Fulton Corp. v. Justus

• Citation: 450 S.E.2d 728,338 N.C. 472
• Decision Date: 09 December 1994
• Docket Number: No. 305A93,305A93
• Parties: , 63 USLW 2413 FULTON CORPORATION v. Betsy Y. JUSTUS, Secretary of Revenue.
• Court: United States State Supreme Court of North Carolina

Page 728

450 S.E.2d 728

338 N.C. 472, 63 USLW 2413

FULTON CORPORATION v. Betsy Y. JUSTUS, Secretary of Revenue.

No. 305A93.

Supreme Court of North Carolina.

Dec. 9, 1994.

Womble Carlyle Sandridge & Rice by Jasper L. Cummings, Jr., Raleigh, for plaintiff-appellant and -appellee.

Michael F. Easley, Atty. Gen. by Marilyn R. Mudge, Asst. Atty. Gen., for defendant-appellant and -appellee.

EXUM, Chief Justice.

Plaintiff, Fulton Corporation, is a North Carolina corporation with its principle place of business in North Carolina. Plaintiff owns stock in other corporations and pays an "intangibles" tax on that stock to this State pursuant to N.C.G.S. § 105-203. On 1 May 1991 plaintiff filed suit challenging the constitutionality of North Carolina's intangibles tax levied on ownership of corporate stock. Plaintiff alleged that the provisions of North Carolina's general statutes controlling the taxation of stock, particularly N.C.G.S. § 105-203, violate the Commerce Clause of the United States Constitution because the statute taxes more heavily stock of corporations not doing business in North Carolina. Plaintiff also alleged that the taxing scheme violates plaintiff's due process and equal protection rights under the North Carolina and United States Constitutions. Plaintiff requested that N.C.G.S. § 105-203 be declared null and void and that defendant be ordered to pay plaintiff a refund for the intangibles taxes paid by plaintiff for the 1990 tax year. Plaintiff and defendant both filed motions for summary judgment. The Superior Court allowed defendant's motion and denied plaintiff's motion on 15 November 1991.

Plaintiff appealed to the Court of Appeals. The Court of Appeals reversed the superior court's ruling, holding the intangibles tax at issue violative of the Commerce Clause. The Court of Appeals, however, found that the unconstitutional provisions of the taxing scheme are severable and struck the portion of N.C.G.S. § 105-203 which reduces intangibles tax based on the extent of business done in North Carolina by the issuing corporation. Thus, the intangibles tax on plaintiff's stock remained and plaintiff was denied a refund. Plaintiff appealed the decision of the Court of Appeals, arguing that the Court of Appeals correctly determined that the taxing scheme was unconstitutional, but that it erred in excising the deduction in N.C.G.S. § 105-203 rather than making the deduction applicable to the stock of all corporations. Defendant also appealed from the Court of Appeals' decision, arguing that N.C.G.S. § 105-203 does not violate the Commerce Clause.

We begin with an overview of North Carolina's intangibles tax on corporate stock and other related tax statutes. ² Pursuant to N.C.G.S. §§ 105-130 to 105-130.41, North Carolina imposes an income tax of 7.75% ³ on the net income of corporations doing business in North Carolina. N.C.G.S. § 105-130.3 (1992). If a corporation does business in North Carolina and other states, then only that percentage of its business income which is apportionable to North Carolina is taxable here. N.C.G.S. § 105-130.4(b) (1992). A corporation's business income is apportioned on the basis of three factors: (1) the value of the corporation's property owned, rented or used in North Carolina during the income year divided by the value of all the corporation's property owned, rented or used during the income year; (2) the total amount paid by the corporation in North Carolina during the income year as payroll divided by the total amount paid by the corporation everywhere during the income year; and (3) the corporation's total sales in North Carolina divided by the corporation's total sales everywhere during the income year. N.C.G.S. § 105-130.4(j)(1), (k)(1), (l )(1) (1992). The first factor, sales, is double-weighted in the apportionment formula. N.C.G.S. § 105-130.4(i) (1992). A multi-state corporation's nonbusiness income, such as rents, royalties, and dividends are taxed depending on whether and to what extent the income has some connection to the state. N.C.G.S. § 105-130.4(c) (1992). For example, if the property from which rents and royalties are gained in located in North Carolina, then that non-business income is taxable in North Carolina. N.C.G.S. § 105-130.4(d)(1) (1992).

