N.C. Local Government Finance Policy Manual

5.0 Introduction

Counties and municipalities play a vital role in delivering core public services to the local community. Specifically, in North Carolina, counties are required by state law to fund public schools, social services programs, mental health programs, emergency medical services (EMS), courts, jail facilities, registers of deeds, and building code enforcement. They may also provide many additional services, ranging from zoning and land use planning to water and sewer utilities, to recreation and cultural activities, and economic development. Although state law only mandates that municipalities provide for building code enforcement, with a few exceptions, counties and municipalities may provide, and fund, most of the same discretionary services.

Because counties and municipalities are created by the state legislature, they may only levy taxes and charge fees with express authorization from the General Assembly via a general law (statute) or a local act. The General Statutes (G.S) describe the various revenue sources available and outline the legal requirements and procedural processes that must be undertaken for a county or municipality to take advantage of a particular revenue source. In some cases, only counties or municipalities (not both) are eligible to levy a tax, charge a fee, or receive a distribution of taxes levied by the state. This distinction is important, and a county or municipality must first ensure that it has the authority to raise a particular revenue source before doing so.

The purpose of the revenue policy is to provide information on the most common sources of revenue available to local governments. The policy categorizes and divides the revenue sources into four sections: (1) locally imposed taxes, (2) general user fees and charges, (3) state-shared tax revenue, and (4) miscellaneous revenue sources. For each type of revenue source listed within a category, the policy identifies the type of local government (county or municipality) authorized to partake in the revenue source, discuss the mechanics of raising the revenue, and note any restrictions or earmarks on the use of proceeds.

5.1 Locally Imposed Taxes

The legislature has authorized counties and municipalities to levy certain taxes at the local level. The two most significant sources of revenue for local governments are the property tax (ad valorem) and the local sales and use tax. The proceeds from these taxes play a vital role in ensuring a unit’s fiscal stability. Local governments also levy several other local taxes—a few of which require a local act of the General Assembly. Although not as significant as the property tax or local sales tax, the proceeds earned from the other local taxes can be useful in helping fund certain activities and services. This section provides an overview of the property taxes, local sales and use taxes, and the other local taxes that North Carolina’s local governments may levy.

5.1.1 Property Tax

The statutory authorizations and related requirements for a county or municipality to levy a property tax are found in G.S. 153A-149, G.S. 160A-209, and G.S. Chapter 105, Article 11 through Article 30. The property tax, also called the ad valorem tax, is levied on real property, including land, buildings, and improvements to land (e.g., structures or fixtures); personal property (business equipment and automobiles); and on the property of public service companies (electric power companies, telephone companies, railroads, airlines, and certain other companies) that is not otherwise exempt from taxation.

Uniformity Requirement

The governing board sets the property tax rate(s) when it adopts its annual budget ordinance, and, with very limited exceptions, the rate may not be changed once the budget is adopted. (G.S. 159-15). A governing board may adopt a single tax rate, the proceeds of which are used to fund a variety of services, or it may adopt multiple, use-specific tax rates, the proceeds of which are earmarked to fund specific services. The board may also use a combination of both methods. For example, a municipality could adopt one tax rate to fund general fund expenditures and another to fund police and fire services.

The tax rate(s) adopted by the county or municipality must uniformly apply throughout the taxing jurisdiction. [N.C. Const. Art. V, Sect. 2(5)]. A local government is, therefore, prohibited from adopting different tax rates for different property types or by location within the jurisdiction. (The only exception to the uniformity requirement is for service districts, which are discussed below.)

In general, all real and personal property is subject to taxation unless specific action has been taken to exempt or otherwise classify the property. Article V, Section 2 of the North Carolina Constitution exempts some types of property from taxation, including property owned by state and local governments if it is used for governmental purposes. Other than the exemptions noted in the state constitution, only the General Assembly may exempt, classify, or otherwise grant a tax preference. Any exemptions or preferences granted by the General Assembly must apply state-wide. An important point for local governments to understand about exemptions and classifications is that only the General Assembly may grant them.

Levying the Property Tax

A county or municipality may not spend property tax proceeds for any function without the approval of the unit’s voters unless the General Assembly has authorized it to do so. The property tax statutes, G.S. 153A-149 (counties) and G.S. 160A-209 (municipalities) establish the rate of taxation and the purposes or functions that the property tax revenue may be used to support. In general, the standard property tax rate is $1.50 per $100 of assessed valuation; however, there are a few purposes for which property taxes may be levied without limitation as to rate or amount. The property tax statutes divide local government functions into three groups for purposes of expending property tax revenue. The functions and the rate of taxation for each group are explained below.

Group I. For Group I functions, the property tax may be levied without voter approval and without restriction on the property tax rate. Only a few functions are included in Group I. For counties, the functions include many of the state-mandated services they provide, including courts, schools, debt service on general obligation debt, deficits, elections, jails, joint undertakings, and social services. The municipal functions in this group are more limited and include debt service on general obligation debt, deficits, and additional staffing to control civil disorders. [G.S. 153A-149(b); G.S. 160A-209(b)].

Group II. For Group II functions, property taxes may be levied without voter approval but are subject to a combined rate limitation of $1.50 per $100 of assessed valuation. Most county and municipal functions fall within Group II—the statutes list more than thirty authorized functions subject to the rate limitation, such as airports, arts programs, health, fire protection, animal protection, libraries, housing, and many others. Because the Group 2 functions include most, if not nearly all, of the functions of a local government, property tax revenue is essentially an unrestricted revenue source—meaning a local government can use the proceeds to support virtually any public purpose. A unit may modify the rate limitation in one of two ways. First, it may conduct a referendum to raise the rate cap for all functions listed in Group II. Second, it may conduct a referendum to modify the tax rate for a specific function listed in Group II. Any tax levied pursuant to a referendum is not counted against the Group II limit. [G.S. 153A-149(e),(f); G.S. 160A-209(c),(f)].

Group III. For Group III functions, a unit may hold a vote to levy a property tax on any function it may otherwise lawfully perform that is not already taxed under Group I or II. Group III functions may be approved based on maximum rate, maximum amount, or no restrictions. Therefore, any property tax levied under this option is not necessarily subject to the rate limitation of $1.50 per $100 of assessed valuation. [G.S. 153A-149(d); G.S. 160A-209(e)].

Tax-Levy Formula

A local government is not required to levy a property tax, but it is required to adopt a balanced budget each fiscal year. Therefore, if a unit’s estimated revenue from sources other than the property tax plus appropriated fund balance is insufficient to cover the appropriations, a property tax must be levied at a sufficient rate to balance the budget. [G.S. 159-13(c)].

A local government must determine three variables to calculate the property tax levy for the next fiscal year. First, it must determine the sum needed to balance the budget. This amount is established by taking the difference between the total estimated appropriations (i.e., expenditures) and the estimated revenues from sources other than the property tax. Second, it must determine the collection percentage for the prior fiscal year, expressed as a decimal point. (Most North Carolina local governments collect 95 to 99 percent of the levy.) The estimated collection percentage may not exceed the current year’s collection percentage. Third, it must determine the total value of taxable property in the jurisdiction. Once a unit has these figures, it may calculate the next fiscal year’s property tax levy.

To illustrate the process for calculating the tax levy, assume that (1) a unit must collect $10,000,000 in property tax revenue to balance the budget; (2) its estimated collection percentage is 95 percent; and (3) its taxable valuation of property is $1.5 billion. The total required levy is determined by dividing $10,000,000 by 0.95, which yields a property tax levy of $10,526,000. This figure is divided by the unit’s taxable valuation— $1.5 billion—which yields a tax rate of $0.007017. This figure is multiplied by 100 to produce a tax rate of $0.7017 per $100 valuation.

Property taxes are due on September 1, but taxpayers may delay payment until January 5 without incurring a penalty. [G.S. 105-360(a)]. As a result, local governments generally receive the bulk of property taxes midway through their fiscal year and must rely on fund balance and other revenue sources to finance expenditures during the first part of the fiscal year.

5.1.2 Service Districts

The only exception to the requirement that property tax rates must be uniform throughout a jurisdiction is the authority of a county or municipality to designate a certain geographic area as a “service district” and then levy additional property taxes on the taxable properties within that district. The additional tax revenue is used to fund specific services or improvements that will benefit the properties within the service district area to a greater extent than those provided to properties outside the district. The requirements to establish and fund a service district are set forth in G.S. Chapter 153A, Article 16 (counties) and G.S. Chapter 160A, Article 23 (municipalities).

The General Statutes list the purposes for which a county or municipality may create service districts. Counties often establish service districts to help finance the operational and capital expenses of fire and rescue services, but some other authorized purposes include trash collection, sewer and water systems, and beach erosion control. (G.S. 153A-301). Municipalities often create service districts for downtown revitalization projects, but other authorized purposes include transit development, drainage, sewage collection and disposal systems, off-street parking facilities, beach erosion control, urban revitalization, lighting at interstate highway ramps, watershed improvement projects, and converting private residential streets to public streets. (G.S. 160A-536).

Establishing Service Districts

A governing board must follow a strict statutory process to establish a service district, but voter approval is not required (nor is a vote authorized). A governing board may only define a new service district if it can establish that a proposed district needs one or more of the permissible services, facilities, or functions “to a demonstrably greater extent” than the remainder of the jurisdiction. (G.S. 160A-537(a); G.S. 153A-302). To do this, a report must be prepared in which the unit defines the boundaries of the proposed service district, justifies the increased need for service, and establishes a plan for the provision of services within the district. [G.S. 153A-302(b); G.S. 160A-537(b)]. The governing board must also hold a public hearing on the matter. [G.S. 153A-302(c); G.S. 160A-537(c)].

The governing board of a municipality is required to adopt an ordinance to approve a new service district, which cannot be done until the ordinance has passed at two meetings by a majority vote of the voting members present. [G.S. 160A-537(f)]. The board of county commissioners may adopt a new service after passing a resolution. [G.S. 153A-302(d)]. With few exceptions, the ordinance or resolution defining a new service district shall take effect at the beginning of the next fiscal year after it has been passed. [G.S. 153A-302(d); G.S. 160A-537(d)]. This delay is necessary because a unit may not levy additional property taxes for a part of a fiscal year to fund projects in a newly established service district. However, for municipalities, if the ordinance approving the service provides that general obligation bonds or special obligation bonds are anticipated to be authorized for the project, the ordinance may take effect immediately or as otherwise provided in the ordinance—but no property tax may be levied for part of a fiscal year. [G.S. 160A-537(d)]. After the county or municipality defines a new service district, it is expected to “provide, maintain, or let contracts for the services for which the residents . . . are being taxed within a reasonable time, not to exceed one year.” [G.S. 153A-305(a); G.S. 160A-540(a)].

Funding Service Districts

A local government that has created a service district may choose to levy an additional tax upon all taxable properties within the district to finance, provide, or maintain the services. When a service district tax is levied, the rate of taxation must be included in the annual budget ordinance. The rate of a service-district tax, when combined with the unit’s generally applicable rate of property tax is limited to $1.50 per $100.00 of assessed valuation of property and may only be increased if a majority of qualified voters residing within the district vote to increase the rate after a referendum is held on the matter. (G.S. 153A-307; G.S. 160A-542). Counties may place additional tax rate restrictions on fire districts and ambulance and rescue districts. (G.S. 153A-309.2; -309.3, -310). A county or municipality may also allocate any other revenue that is not otherwise restricted by law to help fund service district projects or may issue general obligation bonds. (G.S. 153A-307, -308; G.S. 160A-542, -543).

Use of Proceeds

Service district tax proceeds must be expended to fund the authorized services or projects in the service district. Any proceeds not expended during the fiscal year in which the tax was levied may be held in reserve—proceeds may not be transferred to the general fund and appropriated for unrelated purposes. The statutes prohibit municipalities from accumulating moneys beyond what is necessary to meet the current needs of the service district, fund long-term goals, and maintain a reasonable fund balance to support service district project(s). [G.S. 160A-542(d)].

5.1.3 Local Sales Tax (levied by counties; shared with municipalities)

A second major source of revenue for many counties and municipalities is the local sales and use tax, which is in addition to the statewide sales and use tax, of 4.75 percent. The tax base for the local sales and use tax includes a retail tax on the sale of tangible personal property, certain digital property, and some related services. This tax base includes a complementary “use” tax on tangible personal property purchased, leased, or rented for storage or use in North Carolina, certain digital property purchased for storage or use in the state, and services sourced to North Carolina. (G.S. 105-164.4; G.S. 105-164.6). The General Assembly determines which transactions are subject to the state and local sales and use taxes, and the North Carolina Department of Revenue (NCDOR) is responsible for distributing the tax proceeds according to statutory distribution requirements.

The authority for counties to levy local sales and use taxes (hereafter the “local sales tax”) is provided in four articles of G.S. Chapter 105, as follows:

• Article 39 (authorizing the levy of a 1-cent sales tax);
• Article 40 (authorizing the levy of a 0.5-cent sales tax);
• Article 42 (authorizing the levy of a 0.5-cent sales tax); and
• Article 46 (subject to voter approval, authorizing the levy of an additional 0.25-cent sales tax).

All North Carolina counties levy Articles 39, 40, and 42 local sales taxes. Whereas, only about half of the state’s counties currently levy the Article 46 local sales tax, which requires voter approval. Accordingly, the combined state and local sales tax rate is either 6.75 percent or 7 percent, if the 0.25-cent Article 46 tax is levied). The local sales tax proceeds are collected by retailers and remitted directly to the NCDOR. In most cases, a taxable sale is deemed to occur at the location in which a buyer receives an item or service. (G.S. 105-164.4B). The tax base for the local sales tax is not always identical to the tax base for the statewide sales tax (e.g., sales of groceries are not subject to the statewide sales tax but are taxable under Articles 39, 40, and 42). The NCDOR distributes the proceeds according to the requirements established in each article.

Distributions to Counties

The NCDOR allocates local sales tax revenue to counties according to the distribution requirements contained in each local sales and use tax article. Article 39 and Article 42 taxes (1.5 percent of the 2 percent total) are allocated on a point-of-origin basis, meaning that the net proceeds are distributed back to the county in which the purchased goods were delivered. [G.S. 105-472(a) (Article 39); G.S. 105-501(a) (Article 42)]. This allocation method benefits counties with higher levels of commercial activity.

Article 40 sales tax proceeds are allocated to counties on a per capita basis, meaning the distribution is based on the total population of a county and its incorporated municipalities, and not upon the taxable transactions that occurred in the county. (G.S. 105-486). Each county’s distribution of Article 40 taxes is then adjusted. This adjustment is done by taking a county’s per capita allocation and multiplying the amount according to an adjustment factor established in G.S. 105-486(b). The adjustment causes counties with larger populations to receive a greater distribution of Article 40 sales tax revenue.

For counties that levy the Article 46 tax, the proceeds are allocated to the county in which the purchased goods are received or delivered. (G.S. 105-538).

Statewide Pool

Beginning in fiscal year 2016–17, the General Assembly created a “statewide pool” under Article 44 of G.S. Chapter 105 as another method to distribute local sales taxes. The statewide pool is funded with a portion of diverted Article 39, 40, and 42 local sales tax proceeds. In fiscal year 2016–17, $84,800,000.00 was placed in the pool. In each succeeding fiscal year, the total amount is adjusted based on the annual percentage change in Article 39, 40, and 42 collections. [G.S. 105-524(b)]. The “statewide pool” tax proceeds are distributed to counties based on each county’s “allocation percentage” as established in G.S. 105-524(c). The result is that twenty-one of the more urban counties do not receive a direct allocation of the statewide pool moneys, while seventy-nine of the more rural counties do. Accordingly, the statewide pool system helps to ensure that rural counties receive a fair portion of sales tax revenue despite generating less sales tax revenue as more urban counties. The statewide pool moneys are partially earmarked, with counties being required to spend the revenue to support economic development, public schools, or community colleges. [G.S. 105-524(d)]. Municipalities that receive a distribution of the statewide pool moneys from counties may spend their allocations on any lawful purpose.

Distribution of Local Sales Tax Proceeds to Municipalities

Although only counties may levy a local sales tax, municipalities are entitled to share in the proceeds. On an annual basis, the governing board of each county must elect one of two methods to calculate how to share the local sales tax revenue. (G.S. 105-472). The two distribution methods include the per capita method, which is based on total population, and the ad valorem method, which is based on a percentage share of property taxes. (G.S. 105-472).  Counties that levy the Article 46 sales tax are neither required nor authorized to share a portion of the Article 46 proceeds with municipalities. (G.S. 105-538).

Per Capita Distribution Method

G.S. 105-472(b)(1) establishes the process for distributing the local sales tax proceeds using the per capita method. This method considers the “total population” of the taxing county and the municipalities within the county in calculating a municipality’s share of the revenue. If a municipality is in more than one county, only those living in the taxing county will be included as part of the total population of the taxing jurisdiction. To determine the county and each municipality’s pro rata share of local sales tax proceeds: (1) add the county population and the population of the incorporated municipalities within the county to determine the total population of the county; (2) divide the amount of sales tax distributed to the county by the total population; and (3) multiply the resulting figure reached in step 2 by the population of the county and each municipality therein. Each respective product will be the amount to be distributed to the taxing county and each municipality. This method does not require counties or municipalities to allocate a portion of the proceeds to any local taxing districts.

Ad Valorem Distribution Method

G.S. 105-472(b)(2) sets for the process for distributing local sales tax proceeds using the ad valorem method. This method distributes the proceeds of the local sales tax revenue to a county and its incorporated municipalities in proportion to the total amount of ad valorem taxes levied by each on property located within the taxing county. The amount of ad valorem taxes levied by the county or municipality on behalf of a special taxing district and collected by the county or municipality is included, and a portion of the local sales tax proceeds is therefore shared with any local taxing district. For example, if a county levies a general property tax, and it levies property taxes for three rural fire protection districts, the total levy includes the general property tax proceeds plus the three rural fire district tax proceeds. When the county receives its share of local sales revenue, it must allocate a portion of proceeds to the three rural fire protection districts according to the relative total levies.

Use of Local Sales Tax Proceeds

A portion of local sales tax revenue is earmarked for specific uses. Per G.S. 105-502 (Article 42) and G.S. 105-487 (Article 40), counties must reserve 60 percent of Article 42 tax proceeds and 30 percent of Article 40 tax proceeds for public school capital outlay or debt service payments associated with school construction projects. If the amount allocated to a county under Article 40 is higher than the amount allocated to the county under Article 42, the county must also use 60 percent of the difference between the two for public school capital outlay purposes. In addition, G.S. 105-524(d) requires counties to use the statewide pool proceeds to support economic development, public education, and community colleges. Counties may spend any remaining sales tax proceeds, including the Article 46 tax proceeds (if levied), to support any public purpose a county is authorized to undertake. 

There are no statutory earmarks on distributions of Article 39, 40, or 42 tax proceeds, or statewide pool moneys, made to municipalities. Therefore, municipalities may expend the revenue to support any lawful public purpose.

5.1.4 Public Transportation Local Sales and Use Tax

G.S. Chapter 105, Article 43, the Local Government Public Transportation Sales Tax Act, allows counties and public transportation authorities to levy an additional local sales tax to finance local public transportation systems. A county may only levy this tax if it, or at least one unit of government within the county, operates a public transportation system. (G.S. 105-511.1). The tax does not apply to the sales price of food that is exempt from tax pursuant to G.S. 105-164.13B or to the sales price of a bundled transaction taxable pursuant to G.S. 105-467(a)(5a). (G.S. 105-506.2). Mecklenburg, Wake, Durham, and Orange counties, and a regional transportation authority encompassing Forsyth and Guilford counties, have been approved to levy the tax at a rate of 0.50 percent, while all other counties levying the tax must adopt a rate of 0.25 percent. (G.S. Chapter 105, Art. 43, Parts 2-6).

Levying the Transportation Tax

A county may direct the county board of elections to conduct an advisory referendum on the question of whether the county may levy this additional tax to support public transportation systems. The governing board must hold a public hearing on the matter at least 30 days before the election. (G.S. 105-511.2). If the majority of those voting in the referendum are in favor of levying the tax, the governing board may adopt a resolution to levy the tax. (G.S. 105-511.3).

Distribution and Use of Proceeds

The NCDOR collects the tax and, on a monthly basis, allocates the proceeds to each taxing county and to any unit(s) of local government in the county that operates public transportation systems on a per capita basis. Counties or municipalities that do not operate a public transportation system may not receive a distribution of proceeds. (G.S. 105-511.4). The public transportation tax revenue must be used to finance, construct, operate, and maintain local public transportation systems. The proceeds must supplement and not supplant or replace existing funds allocated to fund public transportation systems. [G.S. 105-511.4(b)].

5.1.5 Medicaid Hold-Harmless Payments

Prior to 2007, counties paid 15 percent of the non-federal share of Medicaid costs. As part of the “Medicaid Swap” legislation enacted in 2007, the state agreed to cover these costs in exchange for counties forfeiting the authority to levy a local 0.50 percent sales and use tax under G.S. Chapter 105, Article 44. This legislation created two separate local government “hold harmless” payments. [S.L. 2007-323, §§ 31.16.1(a)-31.16.4(f); S.L. 2007-345, § 14; S.L. 2008-134, §§ 13–15].

First, because the proceeds of the Article 44 county tax had been shared with municipalities, the legislation required counties to hold municipalities incorporated before October 1, 2008, harmless for lost tax revenue. The municipal hold-harmless payment created under G.S. 105-522 ensures that municipalities receive the equivalent amount of revenue that they would have received if the 0.50 percent tax were still in effect. Half of the former Article 44 revenue was distributed to counties on a point-of-sale basis and half on a per capita basis, and the formula for calculating a municipality’s hold-harmless payment reflects that former distribution. A county can calculate a municipality’s share of the hold-harmless payment by (1) determining the municipality’s share of Article 40 tax proceeds, which is the “base hold-harmless amount”; (2) dividing the “base hold-harmless amount” in half and then subtracting 0.25 percent of the municipality’s share of the Article 39 sales tax proceeds; and (3) adding the base hold-harmless amount determined in step 1 to the sum (positive or negative) reached in step 2. The resulting figure will be the adjusted hold-harmless payment due to the municipality. (G.S. 105-522).

