The North Carolina Department of Revenue issued “Important Notice: Corporate Tax – Secretary Announces That New Statute Abrogated Prior Final Agency Decision,” effective Dec. 31, 2020. This notice advises taxpayers that, due to statutory changes to the definition of “apportionable income” in N.C. Gen. Stat. § 105-130.4(a) enacted by Session Law 2017-204, the Final Agency Decision No. 09 REV 5669, issued in April 2011, “is no longer the correct application of N.C. Gen. Stat. § 105-130.4.” The Department explains further that it will no longer follow Final Agency Decision No. 09 REV 5669 for transactions taking place after the date of the Important Notice and, instead, will apply the new definition of “apportionable income … “to evaluate what items constitute apportionable income.”

Session Law 2017-204 changed the definition of “Apportionable Income” from “all income that is apportionable under the United States Constitution” to “all income that is apportionable under the United States Constitution including income that arises from either of the following:

a. Transactions and activities in the regular course of the taxpayer's trade or business.

b. Tangible and intangible property if the acquisition, management, employment, development, or disposition of the property is or was related to the operation of the taxpayer's trade or business.” This change brings North Carolina in conformance with the definition of Apportionable Income set forth by the Multistate Tax Commission in Model Compact Article IV. Division of Income [UDITPA] issued July 29, 2015.

Final Agency Decision No. 09 REV 5669 involved a determination of whether gain from the sale of a limited partnership interest was apportionable income to North Carolina. The Decision concluded that the gain was non-apportionable income (which was sourced to Texas because the LP was domiciled in Texas) because the Petitioner's connection to the limited partnership was a mere investment of funds that was passive and that neither Petitioner nor the affiliated group regularly or directly participated in the day-to-day operation of the limited partnership in any way. While the Important Notice explains the outcome of the Final Agency Decision No. 09 REV 5669 by saying that “under the then-governing North Carolina regulation, the gain was nonapportionable income allocable to the taxpayer’s state of commercial domicile,” the Final Agency Decision No. 09 REV 5669 was grounded, at least in part, on constitutional principles arising out of the U.S. Supreme Court’s Commerce Clause jurisprudence. Therefore, the effect of the Important Notice and the change to N.C. Gen. Stat. § 105-130.4 will bear further monitoring.

If you have any questions regarding this significant change in the North Carolina apportionment rules, or in understanding how the statutory changes affect your business operations, please contact Reed Hollander, Sabrina Conyers or Wells Hall, who contributed to the drafting of this State Tax Report, or any member of the Nelson Mullins Tax Practice.