Copyright 1998 - N.C. Administrative Office of the Courts

Docketing Information on this case


No. 61A98

(Filed 4 December 1998)

Taxation § 92 (NCI4th)-- intangibles tax -- unconstitutional -- refund -- requirement of protest

    The trial court erred by dismissing the claims of plaintiffs who paid an intangibles tax without giving notice of a challenge to the legality of the tax where the General Assembly subsequently determined to refund the tax only to taxpayers who had originally protested it. The tax at issue is valid and the thirty-day notice of challenge to the legality of the tax in N.C.G.S. § 105-267 does not control the decision. The General Assembly here took a uniformly applicable intangibles tax that was valid and enforceable and attempted to classify retroactively those taxpayers who will not be liable for the tax. Such a scheme violates the uniformity provision of the North Carolina Constitution.

    Justice WYNN did not participate in the consideration or decision of the case.

    Justice FRYE concurring in the result.

    Justice WHICHARD joins in the concurring opinion.

    On discretionary review prior to determination by the Court of Appeals, granted by the Supreme Court ex mero motu pursuant to N.C.G.S. § 7A-31(a) and Rule 15(e)(2) of the North Carolina Rules of Appellate Procedure, of orders entered 23 May 1997 and 11 June 1997 by Manning, J., in Superior Court, Wake County. Heard in the Supreme Court 1 October 1998.

    G. Eugene Boyce, and Womble Carlyle Sandridge & Rice, P.L.L.C., by William C. Raper and Keith Vaughan, for plaintiff-appellants.

    Michael F. Easley, Attorney General, by Edwin M. Speas, Jr., Chief Deputy Attorney General; Thomas F. Moffitt, Special Deputy Attorney General; and Marilyn R. Mudge, Assistant Attorney General, for defendant-appellees.

    ORR, Justice.

    This action arises out of plaintiffs' challenge to the constitutionality of the intangibles tax imposed by the State of North Carolina pursuant to N.C.G.S. § 105-203 during the tax years from 1991 through 1994. Prior to plaintiffs' filing this suit, a similar constitutional challenge was brought by Fulton Corporation, a North Carolina corporation which held stock in six other corporations, only one of which did business in North Carolina. Since the present case was stayed pending the ultimate determination in Fulton, we begin our discussion by reviewing that course of litigation since the resolution in Fulton affects the ultimate result here.

    For a number of years, the State of North Carolina imposed an intangibles tax pursuant to N.C.G.S. § 105-203 on the fair- market value of shares of stock owned by North Carolina taxpayers on December 31st of each year. The statute provided, in pertinent part:

        All shares of stock . . . owned by residents of this State . . . shall be subject to an annual tax, which is hereby levied, of twenty-five cents (25 cents) on every one hundred dollars ($100.00) of the total fair market value of the stock on December 31 of each year less the proportion of the value that is equal to:

        (1)    . . . the proportion of the dividends upon the stock deductible by the taxpayer in computing its income tax liability under G.S. 105-130.7 . . . . 

N.C.G.S. § 105-203(1) (1992) (repealed 1995).

        Under the tax scheme, if a corporation does no business in North Carolina and has no taxable income here, then the taxable percentage of a shareholder's stock is one hundred percent. If a multistate corporation does business in North Carolina and earns business and/or nonbusiness income subject to North Carolina income tax, then the taxable percentage of a shareholder's stock is the inverse of the issuing corporation's net taxable income in North Carolina.

Fulton Corp. v. Justus, 110 N.C. App. 493, 496, 430 S.E.2d 494, 496 (1993).

    On 1 May 1991, Fulton Corporation challenged the constitutionality of the intangibles taxing scheme alleging specifically that N.C.G.S. § 105-203 violates the Commerce Clause of the United States Constitution, as it places a heavier tax burden on stock of corporations not doing business in North Carolina. Further, the plaintiff alleged that the taxing scheme violated its due process and equal protection rights accorded by the United States and North Carolina Constitutions. The trial court granted summary judgment for the defendant Secretary of Revenue, and the plaintiff appealed.

    The Court of Appeals subsequently held

    that the portion of the State's intangibles tax scheme which increases the tax liability for owners of stock in corporations whose business and property is not completely in North Carolina violates the Commerce Clause of the United States Constitution. That language is excised from N.C. Gen. Stat. § 105-203. Plaintiff is entitled to no refund. The trial court's judgment for the defendant is reversed, and the cause is remanded for entry of a judgment declaring the intangibles tax provision at issue in violation of the Commerce Clause. Plaintiff is entitled to no further relief.

Id. at 505, 430 S.E.2d at 502.

    On appeal, this Court in Fulton Corp. v. Justus, 338 N.C. 472, 450 S.E.2d 728 (1994), reversed the Court of Appeals. "After carefully reviewing the [U.S.] Supreme Court's jurisprudence in this area of the law, which the Court itself has characterized as a 'quagmire,' (citations omitted), we conclude that the tax in question is permissible based on the Court's holding in Darnell." Id. at 476-77, 450 S.E.2d at 731. Thus, this Court, after a thorough review of precedent decided by the United States Supreme Court, concluded that the intangibles taxing scheme as enacted by the legislature was valid and enforceable in its entirety. However, this determination was not final since the United States Supreme Court on 17 April 1995 granted plaintiff's writ of certiorari to review our decision validating the intangibles taxing scheme.

