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House | June 16, 2016 | Chamber | House Finance

Full MP3 Audio File

[BLANK_AUDIO] Good Morning? The House Committee on Finance will now be in order. Today our sergeant-at-arms are Reggie Seals, Marvin Lee, Kerry Magro and Randy Wall. We have pagers with us today, Boyce Evans Abby Young, Lexy Cop, Sanyona Vermudni/g. Was that even close? Thank you. Thank you for your patience. Dillon Winstead and Wes Whitmire. Are you any relation to Rep Whitmire? In what way? You have my deepest sympathies sir. Our able to staff is with us today, Trina Griffin, Greg Ronnie, Jonathan Tart, Nick Gimmins/g, Rodney Bazil and Denise Canada. First bill is the house bill 1033 ID card fee waiver with disability. Rep Hardister will present. We have a technical correcting amendment as today, Representative Hager is recognized to send that forward. We are not distributing copies, it merely changes the effective date to October 1 2016. All in favor say aye. >> Aye. >> Opposed. Motion carries. Mr. Hardister you are recognized >> Thank you Mr. Chair, good morning members of the committee, House Bill 1033. What the Bill does is it waves the fee for a special ID card for person who has a developmental disability, and of course developmental disability is defined by a statue. An example would be severe autism, Downs Syndrome, Cerebral palsy, epilepsy, these are conditions that affect a persons ability to function independently. Current law provides that if a person is legally blind or over the age of 70 or becomes disabled and they don't have to pay the fee so there's a correct parity for a person who has a developmental disability, and that concludes my explanation of the bill. >> Thank you. I do also like to recognize Representative Avila, do you have any further comments? >> Further discussion, further debate? Representative Warren. >> For a question and for a motion, The gentleman's recognized for a question. >> Rep [UNKNOWN] these will be satisfactory for the voter ID purposes? >> Yes sir, that's correct. >> Again promotion appropriate time sir. >> All right, after one comment I've been informed that we do have a fiscal note on the way the estimated annual cost is In the order of $100,00. >> Rep Warren is recognized for a motion. >> I make a motion for a favorable report for the PCS for house bill 1033 unfavorable to the original. >> Rep Warren moves that house bill 1033 as amendment be rolled into a new PCS favorable to The PCS unfavorable to the original bill, Representative Lukie. >> Thank you Mr. Chairman, I apologize for being late. I did hear the reference to $100,000 appropriation? >> Yes sir, that would be cost to the lost revenue in allowing this. It's a waver of the fee An ID for disabled. >> Thank you. >> Further discussion, further debate? Submitting in favor the motion say aye. >> Aye. >> All iii opposed say no. The bill is approved and will be sent to the floor. >> Thank you Mr. Chair. >> Thank you. House Bill 99 And four. >> Mr. Chairman? >> Yes. >> On that I don't object to it but what's the source of this that doesn't have a source of what's being passed out right now? >> Sir I have no idea, the chair was not asked for permission to distribute that. >> [INAUDIBLE] >> Oh the other chair gave permission. >> [LAUGH] Representative Sane what's the source of the. >> I don't have any answer there. >> We welcome Representative Sane from a trip on legislative business to Los Angeles but he took the red eye back if he seems a little less than his usual [INAUDIBLE] itself, I hope You will be patient with him today. House Bill 994, proposed committee substitute for discussion only.

Representative Szoka moves the PCS be before us. All in favor say aye. >> Aye. >> Opposed no. Representative Stein and Representative Szoka are Recognized to present the bill >> Good morning Mr Chairman good morning members of the committee.I may not be at a 100%, I may be at 110%, you never know what I can do to you. So, stand by, we'll find out. House bill house PCS 994 before you, Then you probably prudent it to let chairman Zoka present the sales tax PS1, he's a numbers person, I'm not, and he's also intimately involved with some of the many talks over the last couple of months about the sales and news tax. So, Representative Zoka, Mr Chairman if that's okay I'll turn over to him >> Representative Zoka is recognized. >> Thank you Mr Chairman. Before we actually go through the bill section by section, I'll have Mrs Grivin help me with that. I think it's really important that we get the context of the changes that we vetted for last year, for results of that as it apply in real life out in businesses in our state and before I get into it. So I usually don't read but I'm gonna read and I spent some times on this because words are very important. I wanna make sure I'm saying exactly what I mean. As we all recall, last year's legislative session, we did expand North Carolina sales tax into some services as part our continuing effort to expand the base with the same time simply following our text structure for individual and corporate income taxes as well as reducing the tax rates for individuals and corporations. And if we call this the sales tax exponentially made wasn't of repair, maintenance and installation of tangible personal property. If you like me probably you've probably had a number of calls since last session adjourned on businesses who've had issues trying to figure out exactly how this works. If you go back to finance last year, and some of the conversations at the time. One of our stated goals in both the senate and house was to not greatly expand the number of tax collectors, new tax collectors. And if you recall, the talk went down, that we're going to expand the services where businesses are already retailers. So, we're not asking him to do something new. Now, we'd like you to put that at the back of your mind as we go on. Is there anybody here who knows tax policies, extremely complicated? In the implementation of the new law that we passed last year, the department of revenue spent long hours in translating that law into policy. So the public could comply. In fact they'd published many technical bulletins. There's about 60 of them try and help the public comply which raised further questions on how businesses could actually comply. So, whether it was because of the law itself or because of the way it was implemented with the guidance given, it became clear to me over time that the're inconsistencies in the application of the law that need to be cleared up and that's what I wanna talk about today. Let me just give you three simple examples. Okay one is a car wash. Okay and the implementation of this if a business had a coin operated drive we all that their is put dollars in their now. So I just one Monday put eight bucks in, you go through, there is no retail sales at all. Nothing. So that would not be subject to the new tax. However if that same coin operated car wash decided to sell rags or something out of a dispenser. So that at the end you could drive it off yourself. That was defined as a retail establishment and they would have to charge sales tax. So you've got two businesses essentially doing the same thing that are being charged differently in taxes which that is not ever the objective of tax policy to have two taxpayers treated differently. Another one a flooring contractor versus a flooring installer. Let's say a flooring contractor has $100,000 in annual sales. He would be in the retail trade if for example he had $70,000 of that was actually in selling of flooring and $30,000 of it was in installing the flooring. He would have to charge sales tax not only on the sales part of it but on the installation as well. Compare that to a flooring installer who doesn't sell the flooring, you buy it from somebody else and he just comes to again $100000 income annual income all he gets is 100% of his sales from installing the flooring and that person, They don't have to charge sales tax. And as I can see my friends from DOR looking at that cuz I think that's directly from [INAUDIBLE] And finally consider an above

ground pull contractor and an installer. A similar and above ground pull is tangible personal property so it's a similar thing like the flooring. But you can theoretically take the pool with you. It's tangible personal property, a hundred thousand dollars if the person sells $70, 000 in pools and 30,000 in chemicals then he wouldn't be subject to sales tax however, was flipped around the other way and he sold more and pool chemicals and services than in the installation of a ground pools. He would have to charge sales tax on everything. So I mean I've got dozen more examples around and can go on. You get the point. So we have to fix this. We have to fix it to help businesses understand what they have to charge sales tax on, and we have to help our department of revenues so they can evenly apply the tax that we passed last year. So that's the problem that we're dealing with. Through the issue we are dealing with. So basically the way I see it we have one of three options. The first option in any legislative action is always to do nothing action. We could choose to do nothing. I would hope that no one in this committee would vote for the do nothing action because it doesn't make sense and we know it would have problems in this policy that we would fix it. So that takes us to the next option which I would call which is the senate approach. [COUGH] And you already have that it's in the senate's budget that was sent back to us in the budget process. So as you look through there you'll see what they wanna do. And let me just say a few things about the senate's proposal. First of all its a well thought out, it's very well thought out. And it does accomplish the goal of getting rid of this inconsistencies. It does achieve that. What their approach does in the tree example I gave it resolves all of those. Where it. For the most parts the services to deal with real property and housing and commercial of buildings their is a tree factor test applied to determine if the service. [COUGH] would be taxed or not and their is a list of specific exemptions for installations. Let me just read from the it's not in the bill and that is in the senate portion of the budget. But those installations will be for plumbing systems, heating and cooling equipment, installing electrical wires and roofing, septic tack segregation sprinkler system, roads, parking lot, side walks. So they do recognize that some of these things need exceptions and they do address that. However there is other services which when they go down the road of expanding, The base even further, then I believe that we jointly the two houses were great till last year. With their definitions would expand anything. Such things as pest control would now be taxable, cleaning carpets floors, window washing, gutter cleaning, pressure washing, some floor maintenance, home warranties. Those are some of the things those things that would now be taxable So, well, I believe that it fixes much of the problem, it comes up with another set of problems, and that's even before you get into commercial buildings and the application of their proposal into cleaning and maintenance of commercial buildings And let's now think of a commercial building like maybe the size of this. Let's think of a food processing warehouse or a storage center, or even your local glossary store. Cleaning the floor is to been compliant with federal regulations, there's a huge expense. So, the're things that would still be uncertain for businesses and may in fact Increase taxes on businesses by quite a bit, and that is certainly not the advantage of what we wanna do. So, just to summarize that proposal, the advantages it does resolve the issue disparities by expanding the base. It does increase revenue to the state and I might add that it's beyond what we originally projected when we passed the law last year. I believe, I haven't consulted with the department of revenue but I believe that it would make it easier for the department of revenue to administer the tax. However, the disadvantages are that it expands the basic companies that would collect sales tax well beyond what we intended last year. I ask the department of revenue to give me some type of estimate on that and I will give them the foot note here and make it very clear that this is not the hard estimate, it's very difficult to get to the fixed number of businesses that would be new tax collectors, they have given me a very soft estimate of 32,000 new businesses would be required to collect tax which had not to this point collected it. I used to own a marketing company.

I still have an account with experience for leads. What I did is I took what the senate proposal was and did the research to figure out the SIC standard industry codes were, fed that into experience myself just to get account and if you notice for business leads for mailing purposes I used to use do a lot of work mail in another life. Anyway when I came the account for that intergram, and this is a soft number but I came to about 29,000 new companies. [COUGH] Even if both of these estimates are off by a factor of 100% even if it's only 10 or 15,000 new businesses that had not collected retails sales in the past. I think that goes beyond the intent of what we were trying to do last year when we passed the tax law. So I looked at that like a large Disadvantage, and as of yet there are still some unidentified potentially increase to expenses of businesses, as I mentioned, grocery stores, distribution centers are in line with refrigeration for perishable items, things like that. So when you're looking at. I run a space that's 1500 square feet for a business I mean that's That's not where my concern is it would be in this larger things. So i'm still working with stake holders on that. So in some rate I've sent a proposal. They did a good job they really did. It's just the difference in philosophy and how far we wanna expand the basis opposed to what your gonna hear, and it does sell the disparities Issue. So what we've done in the proposal it's in this bill part one is we've taken the best parts in the center proposal and that's about 75% of it and it was very good work. We've made some changes in clarifying definitions. We've listed specific exemptions that in our opinion makes sense And the overall impact of that is become more inline with what I believe last years's tax expansion of the base was all about and it definitely limits the number of new tax collectors. Mr. chair with your permission at this point I had asked Ms Griffins To explain the bill section by section I had asked Sarah to hold that question till she is done. When miss Griffin is done with that. I'll wrap up with a short summary and then take in all the questions that you may have. >> Representative Szoka are you asking her to explain the entire bill or part one? >> Just part one sir. >> Okay Ms Griffins is recognized to explain part one Part one. >> Thank you Mr. chairman and just to start with perhaps the 30,000 port view. I think it's easiest when this is a fairly complex issue. The easiest way to think of it is in terms of two buckets. To think of the repair and maintenance service and installation services. And then to further think of those items in terms of tangible personal properties and real property. So what this bill does with regard to the repair and maintenance of tangible personal property is to clarify those terms that representative Szoka mentioned with regard to things like car washes including alteration. And I will go through that when we get to the bill. Probably the most significant change from current law would have to do with the repair and maintenance of real property and the reason for that is because as he mentioned right now the law has a distinction between retailers and none retailers, and so as a practical mater. You have very few retailers that are engaged in the repair and maintenance of real property. So by eliminating that distinction you necessary are going to draw in more business that would perform that service and it would therefore become taxable. So that's just sort of with regard to repair and maintenance of tangible. Property and real property, and then when we talk about installations. With installation you are always installing tangible personal poverty but the complexity comes in that once you install it. If you install it into a home or perhaps a business it becomes real property and it's no longer tangible Personal property is just real property, so the question became how do you treat those installations, and you can imagine different gradations of installations where something breaks in my home, say in my dish washer and I need a part installed. Well that's an installation, but now I wanna remodel my kitchen and I have my Cabinets and counter tops and flooring's installed, that's also an installation. So what the bill intends to do is exempt most installations into real property by defining those as capital improvements. There would still be some installations that would be taxable So I just sort of wanted to start with that high level and think of it in terms of repair and maintenance versus installations. So starting with section 1.1 of the bill there're three components

