A BILL TO BE ENTITLED
AN ACT To Protect Small Businesses from Certain Sales and Use Tax Assessments, TO require the Department of revenue to document certain verbal advice given to taxpayers, to Allow taxpayers to rely on documented verbal advice from the Department of Revenue, and to give the Secretary of revenue more discretion in resolving sales and use tax disputes concerning small businesses.
The General Assembly of North Carolina enacts:
SECTION 1.  Article 9 of Chapter 105 of the General Statutes is amended by adding a new section to read:
"§ 105‑244.2.  Reduction of sales tax assessments against small businesses that attempt to comply with the law.
(a)	Findings. – The General Assembly finds that many aspects of the sales and use tax laws are complex, that the application of the tax in these complex areas turns on slight differences in facts, and that taxpayers who make a good faith effort to comply with these laws may nevertheless fail to apply the law correctly. The General Assembly further finds that these complex areas of the sales and use tax laws are particularly challenging for small businesses to apply correctly, that assessments against these businesses for this inadvertent noncompliance often threaten their viability, and that the State's tax laws are not intended to place the viability of small businesses in jeopardy.
(b)	Reduction. – The Secretary must reduce an assessment against a small business for State and local sales and use taxes and waive any penalties imposed as part of the assessment when the assessment is made as the result of an audit of the small business by the Department and all of the following apply:
(1)	The gross receipts of the business for the calendar year preceding the year in which the audit period begins, combined with the gross receipts of all related persons as defined in G.S. 105‑163.010, do not exceed one million eight hundred thousand dollars ($1,800,000).
(2)	The business remitted to the Department all the sales and use taxes it collected during the audit period.
(3)	Either of the following applies:
a.	The business attempted to comply with the sales and use tax laws by obtaining and following advice from the Department before the business received notice of the audit from the Department.
b.	The business made a good faith effort to comply with the sales and use tax laws and the assessment is based on the incorrect application of one of the following complex areas of these laws:
1.	The rate of tax that applies to food.
2.	The distinction between a retailer and a performance contractor.
3.	The distinction between a service that is exempt from tax and a service that is provided in conjunction with the delivery of tangible personal property and is part of the sales price of the tangible personal property.
4.	The determination of whether a person is a manufacturer.
(4)	The business had not been told by the Department in a prior audit to collect sales and use taxes in the circumstance that is the basis of the assessment, as reflected in the written audit comments of the prior audit.
(c)	Amount. – The amount by which a sales and use tax assessment against a small business must be reduced under this section is a percentage of the assessment. The percentage is determined by the average monthly gross receipts of the business for the calendar year for which annual gross receipts are determined under subdivision (b)(1) of this section. A reduction of an assessment under this section and the waiver of penalties imposed as part of the assessment apply only to the amount of an assessment attributable to reliance on advice from the Department or the incorrect application of one of the complex areas of the law listed in subdivision (b)(3) of this section.
The following table sets out the applicable percentage reductions of an assessment:
	Average Monthly Gross-	Average Monthly 	Percentage
	Receipts of Business Over	Gross Receipts Up To	Reduction
	‑0‑	$50,000	98%
	$50,000	$100,000	95%
	$100,000	$150,000	90%	"
SECTION 2.  Article 9 of Chapter 105 of the General Statutes is amended by adding a new section to read:
"§ 105‑258.2.  Taxpayer conversations.
(a)	Taxpayers. – The Secretary must document advice given to a taxpayer in a conversation with that taxpayer when the taxpayer gives the Secretary the taxpayer's identifying information and asks the Secretary about the application of tax to the taxpayer in specific circumstances. The Secretary must make an entry in the account record of the taxpayer setting out the date of the conversation, the question asked, and the advice given. This requirement applies regardless of whether the conversation is conducted by phone or in person.
(b)	Sales Tax Inquiries. – The Secretary must document advice given in a conversation with a person who is not registered as a retailer or a wholesale merchant under Article 5 of this Chapter when the person gives the Secretary the person's name and address, describes a business in which the person is engaged, and asks if the person is required to be registered under Article 5. The Secretary must keep a record of the person's inquiry that sets out the date of the conversation, the person making the inquiry, the business described in the conversation, and the advice given. This requirement applies regardless of whether the conversation is conducted by phone or in person."