A corporation, such as plaintiff here, whose commercial domicile is in North Carolina must pay income tax on dividends received on stock which it owns. N.C.G.S. § 105-130.4(f) (1992). N.C.G.S. § 105-130.7(1) provides for a deduction in the dividends on which the corporation pays tax; it states:

[T]he Secretary of Revenue shall determine from the corporate income tax return filed during the year ending September 30 by each corporation required to file a return during that period the proportion of the entire net income or loss of the corporation allocable to this State under the provisions of G.S. 105-130.4, except as provided herein.... A corporation which is a stockholder in any such corporation shall be allowed to deduct the same proportion of the dividends received by it from such corporation during its income year ending on or after September 30.

The amount of deductible dividends is capped at $15,000. N.C.G.S. § 105-130.8(6). Thus, the amount of dividends a corporate shareholder may deduct is based on the percentage of the issuing corporation's net income that is allocable to and taxable in this state. The greater percentage of corporate income allocated to and taxed in this State, the more dividend income the shareholder is allowed to deduct.

N.C.G.S. § 105-203 sets forth the intangible property tax to be levied against North Carolina residents for stock owned. It states:

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 (25cents) 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) In the case of a taxpayer that is a corporation, the proportion of the dividends upon the stock deductible by the taxpayer in computing its income tax liability under G.S. 105-130.7 without regard to the fifteen thousand dollar ($15,000) limitation under G.S. 105-130.7....

Thus the intangibles tax on stock is computed in the following manner: the greater the percentage of the issuing corporation's total income which is allocated to and taxed in this state the more dividend income from that corporation a corporate shareholder is allowed to deduct and the less intangibles tax the shareholder pays. The amount by which the intangibles tax against the shareholder is reduced, therefore, is directly related to the amount of the issuing corporation's income which is allocated to and taxed in this state. If 70% of the issuing corporation's income is allocated to North Carolina, then 70% of the dividends on that corporation's stock are deductible by the corporate shareholder as income, the stock's value for intangibles tax purposes is reduced by 70%, and the intangibles tax thereby decreased by 70%.

We now turn to the issue before us, which is whether North Carolina's intangibles tax on stock violates the Commerce Clause.

The United States Constitution grants Congress the authority to "regulate Commerce ... among the several states." U.S. Const. art. I, § 8, cl. 3. It is well established that "[t]he Commerce Clause was not merely an authorization to Congress to enact laws for the protection and encouragement of commerce among the States, but by its own force created an area of trade free from interference by the States." Freeman v. Hewit, 329 U.S. 249, 252, 67 S.Ct. 274, 276, 91 L.Ed. 265, 271 (1946), reh'g denied, 329 U.S. 832, 67 S.Ct. 497, 91 L.Ed. 705 (1947). Pursuant to the Commerce Clause no state may "impose a tax which discriminates against interstate commerce ... by providing a direct commercial advantage to local businesses." Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 458, 79 S.Ct. 357, 362, 3 L.Ed.2d 421, 427 (1959). It is the Court's " 'duty to determine whether the statute under attack, whatever its name may be, will, in its practical operation work discrimination against interstate commerce.' " Maryland v. Louisiana, 451 U.S. 725, 756, 101 S.Ct. 2114, 2134, 68 L.Ed.2d 576, 601 (1981) (quoting Best & Co. v. Maxwell, 311 U.S. 454, 455-56, 61 S.Ct. 334, 334-35, 85 L.Ed. 275, 277 (1940)).

Even a discriminatory tax, however, will be upheld where it is "designed simply to make interstate commerce bear a burden already borne by intrastate commerce." Associated Indus. of Missouri v. Lohman, 511 U.S. 641, ----, 114 S.Ct. 1815, 1821, 128 L.Ed.2d 639, 647 (1994). "Under that doctrine, a facially discriminatory tax that imposes on interstate commerce the rough equivalent of an identifiable and 'substantially similar' tax on intrastate commerce does not offend the ... Commerce Clause." Oregon Waste Sys., Inc. v. Department of Environmental Quality, 511 U.S. 93, ----, 114 S.Ct. 1345, 1352, 128 L.Ed.2d 13, 23 (1994). "The common thread running through the cases upholding compensatory taxes is the equality of treatment between local and interstate commerce." Maryland v. Louisiana, 451 U.S. at 759, 101 S.Ct. at 2135, 68 L.Ed.2d at 603.

Plaintiff argues that the intangibles tax on stock is facially discriminatory against corporations doing business outside North Carolina. Plaintiff asserts that due to the greater taxation of stock of corporations doing business outside North Carolina, those corporations will have more difficulty raising capital through the sale of stock in North Carolina than will corporations doing business in North Carolina only. Plaintiff also asserts that the current tax scheme encourages corporations to conduct business in North Carolina since that will reduce the intangibles tax liability to its North Carolina shareholders thereby enhancing the marketability of its shares...