of this and this is designed to help retailers who were sort of caught up in the new law That became effective last March where there was a lot of confusion about how the law applied. So subsection A provides a ten month grace period starting from March first of last year to December 31st, oh no sorry March first 2016 And ending December 2016 to say that if you made a good faith effort to collect the proper amount of tax and you failed to correct sales tax when you should have because you honestly didn't know your service was subject to tax then the retailer is not going to be liable for that, it's basically a grace period Subsection B of the bill would provide sort of a six year window where the secretary of revenue would have the ability to compromise a retailer's liability if they failed to correct the appropriate amount of tax with regards to these repair, maintenance, and installation services Which is similar to what we did when we enacted the tax on service contract and admissions, again sort of giving retailers and opportunity to become educated about the law and not get innocent on businesses caught up in that. Subsection C of the bill has to do with the Situation where under a current law, if you're a business and you collect sale tax when you should have remitted used tax, then generally speaking the department of revenue will let you off-set your used tax liability with the sales tax that you collected. However That ability was not allowed for retailer contractors when we enacted that provision a couple of years ago. So subsection C of that one section 1.1, takes that limitation out which would allow Retailers to off-set their used tax liability with sales tax liability. Turning to section 1.2 of the bill, we have some definition. I will try not to get too detailed but the reason for some of these definitions are for the purpose of exempting The services from tax, so you can see new definitions have been created for an alteration service, a building cleaning service, house cleaning, and janitorial services, landscaping services, we'll come back to motor vehicle service contracts. So, some of these definitions are so that later in the bill Bill, those items are actually exempted from tax. So that they don't get pulled in to the definition of repair and maintenance. Probably the next main section you want to look at is on page six of the bill. So, essentially what the bill What the bill does is you have repair, maintenance, installation services, and then there's a curve out if you will for contracts for capital improvements. So, if you have contracted with the real property contractor, for a capital improvement on your home, that is not going to be subjected to tax, and you can see the The definition on page six at the bottom of the bill, and Representative Zoka mentioned the three factor tests, these item is pretty much identical to what was in the senate budget, and as it said it sets out factors that would be considered to determine whether something you having installed holding your home as it happens on improvement and then it's specifically less 6 or 7 items that just as a matter of law would be capital improvements and therefore would be except. And you can see that list bottom of page six top of page seven. Things like installing an HBack system. This that would require a permit such as certain plumbing or electrical work. And then if you turn to page eight you will see further exemptions from the tax on RMI or repair maintenance installation services. These are things that would otherwise qualify as repair and maintenance items, but as a policy matter are being exempted and I won't read through the whole list but again many of these were also in the senate budget but some were not. In the ones that were not I'll point out the differences. If you look at the bottom of the list you'll see building cleaning service, but the senate budget will tax those items. Things like having your gutters cleaned, or your house thorough washed, or your windows washed,

which is distinguishable from having house keeping or janitorial service but this proposal would exempt building cleaning It would also exempt all car washes and as representative [INAUDIBLE] mentioned the senate provision will tax all car washes. It will also exempt alteration services, so clothing alterations, furniture [INAUDIBLE] things like that which are currently taxable now under the department's interpretation of the current law those would be exempt under this bill. Also pest control which is another item that the senate budget taxes. Oh, there's also an exemption for storage of a motor vehicle and towing services. Some towing is currently taxable, some is not. It depends on whether it's part of a repair. Sort of turning back the other item has to do with motor vehicle service contracts. It was unclear when we passed the law what exactly was a motor vehicle service contract, whether that was a contract that covered the entire car bumper to bumper or a service contract that might have been for particular components of the car and the reason that it was important is because we've an exemption for motor vehicle service contract while the repairs, the actual motor vehicle repairs would be taxable,so this bill clarifies what a motor vehicle service contract is, which is it's either for the entire car or component parts and it would be exempt from sales tax under this bill. And finally I'll just mention that the bill would direct the department of revenue to issue guidance to tax payers relative to the changes in this bill within 120 days the bill becoming law, and the idea here is to try to get information out to tax payers as soon as possible to retailers so that everyone's clear on what is taxable and what is not, this concludes my remarks Mr. chairman, I'm happy to answer any question. >> Okay, thank you Ms [INAUDIBLE] I did wanna recognize that Cindy [INAUDIBLE] and Dr. Boadman are also here to staff us today on our flank to provide inflating far is needed to answer an earlier question from Representative Stam the piece that relates to the new market tax credit it was provided by Susan Martin who represents one of the companies involved in that. Questions only not debated this time on section one of Representative Szoka. >> Thank you Mr. chair let me just wrap this up for the brief summary, I think the advantage is in disadvantages, I listen for the first two options and option number three, the house option. the advantages that I see are there it does accept about 75% of the senate proposal because they did do a good job in thinking out a lot of these. I think another advantage is the resolves issues disparities that I mentioned earlier and you saw or her rather is miss Griffin and went there instead it does do that, most importantly it does not drastically increase the number of new tax collectors which in theory over a period of years I'm not necessarily against and I don't think any of the other chairs are. However what we've here right now is a time of great uncertainty for businesses and if you've ever owned a business the thing that businesses desire the most next to profits is certainty so they can operate. So I think that was an advantage that those do that for us. It gives us more time for stakeholder input really drill down into some of this things even this morning. Some one came out to me and said what about this. And say like we are gonna have to get into that as well. So with the base expansion to the extent that the senate proposal has. It's a little too much too fast for us to do here in the short session. Now the disadvantage is to have this and there are some, well there's one really and that is it does generate less revenue than the senate proposal which in their proposal also you recall that going increasing the zero income tax bracket, they have that two years, our original proposal had four years so this does generate less income because we're not expanding the base as greatly as they are. We're just fixing what we passed last year. So that is a disadvantage. In summary the single defining difference between these two approaches is undertaking another major base expansion or the sales tax base now. To correct the issues that happen because the last years bill or do we attempt to correct those issues and started at further and

