Tax reforms crunch nonprofits

by Michelle Saxton
Wednesday, December 11, 2013

Arts and nonprofit groups are preparing for upcoming changes in North Carolina’s tax system that will expand the 4.75 percent state sales tax to certain entertainment activities. 

Starting Jan. 1 admission fees for live performances and events, motion pictures or film activities and guided tours of museums, cultural sites, gardens and exhibits will be subject to the tax. The expansion was included in the Tax Simplification and Reduction Act, or House Bill 998, which passed in 2013 and became law.

Admission fees would not include amenities. Other exemptions would include elementary and secondary school events, agricultural fairs, youth sporting events and state attractions, as well as two nonprofit events per year.

“One of the biggest concerns with the new tax is its complexity,” said Michael Murchison, a partner at Murchison, Taylor & Gibson in Wilmington and a board member for the N.C. Center for Nonprofits.

“It only applies to live performances or other live events of any kind — now what does that mean?” Murchison added in a Friday, Dec. 6, phone interview. “Does that encompass every fundraiser that a nonprofit has, or does the fundraiser have to include some live component … like an auction or a band or a dinner?”

There is an exception for nonprofits’ first two events each calendar year, but Murchison noted those are not necessarily always the ones that count as far as raising funds.

“It’s not a blanket exemption for all fundraising events,” Murchison said. 

Most arts organizations would likely be affected, Arts Council of Wilmington Executive Director Rhonda Bellamy said Tuesday, Dec. 10.

Bellamy, who also serves as an Arts North Carolina board member, said she has been inundated with concerns from constituents. 

She added she just recently began to receive information clarifying who would be affected, and many organizations had yet to develop a process to collect the sales tax and inform audiences. 

“They don’t know how to budget for next year,” Bellamy said. “Will they have to absorb losses?” 

Bellamy is asking for the state to delay the tax’s implementation until Oct. 1, 2014.

“It’s going to be an administrative burden, and they need more time,” Bellamy said.

Meanwhile, arts patrons can expect more expensive admission costs for ticketed events, Bellamy said.

Initial ticket sales before Jan. 1 still would be subject to a 3 percent gross receipts tax, of which most nonprofits currently are exempt, while certain ticket sale admission charges after Jan. 1 will be subject to the 4.75 percent sales and use tax, the N.C. Center for Nonprofits has said.

Many counties have additional taxes tacked on to the state sales tax, including a 2.25 percent local sales tax for New Hanover County that brings the total to 7 percent, the North Carolina Department of Revenue states. 

Newspaper sales

Other tax changes effective Jan. 1 include the repeal of an exemption for newspaper sales through street vendors, carriers making door-to-door deliveries and vending machines. Street vendor and newspaper carrier sales will be subject to the 4.75 percent state sales tax, while coin-operated vending machine sales could include a tax on 50 percent of the sales price at the 4.75 percent rate, the state Department of Revenue has said on its website, adding that local taxes could apply too.

Film and preservation

Meanwhile film production and historic preservation officials are concerned about the scheduled expiration of tax credits that have benefited both enterprises. Both were scheduled to sunset Jan. 1, 2015.

Preliminary results from a North Carolina State University study on the 25 percent film tax credit’s impact estimate that without the credit New Hanover County could lose at least $10 million annually.

The study was not yet complete. A full version considering the larger statewide impact could be ready in January, Wilmington Regional Film Commission Director Johnny Griffin said Monday, Dec. 9. 

Uncertainty regarding the tax credit’s future could affect filming, particularly with the television market, Griffin said.

“They usually want to try to run their budgets two to three years in the future,” Griffin said. “So if you have an incentive that doesn’t go that far in the future often times they’ll just take you off the list and not consider you.”

North Carolina’s State Historic Rehabilitation Tax Credit program offers a 30 percent state tax credit for qualifying rehabilitations of residential historic buildings, as well as a 20 percent state tax credit for commercial historic buildings, which matches a 20 percent federal tax credit, Historic Wilmington Foundation Executive Director George Edwards said.

“It stimulates an awful lot of interest in rehabilitating historical buildings,” Edwards said Dec. 6. “The incentives make the cost of rehabilitation much more user-friendly.”

Benefits include the overall aspect of recycling, as materials from existing buildings are used and streets, utilities, neighborhoods and schools already are in place, Edwards said.

“It draws countless people to this city they love to be able to walk through a vibrant downtown and one that has a sense of history,” Edwards added.

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