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Senate | February 24, 2015 | Committee Room | Senate Finance Committee Meeting

Full MP3 Audio File

What time is it, Senator Ford? [SPEAKER CHANGES] 1:02. [SPEAKER CHANGES] 1:02. I am going to call this meeting of Finance to order at this time. And we have a list of pages here. The first one must have been written by Senator Rucho. It cannot be read. Number two is Nick Mills from Raleigh. Sponsored by Senator Stein. That was all you could find, sir? Where is this kid? I don’t, there he is. I’m proud of you. You’ve, hopefully Senator Stein will help educate you and I hope he’ll buy you lunch one day like I do all of mine. Mary Grace McConnell from Harrisburg, sponsored by Senator Hartsell. And K-A-Y-L-D, is that Kyled? Kaled? Kayla? Well that’s K-A-Y-L-A, not -D. Kayla. Is it K-A-Y-L-A? All right. From Raleigh. Senator Hartsell again? Stretched all the way down here to Raleigh to pick up. Sergeant at Arms who always do a superb job around here and we truly are thankful for them. Senate Finance Sergeant at Arms, we’ve got Canton Lewis, Charles Jeffries, and Steve McCaig. Today, since I don’t have a copy of ?? We’ve got one bill and it is a PCS and we, Senator Rabin moves the PCS be adopted. All in favor? Opposed? Okay, it’s adopted. And at this time, on the revenue laws, technical changes. Most of these, you’ve seen before. Senator Rucho is recognized. [SPEAKER CHANGES] No, Senator Rabin. [SPEAKER CHANGES] Senator Rabin is recognized. [SPEAKER CHANGES] Thank you, Mr. Chairman. I’ll call on Senator Rucho if time allows. It won’t. Okay. [LAUGHTER] Members of the committee, Senate Bill 19 is a rehash of a potpourri of three bills that we had pre-bill, have already been voted on and have passed the Senate. I will draw your attention to two sections of the bill, one being Section Four and one being section 24. Section 24 was the reason for the PCS and that’s all and I’m going to ask Miss Avery if she will explain the bill. Then if there are any questions or any clarifying statements, either Senator Rucho or I will help with those. So Miss Avery, if you will explain the bill as needed, please? [SPEAKER CHANGES] Thank you Senator Rabin. The bill that you have before you, as Senator Rabin said, is the technical changes that did not, were not enacted last year. They’ve just been put forth. They were in Revenue Laws for three meetings. We have not had any comments on them. Section Four of the bill is a section that was recommended to you by the Revenue Law Study Commission and Heather will explain that provision in just a moment. The other change made by this PCS is the addition of section 24. This is something that was brought to the Finance chair’s attention. It is something we’ve been in discussions with the Department of Revenue about. There’s some time sensitivity to it. And this is, the purpose of it is to prevent the double taxation of some funds that were allowed to airline employees that were part of an airline bankruptcy to roll into an IRA. Right now they are subject to, the rollover amounts have been subjected to state income tax. The federal, Congress extended the federal statute of limitations to allow a taxpayer to deduct that from gross income. However because our statute of limitations had already run for these taxpayers, they could not file a companion request for refund at the state level. The double taxation comes into play that when they take those subsequent distributions at both the federal and state level, they too will be subject to tax. So section 24 is just trying to conform our law with some changes that the federal government made, in a very narrow situation for a very few taxpayers. Thank you. [SPEAKER CHANGES] As Cindy mentioned, Section Four was a recommendation of the Revenue Law Study Committee and this section deals with the income tax reductions in the Tax Reduction Act of Session Law 2013-16. As you recall, the General Assembly enacted many tax reductions in that act. As part of it, they repealed the franchise tax on electricity and piped natural