do it in revenue loss again. And next year in the long session. Mr chair that concludes my presentation. >> Thank you, Representative Hager I think you're first up for a question. >> Thank you Mr. chairman just a couple of questions. Last year Representative Szoka you may or may not know so don't apologize. How much did the sales tax expansion net as last year. I'd ask staff to help us out with that. >> Jonathan or Miss Canada. >> This sales tax expansion that was enacted last year is estimated to bring in around 160 million in the next fiscal year. >> Does gentleman have a follow up? >> Yes I do, thank you sir. This real quick, and only expansion and I know we're just trying to clean up some of these but it has been my, I guess my frustration with the sales tax pieces is I don't see anything that I would reconsider white collar businesses in this lawyers, engineers, doctors and those things, am I missing that or are there some Some of that woven in here that I don't see, seems like it's all blue collar, all working class got taxes and that troubles me. >> Okay, but [INAUDIBLE] close to debate >> Does it include any of the none blue collar jobs. >> Mr. chairman. >> Yeah Representative [INAUDIBLE] not to necessarily debate it but representative [INAUDIBLE] I believe you're absolutely correct and I think that's been some of the sticking points between the house and the senate as we've gone through tax reform, the first script that I was looking at was the lawyers but they haven't quite got there yet, and no offense to the lawyers in the room but What's fair is fair, correct. So that is an ongoing debate, an on going discussion but I think you highlight something that is fair and should be highlighted again and again until we get to the point, I appreciate your comments. >> Follow up, representative [INAUDIBLE] Thank you Mr.Chair and I guess this question is directed to the bill sponsors or at stuff either one. Couple of questions if you will bare with me a second, one, is the South Carolina collect server sales tax Miss Griffin? >> The South Carolina, I don't know the specifics, service taxes but if you're asking for a comparable with regards to repair, maintenance, and installation, South Carolina does not tax repair and installation labor. >> Follow up >> Follow up My point is, that I live on boarder county and as a boarder county resident, if you're gonna be fair about all this things and I have the option, I'm gonna use here swimming pool, [BLANK_AUDIO] One is if I go use of those sales taxes that are collected on point of sale, you go to South Carolina you buy some food suppliers, you contract with somebody in South Carolina come do maintenance to your pool. There's somebody in my county that can do maintenance for the pool, but in South Carolina, they wouldn't add tax to it basically, they've got the same problem. I mentioned this before about some of my, and I know this didn't have anything to do with this directly, and I know we don't have any control over it but some small businesses in my county have problems with Internet sales and all these other kinds of stuff. In our efforts to be fair, I want us to Remember these things too. Thank you Mr Chair. >> Rep Luebke. >> Thank you Mr Chairman. Two questions for Rep [UNKNOWN] you mentioned pest-, I'm sorry, it's okay Apologize having an ethnic name myself I understand and apologize. You mentioned pest control as one where you thought it not ought to be included but the senate did. Could you specifically with that one tell me the senates rationale and then The House rationale as to why it ought not be taxed. It's not passed- >> Representative Zoka, I could certainly appreciate if you would address the House rationale as to the rationale of the Senate. >> I'm not sure the Senate could answer that question sir. >> [LAUGH] >> Yeah, I was gonna say that Say that is a rather tall order. But briefly, with the way they took the definitions, there is an answer to it. It's a logical progression from the approach that they took. And if you wanna get deeper into that you'd have to ask one of their