SECTION 3.  G.S. 105‑264 reads as rewritten:
"§ 105‑264.  Effect of Secretary's interpretation of revenue laws; written and verbal advice.
(a)	Interpretation. – It is the duty of the Secretary to interpret all laws administered by the Secretary. The Secretary's interpretation of these laws shall be consistent with the applicable rules. An interpretation by the Secretary is prima facie correct. When the Secretary interprets a law by adopting a rule or publishing a bulletin or directive on the law, the interpretation is a protection to the officers and taxpayers affected by the interpretation, and taxpayers are entitled to rely upon the interpretation. If the Secretary changes an interpretation, a taxpayer who relied on it before it was changed is not liable for any penalty or additional assessment on any tax that accrued before the interpretation was changed and was not paid by reason of reliance upon the interpretation.
(b)	Written Advice. – If a taxpayer requests in writing specific advice from the Department and receives in response erroneous written advice, the taxpayer is not liable for any penalty or additional assessment attributable to the erroneous advice furnished by the Department to the extent the advice was reasonably relied upon by the taxpayer and the penalty or additional assessment did not result from the taxpayer's failure to provide adequate or accurate information.
(c)	Documented Verbal Advice. – If a taxpayer verbally requests specific advice from the Department and receives in response erroneous verbal advice, the taxpayer is not liable for any penalty or additional assessment attributable to the erroneous advice furnished by the Department to the extent the advice was reasonably relied upon by the taxpayer and the penalty or additional assessment did not result from the taxpayer's failure to provide adequate or accurate information. In order to receive the protection afforded by this subsection, the advice on which the taxpayer relied must be documented in the records of the Department, as required by G.S. 105‑258.2.
(d)	Revised Interpretations. – This section does not prevent the Secretary from changing an interpretation and it does not prevent a change in an interpretation from applying on and after the effective date of the change."
SECTION 4.  G.S. 105‑237.1 reads as rewritten:
"§ 105‑237.1.  Compromise of liability.
(a)	Authority. – The Secretary is authorized to compromise a taxpayer's liability for a tax that is collectible under G.S. 105‑241.22 when the Secretary makes one or more of the following findings:
(1)	There is a reasonable doubt as to the amount of the liability of the taxpayer under the law and the facts.
(2)	The taxpayer is insolvent and the Secretary probably could not otherwise collect an amount equal to or in excess of the amount offered in compromise. A taxpayer is considered insolvent only in one of the following circumstances:
a.	It is plain and indisputable that the taxpayer is clearly insolvent and will remain so in the reasonable future.
b.	The taxpayer has been determined to be insolvent in a judicial proceeding.
(3)	Collection of a greater amount than that offered in compromise is improbable, and the funds or a substantial portion of the funds offered in the settlement come from sources from which the Secretary could not otherwise collect.
(4)	A federal tax assessment arising out of the same facts has been compromised with the federal government on the same or a similar basis as that proposed to the State and the Secretary could probably not collect an amount equal to or in excess of that offered in compromise.
(5)	Collection of a greater amount than that offered in compromise would produce an unjust result under the circumstances.
(6)	If the liability is under judicial review after a final administrative decision, acceptance of the offer is in the best interest of the State.
(b)	Written Statement. – When the Secretary compromises a tax liability under this section and the amount of the liability is at least one thousand dollars ($1,000), the Secretary must make a written statement that sets out the amount of the liability, the amount accepted under the compromise, a summary of the facts concerning the liability, and the findings on which the compromise is based. The Secretary must sign the statement and keep a record of the statement. If the compromise settles a dispute that is in litigation, the Secretary must obtain the approval of the Attorney General before accepting the compromise and the Attorney General must sign the statement describing the compromise."
SECTION 5.  Section 1 of this act is effective when it becomes law and applies retroactively to sales and use tax assessments made on or after May 1, 2005. An eligible business that paid an assessment made on or after May 1, 2005, in an amount greater than the amount required under G.S. 105‑244.2, as enacted by this act, may obtain a refund of the difference between the amount paid and the amount required under this act by filing a claim for refund with the Secretary of Revenue in accordance with G.S. 105‑241.7. The claim for refund for an assessment paid before the effective date of this act must be filed within one year after the effective date of the act.  Sections 2 and 3 of this act become effective January 1, 2009.  The remainder of this act is effective when it becomes law.