Second, the legislation guaranteed that each county would benefit by at least $500,000 because of the Medicaid swap. In other words, if a county’s gain from not having to pay Medicaid expenses did not exceed its loss from the half-cent sales and use tax by at least $500,000, the state would make a supplemental payment to the county to make up the difference. Over time, the state reduced the guaranteed benefit to $250,000 effective in fiscal year 2015–16 and to $125,000 effective in fiscal year 2016–17. Starting in fiscal year 2017–18, the General Assembly determined that it would only make a supplemental payment if the tax revenue loss exceeded the gain to the county from the reduction in Medicaid expenses that year. (G.S. 105-523). As a result, only those counties that gave up more in lost tax revenue than they would have paid out in Medicaid costs receive a county hold-harmless distribution from the state under G.S. 105-523.

5.1.6 Rental Car Gross Receipts Tax

Counties (G.S. 153A-156) and municipalities (G.S. 160A-215.1) may, by ordinance, levy a tax of up to 1.5 percent of the gross receipts derived from the short-term lease or rental of vehicles at retail to the public. A short-term lease or rental is a lease or rental of a motor vehicle for a period of less than one year (365 days). (G.S. 105‑187.1). Gross receipts include all moneys received on the rental or lease not including other taxes, fuel charges, or the rental of optional equipment such as child seats.

The taxable transaction occurs at the location where the customer takes delivery of the vehicle at the time of lease or rental. The types of vehicles covered include passenger motor vehicles, cargo vans, pickup trucks, and trucks with a gross vehicle weight rating of 26,000 pounds or less and that do not require the driver to possess a commercial license to operate. [G.S. 153A-156(e)(2); G.S. 160A-215.1(e)(2)].

If adopted, the effective date of the ordinance should be no earlier than the first day of the month following ordinance adoption. The county or municipality should identify and notify retail establishments subject to the tax of the obligation to collect the tax and to include a disclosure in each rental or lease agreement that identifies the tax and the applicable rate of taxation. [G.S. 153A-156(b); G.S. 160A-215.1(b)]. If the retail establishment is located in a county and in a municipality that levies the tax, it must collect both.

Use of Proceeds

Each retailer is responsible for collecting the tax and placing the proceeds in a segregated account until the proceeds are remitted each month to the levying county or municipality. The tax shall be administered in the same manner as the sales tax levied under G.S. 105-164.4. (G.S. 153A-156; G.S. 160A-215.1). The levying unit may credit the appropriate revenue account in the general fund and the proceeds may be used to support any lawful public purpose.

5.1.7 Animal Tax

Counties (G.S. 153A-153) and municipalities (G.S. 160A-212) may levy an annual animal tax on the privilege of keeping dogs, cats, or other domestic animals. A local government may decide which animals to tax and the tax rate. It is common for the rates to vary based on the type of animal and whether the animal has been spayed or neutered. For example, a unit may charge $10 for fixed dogs and $30 for dogs that have not been spayed or neutered. The revenue generated from the animal tax may be credited to the general fund and used to support any lawful public purpose.

5.1.8 Short-Term Heavy Equipment Tax

Counties and municipalities may levy a tax on the gross receipts of individuals or entities whose principal business is the “short-term lease or rental” of “heavy equipment” at retail. Heavy equipment is defined to include any “[e]arthmoving, construction, or industrial equipment that is mobile, weighs at least 1,500 pounds,” and is either (1) “a self-propelled vehicle that is not designed to be driven on a highway”, or (2) “industrial lift equipment, industrial material handling equipment, industrial electrical generation equipment, or a similar piece of industrial equipment.” [G.S. 153A-156.1(a)(1); G.S. 160A-215.2(a)(1)].

Specifically, counties may, by resolution, impose a tax at a rate of 1.2 percent on the gross receipts from the short-term lease or rental of heavy equipment. A retailer is liable for the tax when the place of business to which the heavy equipment is delivered is located in the county. [G.S. 153A-156.1(b)]. Municipalities may, by ordinance, levy a tax at a rate of 0.8 percent on the gross receipts from the short-term lease or rental of heavy equipment if the place of business to which the equipment is delivered is located within the municipality. [G.S. 160A-215.2(b)].

Use of Proceeds

When levied, heavy equipment subject to this tax is exempt from property tax under G.S. 105-275(42a). The tax is payable quarterly to the county finance officer or the municipality by the last day of the month following the end of the quarter. [G.S. 153A-156.1(c); G.S. 160A-215.2(c)]. The proceeds may be credited to the general fund and used to support any lawful public purpose.

5.1.9 County Vehicle Registration Tax

A county may levy an annual vehicle registration tax if the county, or at least one unit of local government in the county, operates a public transportation system. The maximum annual rate counties may charge is $7.00. (G.S. 105-570). The levying county must distribute the proceeds of the tax on a per capita basis to the county (if it operates a public transportation system) and to any municipalities therein that operate public transportation systems. [G.S. 105-570(c)]. If the county or a municipality within the county does not operate a public transportation system, the population of that county or the municipality must be excluded from the pro rata share calculation, and those units may not retain any proceeds. [G.S. 105-570(c)(2)-(3)]. If the county or a municipality begins to operate a public transportation system, the county or municipality may begin receiving a distribution of proceeds beginning the first day of July that is more than 30 days thereafter. [G.S. 105-570(c)].

The proceeds shall only be used by the county or municipality to operate a public transportation system, including financing, constructing, operating, and maintaining the transportation system. [G.S. 105-570(d)]. The “operation” of a public transportation system includes entering a contract or interlocal agreement with another entity (county, municipality, or transportation authority) to allow that entity to take over operations. [G.S. 105-570(e)]. A municipality and a county may enter an interlocal agreement for the operation of a county human services public transportation system within a municipality if the municipality also operates a public transportation system. [G.S. 105-570(f)]. A municipality or county may also contract with a private entity to operate the public transportation system. [G.S. 105-570(e)].

5.1.10 Municipal Motor Vehicle Tax

For the use and privileges of the public highways, municipalities may levy an annual motor vehicle tax upon any vehicle resident in the municipality. (G.S. 20-97). The aggregate annual tax levied, including any annual municipal vehicle tax authorized by local legislation, may not exceed thirty dollars ($30.00) per vehicle. A municipality must use the tax proceeds as follows: (1) up to the first $5.00 of the tax may be used for any lawful purpose; (2) not more than $5.00 of the proceeds may be used for financing, constructing, operating, and maintaining the public transportation system (if the unit operates a public transportation system); and (3) remaining proceeds must be used for maintaining, repairing, constructing, reconstructing, widening, or improving public streets in the municipality that are not part of the state highway system. (G.S. 20-97).

Taxi Tax

Municipalities may levy a tax of not more than fifteen dollars ($15.00) per year upon each taxicab in the municipality and may use the proceeds for any lawful public purpose. [G.S. 20-97(d)]. There is no authority to extend this tax to vehicles used by drivers for a transportation-network company (e.g., Uber or Lyft).

5.1.11 Malt Beverage and Wine Retail License Tax

Entities that sell beer and wine at retail must obtain certain permits from the North Carolina Alcoholic Beverage Control (ABC) Commission. These permit holders must also obtain an annual malt beverage or wine license from the county and municipality in which the establishment is located. (G.S. 105-113.78; G.S. 105-113.77). The tax rate is set by statute and varies depending on the type(s) of beverage sold and whether consumption will occur on or off-premises.

• License fee for counties: $25.00 for the on-premises sale of beer and/or wine; $25.00 for the off-premises sale of wine, or both; and $5.00 for the off-premises sale of only beer. (G.S. 105-113.78).
• License fees for municipalities: $15.00 for the on-premises sale of beer and/or fortified wine; $10.00 for off-premises sale of wine, or both; and $5.00 for the off-premises sale of only beer. Entities or persons needing multiple licenses in the same year for different establishments must pay 110 percent of the base license tax, and that increase applies progressively for each additional license. (G.S. 105-113.77).
• Municipal wholesaler license: Municipalities may require wholesalers of beer and wine located within their jurisdiction to obtain a wholesaler license and pay a corresponding annual tax of up to $37.50. (G.S. 105-113.79).

Use of Proceeds

The proceeds of the taxes related to the issuance of malt beverage and wine licenses may be credited to the general fund and used to support any lawful public purpose.

5.1.12 Occupancy Tax (By Local Act)

Counties and municipalities may, by local act of the North Carolina General Assembly, be granted authority to levy an occupancy tax on the gross receipts derived from the overnight rental of an accommodation, defined in G.S. 105-164.3(1) as a hotel, motel, inn, residence, cottage, or a similar lodging facility for occupancy by an individual. Each levying unit’s tax rate is set forth in the local act authorizing the levy of an occupancy tax. Although a few units have been authorized to levy the occupancy tax at a higher rate, a rate of 3 percent is standard. If a county and a municipality within the county both levy a 3 percent occupancy tax, the total occupancy tax rate will be 6 percent (the county and municipal tax rates are added together). The occupancy tax rate is levied in addition to any state or local sales tax.

Levying the Occupancy Tax

Each local act authorizing the levy of local occupancy taxes must include a uniform set of administrative procedures that address matters such as collection, administration, and penalties. (G.S. 153A-155; G.S.160A-215). Units of government that levy these taxes must comply with the statutory requirements and other stipulations included in the local act. Some units that levy an occupancy tax establish a Tourism and Development Authority (TDA), which is a public authority, to help oversee and administer the tax. Alternatively, some levying units collect and administer the occupancy tax directly. In this circumstance, a department within the local government oversees the travel and tourism functions.

Use of Proceeds

A levying unit’s local act will stipulate how the occupancy tax proceeds may be expended. In general, local occupancy tax proceeds are earmarked for expenditures involving tourism.  For example, the proceeds are often required to be used to promote travel and tourism and for other tourism-related expenditures. Expenditures that promote travel and tourism relate to advertising or marketing an area or activity, conducting market research, or engaging in similar promotional activities. Other tourism-related expenditures may include efforts increase the use of lodging facilities, meeting facilities, recreational facilities, and convention facilities, as well as beach nourishment (replenishing the sand on an eroded shoreline). The statutes expressly prohibit occupancy tax proceeds from being used to develop or construct a hotel or other type of transient lodging facility. [G.S. 153A-155(f1); 160A-215(f1)].

5.1.13 Prepared Food Tax (by local act)

A few local governments have been granted authority through local acts to levy a tax on the sale of prepared food and beverages sold at retail for consumption on or off-premises. When authorized, the tax rate is typically limited to 1 percent of the retail sales price of the prepared food. “Prepared food” is defined in G.S. 105-164.4L(a) and includes food that is sold in a heated state, food that has been mixed or combined by the retailer for sale as a single item, or food that is sold with utensils provided by the retailer.

The jurisdictions that currently levy a prepared food tax include, Cumberland (S.L. 1993-413), Dare (S.L. 1991-177), Durham (S.L. 2008-116), Mecklenburg (S.L. 1989-821), and Wake (S.L. 1991-594; S.L. 1995-458) and (2) the municipalities of Charlotte (S.L. 1989-821), Hillsborough (S.L. 1993-449), and Monroe (S.L. 2005-261). The proceeds of the prepared food tax are generally restricted for the purpose specified in the local act.