finance folks. When we looked at The type of services that were being done. Pest control is one of them I have a service that comes to my house, so there's a number of services in a routine cleaning and maintenance of the house that anyone might not pyramid up but all of a sudden if you're having your carpets cleaned and pest control and your gutters cleaned and car washed To us it looks like a pyramiding effect on homeowners and that's what drove the logic in exempting pest control. >> Follow up. >> Thank you, one of the sales tax items that I get a lot of complaints about is Is the addition of the sales tax on labor at an automobile repair shop. And it raised a lot of money as I recall from last year, but it also has raised a lot of complaints. And I wondered if you could tell me why with all the clients, you must have heard as well, that I heard Why you wouldn't have reformed things to remove that tax. >> Well, Rep Lucas remember the debate from last year that was thoroughly debated last year. I have heard several comments about this. I'm sure folks have, but they also Thanked us for lowering their personal income tax rate at the same time. So it's one of those things that was never our intent to try and undo anything that was passed last year. Just merely to clarify the intent of what was passed last year. >> Okay, Representative Sam Representative Brad do you have a question? >> Yes sir, thank you Mr Chairman has there been any considerations to perhaps evaluate consumer to business taxation versus maybe business to business taxation? And let me expand the genesis of my question. We have a We have lots of sole practitioners out there, handymen for the better part of it, that go around doing repairs to apartment complexes, single tenant homes etc. That's a space that I live in every day and my understanding based on the Senate's version and perhaps even this version as well, is that those are the types of people that Will not be exempt because they're not altering clothes, they're not spraying chemicals for pests, they're actually going in and doing handyman type things and we're going to put a burden on them to start becoming tax collectors and these are sole proprietors that probably can make their own payroll. So my question is, in instances when perhaps a consumer calls them Somebody versus when those folks are working for businesses who are contracted by owners, has there been any consideration to look at that type of methodology? >> Absolutely and that's what drove the house approach on this because as you correctly pointed out under the Senate approach those type of handymen Folks would in fact be taxable for cleaning or maintaining tangible personal property and real property, under our approach those same folks they would not have to charge sales tax. >> Follow up. Alright just information for the benefit of the committee While the local government committee does not meet today it means we can't run right up to 10 o'clock but there are some other meetings and we will loose our quorum at 10 so we need to get through the bill. At this point let's go on to part two, representative Sane, are you presenting that? Senator Gurn if you could join me. If you don't mind sir. Thank you Mr. chairman. Representative Martin was kind of slated to represent on new markets today. She had an emergency I think with her daughter in Nashville so she had to live and I certainly understand that she needed to take care of some family business but that being the case I didn't want to make sure that we highlighted new markets, it's something that representative Martin has been really excited about and working on. It does look at our more rule communities and find new ways to invest capital and senator Gurn has worked on this piece on the senate side for quite sometime starting at the beginning of 2015, I know maybe before that he and I have met on this issue a number of times as well as crowd funding which I think you guys passed out of the senate just a couple of days ago or as I've been gone I'm not sure exactly the timeline but that's coming to us as well and I think the piece is very much complementing each other and Mr.chairman your permission I've let up senator Gurn speak a little bit about new markets but it's exciting particularly for us as we are trying to address economic development in our more rule communities,

how do we address some of these issues, how do we infuse new capital and yet those communities moving and involved in the growth game where sometimes they haven't always been included so I think it's a wonderful solution that I'm excited about, I know many of you that represent rule communities should also be excited about this again we talk about to North Carolina, I don't think it necessarily has to be a case but we do that to understand that each community is different and I think this is a great way to start addressing that. Senator Gurn? >> Senator Gurn welcome to the house committee on finance, you are recognized sir. >> I just can't tell you how good it feels to be in the house committee on finance, thank you for allowing me to come here. Thank you representative, I'm glad to have you back. I feel better for the State of North Carolina to have you here. We have been working on the new markets for a few years and quite honestly what's in front of you today is I think the best new market package we could possibly put in front of you. And I'm gonna keep this brief and then because I know you may have a lot of questions but I agree with the representative and I think probably many of you in here. We've done a tremendous job in this state growing the economy. You can look at the charts, you know what is done. But we all know when you get out of some of the, particularly our larger metropolitan areas. We're probably not feeling that in our more rural communities and we're certainly not feeling that if you are a startup or an entrepreneur or a new business. And the main reason for that is the lack of capital. We do not have the ability today and the capital market to do traditional financing to grow your businesses or start your businesses and particularly in our rural communities. So we have an extraordinarily great opportunity right now to take the federal new markets credit and incentivise through a state component to bring that money to the state of North Carolina . The opportunity lies in front us cuz starting in about December, seven billion dollars of federal new market money is going to be made available. And we are gonna have companies that are all over the united states applying for that. And they probably 300 plus companies now. They can take that money any where they want. How do we get it to come to North Carolina cuz right now folks we are none real estate deals which this is. We only have over the past I think ten years average about 13 million coming to North Carolina. Only $13 millions. Well this bill will immediately drive $100 million of at risk private capital to our entrepreneurs small business and predominately in our rural communities that are low income. By the way not to live out our good friends in the metropolitan area. Thus say representative looking at what about us. 25% of that can go anywhere as long as it's in low camp income areas. So we go an extraordinary opportunity to do that. Couple of things. Back up and let questions be asked. What is that dude with the market? Well you got to remember most of this money is going in something that in more non traditional financing, I like to call it cuz I grew up and had to find bills everyday and I [INAUDIBLE] there's a financing component called gap financing. You've got a little bit of money let's say 10% that you may wanna put down to grow your business and you've got a loan but unfortunately that traditional loan it might be for 65 or 75% if you go to the banks you know what I'm talking about, or you got that gap in there. That's where new markets can come in and fill out the low market interest rates are taking a very risky decision because they're kind of the last person to get paid but what I wanna make this point is if we do $100 million of that risk capital and [INAUDIBLE] we know we gotta grow because of the federal because of the loans that will be incentivized to be a part of that company's business and because of product capital you'll see that 100 million per year or 500 million over five years which is our sunset. That will grow to as much as $1.5 billion because you'll have more capital that will pile on to our $100 million a year or $500 million over the next five years. Can you imagine, what we can do in the state with $1.5 billion of private capital? The other thing that I do want you to know is we don't want bad deals and neither do these companies, and they have to take every single deal that comes to the state of North Carolina. They have to do it, regionally or nationally recognized model or study showing at least a 1 to 1 return to the state. So the state is actually going to be made whole based on this regional

