And so I have a handout [INAUDIBLE] and hopefully that makes it easy to understand, if you pull out that one page handout, it says summary of market based sourcing. See a general principal of this is that we can have a company that is doing business in North Carolina and in other states, we're not allowed to tax all of their income. We have to have some sort of a [INAUDIBLE] formula to calculate only a percentage of their income tax. And under of the existing all right now if your a company that performs services, the percentage of your income with taxes based on how much of your business activities are conducted in North Carolina. And that's actually measured by the number of employment and capital investment cost in our state, so you have a bit of a job creation determined with the current system because the ore, the larger the percentage of the companies employment in capital investment in North Carolina the larger the percentage of their income with tax, so in market based source he changes the way that percentage is calculated. Instead of being based on how much their employments in the state is based on how much of their services are consumed in the state by North Carolina consumers. On that regard where the employee they work force an investment to perform services. So this is to be thought of as a job creation and similar to what you did for single cells factor for manufacturing companies, so that's what the bill does and just like single cells factor it's a situation where not every taxpayer impact will win, you're since like given a tax right to companies that have most of their employment in North Carolina and you're paying for it by collecting more from out of state companies that don't have as much of an employment presence in the state but they benefit from state as a market, as a consumer market place, so you have a lot of of setting impacts going on there. If you look at the Cisco chart that summarizes this bill, that's why you end up if you look in 1819, the bill generates about $10 million in revenue, this market base sourcing is a fed if in 2018 which is the same year single cells factors effective so you get a part of your impact in 17, 18 and about 5 million, so that's the core of what this market base sourcing does, I'll also mix in another specific provision in there that specifically defines what the North Carolina market place is for broadcasters. There are six or seven large corporations that create and produce most of the TV content that we all watch. This is for example Disney, time Warner broadcasting, CBS but it's all companies we've all heard of they create shows and they license the rights of those shows to our cable companies into our satellite companies and these days sometimes the internet is straining companies, these companies then offer them to us as consumers to watch, and under this senate market base sourcing plan the percentage of the bar cost income and come to North Carolina with tax be based on the percentage of consumers in North Carolina, the percentage of the audience watching the show as they create there in North Carolina, so that's what this plan is and I'll tell you the broadcasters are opposed to it, they would prefer to use a different plan, there was tax that income only if the licence see you as located in North Carolina, so when it's that point for me cuz I've had charter cable is if charter cable was offering, I was using charter cable the percentage of the licensing income that was taxed be based on how many viewers in North Carolina are watching that show but under their plan you were not taxed because charter is a company based in Missouri they would make the determination based on where the licensee is located instead of where the viewer is located. So there's significant difference there you got considerations that both sides of that argument bring to the table. The bottom line is probably money is the key consideration. I think the broadcast companies have stated that applying the tax right will have an effect in 2018 which is 3 percent, they would pay probably between three and four million dollars to the state and none of this other plan they pay between 30 and 40 million so there's difference in manning there,. other provisions of the market base source in bill just explain the portion concepts for banks, this is largely just caught to find this existing principles for banks, they already have market base sourcing principles in the statute so it's really codifying that then there's the rule making provision in there for the department revenue that requires a public process to create these rules. Turn back every retainer that's market base sourcing. >> First before we move, anybody has any questions on market based sourcing? >> Representative Bishop?

