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Basic Business Taxes

Income tax:
A credit against the income or franchise tax is available for manufacturing and processing, warehousing and distribution, data-processing industries, and air carrier services with at least five full-time employees working 40 or more weeks during the taxable year. The company will earn a credit for each new job created and for additional machinery and equipment placed in service, and can take the credits in equal installments over a four- to seven-year period. A range of carry-forwards is available depending on the size of the project. The enterprise factor of the area in which the jobs are created determines the amount of tax credit per job.

If a corporation does business in North Carolina and in one or more other states, North Carolina taxes a fraction of its income based on the amount of sales, payroll, and property it has within the state. In calculating the fraction, the amount of sales counts twice as much as the amount of payroll or property. Thus, a business located in North Carolina that makes significant sales outside the state would be taxable on less of its income than a comparable business located elsewhere but making significant sales within North Carolina.

Income tax credits are also available for performing research and development, training new and existing employees, constructing or installing solar equipment, constructing a cogenerating power plant, or utilizing the Wilmington or Morehead City ports.

Sales tax:
North Carolina has a state sales tax of 4.5 percent and a local sales tax of 2.5 percent. Meckenburg County also levies an additional .5 percent local tax for public transportation. On July 1, 2007, the state sales tax rate will be lowered to 4.0 percent.

Exceptions:
• • Reduced rates are allowed for certain business items. Industrial equipment and machinery as well as fuel (other than electricity or piped natural gas) is taxed at 1 percent with a maximum tax of $80 per item. As of January 1, 2006, these items are exempt from sales tax, but purchasers of these items are subject to privilege taxes at the same rates.
• • Raw material for production, packaging, and shipping materials, and items bought for resale are exempt. Commercial motor vehicles are taxed at 3 percent with a maximum tax of $1,000 per vehicle. Aircraft, boats, railway cars, and mobile offices are taxed at 3 percent with a maximum tax of $1,500 per item.
• • The sales tax rate for electricity sold to manufacturers was reduced from 2.83 percent to 2.6 percent, effective July 1, 2007.
• • A new 50 percent sales tax refund for motorsports racing teams was enacted, while the refund they enjoy on aviation fuel was extended.
• • Certain industries may receive a refund of sales tax on purchases of building materials, fixtures, and equipment if the facility costs at least $50 billion in a Development Tier 1 and $100 million in other tiers. The qualifying industries are bioprocessing, pharmaceutical and medicine manufacturing and distribution, aircraft manufacturing, computer manufacturing, motor vehicle manufacturing, semiconductor manufacturing, and air courier services.

Inventory tax exemption:
Inventories owned by North Carolina manufacturers and retail and wholesale merchants are not subject to an inventory tax.

Software tax exemptions:
There is no sales tax on custom computer programs or property tax on computer software if it is expensed.

For more information, visit www.nccommerce.com and click on the financial incentives link.

State Contact Information:
North Carolina Department of Commerce
301 N. Wilmington Street
4318 Mail Service Center
Raleigh, NC 27699-4318
(919) 733-4151