model, and by the way, studies that have been done. But at the same time can you imagine what we're doing to our communities? This is an extraordinarily great opportunity to do something that we all want to do, and that is to put this money in the targeted sectors and in the targeted areas of our state that are thirsty to grow their business and are looking for something that they do not have which is capital. And you take this and you take your crowd funding bill we can change the economic landscape in the State of North Carolina and this very, very important sectors in our economy. Representative Sane. >> Thank you Mr Chairman and thank you senator again. I appreciate your excitement in this and your dedication to it. Again understanding that capital and investment has been one of the real challenges in our rural communities and Representative Hager, myself others in the committee we been in small business Businesses we know what it's like to be a small business person in a rural area trying to just keep the loans that you need to expand your business and to do things. So it's always difficult. And this is certainly a way to take advantage of what the FEDS have put out there as an opportunity but also with an object in mind just to make sure that we protect our investment. And so >> [COUGH] >> apology for that. Again, Rep Martin could not be here. She would apologize to you were she here. She has put a lot of passion and time working with Senator Gunn and others. I think Senator Heiss is here co-sponsor as well on the senate side. So many folks have had their hands in this and understand it and have really worked on it very hard. Wanted to make sure that it was discussed. Crowd funding that will be coming to us I guess in a day or two whenever that comes to finance. But I think Mr Chairman, before we take questions, staff has deeper explanation I think it might satisfy some of the questions first if we could go to staff. >. Great. Mr Ronnie [INAUDIBLE] >> Yes sir. >>Mr Ronnie I think that one way to think about this and that the easier explanation might be to just take it chronologically really quickly. So what is the US congress decides how much it will allocate to the United States of this federal tax credit. That's where the name new markets come from. And so the US congress allocates whatever billions of dollars And the US Treasury takes that theoretical allocation and then all across the United States these companies apply for some of that US Treasury allocation and they get it. They have service areas and so these loans already occur in North Carolina. So at the federal level they allocate these billions of dollars, the US Treasury does in some mysterious way The companies have various areas. So then what they actually do in real life is they go out there. Insurance companies form leverage pools of money so that no base capital is tied up. And your big insurance company put $100 million into some leverage pool and then you have to find one of these companies that has the allocation Allocation for the US treasury to match your 100 million then you have a service area where the US treasury says you can operate and then you go out there and you make these loans. When you make the loan, the federal credit is 39% so if you loan $100 million out of your leverage pool then you write there 39 million dollars of federal credits can be sent off to the insurance company whoever can immediately use those credits. What this bill does is it creates a state level credit that lays on top of that federal program and so now if you do this activity in North Carolina, you're gonna get a 25% credit so that's another 25 million of your Theoretical 100 million dollars so you've got 64 million of tax credit state and federal for the $100 million dollars that was in the pool and then what the actual activity that you have to do, you've got to get this 100 million dollars of loans out the businesses that would qualify under the federal requirements and then some additional state requirements Is out there, instead of the federal requirements are that you've to meet certain limits which have to be on the low income community extend by census tracks, some of those census trucks might have some urban areas in them in addition to some rural areas, and then at the state level we're trying to tear one or two basically That again, that's 80 of our 100 counties would fit into that pool and if you look at the North Carolina state cap is a five million dollar investment, so you can't put more than five million in one activity and there are other caps that you get from the federal side like you know there's a business size cap But they are pretty generous and in some situations this largest order in 50 employees, so if you can fund businesses that can meet this requirements there is no, these loans will have to be at any like discount or anything, so when they make this loans, when the companies identify the businesses they They're gonna make the loans

too, that's a private transaction and so obviously they won't vote the loan back, it can be a loan or an equity investment so you've got your 100 million dollars that you put out there as loans or equity, you hope you're gonna get that back with interest or return and in addition to the tax credit you got, and so what this thing would do is That theoretically it's gonna pull some of these federal loans that have gone into other states into North Carolina and so you would increase that amount of this federal loan program activities occurring in North Carolina because you would assume that people would shift From other states to North Carolina so that they could get the North Carolina tax credit in addition to the federal tax credit. >> Thank you Mr. [INAUDIBLE], questions for the sponsors. Representative [INAUDIBLE] That was an excellent explanation by the way, I just wanna add to that if I may, I find the opportunity to serve over the past six months or so on joint house of the senate committee on mall business access to capital and one of the biggest issues that That we face in the rural areas, and small businesses not being able to get capital. A part of the reason, and the're a lot of different reasons but lending does not follow businesses into the rural areas, mainly because of risk factors and all the other things that go into lending. The private Private sector has this is an opportunity through the private sector to follow money into the very areas that the financial institutions typically will not loan to or don't loan to, or as it were said earlier, they may be able to get loan for 50% And they need something, or some entity that come in and make up the difference to make it work. This program is an excellent piggy back to opportunities that are there in small business, but the opportunities that are there are not Of the magnitude we need to really jump start and make it work in the rural areas. And the same hole is true for low income property. I think it's an excellent method to be able to raise capital. The risk is assumed elsewhere as As we have seen in other programs that we have done. I won't mention any names but the risk is assumed elsewhere. This is a program that gives a lot of opportunities for leverage of dollar into the rural areas as Sen Gunn said. You get a small investment In one property that can be multiplied or magnified into large dollars back into North Carolina. So I just wanted to add that. >> Representative Collins for a question? >> Yes I don't fully understand new market tax credits and One thing has been stressed here but I know in my area the federal new market tax credit has been used, if not exclusively, primarily by local governments. I know they have to be financed through some private group, but to build athletic field complexes and things like that and basically after the Whoever the private person is that gets their tax credits after seven years, they are out of it and basically the taxpayers in the locality are on hook for paying the thing off. Will this state tax credit allow for that same type of? It's basically an in run around having general obligation bonds or revenue bonds for some of our local governments. We did Do away with COPS but we didn't do away with this and it's another way that local governments can get local taxpayers on the hook without their approval and I'm wondering if this will allow for the same loophole. >> Senator Gunn. >> Thank you Representative, I think that's a good question, one thing that I want this body to know is, we have strictly prohibited Real estate investments or real estate in this bill, we want this going into growing the business itself and the business components that help folks so we do not, if somebody's gonna build a big building I think the federal may in fact allow that, this does not, we thought it was very very Very important that we drive this capital into the growth of the business so we have eliminated the real estate component. >> Follow up? >> Not at this time thank you. >> Thank you representative. Representative Alexander. >> Thank you [INAUDIBLE_AUDIO] [COUGH]. I noticed in In going over this that the federal program does allow investment in urban inner city areas but it seems that you have