>> Mr. Chairman, I just like to ask for one repetition if you could. Did you say the plan to broadcast this favor would touch based on where the licensing is, is that what I understood? >> Yes sir, I'll give you a good example. Again I'll use charters in Missouri, locate their estate licence and I think when I was talking to them in other cases, my girls watched that Two Broke Girls, so if they created Two Broke Girls - >> Still wanna watch that. >> Right. So if they were licencing that show to whatever law and order, licencing that show to a cable company and then we watched it under their scenario you won't tax [UNKNOWN] licence to charter cuz it's charter's in Missouri not in North Carolina. Under this alternative you would tax it based on a percentage of viewers that are watching the program and when I did the estimate, I don't have the specific numbers but a rough estimate would be based on US population so if North Carolina's 3% of the population maybe 3% of that income you would tax. Now the alternative you will not tax it. And those other examples you could bring in in Netflix, you're gonna do the same example there in California, you could talk about advertisers, where those advertisers are located. Under the city concept you would tax the same way based on percentage of viewers watching the shows and the advertisements that are contained in the shows, under their plan we would tax it if the advertiser's located in the state or if the [UNKNOWN] is located in the state. Given his arguments on both sides the key being there's 3 to 4 million paid under their scenario, 30 to 40 million on the other scenarios. They got shareholders, some significant impact on the availability. >> Follow up Mr. Chairman? >> You're recognized for a follow up. >> So is there any research on like the conflicting incentives here because it seems just from a sort of common sense perspective, first of all as you say it rewards service businesses who have employment base in North Carolina, relatively speaking and that's good. And to the point, we're talking about the broadcasters for example, it sounds to me like their business in North Carolina would be elastic, better say they have market here of people who are viewers.And so they're gonna serve that market, it doesn't really make sense to me to allow them to avoid tax in the courses selling to that market just by having almost a paperwork issue of where their licensing has it's domicile, or whatever state. I just wonder if there was any research by staff or other staff that's readily available about the conflicting incentives and which one, cuz obviously you wanna leave aside people seeking to influence legislation for their own benefit, the way to look at it seems to me would be which is best for the North Carolina economy. >> I'll give you some background you should serve to inform your opinion. There's 18 states that use this audience factor that's proposed in this plan. There's about nine states that use the plan that they've proposed including their home state is the treatment that there after is a little different than how you treat other intangible, these is intangible property that you're licensing, I think the point you're making is that that intangible license only has value if there's a market and North Carolina there's a market and you would treat other intangible licensing incomes similarly in our statute, under this bill and currently. For example, like trademarks or other types of things like that, if you sold a piece of clothing with a trademark on it, we wouldn't determine the tax based on where the license is, it would be based on the sales of the clothing bearing the trademark so it's a similar concept. They;ll present arguments to the other side, they can tell yo that if it's in that place they don't always know who in that place subscribes are so they will say that and so they think it's not an easy way for them to do it and they would rather do it based on where that specific customer is located. There's arguments on both side from my perspective I guess being it physical I said the money is really a driving factor, both of these is a significant difference. >> [COUGH] Representative Jones. >> Thank you Mr. Chairman. If I may address the question again to Mr. Tart, I wanna followup a little bit with representative Bishop's line of questions in your answers to him but if you could go a little further with the background could you break the committee as to how, the current law as it is, how and when it came into being and maybe just give us a little bit more background of where we are now versus where the senate is proposing that we would go with this, particularly with the broadcasters. >> Yes sir.

So I think if you listed some of the senate hearings on this, there's the approachment/g process for the broadcaster's currently is governed by a private [UNKNOWN] that was issued by the department of revenue that governs how they do their encroachment and it's taxed on North Carolina under that let a rolling if they enter into a contract to lias a show and that contract is agreed to in North Carolina. So that would be similar to the approach we are talking about now, I would assume this contracts are executed at commercial Domicile's Headquarters and places like that, so in other words, point is it's not audience based, it's based on what the contract has agreed to. >> Follow up Mr. Chair. >> Follow up. >> Just to clarify again and maybe just in layman's terms since you've talked about the private letter ruling from the department of revenue, could you explain what that is and could you also tell us when that specifically happened. >> So, late December 2012, some of that Four Season song [LAUGH] >> [LAUGH] >> 63 [LAUGH] it's getting my mind, sorry about it [LAUGH] Late December 2012 not 63. [LAUGH] >> Very good [LAUGH] Representative Adams and Representative Meyer. representative Adams. >> Thank you Mr. Chairman. I once had a dream about a fantasy advertising tax but I woke up and in cold sweat when I started thinking about how to apply it. I understand the idea behind this but it seems like a great opportunity for