North Carolina offers a variety of ways to reduce business taxes and other costs, each tailored to specific situations that may apply to your company.
Machinery and Equipment, Sales and Use Tax Exemption
Mill machinery, a term that generally includes manufacturing machinery, is exempt from sales and use tax. For a list of items that are classified as mill machinery, please see the North Carolina Department of Revenue’s Sales and Use Tax Technical guides..
North Carolina does not levy a sales and use tax on repairs to industrial machinery or service contracts for mill machinery.
Electricity, Fuel and Natural Gas, Sales and Use Tax Exemption
Retail sales, as well as the use, storage or consumption of electricity, fuel and piped natural gas sold to a manufacturer are exempt from sales and use tax for use in a manufacturing operation. This exemption does not apply for a facility not primarily engaged in manufacturing. For purposes of the exemption, a “facility” is (1) a single building or (2) a group of buildings that are located on a single parcel of land or on contiguous parcels of land under common ownership. “Facility” also refers to any other related real property contained on the parcel(s) where manufacturing activity occurs.
Raw Materials, Sales and Use Tax Exemption
Purchases of ingredients or component parts of a manufactured product that become an ingredient or component part of tangible personal property are exempt from sales and use tax. In addition, packaging items that constitute a part of the sale (retail or wholesale) and are delivered with the product to the customer are exempt from sales and use tax.
Inventory, Property Tax Exclusion
North Carolina and its local governments do not levy a property tax on inventories.
Inventories owned by contractors, manufacturers and merchants (retail and wholesale) are excluded from property tax. Inventories are defined as goods held for sale in the regular course of business by manufacturers, retail and wholesale merchants and construction contractors. For manufacturers, the term inventory includes raw materials, goods in process and finished goods, as well as other materials or supplies that are consumed in manufacturing or processing. Inventory also refers to any commodity or part thereof that accompanies and becomes part of the property being sold.
For a full list of items that are exempt from the sales and use tax, please see North Carolina General Statute 105-164.13.
North Carolina provides three sales and use tax exemptions for purchase of the following items related to data centers and their operations:
- Electricity and support equipment purchased for a “Qualifying Data Center”
- Electricity and certain business property purchased for an “Eligible Internet Data Center”
- Computer software at a “Data Center”
“Data Center” is defined as: A facility that provides infrastructure for hosting or data processing services and is concurrently maintainable. The power and cooling systems serving the computer equipment must include redundant capacity components and multiple distribution paths. Although the facility must have multiple distribution paths serving the computer equipment, a single distribution path may serve the computer equipment at any one time.
Exemption for a Qualifying Data Center
Purchases of electricity for use at a qualifying data center and the purchase of data center support equipment to be located and used at such a facility is exempt from sales tax.
A “qualifying data center” must meet the following two conditions:
- The Secretary of Commerce must have made a written determination that at least $75 million in private funds has been or will be invested by one or more owners, users or tenants of the data center. Such funds must have been invested within five years of the first real or tangible property investment in the facility. Real and tangible investments in the data center that were made prior to Jan. 1, 2012 may not be included in the investment required.
- The data center must meet county wage standard and health insurance requirements.
“Data center support equipment” is property that is capitalized for tax purposes and used for one of the following purposes:
- Providing service or function included in the business of an owner, user or tenant of the data center;
- The generation, transformation, transmission, distribution or management of electricity, including exterior substations, generators, transformers, unit substations, uninterruptible power supply systems, batteries, power distribution units, remote power panels and other capital equipment for these purposes;
- HVAC and mechanical systems, including chillers, cooling towers, air handlers, pumps and other capital equipment used for these purposes;
- Hardware and software for distributed and mainframe computers and servers, data storage devices, network connectivity equipment and peripheral components and equipment, or
- Providing related computer engineering or computer science research.
Exemption for Eligible Internet Data Center
Purchases of electricity for use at an eligible internet data center and eligible business property to be located and used at such a facility is exempt from sales tax.
An “eligible internet data center” is defined as a data center that satisfies each of the following conditions:
- The Secretary of Commerce must have made a written determination that at least $250 million in private funds has been or will be invested in real property and/or eligible business property at the facility. The investment must take place within five years of the commencement of construction of the facility.
- The facility is used primarily by a business engaged in software publishing included in industry 511210 of the North American Industry Classification System (NAICS) or an internet activity included in NAICS industry 519130.
- The facility is located in a Tier 1 or Tier 2 county.
- The facility comprises a structure or series of structures located or to be located on (1) a single parcel of land or (2) contiguous parcels of land that are commonly owned or owned by affiliation with the operator of that facility.
Exemption for Computer Software
Computer software that is sold to a person who operates a data center and that is used within the data center is exempt from sales tax. Computer software is defined as a set of coded instructions designed to cause a computer or automatic data processing equipment to perform a task.
North Carolina's economic tier system is incorporated into the Eligible Internet Data Center Sales Tax exemption to encourage economic activity in the less prosperous areas of the state. For more information about county tier designations, visit our County Development Tier Designations page.
Sales of equipment, or an accessory, an attachment, or a repair part for equipment that is sold to a large fulfillment facility is exempt from sales and use tax. It must also be used at the facility in the distribution process, which includes receiving, inventorying, sorting, repackaging, or distributing finished retail products. Electricity is not eligible for the sales tax exemption.
A large fulfillment facility is used primarily for receiving, inventorying, sorting, repackaging, and distributing finished retail products for the purpose of fulfilling customer orders. The Secretary of Commerce must also certify that an investment of $100 million dollars (real and tangible personal property) for the facility within five years after the date on which the first property investment is made and that the facility will achieve an employment level of at least 400 within five years.