5.1.14 Local Real Estate Transfer Tax (by local act)

Seven coastal counties have been authorized to levy an excise tax of 1 percent ($1 for every $100 of the valued property) upon the conveyance of real property. These counties include Camden (S.L. 1985-954), Chowan (S.L. 1985-881), Currituck (S.L. 1985-670), Dare (S.L. 1985-525), Pasquotank, Perquimans, and Washington (S.L. 1989-393). The tax is due when a property is sold. The proceeds of the real estate transfer tax are generally restricted for the purposes specified in the local act.

5.2 Local Fees, Charges, and Assessments

There are a handful of fees, charges, and assessment revenues that local governments may charge to help cover costs associated with providing a variety of public services, ensuring regulatory compliance, enforcing ordinances, and constructing and maintaining public infrastructure. The fees and charges collected by local governments generally fall into one of the following categories: regulatory fees, general user fees, public enterprise, special assessments, and statutory fees.

5.2.1 Regulatory Fees

Regulatory fees are used to fund the oversight and administrative costs associated with performing certain regulatory activities and functions. They include fees for issuing zoning and building permits, inspections, evaluating environmental impacts, reviewing subdivision plats, and enforcing other local ordinances. Counties have broad statutory authority pursuant to G.S. 153A-102 to charge fees in connection with performing regulatory activities and providing services (municipalities do not share the same broad authority).

In some cases, a statute that authorizes the performance of a regulatory function will specify the amount of any associated regulatory fee that may be charged in connection with performing the function. For example, G.S. 160A-304 allows municipalities to charge taxi drivers up to $15.00 for a permit to operate a taxicab. In other cases, a statute may authorize a fee but not specify the amount. For example, Chapter 160D, which authorizes units to engage in a range of regulatory activities related to land use planning and zoning, allows units to “fix reasonable fees for support, administration, and implementation of programs authorized by [160D], and [to use] such fees . . . for no other purposes.” [G.S. 160D-402(d)]. Finally, it is common for a statute to authorize a unit to perform a regulatory activity but not address the authority to charge a fee. In such cases, our courts have held that the authority to charge a fee may be implied from the statutory authority to engage in the regulatory activity. A regulatory fee must be “reasonable” and should not exceed the direct and administrative costs of funding the performance of the regulatory activity. [Homebuilders Association of Charlotte, Inc. v. City of Charlotte, 336 N.C. 37 (1994)].

Use of Proceeds

Some statutes earmark the proceeds of regulatory fees for certain uses—usually to support the underlying regulatory activity. For example, G.S. 160A-301 requires municipalities to use the proceeds of parking meters to defray the cost of enforcing and administering traffic and parking regulations. If the statute authorizing the unit to undertake a regulatory activity does not earmark funds, technically revenue may be used for any public purpose. However, because regulatory fees are charged to support the performance of a specific regulatory activity, the unit may want to separately account for regulatory fees and appropriate the fees in the budget to the corresponding department, function, or activity.

5.2.2 General User Fees

General user fees are charges imposed on individuals who take advantage of a specific government service for which the fee is being charged. The key to general user fees is that only those who take advantage of the service or activity are responsible for paying the fee. General user fees are often charged in connection with recreational activities, community arts programs, cultural events, library fees, on- and off-street parking, and certain public health services. This revenue is usually accounted for in a unit’s general fund, and, unless otherwise restricted by state law, may be used to support any lawful public purpose.

5.2.3 Public Enterprise Fees

Counties (G.S. 153A-275) and municipalities (G.S. 160A-312) have broad authority to acquire, construct, establish, maintain, own, operate, and contract for the operation of public enterprises. A public enterprise is an activity of a commercial nature that could be provided by the private sector. The most common public enterprise services are water supply and distribution systems, sewage collection and treatment, and solid waste collection and disposal utilities. Both counties and municipalities may also operate public enterprises for airports, public transportation, off-street parking, and stormwater systems. (G.S. 153A-274; G.S. 160A-311). Municipalities have additional authority to operate public enterprises for electric power generation and distribution, gas production and distribution, and cable television. (G.S. 160A-311).

Establishing Rates, Fees, and Penalties

The authority to regulate the operation of public enterprises includes the authority to establish rates, fees, and penalties for the use of services provided by a public enterprise. (G.S. 153A-277; G.S. 160A-314). These fees include, for example, hookup charges, monthly user fees, and system development fees. State law imposes restrictions on user-fee rates for certain public enterprise services. For stormwater services, the fees assessed may not exceed the cost of administering the stormwater-management program. [G.S. 153A-277(a1)(2), G.S. 160A-314(a1)(2)]. For solid waste fees (collection fees, disposal and use fees, and availability fees), each fee may not exceed the costs of providing the specific solid waste services for which the fee is authorized. (G.S. 153A-292; G.S. 160A-314.1).

Local governments may not vary rates for individual users unless there is a valid, utility-based reason for doing so. For example, a local unit may vary rates according to whether the property serviced is residential or commercial or based on size [see e.g., G.S. 160A-314(a1)(2)]. A public enterprise may not charge lower rates based on a customer’s age or ability to pay because these factors do not support a valid, utility-based rationale. Similarly, late fees and penalties generally may not be waived for individual users unless there is a utility-based rationale for waiving or reducing a penalty.

Use of Proceeds

Public enterprises are often self-supporting, or largely self-supporting, meaning that the revenue generated through fees and rate charges is sufficient to cover the costs of providing the services. The revenue generated by a public enterprise must first be used to fund the enterprise’s operating expenses, capital outlay, and debt service obligations. In some cases, enterprise fee revenue may be transferred to another fund and used to support general government services. A transfer out is only permissible when all the expenses related to the enterprise operation expected to come due during the fiscal year are covered.

Certain enterprise fee revenue is earmarked and may not be transferred to the general fund to support general fund activities. For example, availability fees to support solid waste disposal facilities may only be used to cover the costs of operating the facility. (G.S. 153A-292; G.S. 160A-314.1). Therefore, if solid waste-fee revenue is transferred to the general fund, the revenue must be used to reimburse the general fund for services provided to the solid waste enterprise. The revenue may not be loaned to the general fund to help balance the current year’s budget. If solid waste-fee revenue is transferred to a debt service fund, the revenue can be used to make debt-service payments related to borrowing for a solid waste project. There is an exception—G.S. 160A-314.1(a) authorizes a municipality that contracts with another local government to collect its solid waste to levy a surcharge on the fee, and the surcharge revenue may be used for any public purpose.

Stormwater-fee revenue must be expended to support stormwater management projects; therefore, it may not be transferred to the general fund and used for other purposes. [G.S. 160A-314(a1)(2); G.S. 153A-277(a1)(2)]. Transfers from electric funds may not exceed the greater of (1) 3 percent of the gross capital assets of the electric system, or (2) 5 percent of the gross annual revenues of the preceding fiscal year. (G.S. 159B-39). In some cases, there are additional restrictions imposed on other enterprise revenue by contract, bond covenants, local acts, or grant agreements, which may constrain a local government’s ability to transfer money from the enterprise fund.

In general, it is a disfavored practice to rely on enterprise fee-revenue to fund general government expenditures, and units should use caution and understand the consequences of doing so. Notably, when water or sewer enterprise fund moneys are transferred to the general fund to supplement the general fund revenues, the unit is prohibited from receiving loans or grants for water or wastewater purposes from certain state funding sources, such as the Clean Water State Revolving Fund. [G.S. 159G-37(b)]. This prohibition applies only to transfers intended to help support the general fund—not legitimate reimbursements for expenses that can be reasonably allocated to the operations of the public enterprise.

5.2.4 Special Assessments

Special assessments are a financing tool that counties and municipalities may use to help fund certain capital projects. A special assessment is a charge levied against real property within a defined geographic area to pay for public improvements that benefit that property. Like a user fee, a special assessment is levied in proportion to the benefit that the assessed property receives. Like a property tax, a special assessment is levied against the property and creates a lien on each parcel of real property assessed, which may be foreclosed in the same manner as a property tax lien.

At present, state law authorizes the levy of two types of special assessments: “traditional” special assessments and “critical infrastructure” special assessments. Importantly, the authority for municipalities and counties to impose critical infrastructure special assessments is set to expire on July 1, 2025, for projects that have not been approved under a final assessment resolution. [G.S. 160A-239.1; S.L. 2020-58, Section 7.2 (municipalities); G.S. 153A-210.1; S.L. 2019-215, Section 3 (counties)].

Traditional Special Assessments

G.S. Chapter 160A, Article 10 and G.S. Chapter 153A, Article 9 establish the procedural process and related requirements local governments must follow to levy traditional special assessments. The purposes for which a traditional special assessment may be levied are established by statute. Counties may levy traditional special assessments to finance the capital costs of water systems, sewage collection and disposal systems, beach erosion control and hurricane protection works, watershed improvement projects, drainage projects, water resources development projects, local costs of N.C. Department of Transportation improvements to subdivision and residential streets located outside of municipalities, and streetlight maintenance. (G.S. 153A-185). Municipalities may levy traditional special assessments to finance public improvements involving streets, sidewalks, water systems, sewage collection and disposal systems, storm sewer and drainage systems, beach erosion control, and flood and hurricane protection works. (G.S. 160A-216, -238).

Levying Traditional Special Assessments

Counties and municipalities are required to follow a detailed statutory process to levy a traditional special assessment, but a voter referendum is not required (nor authorized). With a few exceptions, a petition signed by the owners of property to be assessed is not required. However, a petition is required and must be signed by a majority of owners of property to be assessed, for the following purposes: municipal streets and sidewalks [G.S. 160A-217(a)] and county subdivision streets and streetlights. [G.S. 153A-205(c); 153A-206(d)].

Among the benefited properties, the assessments must be levied on a uniform basis. The amount of each assessment must bear some relationship to the amount of benefit that accrues to the assessed property. The bases for making assessments are specified in G.S. 153A-186 or 160A-218. The basis for making assessments includes the frontage abutting on the project, at an equal rate per foot of frontage; the area of land served; the value added to the land served; the number of lots served, or a combination of two or more of these.

Before a county or municipality may levy a special assessment to recoup costs from benefited properties, it must fund all a project’s costs upfront. Therefore, it is only after a project is complete that a traditional special assessment may be levied. Generally, assessments may be paid in up to 10 annual installments, with interest on the amount outstanding not to exceed 8 percent. [G.S. 153A-199; -200(a); G.S. 160A-232, -233(a)]. If any installment is paid late, the remaining payments are accelerated and become due and payable, unless the council waives acceleration. Assessment liens may be foreclosed under any procedure prescribed by law for the foreclosure of property tax liens. [G.S. 153A-200; G.S. 160A-233].

Use of Proceeds

There are no statutory earmarks on the use of revenue earned from payments made on special assessments; therefore, this revenue may be used to support any lawful public purpose.

Critical Infrastructure Special Assessments

G.S. Chapter 160A, Article 10A and Chapter 153A, Article 9A authorize counties and municipalities to levy “critical infrastructure” special assessments to fund a broad array of public infrastructure projects. Critical infrastructure assessments may be imposed to help cover the capital costs of projects (1) “for which project development financing debt instruments may be issued under G.S. 159-103”, and (2) “for the purpose of the installation of distributed generation renewable energy sources or energy efficiency improvements that are permanently fixed to residential, commercial, industrial, or other real property.” [G.S. 153A-210.2(a); G.S. 160A-239.2(a)].