arguments, huge arguments about what t About what is and what isn't, what was and what should be. Can this tax be applied in a way that is clear cut? >> Well it's used in 18 states , it's used in the 4 home states/g and it does give me an advantage there, so it's the same information. Again as I stated, they wouldn't make the argument that this is more difficult administratively than what they were proposed and you're gonna get arguments on all sides of that. >> I'll leave it at that, it seems to me like this would be very difficult to apply without massive arguments either that. I don't necessarily disagree. I keep hearing Puff the Magic Dragon playing in my head. But nevertheless, Representative Meyer. >> Thank you, Mr. Chairman. I don't have any song references nor fantasy dreams about- >>Then I'm sorry, sir. You've lost your turn. We have to move on to somebody who can. You're recognized. >> [LAUGH] >> I do have a question for Mr. Turt. So I understand from the fiscal analysis that over time this is going to result in an increase in revenue for the state of North Carolina. I wonder if it's a generalization but a fair generalization to say that market based sourcing would decrease the tax burden on many corporations that are headquartered in North Carolina but make up the revenue by increasing the tax burden to corporations that are not based in North Carolina but service consumers in North Carolina. Is that a fair way to explain this? >> Yes sir. >> Thank you, Mr. Chairman. >> Thank you. And the Chair has a question for Mr. Tart. At one point and time we were talking about the multistate commission. Is that addressed in this? >> I believe the multistate tax commission is addressed in this. What you have is a rule making process that's in the statute that requires the department of revenue to follow an expidated rule making process which requires public input on the rules. So you know there's no specific requirement of multi state tasking no sir. >>No requirement and also no prohibition of that either, correct? >> No, it's a rule making process open to anything and open to public input. >> Great, thank you. Representative Holly. >> Thank you, I have a question. Has this is in the other 18 states that are doing this, have they been doing it very long, long enough to show a track record to see if this really works or not or have they had to. Do you know if they have had to incur a lot of expense now and collecting funds for this and opening up a new department just to do the collections on this? What do you know about the cost associated with doing this kind of thing? >> Start. >> Yes sir, I know this has been around since 1990s, I am not aware of anybody creating a new department. Whether or not they have administrative experiences associated with it I can't speak to you.

>> We started on that line of question with administrative expenses with a significant change in tax policy would you imagine that the power to vote would need to hire or we focus retask some of their folks over there to deal with market base sourcing. >> I don't believe so I have not heard them bring that up, they have been involved in the discussions, this sir. >> Okay, thank you. Any other question from market based sourcing before we move forward? Seeing none, Miss Griffin? >> If you're following along we just completed the third bullet on your summary and I'm going to skip over the fourth one because it deals with the sales tax on repair maintenance and installation and that requires slightly more exclamation so I'll skip over to the fifth bullet which, and if you are following along in the bill, that up here is on page 185, and what this provision does is essentially provide a cap on the tax that would have to be paid fro repair, maintenance and installation services on boats and aircraft. And the way that it accomplishes because North Carolina is a first participant in the streamline sales tax agreement, we cannot have caps on particular items that are subject to sales tax, you can neither exempt or tax it at the rate, but it sort of can't be in between, so the way to accomplish this particular cap is to authorize purchasers of repair, maintenance and installation service for a bolt or aircraft to obtain a direct pay permit from the department of revenue and what this would enable them to do is purchase this services without having to pay the tax at the time the retailer would not have to collect the tax and then the purchaser will be required to remit use tax to the department up to $25,000 meaning the repair or maintenance for installation services were up to $25,000 so it would be the sales tax on that, so as a practical matter, the state tax would be capped at 118750 and then the local tax would be capped at whatever the local rate is times 25,000. The next provision Denise is going to address and this has to do with the state contribution for the dealing with the local sales option [SOUND] >> Denise. >> Denise Canada fiscal research. As Trainer said the next bullet on your summary, somehow it's bill 1030 talks about the repeal of the $17.6 million of state funds that last years enacted budget directed to go from state to state till tax revenue to local sore tax revenue. In essence in last years acted budget you directed that the state contribute the portion of its sales tax money that comes out of the 4.75% sales tax input that into the part of money that just to get it to local government. And this repeals that provision. None of those funds have been distribute or allocated to local governments yet because that provision would have been effective July 1st of this year [SOUND] And the last item is um a property tax exclusion extension of a sunset. In 2009 you may recall there was an explosion at the ConAgra plant in Garner. The plant was given to the town of Garner and the town created an economic development corporation to maintain and restore the property in order to attempt to market it and put it up for sale at the time there was a sunset placed on the property tax exemption, it expires July 1, 2016 and this section would extend the sunset until 2021. That property has not been sold yet, but the property tax exemption would not apply once the property is leased or sold. And now I am going to turn back to the fourth bullet which has to do with the sales tax on repair, maintenance and installation. And if you are following along in the bill, these provisions start on page 178. So before we get into what the bill does, I think it's important to understand sort of the current law and where we are as a result of the changes that the general assembly enacted last year, there were three changes that went into effect March 1st 2016, first the general assembly repealed the exemption for installation charges in conjunction with the sale of tangible personal

