Locally levied sales and use taxes make up the second largest source of tax revenues for counties and municipalities in North Carolina. Therefore, how these taxes are distributed among local governments can be very important for local finances. Unfortunately, as is all too often the case with tax law, the manner in which these taxes are distributed to local governments is anything but ‘simple.’ The following is a somewhat brief description of how these taxes are allocated to counties.
First, it’s important to have a little bit of background. In North Carolina, local governments do not have independent authority to levy taxes. In order for a local government to levy any tax, authorization for the levy must first have been granted by the General Assembly. There are currently five general sources of authority (and two local acts) for counties to levy local sales and use taxes. The sources of authority differ on numerous specifics, but for purposes of discussing the allocation of the tax proceeds there are a couple of key points to keep in mind.
- First, G.S. 105-469 provides a special distribution formula for the local sales and use taxes levied on sales of food. The distribution of these tax proceeds is not discussed in this point.
- Second, local sales and use taxes levied on items other than food under four of the general sources of authority (and both the local acts) are allocated to counties based on a point-of-sale basis. Under a point-of-sale allocation, the tax proceeds are allocated to the county where the transaction that generated the tax is sourced. Generally speaking, this will be the location at which the consumer takes possession of the item (for example, the store, if the purchaser takes physical possession of the item, or the place to where the item is delivered to the customer).
- Third, local sales and use taxes levied on items other than food under the other general source of authority are allocated to counties on a per capita basis, subject to an adjustment. (This adjustment can be significant – increasing a county’s allocation by as much as 49% or decreasing it by as much as 19%.) Under a per capita allocation, the tax proceeds are allocated to a county based on its proportional share of the population of all counties that levy the tax.
- Fourth, local sales and use taxes levied under some of the sources of authority must then be shared by the county with cities that are located within the county, while taxes levied under some of the other sources do not have to be shared. The distribution of taxes between counties and cities once the initial allocation is made to counties is not discussed in this post.
Whether a tax is allocated to counties on a point-of-sale basis or a per capita basis can make a big difference to a county. Generally speaking, point-of-sale distribution benefits a) counties that have large urban centers that are surrounded by either suburban or rural counties, and b) counties that have significant tourism industries. In the first case, retail establishments in these urban centers tend to draw shoppers (and their tax dollars) from the outlying suburban and rural areas. I like to think of this as the “mall” effect. In the second case, counties with a significant tourism industry tend to draw a larger portion of sales from part-time residents and visitors. I like to think of this as the “beach house or mountain lodge” effect.
Based on an analysis of data provided by the Department of Revenue in its publication Statistical Abstract of North Carolina Taxes 2012, about a quarter of North Carolina’s counties would benefit from a distribution of local sales and use tax revenues based solely on the point-of-sale basis rather than on a “pure” per capita basis (i.e. not allowing for the adjustment mentioned above). In ten counties (Dare, Currituck, New Hanover, Durham, Mecklenburg, Buncombe, Carteret, Watauga, Cabarrus, and Wake), the county allocation would be at least 25% more under a pure point-of-sale basis. In Dare County, the allocation would be 3.5 times as great under a point-of-sale basis. On the other hand, in 60 counties the county allocation would be at least 25% more under a pure per capita basis. In 19 counties, the county allocation under the per capita basis would be at least double that under the point-of-sale basis, with Gates County receiving almost five times as much under the per capita method.
Clearly, how one chooses to divide local sales and use tax revenues among the counties can have a big impact in some locations. The allocation of these revenues has been the subject of legislative interest since local sales and use taxes were first authorized. It is likely to remain a subject of legislative interest in the 2015 General Assembly as tax reform efforts are expected to place more emphasis on sales and use taxes. This could be an issue that divides members of the General Assembly going forward – not into the usual partisan camps, but along urban/rural lines.