Research and Development Activities for Physical, Engineering and Life Science Companies
Sales of equipment, or an attachment or repair part for equipment for companies primarily engaging in research and development activities in the physical, engineering, and life sciences, including in the industry group, 54171 NAICS code is exempt from sales and use tax.
Software Publishing Activities for Software Publishers
Sales of equipment, or an attachment or repair part for equipment for companies primarily engaging in software publishing activities for software publishers, including in the industry group, 5112 NAICS code is exempt from sales and use tax.
Pollution Abatement Equipment
Sales and Use Tax Exemption
Pollution abatement equipment for manufacturing is exempt from sales and use tax. In addition, chemicals purchased by manufacturers to be used in air or stream pollution abatement equipment or processes are exempt from sales and use tax.
Pollution abatement equipment means any equipment, including parts and accessories, used to eliminate, prevent or reduce air and water pollutants emitted resulting from the manufacturing process. This category also includes equipment used for the purpose of treating, pretreating or modifying any potential solid, liquid or gaseous pollutants that might be harmful, detrimental or offensive to human, animal or plant life or to property. Neither buildings housing such control and abatement equipment, nor equipment used within a building’s interior primarily for health, comfort or safety purposes is eligible for this exemption.
Property Tax Exemption
North Carolina does not levy property tax on real and personal property that is used exclusively for air cleaning, waste disposal or to abate, reduce or prevent air and/or water pollution. To claim an exclusion on property tax liability, a taxpayer must apply to the county for exclusion during the annual listing period and apply to the North Carolina Department of Environmental Quality for exclusion certification.
The North Carolina Recycling Property Tax Exemption excludes equipment and facilities used exclusively for recycling and resource recovery from property tax liability. For more details and application information, please visit the Solid Waste Section of the N.C. Department of Environmental Quality website.
Recycling Business Assistance Center, Recycling Business Development Grants
The Recycling Business Assistance Center (RBAC) is a partnership between the state Departments of Environmental Quality and Commerce. RBAC offers a variety of financial tools and incentives for recycling businesses, including tax credits, grants, loans and incentive programs.
In an effort to divert materials from the waste stream while supporting company growth, expansion and job creation in North Carolina, RBAC offers Recycling Business Development grants to eligible organizations. Funds are typically used for sustainable investments in equipment and buildings necessary to increase the capacity of a recycling company. Funding is made available through an annual request for proposal process that begins in the fall. Applicants may request a maximum of $40,000 and must provide at least a 50% cash match. For more information, visit the Grants section of the RBAC website.
If you own or lease a “certified historic structure,” as designated by either North Carolina's Historic Preservation Office or the U.S. Department of the Interior’s National Park Service, your structure is eligible for historic preservation tax credits.
Credits are available for the rehabilitation of:
- Income-producing historic properties
- Owner-occupied historic residences.
Historic Preservation Tax Credit Levels
- A 15% state tax credit for rehabilitation of income-producing certified historic structures is awarded to rehabilitations that qualify for the federal tax credit and spend up to $10 million.
- A 10% state tax credit for rehabilitation of income-producing certified historic structures is awarded to rehabilitations that qualify for the federal tax credit and are for expenses from $10 million to $20 million.
- There is also a 5% bonus if the development is within a Tier 1 or Tier 2 county or is located in an eligible targeted investment site. This bonus may be applied for expenses up to $20 million.
The Historic Preservation Tax Credits program uses the state's economic development Tier System to encourage economic activity in the less prosperous areas of the state. For more information about county tier designations, visit our County Development Tier Designations page.
Foreign Trade Zones
Foreign trade zones (FTZ), sometimes known as free trade zones, are geographically designated and secured areas that for legal purposes are considered outside of U.S. Customs territory. FTZs offer several economic advantages for companies involved in international trade.
North Carolina has four general-purpose FTZs and eighteen active subzones approved for use by individual companies. In addition, three of the zones have successfully transitioned to the Alternative Site Framework (ASF), which greatly simplifies service to users. An ASF has a large, preapproved service area in which the organization in charge of the FTZ, the grantee, can propose new sites. Within this broad service area, which incorporates several counties, the grantee can work with interested companies to establish sites intended for either an individual company’s use or the use of several companies.
Foreign or domestic merchandise may enter an FTZ without a formal customs entry document or payment of customs duties or government excise taxes. If the final product is exported from the United States, no customs duty is levied. If the final product is imported into the U.S., duty and excise taxes are due at the time of transfer from the FTZ and formal entry is made into the United States. Duty is paid on the product itself or its imported parts, whichever is lower.
Generally, merchandise is exempt from payment of duty even if it is:
- Used in a manufacturing process;
- Combined with other domestic or foreign materials;
- Displayed for sale, or
Spoiled or damaged goods or waste materials may be destroyed, discarded or re-exported duty-free.
State and local governments generally do not impose sales and use taxes on items in an FTZ. For this reason, a company operating in such a zone can realize savings on such taxes as well as on interest, labor and shipping costs.
New capital investment by companies that might otherwise have located in foreign countries is another important advantage. This new investment activity spurs development of support industries.
The foreign trade zones in North Carolina are:
- Zone #214 – This zone includes the Port of Wilmington, Port of Morehead City and the NC Global TransPark. Zone #214 is administered by the North Carolina Department of Transportation.
- Zone #93 – The Greater Research Triangle Zone is based in Durham. Zone #93 is administered by the Triangle J Council of Governments.
- Zone #230 – The Piedmont Triad Zone is based in Greensboro. Zone #230 is administered by the Piedmont Triad Partnership.
- Zone #57 – The Greater Charlotte Zone is based in Charlotte. Zone # 57 is administered by the Charlotte Regional Partnership.
- Zone #20 – The Northeast NC Zone is based in Norfolk, Virginia. Zone #20 is administered by the Virginia Port Authority.