excluded the urban inner cities that have the same kinds of problems that you find And then tear one and tear two counties, and could I ask, one or both of your illustrious gentleman to address that for the benefit of market divisions. >> Representative Gunn >> Sorry for the verdict commotion, >> Do not take that defensively. It makes you feel good >>Thank you representative you know You know we're not gonna leave you out of this. We can't do that. This program has been structured so that 75% will go to tier one and tier two but another 25% can go to anywhere in the state of North Carolina as long as it is low income. And you really think about it, we do Do wanna drive a larger proportion into our smaller communities and our areas that are really strut for opportunities but if you take crowd funding which we think the tech sector ans some of our more sophisticated companies that are quite frankly located in the Charlotte's and the Raleigh's in the research triangle between the two bills if you couple those two together is for the entire state but you can take as long as it's low income 25% of this can be directed to the more urban areas. >> Does the gentleman wish to follow up. Thank you. Representative Stan. Questions or debate? Well I would prefer a question but I'll hold. Okay. >> The gentleman's courtesy is appreciated. Rep Meyer. >> Thank you Mr Chairman. Sen [UNKNOWN] just mentioned that there is There's a restriction on using the funds for real estate investment side. I just wonder where that is in the bill. If you can tell me Sen Gunn or staff can tell me? >> I'm gonna have to defer to staff Rep [UNKNOWN] There's a lot of versions of this bill. And this is the one that was supposed to be for this committee. I'm not so sure there's a restriction in there on real estate other than what the federal restriction is. So I'll have to research that. But I'm not sure it's in this This version. [BLANK_AUDIO] >> Yeah >> Mr Chair, Senator Gunn is telling me that a gentleman Jeff Craver knows where it is in the bill is he present? >> If we could differ that Mr Chair ->> Let's yeah Let's get back to we're searching it right now. ->> I'm not ready to open it up to public comment anyway. Further questions? Representative Howard. >> Yes, thank you. Senator Gunn, does this allow credit to a say developer Who might lease property and doesn't make an actual real estate investment. >> Mr Chair once again I think if I could respectfully ask the representative to hold off until Mr. Craber will also answer that question okay. If you may. [BLANK_AUDIO] >> Any other questions? Hearing none let's go into part 3 Local Government Tax Information Exchange. What's that representative saying? >> Mr Chairman I think Stan could probably explain me some of these sections. ->> Okay. >> It would be just fine. Mrs.Griffins recognized to explain part three. >> Under current law, there are prohibitions on local governments from disclosing tax information and there are certain exceptions to that as you might imagine And those exceptions are listed on page six of your bill summary, examples would be to comply with a court order or if it's required by the attorney general. There are also some exchange provisions with a regional public transportation authority or even with the department of revenue. What this section of the bill does is Say that a county can share tax information with a municipality located within that county for the purposes of administering a tax and vice versa. A municipality can share tax information with the county for the same purpose. Are there any questions for staff on section three? Okay.

Section four state sales tax exemption from materials used in accepted waste water dispersal systems. Okay Miss Griffin? >> Sure. There are conventional waste water systems used crushed stone or gravel to filter the water through the ground and awash gravel in stone when it's sold by a quarry, is exempt from sales tax because we have a sales tax exemption for products from Mines that are sold to a producer in their un manufactured state. We have what I termed excepted waste water dispersal systems, which are alternative waste water systems that are approved by the Department of Health and Human services and they use a different kind of a filtration material.They don't use stone, but they use sort of this This engineered synthetic material that's mostly made of recycled plastic. And because there is no corresponding or similar tax exemption, the manufacturers of this waste water systems would pay sales tax on those materials that they then use to install this waste water systems. So what this provision Provision would do is provide a sales tax exemption for those synthetic materials, to sort of equalize the tax treatment between the materials used in conventional versus alternative waste water systems. >> Are there any questions for staff? none will go to debate. Representative stand is recognized. >> Just a couple of items on section one I think it's vastly superior to the senate proposal, I support it. On income tax versus sales tax, if you have a flat income tax you don't really have to pick and choose between blue collar and white collar and your favored industries versus non favored. But inherent in sales tax expansions, is you're gonna constantly have to do that. On section two, it reminds me of a parallel program I did research on we were discussing medic expansion, and of course I'm not gonna break the merits of that one, but that's a 10 to 1 federal match. And my thought on that was, it's unsustainable because the amount of the expansion is less than the net borrowing from China every year, and I have no objection to borrowing from China, but it's our great grand children to pay for it. So, it's really immoral to put a debt on our great grand children for things that we're consuming today. Second point is that it seems to me directly opposite to the good parts of senate income tax policy that I really liked of a flatter and lower income tax. And what this does is make it less flatter by this credit thing. Third point, and see how fast I am, this my last point. These are discretionary credits from the federal government. If you think, title nine is not discretionary, and yet the federal government is trying to take Four billion dollars of our title nine money away, and if you think we're gonna get any Federal money under Federal credits under this without strings, I don't think that's possible so I don't see, anyway, i'm not for that. [BLANK_AUDIO] >> Further discussion, further debate? Representative Bishop. >> Mr. Chairman, I have more in pondering something slow. We had a big discussion the other day or some discussion about market based sourcing and in particular the advertisers, the audience factor issue, I see no vehicle for that here, i'm wondering I think I'll make a motion and see whether the chair allows it, I'd move to add the text of Senate Bill 869 as a new part to this, to the present pending bill. Representative Bishop we're not actually taking action on the bill today this was for Discussion, so the gentleman's request to add the Senate bill regarding market based sourcing is noted and will become part of the discussion as it continues. >> Thank you Mr. Chairman. >> Further discussion, further debate? >> Mr. Chairman Representative Collins. >> I would like to hear from, next time we discuss this but I guess we will be when we plan on voting, I would like to hear someone from the state treasurer office an perhaps even our financial expert