property so the definition of sales price that we've had in our statutes for a very long time always included installation charges. However, we had a sales tax exemption for those so installation charges were not taxable. One of the changes you made last year was to repeal that exemption. The second change was that the sales tax space was expanded to include, repair maintenance and installation services. And then finally the sales tax base was also expanded to include service contracts on tangible personal property regardless of whether that property is attached to real property which means that if you had a service contract for example on your age back system. That that would become subject to tax. However, as part of those changes, one of the concerns expressed by the body was that this expansion of the sales tax would create a lot of new retailers meaning you would have a lot of business who weren't currently collecting sales tax because we didn't tax repairs, and maintenance and things so and that they would have to start collecting sales tax and that there was going to be a fairly steep educational component and learning curve for those businesses plus them just learning how to collect the sales tax so one of the things that the legislation did to minimize the number of new retailers was to basically provide that only those businesses that were retailers would have to collect the sales tax on repair, maintenance and installation. So and it basically said that a person who only acts as a real property contractor would not have to collect the sales tax. So the distinctions that were put into the law um created, you would have a similar activity being performed and the tax treatment would differ depending on who was providing it. So to sorta give the easiest example, if you went into Lowe's and um engaged them to do a remodel of your kitchen, and you had Lowe's come and install new flooring and new cabinets and new counter-tops, those installations under the new law that was passed last year would be taxable because Lowe's is a retailer. However if you went to a general contractor who otherwise doesn't have a store front, doesn't maintain inventory, doesn't engage in retail sales, they just perform construction, and you have them do the same things, put in new flooring, put in new cabinets, put in new counter-tops in your kitchen, they would not have to collect sales tax. So this distinction the law um has created um some confusion and some concern um about sort of an unlevel playing field and one of the things that that provision in the senate budget tries to do is address that distinction. Another sort of source of confusion was that um the definition of repair and maintenance talks about restoring property um or applying property and the department was put in a position of having to interpret the meaning of those statutes um and they received a lot of of inquiries from businesses wondering whether their services were subject to tax. And so the department issued a number of bulletins and directives to make businesses aware of their interpretation and you probably heard of um a few of those and among those is that maintenance services essentially includes cleaning, cleaning of tangible personal property, and therefore car washes for example um are currently subject to tax um under DOR's current interpretation um if the car wash is also a retailer and so that is one of the things that this provision also tries to clear up. That things like clothing alterations and cleaning, which the department has interpreted the language to mean that those things would continue to be taxable. So that's just sort of to give a little bit of background of sort of where we are. So first off as I said, the main thrust of this is that the provision tries to treat similar transactions the same so it doesn't matter whether you are a retailer or a contractor if you're performing the repair maintenance and installation services then they would be subjected to tax. However, there are a number of exceptions. One of those exceptions is that if you are a real property contractor

and you are engaged in a real property contract to perform a capital improvement to property, then those installations would not be subject to tax. And again this would also apply to laws as well, because sometimes they're acting as the contractor rather than a retailer. And if you look on page three of the summary um the bill would, so as I said, the bill would exclude capital improvements from tax, which would cover most installations into real property. The bill lists a number of things that are specifically categorized as capital improvements but it also provides a three factor test, so that list is not exclusive and they are not the only things that would be exempt from tax. To give you an example, if you look on page 183 of the bill um on lines 20 through 34 um you'll see the definition of capital improvement and items that are considered to fall into that category. So things like new construction, work that requires the issuance of a permit under the state building code, um installation of a complete system such as a roof or septic tank or heating or air conditioning or plumbing, electrical, irrigation, it also includes the installation of roads, parking lot sidewalks and also landscaping services. All of these things are considered a capital improvement and therefore would be exempt from tax. I know it's kind of a lot to take in. [LAUGH] I'm trying to