Effective for tax years beginning after 2019, a corporation must use market-based sourcing rules to:
- apportion income from sales to North Carolina and other states where it is doing business; and
- determine its North Carolina corporate income tax liability.
In general, a corporation must assign receipts to North Carolina if it determines the market for those receipts is in the state. If the corporation cannot determine the market for the receipts, it must:
- reasonably approximate the state or states of assignment; or
- exclude or thowout the receipts from the denominator of its sales factor.
What Are the Sourcing Rules for Sales From Tangible Property?
Corporations must assign receipts to North Carolina from:
- the rental, lease, or license of tangible personal property located in the state; and
- the sale of tangible property received by a purchaser in the state.
A purchaser receives property in North Carolina if the corporation delivers the property to the purchaser in the state by:
- common carrier or other means of transportation, including transportation by the purchaser; and
- direct delivery to a person or firm designated by the purchaser.
What Are the Sourcing Rules for Sales From Real Property?
A corporation must assign receipts to North Carolina from the sale, rental, lease, or license of real property located in the state.
What Are the Sourcing Rules for Sales From Intangible Property?
A corporation must assign receipts to North Carolina from the sale, rental, lease, or license of intangible property used in the state. The rules apply to receipts from intangible property:
- used to market goods or services purchased by customers in North Carolina;
- used by a contract or government license holder to conduct business in a geographic area in North Carolina; and
- used in a production activity, like manufacturing, in North Carolina.
A corporation must exclude or throwout all other receipts from a sale of intangible property from its North Carolina sales factor.
What Are the Sourcing Rules for Sales From Services?
Corporations must assign receipts to North Carolina from services delivered to a location in the state. A corporation with a net loss balance at the end of its 2019 tax year can elect to apportion receipts from services based on the percentage of its income-producing activities performed in North Carolina. It must make the election on its 2020 tax year return. The election is binding until the earlier of the tax year in which:
- the corporation uses the entire net loss balance; or
- the 15-year carryforward period expires.
By Tim Bjur, J.D.