North Carolina Adopts Market Revenue Sourcing Provisions and Sales Tax Definition of Marketplace Facilitator

On November 8, 2019, Governor Roy Cooper signed Senate Bill 557 into law containing the following key provisions;

  • Market-based sourcing of gross receipts for sales other than tangible personal property and
  • Marketplace facilitator sales tax registration and obligation requirements.
Market-Based Sourcing of Gross Receipts

For tax years beginning on or after January 1, 2020, gross receipts from business activities will be required to be apportioned on a market basis. In the case of services, such receipts will be sourced to where such services are delivered to the customer vs. where the income-producing activity occurs (i.e. based on cost of performance generally consisting of labor including contractors) as under current law. In the case of the sale, rent, lease, or license of intangible property, such receipts will be sourced to the state to the extent of its “use” in the state. To the extent the sale of intangible property is not contingent on its productivity, use, or disposition authorizing the holder to conduct business in a designated geographic area (i.e. goodwill), such gross receipts will be excluded from the sales factor numerator and denominator.

If the market for a receipt cannot be determined, it can be reasonably approximated to each state. To the extent such a receipt cannot be reasonably approximated for assignment, that receipt will be excluded from the sales factor numerator and denominator.

In the case of corporate taxpayers with North Carolina net loss carryovers from their 2019 taxable year, an irrevocable election can be made on their 2020 tax year return to continue sourcing their gross receipts from services using the legacy percentage of income producing activities performed in the state method until all such pre-2020 tax year net loss carryovers have been fully utilized or have expired.

Special market sourcing provisions are included under this bill for wholesale content distributors and banks.

Marketplace Facilitator Sales Tax Requirements (Effective February 1, 2020)

North Carolina joined the approximately thirty-five other states that have enacted marketplace facilitator laws which require marketplace facilitators to collect and remit sales tax on a sellers’ behalf. Effective February 1, 2020, a “marketplace facilitator” with $100,000 in annual gross sales or 200 transactions sourced to North Carolina must collect tax on behalf of their third-party sellers. Note that both direct sales by the facilitator as well as facilitated sales by marketplace sellers are considered in determining whether the threshold is met.

North Carolina defines a “marketplace facilitator” as a person that (i) lists or otherwise makes available for sale a marketplace seller’s items through a marketplace owned or operated by the marketplace facilitator and (ii) collects the sales price or purchase price of a marketplace seller’s items or otherwise processes payment and/or makes payment processing services available to purchasers for the sale of a marketplace seller’s items. A marketplace is defined broadly as a physical or electronic place, forum, platform, application, or other method by which a marketplace seller offers items for sale. Therefore, it is not necessary for the marketplace facilitator to have a physical presence in North Carolina to be required to collect and remit North Carolina sales tax.

In addition to the collection and remittance of tax, a marketplace facilitator must furnish marketplace sellers with a monthly information report about the gross sales and number of transactions with respect to North Carolina sales made by the marketplace seller.

The law includes several protections for marketplace facilitators. Among these protections, marketplace facilitators are protected from class action lawsuits brought on behalf of customers alleging overcollection of tax on facilitated sales by a marketplace facilitator. Further, North Carolina will not assess a marketplace facilitator for failure to collect the correct amount of tax due provided the marketplace facilitator can demonstrate the under collection of tax was due to incorrect information supplied by the marketplace seller (i.e., marketplace seller represents the product is exempt from tax to the marketplace facilitator).

Other provisions related to the marketplace facilitator law includes:

  • The law excludes accommodation facilitators, admission facilitators and service contract facilitators from the marketplace facilitator requirements as these other facilitators have preexisting and separate obligations to collect on their sales.
    • The law does, however, impose certain reporting requirements on these facilitators. For example, accommodation facilitators must file an annual report by March 31 of each year for the prior calendar year for accommodation rentals it makes.
  • Accommodation facilitator was amended to include a person that markets and accepts payment for the rental of accommodations or lists the accommodation for rental on a platform for a fee or other consideration.
    • An accommodation facilitator is deemed the retailer of the accommodation rental and is required to collect and remit sales tax on the gross receipts of the rental.
  • Accommodation facilitators that are operated by or on behalf of a hotel owner, operator or franchisor and that facilitates rentals solely for the related hotels (e.g., Marriott.com) are not considered retailers required to collect tax even if they collect all or a portion of the payment for the accommodation. Rather, as is the case under the prior law, these facilitators should send any tax it collects on accommodation to the provider/ related hotel for remittance to the state.
Other Key Provisions Effective Taxable Years Beginning On or After January 1, 2020
  • 7.5% Standard Deduction Increase for Individual Income Taxpayers
  • Expansion of the definition of “holding company” for corporate franchise taxpayers being availed the maximum $150,000 liability cap (as reported on the 2019 N.C. Corporation Tax Return).