go slow. So the next thing that this provision does is it also tries to clarify um the definition of repair and maintenance when it comes to tangible personal property. So as I mentioned the current law talks about restoring property as part of the definition of maintenance and the department interpreted that to include cleaning. So the bill um includes the word clean so that in the statute it would be more clear that what is meant by maintenance is also cleaning. So under the senate bill all car washes for example would be taxable as well as any other cleaning or polishing of tangible personal property. The senate expands that notion with regard to car washes and also includes self service car washes under current law only car washes that involve personal service where you go somewhere and a person is actually detailing or working on the car but not if you would go through for example at the BP, you know you get your gas and then you go through the self service. Currently that's not being taxed, but under this fill it would be If I were to go out and use one of the washers where I physically wash the car myself, I that taxed under their provision? >> Yes sir. >> Okay. Thank you. >> The other thing again I mentioned alterations. Um under current law the definition of installation talks about applying tangible personal property. The department has interpreted that to include when you take clothing in for an alteration for example and they're hemming your pants that they are applying or installing the thread and so therefore that meets the definition and is therefore taxable. So what this bill does is again to be consistent with how the department has interpreted the current law [COUGH] which specifically put the word alter um in the statute so that it's clear that um clothing alterations would be covered. That would also include other alterations of tangible personal property like furniture, upholstery and things like that. And again those items are currently subject to tax if the business is a retailer. Um I am on page four of the summary and just to mention a couple of these clarifications the bill would provide that um the removal of waste from tangible personal property such as pumping out a boat, would be taxable. It does exempt towing. Under current interpretation by the department, if you had your car towed incident to repair, in other words your car breaks down, you call the mechanic and say need you to come fix my car and they send a tow truck to come get your car and take it to the garage and they then repair your car, um the whole bill would be taxable including the towing. If on the other hand um I just calla tow company and say can you come tow my car to my house [COUGH] that would not be taxable. So what this bill does is it simply exempts all toiling services

from sales. Tax I'm gonna move on from tangible personal property and talk a bit about real property and with regard to repair and maintenance. As I said this bill already exempts most installations into real property and when we talk about that we talk about things like kitchen remodels the cabinet, the counter tops the water heaters the toilets things like that. And now we are talking about repair and maintenance of real property. The current law is a bit inconsistent and lacks a little bit of clarity in terms of how the tax applies, in the repair and maintenance statute it says only the repair and maintenance of tangible personal property is subject to tax. However in a service contract statute. It says that if you have a service contract to repair and maintain tangible personal property. It applies even if that property is attached to real estates. So they don't really match up and so it's not really clear no property was intended or should be taxable. And what this bill does it says that. t expands the tax and repair maintenance to include real property. And some examples of what that would cover. I mean so that would cover something as someone comes out to fix your dishwasher or someone comes out fix your water heater. But it would also include if you look at the bottom of page four of this summary it's gonna cover pest control, it will cover cleaning services to the building itself it would not cover housekeeping and janitorial services. But if you have your carpet cleaned, your windows washed, your sitting pressure wash or garters clean. Those services would be taxed. As well as swimming pool maintenance and home worrenties. Their are some exceptions and the exceptions appear on page five of your summary. One of the exception is if their is a charge for an inspection that is required by law such as you go to get your car inspected, normally that will fall under repair and maintenance because the definition includes monitoring or inspecting property but for instance an inspection is required by the government there would be no tax on those inspection fees. The next one is, there's an exception for repair and maintenance services performed by related member, this is where if you have a company and they have perhaps a separate entity such as subsidy area, LAC that performs all their repair work that would be exempt from tax as well, the next exemption is when you have a capital improvement done and within the six months of the project they come back to do some punch list items that would constitute repair and maintenance, if it's done within the six months of like you have a house built, if it's done within six months of the house being occupied it would still sort of be considered part of that new construction or that original capital improvement so that wouldn't be taxed. There would be no tax on repair and maintenance for roads, parking lots and side walks. For removal of items for properties such as garbage removal, debris, grease out of grease traps and thing like that. It would exempt home inspections and as I mentioned previously house cleaning and genital services we're getting close, now turning to service contracts on motor vehicles, one of the changes that was made last year was that service contracts on motor vehicles were exempt from tax but a question came up as to how that was defined and whether that was a service contract on the whole car sort of a bumper to bumper, warranty if you will but they also make service contracts available for various component parts of the car and so it was unclear from the department's perspective what was intended, so this clarifies that and says that all service contracts on a motor vehicle would be exempt about the repair maintenance items are still taxable for motor vehicles. There's also a couple of grace period or a safe herbert provisions in the bill and they actually appear at the front of the sections,