    On 21 February 1996, the United States Supreme Court in Fulton Corp. v. Faulkner,See footnote 1 516 U.S. 325, 133 L. Ed. 2d 796 (1996), held:

        North Carolina's intangibles tax facially discriminates against interstate commerce . . . . At the same time, of course, it is true that "a State found to have imposed an impermissibly discriminatory tax retains flexibility in responding to this determination." McKesson [Corp.] v. Division of Alcoholic Beverages & Tobacco, 496 U.S. 18, 39-40, 110 L. Ed. 2d 17, [38] (1990). In McKesson, for example, we said that a State might refund the additional taxes imposed upon the victims of its discrimination or, to the extent consistent with other constitutional provisions (notably due process), retroactively impose equal burdens [on] the tax's former beneficiaries. A State may also combine these two approaches. Ibid. These options are available because the Constitution requires only that "the resultant tax actually assessed during the contested period reflec[t] a scheme that does not discriminate against interstate commerce." Id., at 41, 110 L. Ed. 2d [at 39].

Fulton, 516 U.S. at 346-47, 133 L. Ed. 2d at 814-15. The case was then remanded to this Court for consideration of remedial issues.

    On 10 February 1997, in Fulton Corp. v. Faulkner, 345 N.C. 419, 481 S.E.2d 8 (1997) ("Fulton (on remand)"), this Court stated:

        The plaintiff argues that the United States Supreme Court in this case declared the entire intangibles tax unconstitutional. We do not agree with this interpretation. The Supreme Court noted that the Court of Appeals had addressed the issue of severability and decided that the clause required severance of the taxable percentage deduction. Fulton [Corp.] v. Faulkner, [516] U.S. at [347] n.12, 133 L. Ed. 2d at 815 n.12. The Court gave no indication that applying the severability clause in that manner would contravene its holding or that a tax on corporate stock is per se unconstitutional. To the contrary, the Court's language and reasoning revealed the intangibles tax violated the Commerce Clause because of the discriminatory portion -- the taxable percentage deduction. It gave no reason to believe that absent the discriminatory deduction, the tax would violate the Commerce Clause.

Fulton (on remand), 345 N.C. at 422, 481 S.E.2d at 9-10.

    Further, this Court stated that

    [w]hether to enforce the tax as to all shareholders is within the province of the General Assembly.

        The General Assembly may forgive this tax if it so chooses. We do not have the authority to do so.

        We affirm that part of the decision of the Court of Appeals which holds that the unconstitutional part of N.C.G.S. § 105-203 must be severed and the balance of the section enforced.

Id. at 424, 481 S.E.2d at 11.

    The effect of this Court's decision in Fulton (on remand) was to declare as advocated by the State that portion of the intangibles tax remaining, after severing the unconstitutional portion challenged, a valid and enforceable tax. Thus, the taxes paid by Fulton Corporation were not refundable as a matter of right.

    As noted earlier, subsequent to the beginning of the Fulton litigation, plaintiffs in this case similarly filed suit challenging the constitutionality of the intangibles tax levied on corporate stock. On 27 December 1996, the trial court entered an order dated 27 December 1996 certifying two classes of plaintiffs, designated as Class A and Class B.

    Class A members consisted of those who paid the intangibles tax for tax years 1991, 1992, 1993, and 1994, and demanded refunds of the tax within thirty days pursuant to the applicable refund statute, N.C.G.S. § 105-267 (1995) (amended 1996 for taxes paid on or after 1 November 1996). Class B consisted of taxpayers who paid the intangibles tax for the same years but failed to meet the requirements set forth in N.C.G.S. § 105-267.

    On 27 December 1996, the trial court lifted the previous stay and ordered that the action be maintained as a class action on behalf of the two classes discussed above, Class A and Class B.

    After this Court's opinion on 10 February 1997 in Fulton (on remand) responding to the ruling of the United States Supreme Court, the State was faced with two choices as noted in the opinion. The State could "enforce" the intangibles tax against all concerned, or the State could "forgive" the taxes imposed.

    The General Assembly responded by enacting Chapter 17 of the 1997 Session Laws which provides as follows:




        Whereas, former G.S. 105-203 (repealed) imposed an intangibles tax on shares of stock and provided a taxable percentage deduction reducing a taxpayer's liability for this tax in proportion to the issuing company's income taxed in North Carolina; and

        Whereas, the United States Supreme Court in "Fulton Corporation v. Faulkner" held the taxable percentage deduction to discriminate against interstate commerce in violation of the United States Constitution and remanded the case to the Supreme Court of North Carolina to address the remedy appropriate to redress the constitutional violation; and

        Whereas, the Supreme Court of North Carolina in "Fulton Corporation v. Faulkner" (on remand) held that the taxable percentage deduction was severable from former G.S. 105-203, thereby exposing all taxpayers to liability for taxation under G.S. 105-203, including those who were not required to pay the tax on shares of stock, in whole or in part, by virtue of the taxable percentage deduction; and

        Whereas, the Secretary of Revenue has been advised by the Attorney General that the Supreme Court of North Carolina's decision requires assessment and collection of intangibles tax from taxpayers who received the benefit of the taxable percentage deductions in former G.S. 105-203, unless the General Assembly directs otherwise; and

        Whereas, the Supreme Court of North Carolina provided in "Fulton Corporation v. Faulkner" (on remand) that "[w]hether to enforce the tax as to all shareholders is within the province of the General Assembly"; Now, therefore,

    The General Assembly of North Carolina enacts:

         Section 1. The Secretary of Revenue shall take no action to assess or collect intangibles tax from any taxpayer for liability arising solely from the taxpayer's use of the taxable percentage deductions in former G.S. 105-203 (repealed) for one or more of the tax years from 1990 through 1994.

Act of Apr. 10, 1997, ch. 17, sec. 1, 1997 N.C. Sess. Laws 51, 51.

    Having thus forgiven the tax liability for the group of taxpayers who had benefited from the unconstitutional taxable percentage deduction for intangible taxes, the General Assembly was required to address the status of the other taxpayers who had paid the full intangibles tax. As a result, the General Assembly enacted Chapter 318 of the 1997 Session Laws, which provides in pertinent part: