House lawmakers have tentatively approved a proposal to rewrite state tax laws for multi-state corporations doing business in NC. But the Department of Revenue says one provision in the bill could open a giant loophole that could cost the state more than $30 million dollars a year.
Supporters of the measure say corporations avoid moving into NC because state tax laws are too murky, and there are no established, published rules about how the state will apply them to their operations.
Rep. Bill Brawley, R-Mecklenburg, said Revenue officials seem to make up the rules as they go along. The changes will bring clarity. “That’s all that’s being done here. We’re putting in some initial rules.”
“This is the most powerful economic development bill we can pass this year,” said House Majority Leader Paul Stam, R-Wake. “This is the jobs bill. This is the private-sector jobs bill.”
But the Department of Revenue says one provision in the measure could open a loophole that would make it easier for corporations to move taxable income out of the state by charging their NC operations a “royalty fee” for using their trademark. More on that here.
Revenue counsel Canaan Huie said in committee today that the provision would stop $32 million a year from flowing into state coffers.
Stam and Brawley disagreed with Huie. They said it’s not a loophole.
“The $32M is not taxes that are being evaded,” Brawley said. “It’s taxes in excess of what normal tax law would require. It’s being forced” by DOR officials.
Stam said the provision doesn't do what its opponents say it does. “What [corporations] can do is exercise the same options they’ve had for ten years, and they can’t be stopped for cheating."
Rep. Jennifer Weiss, D-Wake, called it “legalized tax evasion.”
“That’s $32M bucks we’re telling them, go ahead, cheat us, it’s legalized,” she said. “You are not benefitting the little guy. You’re giving a big giant tax break to folks who are gaming the system.”
Brawley responded by comparing the change to personal income tax deductions. “Tax avoidance is legally taking advantage of the tax code so that you legally pay your fair share and no more. This is simply fair treatment. Not allowing crime.”
“You are affording to multi-state and multi-national corporations a tax advantage that NC corporations do not have,” said Rep. Paul Luebke, D-Durham, who said small businesses already pay more than their share of the corporate tax burden, and the loophole would add to the inequity. “If you’ve got small businesses at home, please don’t be proud of having voted for this.”
“The royalty provision is just a big loophole. That’s all in the world it is,” added Minority Leader Joe Hackney.
Republicans pointed out that Senate Democrats voted for the provision.
The measure passed with bipartisan support. It gets one final vote tomorrow, and then heads to the governor.
A study committee will look at the proposal before next year, when it takes effect.