so I'm just gonna turn back to that. [BLANK_AUDIO] So the very first subsection in this particular section says that a retailer is not going to be liable for an under collection of sales reduced tax if they made a good faith effort to comply with the law between March 1st and December and so this as a result of collecting tax on repair maintenance and installation services, so this is sort of trying to provide safe harbor if you will for because there has been a lot of confusion surrounding the application of this text. There's also a provision that, there's a provision in the current law that allows the department of revenue, the secretary of revenue compromise attacks payers liability for certain reasons and one of those factors that we put in when we expand the sales tax base to include service contracts and admission charges. That was a factor that was added in. So this bill also adds in a factor that says the secretary has discretion to compromise the tax perish liability with regard to the sales tax on RMI and it's for a six year period. That would again give the secretary some discretion to reduce their liability if they fail to properly collect and then the last provision under current law retail or contractor who paid the incorrect tax whether it's sales tax or used tax, their was a provision that this would allow them to of set. If they paid sales tax or remitted self tax I should say they were supposed to have paid used tax. It would allow sort of an offset of one of the other. So in all of these provisions are designed to try to help the tax payer with this new service. Sorry did have one last thing. There is a another provision that would direct the department of revenue to issue written guidance to taxpayers within 120 days of the enactment of the act. These sales tax changes in this bill would become effective January 1, 2017. And the idea behind that provision is to hopefully give taxpayers and interested parties time to learn about the changes and sort of an educational component since there's a lot there. And I believe that concludes everything Mr. Chairman. >> Thank you staff, thank you Ms. Griffin, Ms. Tart, Denise, everybody. Thank you. I know folks' eyes have kinda glossed over a little bit. It is tax changes we didn't promise that this meeting would be hasty, just that we would explore the Senate finance provisions. Representative Brawley/g I think you have something you wanna ask. >> Well, I wanted to check my understanding. There's an innocuous little phrasing here. I refer you to page 186 line 25. This is Section 38.5 N, which says GS 105524E is repealed. Miss Canada I want you to check my memory on this and make sure I understand this correctly. There was an area of some minor disagreement between the house and the senate last year on the distribution of local options sales taxes, and there was later in the session a compromise where sales taxes were expanded and as part of that expansion in section 105, 524 there was an additional distribution to some counties and in section B that amount was set at 84,800,000 for the first year and each subsequent year would increase by the same percentage that title sales tax were collections increased. In section C there was a list of counties with an allocation factor of 84,800,000. There were several counties who's allocation sector was zero and those included Wake and Meck but also Waltoga, Surry, Moore, Maken, Iredel, Jackson, Guilford, Durham, Dare, Tober, Carteret, Cabarrus, Buncombe, Brunswick, Avery and Alamance.

The reason for allocations of the 7.6 million dollars is that was the difference between the amount of localized option sales tax collected with the expansion and the amount of money being distributed $84,000,800. The 17,000, or 17,600,000 would remain a constant appropriation in future years so that only the growth in that distribution figure would be deducted from the counties that I just listed who would not get any allocation from that sales tax growth, By repealing this section what we've said at the amount available for all counties under sales tax will be reduced by $17, 600,000 in the first year and that number will increase by the growth in sales tax in every subsequent year. So this is essentially undoing the compromise that was done last year. I would suggest that that's probably something that we would want to countenance. A deal being a deal it should be kept. >> Thank you, chairman Brawley. Representative Jones. >> Thank you, Mr. Chair. A question to Ms Griffin, I wanted to ask you and I know that each state has it's own unique tax code but in talking about the changes made the taxation of services here, could you just make a general comment as to how common it is nationwide for these types of services to be taxed? And I do have a follow up. >> Sure, and we can provide you with a more specific numbers but I'm fairly certain there's at least a dozen, if not between a dozen and 20 I'm kind of looking at 20 to see if I've got that right but I know there are a number of states that tax repair and maintenance and installation services and most of those are sort of with that, don't tax, capital improvements or construction labor, however it sort of denoted. >> Follow up Mr. Char? >> Follow up. >> I know there are I believe nine states that did not have an income tax and the closest to us would be our neighboring state of Tennessee but they do have a much higher sales tax rate and so I guess I'm asking specifically do you know whether Tennessee in particular did they tax services similar to the yes or you didn't