Cape Hatteras Electric Membership Corp.. v. Lay

• Decision Date: 01 March 2011
• Docket Number: No. COA10–271.,COA10–271.
• Citation: 708 S.E.2d 399
• Parties: CAPE HATTERAS ELECTRIC MEMBERSHIP CORPORATION, Plaintiff,v.Kenneth R. LAY, Secretary of the North Carolina Department of Revenue, Defendant.
• Court: North Carolina Court of Appeals

708 S.E.2d 399

CAPE HATTERAS ELECTRIC MEMBERSHIP CORPORATION, Plaintiff,

v.Kenneth R. LAY, Secretary of the North Carolina Department of Revenue, Defendant.

No. COA10–271.

Court of Appeals of North Carolina.

March 1, 2011.

OPINION TEXT STARTS HERE

Appeal by defendant from judgment entered 24 November 2009 by Judge Jerry R. Tillett in Dare County Superior Court. Heard in the Court of Appeals 14 September 2010.

Vandeventer Black LLP, Raleigh, by Norman W. Shearin and David P. Ferrell, for plaintiff-appellee.

Attorney General Roy Cooper, by Assistant Attorney General Terence D. Friedman, for defendant-appellant.

ROBERT C. HUNTER, Judge.

Defendant Kenneth R. Lay, Secretary of the North Carolina Department of Revenue (“NCDOR”) appeals from a judgment entered 24 November 2009. After careful review, we affirm.

Background

Plaintiff Cape Hatteras Electric Membership Corporation (“CHEMC”) was originally incorporated on 30 March 1945 under former N.C. Gen.Stat. § 117–19 for the purpose of providing low cost electric service on a non-profit basis to consumers on Hatteras Island, North Carolina. N.C. Gen.Stat. § 117–19 was enacted in 1935 and declared all electric membership corporations (“EMCs”) to be public agencies. The statute stated:

Whenever an electric membership corporation is formed in the manner herein provided, the same shall be, and is hereby declared to be a public agency, and shall have within its limits for which it was formed the same rights as any other political subdivision of the State, and all property owned by said corporation and used exclusively for the purpose of said corporation shall be held in the same manner and subject to the same taxes and assessments as property owned by any county or municipality of the State so long as said property is owned by said electric membership corporation and is used for the purpose for which the corporation was formed.

N.C. Gen.Stat. § 117–19. Pursuant to this statute, CHEMC and Ocracoke Electric Membership Corporation (“Ocracoke EMC”) were deemed to be public agencies and were not required to pay any taxes on the sale of electricity.

The evidence at the bench trial in this matter tended to show that in the early 1960's, disputes arose between EMCs and investor owned utilities (“IOUs”) regarding the provision of electric service to previously unserved territories. In the mid–1960's, EMCs and IOUs began petitioning the General Assembly to pass legislation favorable to their respective positions. After the 1964 election, Governor-elect Dan K. Moore asked representatives of the EMCs and IOUs to reach a compromise. The result was a compromise which involved the assignment of service territories to EMCs and IOUs and the loss of public agency status for EMCs. However, CHEMC and Ocracoke EMC were in a unique position because they had no competitors and the IOUs were not interested in servicing Hatteras or Ocracoke islands.

On 9 March 1965, four bills were introduced in both the House and Senate by the chairs of the House and Senate Public Utilities Committees. These bills constituted the so called “Territorial Act.” House Bill 255/Senate Bill 95 proposed to end the public agency status of EMCs; House Bill 256/Senate Bill 96 declared the telephone cooperatives to be public agencies; House Bill 257/Senate Bill 97 declared Ocracoke EMC to be a public agency; and House Bill 258/Senate Bill 98 declared CHEMC to be a public agency.

On 20 April 1965, N.C. Gen.Stat. § 117–19 was amended by House Bill 255, to state that henceforth “no [EMC] ... shall be a public agency; nor shall any such corporation be, or have the rights of, a political subdivision of the State.” However, the General Assembly, in accordance with the respective House and Senate bills, enacted session laws that declared CHEMC, Ocracoke EMC, and the telephone cooperatives to be public agencies. As it relates to this case, House Bill 258/Senate Bill 98 was codified on 28 April 1965 as a Session Law entitled: “An Act To Declare Cape Hatteras Electric Membership Corporation To Be A Public Agency And Provide That It Shall Be Exempt From Certain Taxation” (“the Special Act”). As a result of the amended statute and enacted session laws, all EMCs, except CHEMC and Ocracoke EMC, no longer had public agency status and were required to pay franchise tax on revenue generated from the sale of electricity.

