Sales Tax FAQs

In an effort to respond to questions we are receiving regarding the sales tax distribution, the following Frequently Asked Questions has been prepared.

Sales Tax Background Information

North Carolina authorizes counties to levy up to a 2.25% in local sales tax. To date, all 100 counties levy at least a 2% local sales tax. The tax levy collected by the counties is then sent to the State, where calculations determine how the sales tax revenues should be distributed back to counties and their municipalities. While counties are mandated to share the revenue from local sales taxes with its incorporated municipalities, North Carolina law authorizes local Boards of Commissioners to decide how the shared revenue is distributed, either based on a per capita or ad valorem formula. If a Board of Commission decides to change the method, Boards must do so during the month of April and the change is effective for sales tax calculations made by the State on or after the following July. The per capita distribution is based upon population and the ad valorem distribution is based on the amount of property taxes collected countywide and within each of the towns.

A key factor in this is understanding tax base. Tax base is the combined value of the financial streams or assets on which tax can be imposed. Obviously, there is greater potential in our municipalities for sales tax revenues based on the current tax base and the potential for it to grow. This is evidenced by the number of businesses in our municipalities that provide sales to the consumer in our community, as compared to the few businesses located in unincorporated areas (i.e. lack of tax base).

What is the sales tax rate?
The North Carolina (NC) sales tax rate is currently 4.75%. An additional 2% is collected by Davie County bringing the total sales tax rate in Davie County to 6.75%.

How does sales tax distribution work?
Each of the local sales and use taxes is collected by the state, along with the state’s comparable tax. After collection costs are subtracted, the net proceeds are allocated among the 100 counties.

What does Davie County use it’s sales tax revenues for?
Sales tax supplements the property tax, and is an important revenue source within the County’s General Fund to support public services such as sheriff, EMS, 911, social services, public health, planning and zoning, building inspections, and public education, to mention a few.

What happened at the April meeting of the Board of Commissioners regarding sales tax revenue distribution?
The Davie County Board of Commissioners changed their method of distributing sales tax from per capita to ad valorem. This means that sales tax revenues are now calculated for distribution based on the valuation of the tax base countywide and within each of the towns. Counties are required by the state of NC to designate their method by adopting a board resolution in April and providing a certified copy of the resolution within 15 days following its adoption to the North Carolina Department of Revenue. This allows the distribution method to be what is used by the state when determining revenues that should be sent to the county and municipalities the next fiscal year. Because of the deadline imposed by state law, the Board of County Commissioners took action to change the method of distribution. However, this DOES NOT require the county to decrease the amount of funds that are designated to the towns in our community, the county has not yet formally decided how much the reduction will actually amount to.

What are the plans to implement this distribution change?
Again, because of the deadline imposed by the State for counties to provide notification regarding plans to change the distribution method, the Board of Commissioners were required to take action. As mentioned earlier, this DOES NOT mean that amounts designated to towns will immediately decrease— the county has the authority to determine the amount of money each town will receive via distribution from sales tax revenues. The Towns of Bermuda Run, Cooleemee, and Mocksville have each been advised that the Board does not intend to reduce the amount of sales tax revenues they receive until July 1, 2017, which allows municipalities to plan budget adjustments, and also recover lost revenue through the growth of their tax base as more businesses that sell to the consumer open their doors for business.

What was the motivation of the Board to change the sales tax distribution method?
The per capita method of distribution is not fair to county citizens living outside of the towns. The ad valorem method provides a more equitable distribution for all residents who receive services that are provided by sales tax revenues. For example, using the per capita method, for every dollar sent to the towns for incorporated residents, unincorporated residents living outside the towns received only 66 cents. The ad valorem method provides incorporated residents and unincorporated residents with a fairer share of sales tax revenues that are the result of purchases made by all residents in Davie County.

The county’s motivation is to ensure that purchases made by unincorporated residents in local municipalities benefits them just as it benefits incorporated residents making purchases in local municipalities.

Is the county changing their distribution method because they need additional revenue to offset the cost of the new high school?
No. The property tax rate to pay for the bond for the new high school was raised on July 1, 2015. No additional funds are needed to pay for the debt or other costs associated with the new high school. Voters approved the use of property tax revenues to pay for the high school—not sales tax revenues.

Will this change in distribution affect small businesses (i.e. force them to close)?
There is no reason it should. Small businesses will still charge the same sales tax rate to their customers. The distribution method could potentially cause municipalities to see a reduction in the sales tax revenues they are allocated (via the new distribution method). This does not impact transactions between a small business and their consumer and any impact felt by the municipality should have no merit in being passed along to the local business community. As mentioned earlier, incorporated areas (especially Mocksville and Bermuda Run) have a greater opportunity to grow their tax base (i.e. new businesses opening in these growing areas) which will in the short-term offset the reduction they see in their allocation from the County, and enable the County to allocate funds needed for the growing list of services funded by sales tax revenue enjoyed by incorporated and unincorporated residents.