know. >> Representative Johns we would have to get that and we can get that for you, I just don't know at the top of my head about Tennessee, thank you. >> Thank you. Next Representative Setzer and Representative Bradford. >> I'd like to thank Representative Brawley for bringing the poison pill to our attention. I also look forward to what else falls out of this document that we haven't found yet. It appears to me is going to be a long summer here. >> [LAUGH] Thank you Representative Setzer I also plan to tame your sheep this at home during pleasure and those at the audience, there is one side of the sheath looks like reduction, there's another side of the sheep that looks like increases how you all figure that one out. Representative Bradford. >> Thank you Mr Chairman. Thank you Mr Chairman. Question perhaps my clarity, so management companies will take home owners associations for example, you know they manage communities, they manage apartment complexes etc So in cases where or in instances where there's something that need to be repaired and then the HOA company sends out its staff to make that repair under this proposed legislation. Is that repair by their staff? Gone I'll be taxable back to the community that's hired them to manage their own asset. >> To the extent that you're using your own employees to perform the repair and maintenance services that would not be. >> Follow up. >> Follow up. >> So just because I like examples, so HOA company has, I'm their employee and my job is to out and swing a hammer every day but the company I work for is hired by a community to handle all of that. If I am called out to fix something when the HOA company bills the owner of the asset for my work, you're saying that a tax would not be applicable in that instance. >> Well let me correct that. I think if you hire a company, an outside company, to come and perform

repairs unless you meet the definition of um the related member um then it would be taxable. There was an exemption I'm trying to point you to it. In the bill on page 185 one of the exemptions from the tax on repair and maintenance services are those performed for a person by a related member and there's a definition um in your summary that talks about being at least 50% being the related member has to have at least 50% of its value as owned by the entity for which is performing the RMI service. So probably in that instance they're not related members i wouldn't think, I'm not sure. It would depend on the facts but if your own employee does the service no, if it's a related service, I mean I'm sorry a related member no tax, but if you just hire a repair and maintenance company to come and service your property then it would be um taxed. >> One last followup. >> Followup. >> So under the last legislation one of the things that seemed to help clarify was that the intent was that no new taxing authorities would necessarily be created. Under this proposed um these changes that we're seeing today, very clearly there's going to be a lot of new taxing authorities, is that accurate? >> Yes. >> Mr. Chairman. >> Representative Brawley. >> I wanna ask a follow up question to Representative Bradford because I think I understand some of the difficulty here. Ms. Griffin, if the management company is paid a flat fee and they do a repair covered by the flat fee per month, is that a taxable transaction? >> That sounds somewhat like a service contract. >> Okay. >> Um so if you have a service contract with a company for then to do repairs and maintenance um then the service contract law and the repair maintenance law are supposed to be consistent. So if I have a one-off repair, and under this bill, it would be taxable then the service contract under which that same repair would be formed should also be taxable. Same with the exemptions. If the repair is exempt, if it meets one of these exemptions, then the service contract for that repair would also be exempt. >> Follow up, Mr. Chair. >> Follow up. >> So in the case as I think Representative Bradford expressed a management company manages a complex if the home owner requests a repair, they receive a separate bill specific to that repair and that would be a taxable transaction I believe so, yes it's an honor receive the bill for that. >> Follow up. >> Follow up. >> Under the previous answer would that then imply that the home owner association monthly fees that are collected would also be a taxable transaction since they might be considered a service contract? >> I'm not sure. I think we'd have to take a closer look at what those homeowner's associations fees, what they would entail. But possibly. >> Last follow up. Would we have concern that the department of revenue might promulgate a rule that says that? Would that be more or less likely? I know that's a tough question. I won't require you answer it. Thank you. >> Representative Brawley, I think you point's well made there that it has potential. Representative Bishop. >> Thank you, Mr. Chairman. So I kinda get the point that somebody might demagogue some of this or it is otherwise fairly characterized as a Rube-Goldberg contraption, and I guess my question to staff is if I understand the point of policy is to try to move more towards a consumption based tax system, which makes some sense. But the getting there appears to be impossibly arcane, and I think my question for staff is, are there models about that transition that have been successfully navigated by other states that would do it in a different way than picking and choosing among services than attempting for all this lines which appears to be hopelessly confounded. >> We have spent a lot of time looking at a lot of different states and there doesn't appear to be a perfect model and so what I can say is that there are just a small handful of states that tax a lot of services and those have been in place for a really long

