Senate Republicans are considering a legislative change that would significantly increase the taxes owed to North Carolina by the country's most prominent broadcasters, including the Walt Disney Co., NBCUniversal, Paramount Pictures, Sony Pictures, Warner Bros. Entertainment and CBS.
During a committee hearing last week, Senate finance leaders said broadcasters have been paying state income taxes based on a favorable interpretation of tax law issued by the state Department of Revenue in late 2012, during the final days of the administration of former Gov. Beverly Perdue, a Democrat.
Sen. Bob Rucho, R-Mecklenburg, co-chairman of the Senate Finance Committee, said during a committee debate that the half-dozen or so “multibillion-dollar broadcasting corporations” represented by the Motion Picture Association of America “were able to carve out a very nice deal” through the private agreement with the Revenue Department back in 2012. Obtained by the Insider, a copy of that “private letter ruling,” with taxpayer information blacked out, gives specific examples of when and how broadcasters are to consider revenue taxable in North Carolina. Senators said last week that they viewed the determination as overly favorable to the broadcasters and questioned its timing.
“We are not in total agreement with the private letter ruling,” said Sen. Bill Rabon, R-Brunswick, a Finance Committee co-chairman.
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Senate Republicans are proposing a change — accounted for in the Senate budget being unveiled Tuesday night — that could increase the money owed by those companies many times over. Senate Bill 869 would determine the percentage of a broadcaster’s taxable income in North Carolina by multiplying its total income by the ratio of its viewing audience in North Carolina to its total viewing audience nationwide.
Senate leaders said 18 states use the viewing audience method proposed by the Senate. Jonathan Tart of the General Assembly's Fiscal Research Division said the bill would require broadcasters to “pay us substantially more taxes than they pay now.”
“You can understand that they would have concern about it,” he said.
Because of time constraints, Motion Picture Association representatives didn't have an opportunity to speak against the change during the committee meeting. Vans Stevenson, MPAA senior vice president of state government affairs, said in an interview that the association wants to preserve the policy outlined in the letter inked during the Perdue administration. But responding to the Senate proposal, MPAA lobbyists have proposed a different change in the tax code that they say would double the broadcasters’ tax liability in North Carolina and put it more in line with other states that have made similar changes in recent years.
Tens of millions of dollars in potential state revenue is at stake in this debate. Under the “private letter ruling,” the broadcasting companies would be expected to pay less than $3 million to North Carolina in 2018. But using the viewing audience method proposed by the Senate, with the 3 percent corporate income tax rate likely to be in effect in 2018, the companies would pay roughly $36 million, estimates show.
According to a letter to legislators, Motion Picture Association lobbyists instead are asking lawmakers to consider a “customer location” method of determining the broadcasters’ tax liability.
Such a method would determine a broadcaster’s market in the state based on the location of the customers who buy its services, such as advertisers, program distributors and subscribers from whom the broadcaster derives its revenue directly. The lobbyists say the customer location method is superior to the viewing audience method in fairness, ease of compliance and administration, enforceability and revenue stability. According to the letter, the MPAA estimates use of the customer location method would double the broadcasters' tax liability in North Carolina. “Our proposal is a fair and equitable proposal on modern taxation of broadcasters with regard to their licensing and advertising revenue,” the MPAA's Stevenson said. “It’s a trend that's been adopted by a number of states over the last decade and continues to be adopted as late as the last couple of years.”
General Assembly Republicans and the Motion Picture Association have a rocky recent past, especially concerning tax incentives to the film industry. Recently, the legislature eliminated a lucrative tax credit for film production companies that do business in North Carolina, replacing it with a $30 million-a-year grant program. The Motion Picture Association also has released a statement opposing House Bill 2, the controversial N.C. law that requires transgender people in government facilities to use bathrooms corresponding to the gender on their birth certificates and forbids municipalities from enacting laws protecting the LGBT community from discrimination.
The Senate Finance Committee discussed but didn't vote on Senate Bill 869 last week.