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Major legislation to modernize the state’s tax system may be postponed until 2011, Democratic leaders in the General Assembly say.

The delay would not be surprising, given that the legislature has been discussing major tax reform for years but has never come close to passing a tax overhaul. Also, the 2010 elections, in which all legislative seats are up for re-election, will make it politically difficult to pass a significant — and likely controversial — tax package.

“I wouldn’t rule it out, but I wouldn’t rule it in either,” said Rep. Hugh Holliman, D-Davidson, the House majority leader. “This is a monumental look at a change to our tax structure, and I don’t think we want to rush it.”

Legislators adjourned their 2009 session in August, after plugging a massive state budget hole with a combination of budget cuts and tax increases. The budget crisis was caused by the recession, but it was exacerbated by the state’s old-fashioned tax system and heavy reliance on the sales tax, which creates large fluctuations in state revenue.

When legislators adjourned in August, they promised to spend the fall and winter extensively studying tax reform with the goal of holding public hearings and passing a bill in 2010. Since then, the House and Senate finance committees have met jointly three times, each time hearing presentations from tax experts.

The full legislature will go back into session in May for a so-called short session, which normally lasts only about two months.

The Senate majority leader, Martin Nesbitt, said he believes it’s unlikely that tax reform could be passed in the 2010 session.

“The short session is designed really to go down there and make budget adjustments,” said Nesbitt, D-Buncombe. “It’s not really designed for any kind of major overhaul or major legislation. So it would be difficult to do it this summer.”

Many previous committees have studied tax reform without reaching broad agreement on the sorts of changes needed. For instance, most experts and legislators agree that the sales tax rate should be lowered but that it should be expanded to cover many more services. And many of the loopholes and exemptions currently in the state’s tax code should be closed, they say.

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The General Assembly on Monday approved changing the state’s tax law with hopes it will result in Apple Inc. announcing a $1 billion investment within days.

The Senate voted 40-8 to go along with conditions including that the company invest in a rural area. The final round of debate lasted less than a minute.

Sen. Tom Apodaca, R-Henderson, urged rejection. He had previously lambasted business recruiters and lawmakers for focusing on high-profile, big companies and ignoring small businesses. Sen. David Hoyle, R-Gaston, said small companies near the site of a promised data center would benefit by providing services.

“There is a lot in this for small businesses,” Hoyle said.

The legislation was sent to Gov. Beverly Perdue, who was expected to sign the bill into law quickly.

An Apple spokeswoman said the company had no comment.

The bill would give the qualifying company a break on state corporate income taxes. The tax break could be worth about $46 million in the next decade, assuming the lone, unnamed company projected to qualify reaches its $1 billion investment target within nine years of starting, according to a memo by legislative fiscal staffers.

The Associated Press reported last month that the unidentified company being targeted by the tax break is Apple, which is seeking a site for its East Coast data warehouse. These facilities, also called server farms, are huge, climate-controlled computer warehouses that can process vast flows of data needed as business functions and everyday life increasingly depend on Internet traffic.

Data centers are heavy users of power and water and are usually spread over large spaces. Google Inc. opened one last year near Lenoir in the western North Carolina foothills. In 2007, state and local governments offered Google an incentives package worth up to $260 million over 30 years, one of the largest in state history, to land the $600 million data complex.

If the Apple project also remained active for 30 years, its server farm could save more than $300 million on its corporate taxes, based on legislative staffers’ estimates.

Sites in western North Carolina also are under consideration for the Apple facility, including in Catawba and Cleveland counties. Both counties posted April unemployment rates of about 15 percent.

Construction of the Apple site would be expected to employ hundreds of workers for more than a year, but the initial full-time work force of the data center would total fewer than 100, lawmakers said last week.

If ultimately approved by the General Assembly, the change would mean a significant tax break only to the rare company that meets all the conditions. The conditions are a sign the Legislature remembers a bad decision 21 years ago when the formula for calculating corporate income tax was changed to attract a single big company.

Qualifying companies would have to invest $1 billion within nine years, locate in one of North Carolina’s poorest counties, provide health insurance, meet a wage standard, and forego other state grants or tax breaks. If a company met those criteria, it would benefit from the change if it had a relatively large shares of its nationwide property and payroll in the North Carolina, but a small share of U.S. sales in the state.

The last time North Carolina changed how it calculates corporate income taxes was in 1988, and it was done to satisfy RJR Nabisco’s plans to build a large cookie plant in Wake County and create 600 high-paying factory jobs.

Nabisco never built the plant. But the revised calculation meant a tax break that wasn’t targeted, but primarily helped manufacturers, said Greg Radford, director of the state Revenue Department’s corporate tax division. He said he could not estimate how much companies have saved as a result of the 1988 revision, which remains in effect.

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The North Carolina House has tentatively approved changing the state’s corporate tax laws to make them more attractive to billion-dollar investments.

The House voted 81-31 Tuesday in favor of a bill changed last week to push companies to counties where unemployment is high. A final House vote is scheduled Wednesday.

While the law makes no reference to a specific business, The Associated Press reported last week that the company targeted by state business recuriters is Apple Inc., which is considering a $1 billion data center.

The tax changes would alter how corporate income taxes are calculated by giving breaks to companies with large shares of their property in North Carolina but a relatively small share of U.S. sales in the state.

Another Senate vote would be needed due to House changes.

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US retail giant Wal-Mart has lost a legal battle to reclaim USD33.5m in tax it paid to the state of North Carolina in a case that may have implications for the way in which US businesses organize their corporate structures.

Wal-Mart was appealing the USD33.5m bill for back taxes, penalties and interest imposed by North Carolina, which had argued that rental payments made by the company to a Wal-Mart subsidiary were improper. However, the state Court of Appeals ruled on May 19 that the state Secretary of Revenue “acted within his lawful authority” when he assessed additional taxes against the company.

“The language of the statute is broad, allowing the secretary to require combined reporting if he finds as a fact that a report by a corporation does not disclose the true earnings of the corporation on its business carried on in this state,” wrote Judge Donna Stroud in her opinion, which was supported by the two other judges on the panel.

North Carolina assessed the additional taxes on Wal-Mart after taking issue with the way in which the company had organized its business to claim a large state tax deduction.

Under this structure, Wal-Mart transferred ownership of all of its stores to a Wal-Mart subsidiary. In most states, this enables Wal-Mart to deduct the “rent” it pays the subsidiary (i.e., the rent it pays itself) from the income that is subject to state corporate taxes. The subsidiary receiving the rent isn’t taxed because it qualifies as a tax-exempt Real Estate Investment Trust under federal and state law – provided it distributes at least 90% of its income in dividends.

According to a 2007 Wall Street Journal report, this structure saved the retailer USD230m in taxes in many states over a four-year period.

The North Carolina Appeals Court decision could strengthen the cases of other states which are seeking to outlaw such practices, and could affect other companies with similar arrangements to those of Wal-Mart.

The company, however, could appeal the latest decision to the state’s Supreme Court.

While Wal-Mart was still reviewing its legal options at the time of writing, a company spokesperson said that taxpayers should be able to rely on “clearly defined laws that are reasonably and fairly enforced.”

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