time but there have been more recent examples and recent I probably mean like within the last 10 to 15 years, but with states that did attempt to impose sales tax on a lot of services that one time and those were quickly repealed and so sort of failed, so whether or not it's sort of a one step attempt, but I can tell you with regard to repair, maintenance installation it's a very complex area and most other states statutes we've looked at are deceptively simple on their face but then there's a lot of departmental guidance behind that it is requires to be developed to implement the statute. >> Thank you Representative Bishop for that question. I realized that there are other competing meetings going on, we will start closing out this meeting with thew idea and understanding that there's much to be discussed in Finance as Representative Setzer alluded to, it could be a long summer, don't cancel your vacation plans yet nevertheless we have a lot to discus since the senate so many interesting new ideas in regards to tax policy. So we will act accordingly. I did have a few folks that they did want to make a few comments. I've got time for may be one, Bill Nelson had asked the broadcasters to speak Miss Nelson are you in the back. If you would press my phone state who you are with and we'll let you be our closer today then will have a lot's more to discuss. You are recognized sir. >> Thank you Mr. chairman. My name Bill Nelson and I'm here to represent the Motion Pictures Association of America and it's member companies. Let me say at the onset that the MPAA and it's members support market based sourcing. What we oppose is the particular and I'd say, peculiar method of applying market based sourcing to the broadcast industry included in the senate budget. This is known as the viewing audience. This is an outdated method and no state that has considered the issue in the last ten years has adopted the viewing audience method with one exemption, that exemption being Massachusetts which adopted the viewing audience method by administrative action and not by action of it's legislature. You've also had that there are 18 states that have the viewing audience method and this is true but the rest of the story is that of these 18 states the broadcasters are generally not even taxable in 10 of them. And so although the viewing method audience method is on the books it is not in effect applied. In 4 of the remaining states, as Mr. Tart explained, the viewing audience method was enacted as an economic incentive to keep the broadcast industry in those states and so it's applied in those states by agreement. That leaves four states where the viewing audience method is applied to the broadcaster to actually generate revenue and I can tell you in those states the audits are highly contentious and lengthy, and this contention is for two reasons. The first is that the viewing audience method is essentially unfair. It does not recognize the broadcaster's actual market. Our markets are the The advertisers and the distributors who pay us fees, the viewing audience method looks to the viewers which are the customers of our customers. This is fundamentally inconsistent with the way you treat other wholesalers, the broadcasters essentially are wholesalers who are selling to retailers and the viewing audience method would source our income base not on where the retail customers. That is the retailers who are our customers, are based but on where their customers are based. The other reason that these audits are so highly contentious is that we do not have the information to know where the viewers are located. Over 40% of our revenue is derived from Internet and satellite distributors who are our competitors. And who do not and will not tell us where their viewers are located. We don't believe that any other industry would be required to source such a great portion of its revenue based on what is essentially a guess. There is a better way and it's a way that the broadcast industry has proposed and we would be happy to discuss it with you, and that is what we call the customer location method. Which would source our revenue just they way you source the revenue of other wholesalers, you look to where the people who actually pay us money, or that is the national advertiser here in North Carolina. Who pay us under advertising contracts and the distributors who buy our content from us. Finally let me just say that if North Carolina were to adopt the viewing audience method it would place North Carolina among the

three or four most high taxed jurisdictions for the broadcast industry in the same company with for instance New York City and Massachusetts. Thank you. I'd be happy to answer any questions. >> Take any questions for Mr. Mills/g. >> I have one. >> Representative Bishop >> So the last thing you said about it being the highest tax jurisdiction on broadcasters, you've got a market here of 10 million people. And there seems to me to be a distinction between the analogy that you drew about wholesalers, and retailers and so forth. It seems to me that a 10 million person audience drives demand to you business. And if it happens to be, maybe even arbitrarily, that your advertisers, domiciles or elsewhere, you're still selling to and there seems that there's a great value in an audience of 10 million people. Isn't it appropriate that value be taxed in course of your commerce. >> I think the way I would answer that is those viewers are not ignored. They are the customers of the cable companies and other distributors who sell content to them under subscription agreements. So when you source the income of those cable companies, you would look to the location of the viewers who are their direct customers. So the viewership in North Carolina is not ignored, it's just that in sourcing the income of the wholesaler, we would encourage you to look to the location of the person who actually pays us money. Viewers don't pay us any money, we get our money from advertisers and distributors. So we believe we should look to where they are located, when you source their income, you were taken to account their viewership being in North Carolina. >> Any other question for Mr. Nelson? Seeing none, thank you sir. >> Thank you. >> Good evening we earn as alluded to will have minimal discussions on the finance package, I do appreciate the members of being here today, members of the audience.