Projects that may be supported through critical infrastructure special assessments include a variety of traditionally “public” projects ranging from capital costs of airports, parking facilities, sewers, water systems, public transportation facilities, certain park and recreation facilities, and most other capital projects a county or municipality is authorized to undertake. Pursuant to G.S. 159-103(a), counties and municipalities may not impose critical-infrastructure assessments to pay for the cost of stadiums, arenas, golf courses, swimming pools, wading pools, and marinas because project-development-financing debt instruments may not be used to finance the capital cost of such projects.

Levying Critical Infrastructure Special Assessments

Before a county or municipality may impose any critical infrastructure special assessment, it must receive a petition signed by a majority of the owners of real property to be assessed whose interest represents at least 66 percent of the assessed value of all real property to be assessed. The petition must include a description of the public infrastructure projects to be financed, the estimated cost of the project, and an estimate of the amount to be paid through the assessment. (G.S. 153A-210.3; G.S. 160A-239.3). After the governing board receives a petition to impose a critical-infrastructure assessment, it must establish an assessment method that will, in the board’s judgment, accurately assess each lot or parcel of land subject to the assessments according to the benefits conferred upon it by the project for which the assessment is made. (G.S. 153A-210.2; G.S. 160A-239.2). The governing board must then adopt a preliminary assessment resolution containing all of the following: (1) a statement of intent to undertake the project; (2) a general description of the nature and location of the project; (3) an estimate of the total cost of the project; (4) a statement as to the proposed terms of payment of the assessment; and (5) an order setting a time and place for a public hearing on all matters covered by the preliminary assessment resolution. [G.S. 153A-210.3(a1); G.S. 160A-239.3(a1)].

The governing board must hold a public hearing on the matter no earlier than three weeks and not later than 10 weeks from the day on which the preliminary resolution is adopted. After at least 10 days have passed following the public hearing, the board may adopt a final assessment resolution directing that the project or portions thereof be undertaken. The assessment resolution must include the estimated cost of the project to be funded from assessments and the amount of the cost estimated to be derived from each respective funding source. (G.S. 153A-210.3; G.S. 160A-239.3).

Funding Critical Infrastructure Special Assessments

Local governments may use a variety of revenue sources to fund critical infrastructure special assessments, including revenue bonds, project development financing debt instruments issued under Article 6 of Chapter 159 of the General Statutes, general obligation bonds, general revenues, and funds from private parties. The assessment revenue may be pledged to secure revenue bonds or be used as additional security for a project development financing debt instrument. (G.S. 153A-210.4; G.S. 160A-239.4). Unlike traditional special assessments, for critical infrastructure assessments a unit need not complete a project before confirming the final assessment roll. Instead, it may base its assessments upon an estimate of the total costs to perform the project. Critical infrastructure special assessments may be paid in up to 25 annual installments. The installments are due on the date that real property taxes are due. [G.S.153A-210.5(a); G.S. 160A-239.5(a)].

5.2.5 Franchise Fees

A franchise is a legal agreement or contract granted by the local government to a private entity that typically allows the private entity to provide certain essential services or utilities within a particular jurisdiction. Counties and municipalities may grant franchises to private entities to engage in a variety of activities. The ability to grant a franchise does not necessarily include the ability to charge a franchise fee—there must be statutory authority to charge a franchise fee. Counties may grant franchises and charge licensing fees for solid waste collection and disposal. (G.S. 153A-136). Municipalities have broad authority to grant franchises for a range of purposes, including for telephone systems and any of the enterprises listed in G.S. 160A-311, except a cable television system. (G.S. 160A-319). Municipalities may also grant franchises and charge a fee for taxicab companies. (G.S. 160A-304; G.S. 20-97).

5.2.6 Statutory Fees

The General Statutes establish several statutory fees that counties and municipalities must or may charge in connection with providing certain services. For example, G.S. Chapter 7A, Art. 28, imposes various costs and fees associated with criminal and civil proceedings and other court-related activities. Below is a list of some of the statutory fees collected in connection with providing certain services.

Facility fees: To offset the expense of maintaining judicial facilities, several statutes impose fees for the use of courtrooms and related judicial facilities. The facility fees are generally remitted to the county in which the judgment is rendered, unless the judgment is rendered in facilities provided by a municipality, in which case, the fee shall be paid to the municipality. The most common facility fees include:

• Criminal actions: $12.00 facility fee for cases heard in district court; $30.00 for cases in superior court. Fees are assessed only upon conviction. [G.S. 7A-304(a)(2)].
• Civil actions: $12.00 in cases heard before a magistrate; $16.00 for cases heard in district and superior court. [G.S. 7A-305(a)(1)].
• Special proceedings: $10.00 to be remitted to the county. [G.S. 7A-306(a)(1)].
• Administration of estates: $10.00 to be remitted to the county. [G.S. 7A-307(a)(1)].
• Fees on Deposits: A fee of 4 percent (4%) of each principal amount deposited by the clerk in an interest-bearing checking account shall be assessed and collected. [G.S. 7A-308.1(1)].

Use of Facility Fee Proceeds

The facility fee revenue must be expended to provide, maintain, and construct adequate courtroom and related judicial facilities including adequate space and furniture for judges, district attorneys, public defenders and other personnel of the Office of Indigent Defense Services, magistrates, juries, and other court related personnel; office space, furniture and vaults for the clerk; jail and juvenile detention facilities; free parking for jurors; and a law library (including books). Facility fees should be tracked as a separate group of accounts within the general fund indicating in detail all receipts and expenditures of such funds. In the event the funds derived from the facilities fees exceed what is needed for the above purposes, a county or municipality may use any or all of the excess to retire outstanding indebtedness incurred in the construction of the facilities, or to reimburse the county or municipality for funds expended in constructing or renovating the facilities (without incurring any indebtedness) within a period of two years before or after the date a district court is established in such county, or to supplement the operations of the General Court of Justice in the county. [G.S. 7A-304(a)(2); G.S. 7A-305(a); G.S. 7A-306(a); G.S. 7A-307(a); G.S. 7A-308.1(1)].

Arrest and Service of Criminal Process Fees: A fee of $5.00 shall be paid to the county for each arrest or personal service of criminal process, including citations and subpoenas. If the arrest was made or process was served by a municipality, the fee must be paid to the municipality employing the officer. [G.S. 7A-304(a)(1)]. The revenue may be credited to the appropriate revenue account in the general fund and be used to support any lawful public purpose.

Service of Civil Process: A fee of $30.00 shall be paid to the county for each item of civil process served, including summons, subpoenas, notices, motions, orders, writs and pleadings. (G.S. 7A-311). When civil process is served on two or more persons or organizations, a separate service charge shall be made for each person or organization. The process fee shall be remitted to the county. The civil process fee does not apply to service of summons to jurors. [G.S. 7A-311(a)(1)]. The fee revenue should be appropriated to the account in the general fund (likely law enforcement) and expenditures must be tracked. At least 50 percent of proceeds must be expended to ensure the timely service of process within the county, which may include the hiring of additional law enforcement officers. [G.S. 7A-311(a)(1)(c)].

Jail Fee: A fee of $10.00 is charged for each 24-hour period of confinement. The fee is not payable if the case or proceeding is dismissed, defendant is acquitted, probable cause is not found, or the grand jury returns no true bill. (G.S. 7A-313). Jail fees are not earmarked and may be expended to support any lawful public purpose.

Pretrial Release Fee: A fee of $15.00 is payable to the county providing pretrial release services, but only if the defendant was released under the supervision of a county agency providing such services. [G.S. 7A-304(a)(5)]. The pretrial release fee revenue is not earmarked and may be expended to support any lawful public purpose.

Register of Deeds Fees: The register of deeds collects fees for performing the official acts set forth in G.S. 161-10. The types of fees collected by the register of deeds and the amount are stipulated in G.S. 161-10. The types of fees include fees for recording deeds and other instruments that affect land titles, fees for recording security interests under the Uniform Commercial Code, fees for issuing marriage licenses, and several others.

Use of Proceeds

The county must deposit an amount equal to 1.5 percent of fees collected under G.S. 161-10 with the State Treasurer every month to help fund a supplemental retirement pension fund for retired registers of deeds. (G.S. 161-50.2). Counties must also remit a portion of the register of deeds fees to various state agencies to support specific programs. [G.S. 161-11.1 (portion of marriage license fees to be remitted to N.C. Department of Health and Human Services for deposit in Children’s Trust Fund), -11.2 (portion of marriage license fees to be forwarded to N.C. Department of Administration for deposit in Domestic Violence Center Fund), -11.3 (portion of fees shall be expended for computer imaging and technology needs for preservation of public records), -11.5 (portion of fees collected shall be remitted to State Treasurer for deposit in Flood Plain Mapping Fund, general fund, or Archives and Records Management Fund of Department of Natural and Cultural Resources)].

Counties should maintain accounting records that show the unit is meeting the requirements to distribute proceeds to the various state agencies. Any revenue that the county retains after making the required appropriations is unrestricted revenue and may be used to support any public purpose. County records must account for the remittance of funds to the state agencies in accordance with statutory requirements. Counties may appropriate the unrestricted revenue to the appropriate account in the general fund.

5.3 State-Shared Revenue

The General Assembly requires the state of North Carolina to share a portion of certain state tax revenues with counties and/or municipalities. In general, the North Carolina Department of Revenue (NCDOR) is responsible for collecting the shared taxes and distributing the proceeds according to the statutory requirements. Most of the state-shared tax revenue is allocated to both counties and municipalities. In a few cases, a tax is only shared with one or the other, not both. This section provides an overview of the state-levied taxes that are shared with local governments and notes in parentheses next to each revenue source whether counties, municipalities, or both may share in the proceeds.

5.3.1 Video Programming Services and Telecommunication Taxes (counties and municipalities)

In 2007, the General Assembly exchanged a local government’s authority to collect local cable franchise taxes with the ability to receive a distribution of statewide sales taxes levied upon the sale of telecommunications services, video programming services, and direct-to-home satellite services. The tax is levied at the combined general rate of 7.0 percent. [G.S. 105-164.4(a), -164.3(37)]. The NC Department of Revenue (NCDOR) distributes the tax proceeds on a quarterly basis, with counties and municipalities receiving 7.7 percent of the net proceeds of the telecommunications tax; 23.6 percent of proceeds collected from the sale of video programming services, and 37.1 percent of quarterly net proceeds collected from the sale of direct-to-home satellite services. (G.S. 105-164.44F(a)(2); G.S. 105-164.44I).

The video programming services tax revenue is intended to help local governments support the operation of “qualifying PEG channels.” A qualifying PEG channel is a public, educational, or governmental access channel that operates for at least ninety days during a fiscal year and that delivers at least eight hours of scheduled programming a day, with at least six hours and forty-five minutes of the content being non-character-generated programming. The programming content may not repeat more than 15 percent of any other PEG channel provided to the same county or municipality. (G.S. 105-164.44J; G.S. 66-350).