here in the house kind of discuss their opinion Of the new market tax credits. Is there anyone from the treasurers department here today. Okay, I think there are some people in the audience that wanted to discuss this both pro and con, you had Jeff Craver, is Mr Craver Okay Mr Craver would you please identify yourself and speak for no more than three minutes. >> Mr. chairman, members of the committee, I'm Jeff Craver, I'm principal of Advantage Capital Partners, I actually was just seeking to clarify little points, the real estate issue that was brought up that is actually on the top of page 13 It says that credits will be called back if there's investment into a real estate. New markets, real estate transaction to a qualified business. That would only apply for the state portion, of course the federal would still apply and allow or a federal investment but there would be no state Market tax credit in that case. The other thing I want to mention is that the investments are both loans and they are equity, they are at risk, they are required actually, at one point of clarification they are required to be invested in types of vehicles or in ways that are not available On the market place that is monitored very closely by the US treasury on an annual basis, it is reported to US treasury on annual basis, it is blind scored and pure viewed when this funds apply to US treasury so it is not a system where they are putting any sort of attachment to the private sector Investors, they are actually, are completely blind scored. The scores are then processed, the top 75 or so out of 300 firms that apply or receive an allocation. Those are the only points I wanted to clarify. >> Thank you sir, there were two Questions. I think Representative Howard had a question. The lady is recognized. >> Mr Craver. I guess my question is this. Does this allow a credit to a developer who simply leases property And doesn't actually make a real estate investment that we would perceive as a real estate investment >> Thank you that's an excellent question and the answer is, no it does not. The federal definitions and regulations test real estate versus non real estate based on the source of the income that the qualified Business receives. The source of income of leases would still be from that real estate so it would even if it was a leasing situation it would not qualify. The only situation that would qualify where real estate could be part of the underlying financing would be a manufacturer who owns their own building and that building And the equipment that's being financed for that manufacturer to expand, to hire employees, that could include the portion of real estate that has to be owned by that manufacture itself. >> Follow up? >> Thank you Mr Craver. >> Becky Grey, did you wanna speak to this? Would you please state who you are and who you represent for the record? >> Thank you. My name is Becky Gray, I work for the John Locke Foundation, a free market limited government think tank here in Riley and as I look at this and I'd like to speak to the new market tax credits part of this bill, With all due respect, what are you thinking? Over the last six years, under your leadership, you have gotten rid of dozens of special car belts, special treatment, this capital chronism that has bogged on our economy for years, we're seeing the results Of that now. The latest GDP numbers in North Carolina. North Carolina now has been ninth strongest economy in the country, the second in the south east, only second to Florida. 252,000 net new jobs have been created in the state since 2013, because of your efforts to eliminate the Is very things like these new market tax credits and this curve outs. So needless to say the [UNKNOWN] foundation thinks this is not a good idea to turn things back to the way that they were and to go in the exact opposite direction that what we're seeing is really working. Thank you. Thank you Miss Grey. Further discussion further debate? >> Mr. Chairman? >> Representative Lukie. >> Thank you I did have one question about excuse me I did wanna hear from the public first and appreciate you recognizing me at

this point. In the bill and I guess this is either for the bills Bill sponsors or for staff, are there any requirements when we talk about job creation, are there any requirements for a wage standard so that the jobs have to pay at least so much before the credit can be provided? And secondly is there any requirement about health insurance? That there would have to be health insurance offered again for this credit to be available, so health insurance and wage standard are my questions. >> All right hold just a minute, staff's researching. >> Greg Riley. >> No sir, there's There's not an insurance requirement and there's not a wage standard. >> Follow up? >> The Chair would ask for a clarification. The federal program has no requirement for a wage standard or insurance either? >> No sir. Mr. Craver works in this industry so we could double check with him but as far as I know the federal system doesn't require those things but I would like him to respond and he is correct, I want to just edit my comments that there is some Additional restrictions in the recapture provision as he discussed in this bill. >> Mr. Craver could you address that question sir. And please identify yourself for the record. >> Yes again Jeff Craver with Advantage Capital Partners. We are a CDE judge had explained we are We're one of the firms, one of the 300 that have pending applications in front of the federal government to try to receive an award. In that application the application is extensive, it is very lengthy, it's several hundred pages. It asks very detailed questions about our investment history. This program has been around for 12 Years- >> Mr. Craig what we're asking is, is there a requirement in either the federal or state program for a guaranteed wage or provision of health insurance? Are you aware if there is such a requirement? >> And Mr Chairman I will get to that answer as quick as possible, which is, there is Not a specific number or wage requirement but in the application we are required to demonstrate the level of impact that will be provided to communities. That is through both high wages, through high benefits, etc.- >>Thank you sir, what we're trying to find out Are the rules sir and not the excellent record of your company but what this would take on all other applicants that may go. Can staff describe whether the rules on the state program copy those of the federal program or our rule is separate and apart. The way it works is that the Federal Government there is a Federal Tax Credit and internal revenue code and then under that tax credit there are the US treasury has issued regulations and then that treasury entity that actually does allocations they issued some more regulations and so those Those two regulatory bodies operate fairly separately and so when I was researching this that you don't always get the same answers from the two federal programs then at the state level the way this bill is designed is the department of commerce would administrate and so they theoretically would have some administering power But really you are relying a lot on those existing federal requirements because that sort of starts your set of requirements to get down to the state level and then this bill adds some state level requirements to it such as that economic 110% economic benefit study that has Has to be done and the limitations to primarily through counties, so it's like you protect all the federal requirements if you meet all those then we tax then there is a few additional restrictive state requirements. >> Senator [INAUDIBLE] did you wanna address this issue? Certainly he is recognized to further amplify the response to Representative Lukie. >> Representative thank you very much and I just wanted to say that we're putting, this is private sector money being lent to small businesses and Startups and people that are trying to grow, no this is not one of our big state government programs where we try to tie hands this is trying to make small businesses thrive and we'll let the market in this small rural communities determine

what the benefits and what the This is a true private transaction and I just wanna make sure you knew that this is a capital bill. >> Follow up, further discussion further debate, hearing none we are adjourned.