North Carolina Requires New Tax Form with Sales and Apportionment Data for Some Corporations

Recent North Carolina tax legislation imposes a new filing requirement on certain C corporations and S corporations. Failure to comply could result in a $5,000 late-filing penalty.

Pursuant to North Carolina House Bill 97, these entities must complete Form CD-400 MS, an information report that compares reported North Carolina apportionment factors with a new factor computed using what are called market sourcing principles. Qualifying corporations are to use sales and apportionment data from their previously filed 2014 tax return: the CD-405 for C corporations, or the CD-401S for S corporations.

This one-page form is due on April 15, 2016, with no extensions permitted. Corporations required to file will be assessed a $5,000 penalty if the form isn’t filed on time with the North Carolina Department of Revenue.

Criteria and Definitions

A corporation must complete and file Form CD-400 MS if it meets all the following criteria:

  • It had more than $10 million of apportionable income in 2014, as identified on Schedule B, Line 16, of the 2014 CD-405, or Schedule B, Line 14, of the 2014 CD-401S.
  • It had a North Carolina apportionment percentage of less than 100 percent.
  • It used the North Carolina sales factor—in whole or in part—to compute its overall North Carolina apportionment percentage.

The legislation describes the market sourcing computation of the sales factor for several types of transactions as follows:

  • Receipts from the sale, rental, lease, or license of tangible property—both real and personal—are sourced to the location of the property.
  • Receipts from services are sourced to the location where the service is delivered.
  • Receipts from the sale, rental, lease, or license of intangible property are sourced where the property is used.

Marketing intangibles are sourced to the state where the consumer is located at the time of purchase of the goods or services. A special analysis applies to contract rights and licenses that authorize the holder to conduct business activity in specific geographic areas.

The legislation leaves several terms undefined and directs taxpayers to the model market sourcing regulations drafted by the Multistate Tax Commission, or MTC.

Next Steps

Corporations with at least $10 million in federal taxable income that file North Carolina tax returns will most likely be subject to this new filing requirement, because the latter two criteria are easily satisfied.

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