Distribution Process

Counties and municipalities that operate a qualifying PEG channel are entitled to receive the first distribution of PEG channel support funds. To receive a distribution, units operating PEG channels must certify by July 15 each year how many PEG channels the unit operates (three is the maximum). The certification is used to determine the amount of each unit’s distribution. A unit receiving a share of PEG channel support funds must distribute the moneys equally among its qualifying PEG channels. (G.S. 105-164.44J).

After the first distribution of PEG channel support funds is made, any remaining net proceeds are distributed to all counties and municipalities based on a unit’s “proportionate share.” A unit’s proportionate share is the ratio of its “base amount” compared to the “base amount” for all other counties and municipalities. For counties and/or municipalities that did not impose a cable franchise tax under either G.S. 153A-154 or 160A-214 before July 1, 2006, the “base amount” is two dollars ($2.00) times the most recent annual population estimate for the jurisdiction. For units that did impose a cable franchise tax before July 1, 2006, the “base amount” is the amount of cable franchise tax and subscriber fee revenue imposed during the first six months of the 2006‑07 fiscal year. A unit’s proportionate share is further adjusted to account for its growth or decline in population in the preceding fiscal year. (G.S. 105-164.44I).

Use of Proceeds

There are certain restrictions as to how a county or municipality may expend the video programming service tax revenue. Local governments that imposed subscriber fees between July 1, 2006, and December 31, 2006, must use a portion of the funds for the operation and support of PEG channels. The amount of funds that must be used for this purpose is the proportionate share of funds that were used for this purpose in the fiscal year 2006–07, which was equal to two times the amount of subscriber fee revenue the county or municipality certified that it imposed between July 1, 2006, and December 31, 2006. [G.S. 105-164.44I(e)].

A county or municipality that used part of its franchise tax revenue in fiscal year 2005–06 to support one or more PEG channels or a publicly owned and operated television station must expend the remaining funds to continue the same level of support for PEG channels and public stations. Once these requirements are satisfied, a county or municipality may expend the remaining revenue to fund any general government service or activity. [G.S. 105-164.44I(e)].

5.3.2 Malt Beverage and Wine Taxes (counties and municipalities that lawfully sell alcohol)

Article 2C of G.S. Chapter 105 imposes an excise tax on the sale of malt beverages (i.e., beer), wine, and liquor. The NCDOR distributes annually the following percentages of the net amount of excise taxes collected on the sale of malt beverages and wine during the preceding 12-month period ending March 31, to the counties and municipalities in which the retail sale of the beverage(s) is authorized:

1. 20.47 percent of the excise tax on malt beverages,
2. 49.44 percent of the excise tax on unfortified wine, and
3. 18 percent of the excise tax on fortified wine. [G.S. 105-113.82(a)].

The revenue shall be distributed to cities and counties within sixty days after March 31 of each year. [G.S. 105-113.82(d)]. The distribution is determined based on population. A county or municipality will only receive a distribution when beer and wine may legally be sold within the jurisdiction. If it is lawful to sell only one type of beverage (beer or wine), the unit may only share in the tax revenue for that beverage. [G.S. 105-113.82(a1)]. A municipality incorporated on or after January 1, 2000, that is disqualified from receiving funds under G.S. 136-41.2 (Powell Bill) is ineligible to receive a distribution of the malt beverage and wine excise tax. [G.S. 105-113.82(h)]. The malt beverage and wine tax proceeds may be expended to support any public purpose or activity. [G.S. 105-113.82(g)].

5.3.3 Solid Waste Disposal Tax (counties and municipalities that provide or contract for solid waste services)

Article 5G of G.S. Chapter 105 imposes a $2-per-ton excise tax on the disposal of municipal solid waste and construction and demolition debris in any landfill permitted under the state’s solid waste management program and on the transfer of municipal solid waste and construction and demolition debris to a transfer station permitted under the state’s solid waste management program for disposal outside the state. [G.S. 105-187.61(a)]. The state shares 37.5 percent of the tax proceeds with eligible counties and municipalities on a per capita basis—only units that provide, or contract and pay for, solid waste management programs or services may receive a distribution. The solid waste disposal tax proceeds must be expended solely to support solid waste management programs and services. (G.S. 150-178.63).

5.3.4 Service Charge for 911 Systems (counties and municipalities that operate PSAPs)

Article 15 of G.S. Chapter 143B establishes the North Carolina 911 Board, which is part of the State Department of Information Technology and authorizes the Board to develop and maintain a comprehensive system for communicating 911 call information across networks and among local public safety answering points (PSAPs). To support the 911 system, G.S. 143B-1403 authorizes a monthly 911 service charge to be levied on (1) each active voice communication service connection that provides access to the 911 system, and on (2) the retail purchase of prepaid wireless telecommunications services.

The 911 Board monitors the 911 Fund (which is where the 911 service charge revenue is deposited) and makes monthly distributions from the 911 Fund to “primary PSAPs”—the entities that serve as the first point of reception for a 911 call. [G.S. 143B-1406; G.S. 143B-1400(23))]. To be eligible for a distribution from the 911 Fund, a county or municipality must (1) operate a primary PSAP, (2) provide “enhanced 911 service,” and (3) have received distributions from the 911 Board in the 2008–09 fiscal year. (G.S. 143B-1406). In addition, G.S. 143B-1406(f) sets forth the ongoing compliance requirements a PSAP, or its governing body, must satisfy to remain eligible to receive 911 Fund distributions. For example, PSAPs must be included in the local government’s annual audit, and the 911 Board must receive a copy of the governing board’s budget detailing the revenues and expenditures associated with the operation of the PSAP.

Distribution Process

The 911 Board must make monthly distributions to primary PSAPs from the 911 Fund. [G.S. 143B-1406(a)]. Each primary PSAP is notified of its estimated distribution amount by December 31 each year and is then informed of its actual allocation by June 1. The 911 service charge revenue is intended to be used to cover eligible costs incurred by each PSAP during the fiscal year. The 911 Board must designate a percentage of any remaining funds (after base distributions are made) to be distributed to primary PSAPs on a per capita basis. (G.S. 143B-1406).

Use of Proceeds

G.S. 143B-1406(d) sets forth how a primary PSAP may use the 911 Fund distributions, requiring that PSAPs expend the moneys for the following limited purposes:

1. the lease, purchase, or maintenance of (a) emergency telephone equipment, including necessary computer hardware and software; (b) addressing (assigning of a street address for enhanced 911 services), (c) telecommunicator failure; (d) dispatch equipment located exclusively within a building where a PSAP or back-up PSAP is located (but excluding the costs of base-station transmitters, towers, microwave links, and antennae used to dispatch emergency-call information from the PSAP or back-up PSAP); or (e) emergency medical, fire, and law enforcement pre-arrival instruction software;
2. costs incurred by a municipality or county that operates a PSAP to comply with the terms of intergovernmental support agreements if certain conditions are satisfied;
3. expenditures for in-state training expenses of 911 personnel regarding the maintenance and operation of the 911 system; and
4. charges associated with the service supplier’s 911 service and other supplier recurring charges.

PSAPs are strictly prohibited from expending revenue on the lease or purchase of real estate, cosmetic remodeling of emergency dispatch centers, hiring or compensating telecommunicators, or the purchase of mobile communications vehicles, ambulances, fire engines, or other emergency vehicles. [G.S. 143B-1406(d)]. PSAPs may carry forward distributions for eligible expenditures for capital outlay, capital improvements, or equipment replacement. However, if the amount carried forward exceeds 20 percent of the average yearly amount distributed to a PSAP in the prior two years, the 911 Board may choose to reduce the PSAP’s base distribution amount. [G.S. 143B-1406(c)].

5.3.5 Real Estate Transfer Taxes (counties)

Article 8E of G.S. Chapter 105 imposes an excise tax on each instrument (deed) that conveys an interest in real property to another person. Per G.S. 105-228.30, the tax rate is $1 on each $500 of the value of the interest conveyed (i.e., the sales price) or fractional part thereof of the consideration or value of the interest conveyed. For example, if an acre of land is sold for $100,000.00, the excise tax upon the deed that conveys the property would total $200.00. The excise tax applies to timber deeds and contracts for the sale of standing timber to the same extent as if these deeds and contracts conveyed an interest in real property. [G.S. 105-228.30(a)].

“The transferor must pay the tax to the register of deeds of the county in which the real estate is located before recording the instrument of conveyance.” [G.S. 105-228.30(a)]. If the parcel is in two or more counties, the tax is paid to the register of deeds of the county in which the real estate has the greatest value. [G.S. 105-228.30(a)]. The register of deeds must remit the proceeds to the county finance officer, who then credits one-half of the proceeds to the general fund and remits the other half, less a two-percent allowance for administrative expenses, to the NCDOR on a monthly basis. [G.S. 105-228.30(b)].  The county may use the proceeds for any authorized public purpose.

5.3.6 Scrap Tire Disposal Tax (counties)

Article 5B of G.S. Chapter 105 of the General Statutes imposes an excise tax on each new tire purchased for storage, use, or consumption in North Carolina or for placement in the state on a vehicle offered for sale, lease, or rental in the state. The percentage rate of the tax is based on the bead diameter of the new tire: if it is less than 20 inches, the rate is 2 percent; if it’s at least 20 inches, the rate is 1 percent. (G.S. 105-187.16).

Each quarter, 70 percent of the excise tax proceeds is distributed to counties on a per capita basis. Counties must expend the tax proceeds pursuant to earmarks established in G.S. 130A-309.54, which include costs associated with (1) the disposal of scrap tires and (2) the abatement of nuisance tire collection sites. If a county has contracted with another unit of government to for the disposal of solid waste, the county is required to transfer the proceeds of the disposal tax to that unit. The transferee is subject to the same restrictions on the use of the funds as the county. (G.S. 105-187.19).

5.3.7 White Goods Disposal Tax (counties)

Article 5C of G.S. Chapter 105 of the General Statutes imposes a tax of $3.00 on the sale of new white goods. (G.S. 105-187.21). White goods are large domestic and commercial appliances such as refrigerators, ranges, water heaters, freezers, unit air conditioners, washing machines, dishwashers, clothes dryers and other similar domestic and commercial large appliances. [G.S. 130A-290(a)(44)]. Each quarter, 72 percent of the net tax proceeds of the white goods disposal tax are distributed to counties on a per capita basis. (G.S. 105-187.24).

Levying the White Goods Disposal Tax

On or before November 1 of each year, a county must submit a copy of its Annual Financial Information Report (AFIR) to the Department of State Treasurer. Based on the information in the AFIR, the Department of State Treasurer will notify the Department of Revenue by March 1 of each year which counties may not receive a distribution of the white goods disposal tax for that year. If the undesignated balance in a county’s white goods account subsequently falls below the threshold amount, the county may submit a statement to the Department of State Treasure, certified by the county finance officer, that the undesignated balance in its white goods account is less than the threshold amount, which is 25 percent of the amount of white goods disposal tax proceeds a county received, or would have received if it had been eligible to receive them under G.S. 130A-309.87, during the preceding fiscal year. (G.S. 130A-309.87).

Use of Proceeds

The purposes for which the white goods tax proceeds may be expended are set forth in G.S. 130A-309.82 and include expenditures relating to the management and disposal of white goods, such as costs associated with capital improvements for infrastructure to manage discarded white goods; operating costs associated with managing discarded white goods, such as labor, transportation, and freon extraction; and the cleanup of illegal white goods disposal sites.