gas, and they also lowered the corporate income tax rate. In May, 2014, the Utilities Commission took its first action related to this act, and it directed the utilities to adjust their rates to reflect the repeal of the franchise tax, and to also adjust their rates to reflect the reduction in the corporate income tax. That order was appealed and on October of 2014 the commission reversed its first order. After that order, both of the natural gas public utilities in the state continued to flow that reduction in the corporate income tax to its rate payers, and two of the electric utilities in the state, Duke and Progress, also continued to flow the reduction in the corporate income tax to its rate payers. However, one, Dominion, did not pass those reductions on to rate payers. What this section does is clarify the General Assembly's intent and make it clear that all of the reduction in the corporate income tax should be passed along to rate payers, and that's what section 4 does. It also tells the commission that it must look at the matter of interest, and it must add interest to any over-collection that resulted from not passing on these savings to rate payers. [SPEAKER CHANGES] Thank you. Questions from the committee? Again, this is a straightforward bill. Other than the section 4 and the section 24, we had discussed, rehashed, and this has been around for over, for a year now. Senator Rucho. [SPEAKER CHANGES] Mr. Chairman, I know the staff has been working with the public staff from the Utility Commission. I see Mr. Ayers here. Would you, can we ask a question of him, please? [SPEAKER CHANGES] Yes. If Chris Ayers would take the mike back there? Turn the mike on. Please, sir, state your name and who you're with again for us? [SPEAKER CHANGES] My name is Chris Ayers. I'm Executive Director of the Utilities Commission Public Staff. [SPEAKER CHANGES] Mr. Chairman, can I have [SPEAKER CHANGES] Question. [SPEAKER CHANGES] Thank you, Mr. Ayers. I know you've had an opportunity to speak with our staff, but having looked at this provision, are you, as Executive Director of Public Staff, comfortable with the direction we're moving in this, and does it clearly delineate the intent of the General Assembly to be sure that the rate payers are the ones that should be receiving a benefit by the lowering of the CIT? [SPEAKER CHANGES] Yes, Senator Rucho. I have looked at the language. I have vetted it with my staff. And I and the Public Staff are fine with the language as it is presented here in the bill. We believe that this does clarify the issue of whether or not the corporate tax decrease should be passed on to rate payers through a reduction of rates. The commission's order, or series of orders, last year, looked at the specific language, concluded one section was clear, the other one was not, and this clarifies that intention, we believe. [SPEAKER CHANGES] ?? No, sir. Senator Stein, I believe it is ?? [SPEAKER CHANGES] Thank you, Mr. Chairman. Two questions. One is do any of these provisions have a fiscal impact and if so, is there a note that shows whether they will have positive or negative impacts on our state revenues? [SPEAKER CHANGES] Senator Stein, Jonathan Tart may want to add to this, and we did not have a fiscal note. There are known revenue impacts. Section 24 may have a slight revenue impact, but it would be insignificant. We don't have any idea what it would be, but it would be a very small amount, and Jonathan, please correct me if I'm wrong. [SPEAKER CHANGES] These figures had no [SPEAKER CHANGES] That's correct. It should be ?? impacting. [SPEAKER CHANGES] Thank you. One more question, Mr. Chair? [SPEAKER CHANGES] Follow-up. Yes, sir. [SPEAKER CHANGES] Some of the members are new to the legislature this time. Some of us are not on revenue laws and there are some of us who may not remember everything we voted on last year. It would be very helpful if staff could just give us a two-sentence on what each section is so we know what we're voting on. [SPEAKER CHANGES] All right. Staff? [SPEAKER CHANGES] I will be happy to start that, and we have other finance team members here. So if I get stuck on for a question, they'll be happy to help me. As you recall, last year there were changes made in the sales tax laws as to how the sales tax should apply in retail contractor situations, such as Lowe's and Home Depot, whether it's an installment purchase and that type of thing. Not installment purchase, but a retail sale plus installation, or if it's a performance contract. This is just some changes to the effective date language to try to answer some of the questions that came up after that legislation was enacted, and there's continued to be conversations between the parties as they've implemented that legislative change. Also, as you recall last year, there were changes made to the sales tax application of when the sales tax and

in a court and the occupancy tax as well applies to the rental of homes. That was the Southern Times, the golf tournament change. Section 2 is just a clarification of that. Section 3 just repeals an unnecessary provision. It was repealed in two different bills last time and this just repeals one of those. Section 4, Heather has already explained. Section 5 had to do with the new tax that this body put onto E-Cigarettes, and this just makes a change that allows the manufacturers to collect the tax on internet retail sales. The effective date is June 1, 2015, because that's when that law will come into effect. Section 6 has to do with the renewable energy tax credit, and right now there's a difference between federal and state law as to when something's put into service, and there is also a difference as to who this right now is specific as to who puts it into service. I believe that there's been sort of a misunderstanding of how that is supposed to work. So what this does is just say the property has to be placed into service. It doesn't really matter if it's the lessee or the lessor. Section 7 is just correcting a codification problem. Section 8 just, out of, let me look at that. I'm gonna ask one of my staff to look at that and some other folks. Let me go to section 9. This just has to say that if there has been an under-withholding of a tax or an over-withholding of a tax because of the tax rate changes made in 2014, that there will not be a penalty for that. This had to do with who is allowed to take a standard deduction. The purpose of the legislation in 2013 was not to change who gets a standard deduction. If you're not allowed a standard deduction at the federal level, you wouldn't get one at the state level. And so that was the conforming change that was made in House bill 1050. However, we didn't, the intent was that no one would be penalized if they under- or over-withheld any wages, any income tax, in that situation, and that's just making that change. Section 10. This had to do with several of the changes that we made in House bill 1050 as it has who is the retailer. And basically says that a person, whoever has to collect the tax, is considered to be the retailer. Section 11 just makes some conforming changes. Section 12 puts in, clarifies that the exemption for piped natural gas, that it is, the exemption from the sales tax includes piped natural gas. That is one of the things that we incorporated into the sales tax statutes in 1050, so these are current exemptions that are on the book, and the intent was that fuel would include piped natural gas, and so this is just making it clear by putting the words in so there was no misunderstanding. Section 13 has to do with the farm agricultural exemption. As you recall, there was a $10,000, one of the changes on the farmer exemption is that you have to actually have $10,000 of income from farming operations to be eligible for the exemption. One of the things that we learned last session is that gross income is based upon your net sales. So you could have a situation where a person sells $20,000 worth of cattle, but they had $15,000 in the cattle, so their net sales was only $5,000. But most people would think that if a person sold $20,000 worth of cattle, they would be a real farmer. So what we did in that section was to clarify that gross income is your gross sales plus all other income. And we also made a change there to address a situation where there is a person who has a contract with a farmer to build their building and things. Under the prior law, if there was

the building being built, whoever was building that building, such as a facility, was eligible to get the sales tax exemption. They did not have to be a farmer. But when we began to put on this income restriction, then there became some question, particularly like with a company such as Hog Slats. It's building the facilities. It's a performance contract. How do we handle that? So what the bill says on page 7, beginning on line 39, is to say that if you're building this facility for a farmer, and that farmer has an exemption certificate, that contractor who is providing that building as a performance contract for that farmer is entitled to the exemption to the same extent that the person with whom he has the contract is exempt. Section 14 does two things. It provides that a retailer who has an agreement with a food service contractor, and this has to do with your meals that are provided in your colleges and universities through your meal plans. That if a retailer has an agreement with a food service contractor to collect and remit the tax, that then that person, the retailer's not liable. One of the two. There's an agreement that can be made between the retailer and the food service contractor. Whoever agrees to collect the tax is the one responsible for collecting and remitting it. Section 15 just makes a change as to who may apply for a certificate of registration, so that it's consistent with changes made in other legislation. And I will say by far the majority, if not all of these changes, did come to the body through the Department of Revenue as it looked to administer the tax laws. Section 16 is just making sure that the statute is codified in the way it should be. This is truly just a codification correction. Section 17. As you recall last year, through a revenue law's proposal, the body changed how the central assessment of mobile communications property would be assessed for taxation. Prior to this change, it was assessed for tax at the local level. But that area is becoming more complex as to how to assess that property. It's very mobile. So what it did was put the assessment up to the Department of Revenue level, up to the state level. The intent wasn't to shift any revenues around, but just to change who assessed the property, and that is just making sure that that intent was carried through. And Section 18 has to do with the privilege license tax. Trina, I'm going to let Trina explain that one. [SPEAKER CHANGES] This is language that was in the privilege license tax statute as it existed, and the utilities industry had relied on this language in an issue that had nothing to do with privilege license tax, but rather rights of way and fees, whether cities can charge fees for rights of way, and they asked that this language be preserved. And what it is is it says that in fact no fees or license tax can be imposed. So the language is identical to the prohibition that is actually in the current law, before the repeal takes effect. So it's just being moved to another statute. [SPEAKER CHANGES] Section 19 deals with the repeal of the franchise tax on electricity and pipe natural gas. As you recall, that was repealed and put in the sales tax base. The distribution for the last fiscal year actually occurred in this fiscal year, and so this clarifies that the Department of Revenue can use those sales tax revenues to make that distribution. Section 20 just conforms to the federal law and codifies the current practices by providing that the same standard deduction amount for a surviving spouse is the same as for a married couple filing jointly. And that you will see through section 20. Section 21 is just putting in the definition of a related person that was repealed in a different section. And section 22 would remove the reference to a repealed statute and clarifying the personal income statutes of the income of a partnership that's apportionable to multi-states is allocated and apportioned according to the apportionment

...formula that we have. Section 23 is trying to address when the items used for a service contract are exempt from tax and when they're not. If the service contract is subject to tax, then the parts used are not. However, with our one percent-- In subsection B we are moving that over to the one percent excise tax statute. If there's a service contract on something that was subject to the one-percent tax, that service contract is not subject to tax because the underlying product was not subject to sales tax. So, in that instance, the repair parts continue to be subject to tax and we put that language-- We wanted to clarify the exemption -- what it applies to -- and we moved it into that statute so that it would be, hopefully, clear to those who were administering it. And then section 24 we've gone over today. [SPEAKER CHANGES] Senator Stein, you're good. Senator Ford, you're okay. Now, that segment of the law means "favorable report" where I come. Well, I like where you come from. We have a motion for a favorable report. We've got a second over here by Senator Ron Rabin. End of discussion? All right. All in favor aye. [SPEAKER CHANGES] Aye. [SPEAKER CHANGES] Favorable report to the PCS. Yes, sir, Senator [UNINTELLIGIBLE]. All right. We've got that. I don't see any nays so the bill is passed. Members, tomorrow at one o'clock we will have a discussion of J-DIG and the ramifications thereof and therein. We'll get you an annoucement out. Thank you.