For years, the NC Chamber has advocated for the elimination of the franchise tax, a duplicative and burdensome levy that continues to hinder our state’s businesses. Despite recent reforms, the franchise tax remains a complex and onerous burden that North Carolina must abolish to keep its competitive edge. 

One of the most frustrating aspects of the franchise tax is its complexity. The affiliated indebtedness rules add layers of difficulty that businesses, particularly those with multiple subsidiaries, find exasperating. The calculation of the net worth base is incredibly intricate, and often more time-consuming than calculating corporate income tax. This complexity not only increases administrative costs but also diverts valuable resources that businesses could use to drive growth and innovation. 

Double Taxation Dilemma 

Another significant issue with the franchise tax is the potential for double taxation. For instance, if a parent corporation owns stock in a subsidiary, the value of the subsidiary is included in the parent’s net worth, even though the subsidiary is also paying tax on its own net worth. While there is an exception for holding companies, the definition of a holding company is so narrow that very few businesses qualify. This results in a situation where many businesses are unfairly taxed twice, stifling their ability to invest and expand. 

An Impediment to Investment 

Although North Carolina now uses only the net worth base for franchise tax, making it less of an impediment to investment than when alternative property bases were used, it remains a bad tax. The pre-2023 franchise tax, with its alternative bases, was likely unconstitutional, as evidenced by Tennessee’s recent $2 billion refund to settle a constitutional challenge. States like Tennessee and Louisiana have recognized the detrimental impact of the franchise tax and have repealed it, leaving North Carolina behind in the race for economic competitiveness. 

Adding Insult to Injury 

One of the most egregious aspects of the franchise tax is that it is due regardless of whether a taxpayer is in an income or loss position. For new or struggling companies, the tax adds insult to injury, imposing an additional financial burden when they can least afford it. The pre-paid nature of the franchise tax, coupled with overlapping tax periods in merger and liquidation situations, further complicates matters, creating a minefield of compliance challenges for businesses. 

A Current Taxpayer’s Struggle 

To provide a real-word example, consider the recent case of a parent corporation that must include the value of its subsidiaries in its net worth, even though the subsidiaries pay tax themselves. This requirement can lead to significant tax liabilities that are difficult to manage, particularly if the parent corporation does not qualify as a holding company. The narrow definition of a holding company means that even a small amount of additional income, such as $1 of bank deposit interest, can disqualify a business from this status, resulting in higher tax payments. 

The Time for Change is Now 

The time has never been more favorable for targeted tax reforms that will support our long-term competitiveness. Franchise taxes, also known as capital stock taxes, are increasingly rare as more states recognize them as major impediments to new investments. The elimination of the franchise tax would result in direct bottom-line savings for job creators throughout the state, presenting a more welcoming front to businesses in all industries.