5.3.8 Telecommunications Tax (municipalities)

Article 5 of G.S. Chapter 105 imposes a statewide sales tax at the combined general rate of 7.0 percent on the gross receipts derived from providing telecommunications and ancillary services. [G.S. 105-164.4(a)(9)]. The sales tax on telecommunications services was enacted in 2001 to replace a previously levied gross receipts tax on telecommunications services. The state collects this tax and, after subtracting $2,620,948, distributes 18.7 percent of proceeds to municipalities each quarter. (G.S. 105-164.44F).

A municipality incorporated before January 1, 2001, receives a distribution based on its “proportionate share” of the distribution in comparison with other municipalities incorporated before that date. The proportionate share is the percentage share of the telephone gross receipts taxes that the municipality received in the same related quarter when the prior sales tax was in effect. A municipality incorporated on or after January 1, 2001, receives a per capita share of the amount to be distributed to all municipalities incorporated on or after this date. The amount is based on the ratio of its population to the population of all municipalities incorporated on or after this date. Municipalities that receive a distribution of the telecommunications tax may use the proceeds to support any authorized public purpose. [G.S. 105-164.44F(b)-(c)].

5.3.9 Electricity Tax (municipalities)

As of July 1, 2014, Article 5 of G.S. Chapter 105 imposes a statewide sales tax at the combined general rate of 7.0 percent upon the sales of electricity. (S.L. 2013-316, § 4.1, repealing the electric utility franchise tax and adopting a new statewide sales tax on the sale of electricity). Pursuant to G.S. 105-164.44K(a), the state collects the electricity taxes and distributes 44 percent of the net proceeds to municipalities each quarter.

Each municipality’s distribution is calculated according to its “franchise tax share” plus its “ad valorem share.” Specifically, the first distribution of the electricity tax is based on a municipality’s franchise tax share, which is equal to the total amount of franchise taxes on electricity that a municipality received in the same related quarter in fiscal year 2013–14. The remaining tax proceeds are distributed in proportion to a municipality’s ad valorem share. A municipality’s ad valorem share is its “proportionate share” of the amount remaining for distribution after determining each municipality’s quarterly franchise tax share. A municipality’s “proportionate share” is the ratio of ad valorem (property) taxes levied in that municipality compared to all property taxes levied by municipalities across the state. When calculating a municipality’s ad valorem share, any ad valorem taxes that a municipality collects on behalf of a taxing district are not included. The proceeds of electricity taxes may be used to support any authorized public purpose. (G.S. 105-164.44K).

5.3.10 Piped Natural Gas Taxes (municipalities)

As with electricity, Article 5 of G.S. Chapter 105 imposes a statewide sales tax at the combined general rate of 7.0 percent on the sales of piped natural gas. [G.S. 105-164.4(a)(9)]. The state distributes 20 percent of the net proceeds of the piped natural gas tax to municipalities each quarter, less administrative expenses. (G.S. 105-164.44L).

The process for levying the electricity tax and calculating a municipality’s distribution is set forth in G.S. 105-164.44L. Each municipality’s distribution is calculated according to its “excise tax share” plus its “ad valorem share.” A municipality’s excise tax share is the amount equal to the excise taxes on natural gas that it received for the same quarter in fiscal year 2013–14. A municipality’s ad valorem share is its “proportionate share” of the amount remaining for distribution after determining each municipality’s quarterly excise tax share. A municipality’s proportionate share is the ratio of ad valorem (property) taxes levied in that municipality to all property taxes levied by municipalities across the state. When calculating a municipality’s ad valorem share, any ad valorem taxes that a municipality collects on behalf of a taxing district are not included. “Gas cities” that operated a piped natural gas distribution system as of July 1, 1998, receive an additional distribution of the piped gas excise tax. The proceeds of the piped natural gas taxes may be spent to support any authorized public purpose.

5.3.11 Motor Fuels Tax (municipalities)

Article 36C of G.S. Chapter 105 imposes an excise tax on the sale of certain types of motor fuel, including gasoline. This motor fuel tax is widely known as the “Powell Bill” and the associated revenue is often referred to as “Powell Bill funds.” Historically, the statutes automatically appropriated a certain percentage of the motor fuel tax revenues directly to municipalities for maintaining, repairing, and constructing streets. However, as of 2015, there is no automatic appropriation to municipalities; instead, the General Assembly appropriates money on an annual basis to the North Carolina Department of Transportation (NCDOT) as state aid, and the NCDOT distributes the appropriated funds to municipalities twice per year—half on or before October 1 and half on or before January 1. (G.S. 136-41.1).

Each municipality’s distribution is determined through a per capita calculation and street-milage comparison. Specifically, 75 percent of funds appropriated to municipalities shall be distributed among eligible municipalities based on population; and 25 percent of funds must be distributed based on the number of miles in a municipality of public streets that do not form part of the state highway system to the total mileage of public streets in all eligible municipalities that are also not part of the state highway system. The mayor of each municipality must provide information to the Department of Transportation that helps determine a municipality’s eligibility to receive funds. (G.S. 136-41.1).

Eligible Recipients

To be eligible to receive Powell Bill funds, a municipality must maintain public streets that do not form a part of the state highway system. In addition, municipalities incorporated after January 1, 1945, must have (1) held the most recent election required by its charter or the general law, (2) levied a property tax for the current fiscal year of at least $0.05 per $100 valuation and collected at least 50 percent of the total property tax levy for the previous fiscal year, (3) adopted a budget ordinance in substantial compliance with general law requirements, and (4) appropriated funds for at least two of a list of eight possible services. A municipality incorporated after January 1, 2000, must appropriate funds for at least four services. (G.S. 136-41.2). Only a municipality incorporated before January 1, 1945, must demonstrate that it has conducted an election of municipal officers within the preceding four-year period and that it currently imposes a property tax or provides other funds for its general operating expenses. (G.S. 136-41.2A).

Uses of Proceeds

Municipalities may only expend the motor fuel tax funds to support projects authorized in the General Statutes. Powell Bill funds are primarily intended for the resurfacing of municipal streets but may also be used to support a variety of projects related to maintaining, repairing, constructing, reconstructing, or widening any street or public thoroughfare— bridges, drainage improvements, curbs and gutters are included. The funds may also be used for meeting a municipality’s proportionate share of assessments levied for such purposes or for the planning, construction, and maintenance of bikeways, greenways, and sidewalks. (G.S. 136-41.3). Additionally, municipalities may match the funds with federal funds administered by NCDOT for independent bicycle and pedestrian improvement projects, or municipalities may elect to have some or all of the allocation reprogrammed for any Transportation Improvement Project currently on their approved project list. (G.S. 136-41.4).

A municipality must maintain a separate record of accounts indicating in detail all receipts and expenditures of the motor fuel tax proceeds. NCDOT annually reports to the chairs of the Joint Legislative Transportation Oversight Committee on how each municipality used its Powell Bill funds during the preceding fiscal year. Any municipality that accumulates an amount greater than the sum of the past ten allocations (five years’ worth) will have an amount equal to such excess deducted from the next allocation. Small municipalities may apply to be allowed to accumulate up to the sum of the past 20 allocations. (G.S. 136-41.3). Any member of the governing board or a municipal employee will be held personally liable for any unauthorized expenditures. [G.S. 136-41.3(b)].

5.4 Miscellaneous Revenue Sources

There are a handful of other revenue sources that some counties or municipalities take advantage of to generate additional revenue. These revenue sources primarily include Alcoholic Beverage Control (ABC) store profits, investment earnings, grants, fines and penalties, and other miscellaneous revenue sources.

5.4.1 Alcoholic Beverage Control (ABC) Store Profits (counties and municipalities that have local ABC boards)

Article 7 of G.S. Chapter 18B authorizes counties and municipalities to establish local ABC boards to help administer ABC store revenue and oversee the operation of local stores. From the gross receipts of the sale of alcoholic beverages, investments, interest on deposits, and any other source, the local ABC board shall distribute the ABC store revenue as set forth by G.S. 18B-805(b), -(c), and (e).

Before making any other distribution, G.S. 18B-805(b) requires a local ABC board to make the following primary distributions from its gross receipts:

1. Pay the expenses of operating the local ABC system, including salaries.
2. Each month pay to the Department of Revenue the taxes due from the Chapter 105 excise taxes, half of the mixed beverage surcharge, and half the guest room cabinet surcharge.
3. Each month pay to the Department of Health and Human Services 5 percent of both the mixed beverages surcharge and the guest room cabinet surcharge.
4. Each month pay to the county commissioners of the county where the charge is collected the proceeds from the 1 cent/5 cent bottle charge required by G.S. 18B-804(b)(6).

After making the primary distributions, G.S. 18B-805(c) requires a local ABC board to make the following secondary quarterly distributions from the remaining gross receipts:

1. Before making any other distributions, the local board sets aside the proceeds of the 3.5 percent markup as authorized in G.S. 18B-804(b)(5) and the additional 1 cent/5 cent bottle charge authorized in G.S. 18B-804(b)(6b). This amount is distributed to the general fund of the municipality or county as authorized in G.S. 18B-805(e).
2. Spend at least 5 percent of the gross receipts remaining after making the distribution required by (1) for ABC law enforcement.
3. Spend directly, or pay to the county commissioners to spend, at least 7 percent of the gross receipts remaining after the distribution required by (1) above for alcohol and substance abuse treatment or education. A local ABC board having a local enabling act with different requirements should follow its own legislation.

After making the distributions required by G.S. 18B-805(b) and (c), the local board may set aside a portion of the remaining gross receipts, within the limits set by the rules of the Commission, as cash to operate the ABC system. With the approval of the appointing authority for the board, the local board may also set aside a portion of the remaining gross receipts as a fund for specific capital improvements. [G.S. 18B-805(d)].

G.S. 18B-805(e) provides that, after making the primary and secondary distributions for the purposes outlined above, the local ABC board may distribute the remaining gross receipts to the county or municipality’s general fund. The governing board may adopt a resolution at any time to alter the distribution formula to be made under this subsection or under any local act. [G.S. 18B-805(e)].

Use of Proceeds

The local ABC board shall pay any estimated distributions within 30 days of the end of each quarter. [G.S. 18B-805(g)]. Counties must expend the proceeds of the one cent/five cent bottle charge provided for in G.S. 18B-805(b)(4) to fund the treatment of alcoholism or substance abuse, or for research or education on alcoholism or substance abuse. For counties that receive a distribution of the 7 percent of gross receipts authorized pursuant to G.S. 18B-805(c)(3), these proceeds must also be expended to support the treatment of alcoholism/substance abuse, research, or education. [G.S. 18B-805(h)]. Funds earmarked for alcohol/substance abuse treatment and education should be recorded in the general fund and expenditures should be tracked to ensure that funds were expended for authorized purposes. Any additional proceeds distributed pursuant to G.S. 18B-805(e) should be appropriated to the general fund and may be expended to support any lawful purpose.

5.4.2 Refund of Federal Excise Tax on Gasoline and Other Fuels (counties, municipalities, and special districts that paid the tax)

Counties, municipalities, and special districts that have paid an excise tax on certain fuel-related sales may claim a refund of excise taxes by filing IRS Form 8849. The types of fuels that qualify are all products that are commonly referred to as gasoline, gasohol, and aviation gasoline. Local governments cannot file for refunds on diesel or kerosene. The U.S. Department of Treasury Publication 510, Excise Taxes, including Fuel Tax Credits and Refunds summarizes the specific requirements that must be met to receive a refund of the fuel tax.

The unit must include an Employer Identification Number (EIN), the number of gallons purchased, the amount of federal tax paid, and an indication that the gasoline was bought for the exclusive use of a local government. Records should be kept verifying the amounts claimed for the following: the number of gallons of gasoline purchased and used during the claim period, the dates of purchases, the name and address of suppliers and the amounts purchased during the claim period, the purpose for which the unit purchased the fuel, and the number of gallons of gasoline used for each purpose. For the “Monthly Claimant’s Income Tax Year End,” use the government unit’s fiscal year end.

Calculation Formula

A refund can be claimed for any quarter of a tax year for which the unit can claim $750 or more. This amount includes the amount of excise tax paid on all fuels used for any qualifying purpose during that quarter or any prior quarter for which no other claim has been filed during the tax year. If a unit cannot claim at least $750 at the end of the quarter, it may carry forward the amount the next quarter of the fiscal year. An annual return must be filed no later than three years following the close of the taxable year.

Accounting Treatment

The U.S. Department of Treasury will refund the entire amount of tax paid either on a quarterly or annual basis. A good system of internal control requires that a unit maintain a control account for gasoline tax refunds. When invoices are paid, the amount representing the excise tax should be set up as a receivable instead of an expense. When refunds are received, they should be credited to the receivable, instead of a revenue.

5.4.3 Refund of State Sales and Use Taxes (counties and municipalities)

Certain North Carolina governmental entities are entitled to an annual refund of the state-levied sales and use tax that they paid on the direct purchases of tangible personal property and services. [G.S. 105-164.14(c) authorizes counties, cities, and numerous types of public authorities to receive a refund of the state sales and use tax.]

Refund Request Procedures

A local government may claim a refund by filing Form E-585—Nonprofit and Governmental Entity Claim for Refund State, County, and Transit Sales and Use Tax. If the entity claiming a refund has paid more than one county’s sales and use tax, Form E-536R—Schedule of County Sales and Use Taxes for Claims for Refund—must be attached to the claim for a refund and list the amount of tax paid to each county. A request for a refund must be filed within six months after the close of the fiscal year. Refunds applied for more than three years after the due date are barred.

The NCDOR Sales and Use Tax Bulletin provides additional information on how to file a claim for a refund.

Use of Proceeds

The refund amount is the actual amount of sales and use tax paid by the unit on direct purchases of tangible personal property. When a county or municipality pays an invoice, the amount of the state sales tax should be set up as a receivable instead of an expense. When the unit receives a refund, the proceeds should be credited to that receivable. The refund proceeds may be expended for any public purpose.

5.4.4 Refund of Local Sales and Use Tax (counties and municipalities)

Just as counties, municipalities, and other governmental entities may receive a refund of the state sales and use tax, they are also entitled to a refund of local sales and use taxes levied by counties. G.S. 105-467 makes the refund provisions for the state sales tax outlined in G.S. 105-164.14 and G.S. 164.14A applicable to the local sales and use tax levied under G.S. Chapter 105, Article 39. Accordingly, the filing process and accounting procedures for refunds of the local sales tax are the same as for refunds of the state sales tax. See section 4.4.3 of this policy for additional information on how to file for a refund of the local sales and use tax.

5.4.5 Unauthorized Substance Tax (county or municipal law enforcement agencies that investigate certain drug cases)

Article 2D of G.S. Chapter 105 levies an excise tax on controlled substances actually or constructively possessed by dealers. To be eligible to receive proceeds of the tax, a county or municipal law enforcement agency must have conducted an investigation that resulted in the identification of a controlled substance to which a tax stamp was not attached. (G.S. 105-113.113). The rate of taxation for unauthorized substances varies based on the type of illegal substance and amount possessed (by weight or dosage units). (G.S. 105-113.107). The tax is payable within 48 hours after the dealer acquires actual or constructive possession of a non‑tax‑paid unauthorized substance, exclusive of Saturdays, Sundays, and legal holidays. Upon payment of the tax, the dealer must permanently affix a stamp to the unauthorized substance. (G.S. 105-113.109).

Distribution Process

The unauthorized substances tax proceeds are credited to a special non-reverting account, the state’s Unauthorized Substances Tax Account, until the moneys are unencumbered. (G.S. 105-113.113). The proceeds are unencumbered when either of the following occurs: 1) the tax has been fully paid and the taxpayer has no current right to seek a refund, or 2) the taxpayer has been notified of the final assessment of the tax and has neither fully paid nor timely contested the tax. (G.S. 105‑241.22). On a quarterly or more frequent basis, 75 percent of the unencumbered substance tax proceeds are distributed to the state or local law enforcement agency that conducted the investigation of a dealer that led to the tax assessment. If more than one state or local law enforcement agency conducted the investigation, the Secretary of Revenue will determine the equitable share for each agency based on the contribution each agency made in the investigation. (G.S. 105-113.113).

Use of Proceeds

The purpose of the tax is to generate revenue for state and local law enforcement agencies. (G.S. 105-113.105). The proceeds should be considered intergovernmental revenue restricted for law enforcement activities and should be budgeted in the general fund. Since this is not a recurring revenue source, the moneys should be used for nonrecurring expenditures.

5.4.6 Grants

North Carolina law authorizes counties and municipalities to accept grants from the federal or state government to construct, expand, maintain, and operate any project or program that state law permits the unit to provide or perform. (G.S. 160A-17.1). Local governments commonly use these grants to finance many types of capital projects, including the acquisition, construction, and equipping of affordable housing, water and sewer facilities, parks or recreation facilities, and other types of public infrastructure.

Federal agencies award a federal grant when Congress has enacted legislation authorizing an agency to make a grant for a specific purpose and has appropriated money to the agency for it to provide the grant. Once an agency has the authority to fund a federal grant, it will announce the availability of the funding opportunity. An agency’s “notice of funding opportunity” or “NOFO” will include detailed information about the award, the types of entities eligible to apply, the evaluation criteria for selection, required components of an application, and how to apply. NOFOs are accessible at grants.gov, a website maintained by the federal Office of Management and Budget. Local governments can use this website to identify and apply for federal funding opportunities.

Local Government as “Recipient” or “Subrecipient”

A county or municipality can receive grant funding directly from a federal agency as a direct “recipient” of a federal award. (2 C.F.R. § 200.1). When a unit is a direct recipient, the federal agency and the local government will execute a grant agreement that reflects the terms and conditions of the federal award. Once a local government executes a grant agreement or accepts federal grant funds, it is contractually bound to the awarding agency to abide by the terms and conditions of the federal award. A county or municipality may also be awarded federal grant in an indirect fashion by obtaining a “subaward” of federal grant moneys from a state agency acting as a pass-through entity. (2 C.F.R. § 200.1).  In this case, the county or municipality becomes a “subrecipient” of the state agency, and the unit is obligated to use the funds in accordance with the terms and conditions of the subaward agreement entered with the state agency pass-through entity. (2 C.F.R. § 200.331 -.333).

Complying with the Terms and Conditions of Federal Grants

As a recipient or subrecipient of a federal grant, a local government must administer those funds in accordance with the federal stat­utes that authorized the grant and other governing laws, regulations, and terms and conditions specified in the grant agreement. Although each federal grant contains unique terms and conditions, 2 C.F.R. Part 200, the “Uniform Administrative Requirements, Cost Principles, and Audit Requirements” (the “Uniform Guidance”) establishes a uniform framework for the admin­istration of federal financial assistance. Local governments that receive federal financial assistance, including federal grants, must be familiar with the compliance obligations that the Uniform Guidance imposes upon their expenditure of federal moneys.

Failure to comply with the terms and conditions of a federal grant or with other federal laws or regulations applicable to the expenditure of federal financial assistance can have severe consequences. Among other things, a federal awarding agency may withhold cash payments from a noncompliant local government, disallow improper costs charged to a federal award, or even partially or completely terminate a federal award. For more egregious acts of noncompliance, a federal awarding agency has authority to initiate suspension or debarment proceedings against a local government, which could prohibit a local government—either temporarily or permanently—from receiving federal grant funds. [2 C.F.R. Part 180].

5.4.7 Investment Earnings

Counties and municipalities may invest the cash balances of any fund. [G.S. 159-30(a)]. North Carolina law prescribes the types of investments that counties and municipalities may make, and in doing so, it generally seeks to minimize investment risk and maximize liquidity. [G.S. 159-30]. Counties and municipalities most commonly invest in certificates of deposit in banks and savings and loan associations; obligations of the U.S. government (colloquially referred to as “treasuries”); obligations of certain agencies established by federal law (colloquially referred to as “agencies”) that mature no later than eighteen months from the date of purchase; and mutual fund for local government investments (e.g., the North Carolina Capital Management Trust). The interest earned on investments must be credited proportionately to the funds from which the invested moneys were drawn. [G.S. 159-30(e)].

5.4.8 Fines, Penalties, and Forfeitures

The rules for the enforcement of ordinances are found in G.S. 153A-123, 160A-175, and 14-4. For many years, a violation of a county or municipal ordinance was presumptively criminal—the violator was guilty of a Class 3 misdemeanor. With the passage of Senate Bill 300, effective December 1, 2021, violations of certain ordinances are no longer presumptively criminal but may still be criminalized if a county or city specifies such in the ordinance. Certain types of ordinance violations may never incur a criminal penalty (e.g., violations of the laws regulating the licensing of businesses or trades, stream clearing programs, outdoor advertising, solar collectors, and cisterns and rain barrels, and most of the Chapter 160D statutes). [G.S. 153A-123(b1); G.S. 160A-175(b1)].

The clear proceeds attached to the criminal violation of the ordinance must be distributed to the public schools to be used for maintaining the public school system. (N.C. Const. Art. IX, § 7). The term “clear proceeds” includes the gross proceeds of a penalty or fine, less the reasonable costs of collection. The gross proceeds do not include the administrative costs of enforcing an ordinance. [Cauble v. City of Asheville, 314 N.C. 598, 604–5 (1985)]. Accordingly, the collecting unit is permitted to retain up to 10 percent of a penalty or fine to the extent that such amount reflects the actual costs of collection. (G.S. 115C-437).

As an alternative to criminalizing the violation of a county or municipal ordinance, a local government may instead choose to attach civil penalties to such a violation. In some cases, a unit may retain the proceeds of civil penalties. However, when a local government collects a civil penalty or fine and that penalty or fine is intended to punish the violator, then the clear proceeds of any such penalty or fine collected must be remitted to the local school administrative unit in the county in which the penalty was assessed. (N.C. Const. art. IX, § 7). For example, these penalties may include: (1) the late listing of or failure to list property for ad valorem property taxation [G.S. 105-312]; (2) the submission of a worthless check for payment of ad valorem property taxation [G.S. 105-357(b)(2)]; and (3) the failure to file or failure to pay occupancy taxes [G.S. 153A-155(e); G.S. 160A-215(e); G.S. 105-236].