On 6 July 1984, the General Assembly enacted Chapter 1097 of the 1984 Session Laws, which split the franchise tax levied on EMCs into franchise and sales taxes. Sales tax was only levied on sellers of electricity who were previously required to pay franchise tax. Since CHEMC was not previously required to pay franchise tax it was not required to pay sales tax. Following a sales tax audit, in a letter dated 4 April 1990, NCDOR acknowledged that CHEMC was not required to pay sales tax due to its status as a public agency.

From 1965 to 2000, CHEMC was never required to pay franchise or sales taxes. On 24 February 2000, the Sales and Use Tax Division of NCDOR sent a letter to CHEMC stating that as of 1 March 2000, CHEMC would be required to pay sales tax on its sale of electricity as set out in N.C. Gen.Stat. § 105–164.4(a)(4a). In a 22 May 2000 follow-up letter, NCDOR stated that CHEMC was required to pay sales tax because of an amendment made to N.C. Gen.Stat. § 105–164.3(25) during the 1999 Session of the General Assembly, which expanded the definition of utility to include “a business entity or municipality that sells electric power[.]” The letter went on to state NCDOR's position that “the changes to G.S. 105–164.3(25) were designed to treat all sellers of electricity alike for sales and use tax purposes, and the only specific exemption provided was for a municipality whose only wholesale supplier of electric power is a federal agency[.]” ¹ On 22 June 2000, NCDOR informed CHEMC that it would also have to pay franchise tax in addition to sales tax. NCDOR concluded that the Special Act only granted CHEMC a property tax exemption. CHEMC has paid franchise and sales taxes since 2000 under protest.²

On 17 November 2000, CHEMC filed a complaint pursuant to N.C. Gen.Stat. § 105–267 (2000) demanding a refund of sales tax paid since 28 July 2000 and asking the trial court to hold that “[CHEMC] is not subject to or liable for sales and franchise taxes[.]” On 23 April 2003, CHEMC amended its complaint to seek a refund for franchise tax paid since 1 January 2001. On 6 August 2007, a bench trial was conducted in Dare County Superior Court before Judge Jerry R. Tillett. Additional arguments were heard on 1 June 2009 and 29 October 2009. On 24 November 2009, Judge Tillett entered judgment in favor of CHEMC, determining that CHEMC was not subject to franchise or sales taxes and ordering NCDOR to refund CHEMC the principal amount of taxes paid in the amount of $7,295,773.65 plus interest. NCDOR was required to pay all costs of the action. NCDOR timely appealed to this Court.

Standard of Review

“It is well settled in this jurisdiction that when the trial court sits without a jury, the standard of review on appeal is whether there was competent evidence to support the trial court's findings of fact and whether its conclusions of law were proper in light of such facts.” Shear v. Stevens Building Co., 107 N.C.App. 154, 160, 418 S.E.2d 841, 845 (1992). “Findings of fact by the trial court in a non-jury trial have the force and effect of a jury verdict and are conclusive on appeal if there is evidence to support those findings.” Id. The trial court's conclusions of law are reviewable de novo. Id.

Discussion

I.

As a preliminary matter, the franchise tax at issue was in existence in 1965 when the Special Act was passed; however, the sales tax statute was not enacted until 1984. Accordingly, we first address the effect of the Special Act as it relates to the franchise tax and then we will address the implication of the enactment of the sales tax statute.

NCDOR argued before the trial court, and argues now on appeal, that there is no ambiguity in the Special Act and the plain language of the statute does not exempt CHEMC from paying franchise and sales taxes; however, if there is an ambiguity in the Special Act, then rules of statutory construction require that such ambiguity be resolved in NCDOR's favor. CHEMC argues that the Special Act is ambiguous because it does not define “public agency,” and, therefore, the Court must discern the legislative intent of the Special Act. CHEMC contends that the clear legislative intent was to give CHEMC tax exempt status. The trial court concluded as a matter of law:

8. The Special Act is ambiguous and therefore the Court must construe it to ascertain the intent of the legislature.

9. Alternatively, the language of the Special Act is clear and unambiguous but a clearly expressed legislative intent requires judicial interpretation. Uncertainty as to the meaning of the Special Act arises from the fact that giving a literal interpretation to the words thereof would lead to unreasonable, unjust, impracticable, or absurd consequences by the General Assembly.

....

22. [T]he Special Act continues the tax-favored public agency status for CHEMC that all EMCs enjoyed under former N.C. Gen.Stat. § 117–19.

23. The Special Act exempts CHEMC from sales and franchise taxes on its sale of electricity to its members.

Accordingly, we must first ascertain whether the Special Act is ambiguous on its face. “A long-standing rule of statutory construction declares that a facially clear and unambiguous statute requires no interpretation.” Taylor v. City of Lenoir, 129 N.C.App. 174, 179, 497 S.E.2d 715, 719 (1998). The Special Act states:

Sec[ ]. 1. Cape Hatteras Electric Membership Corporation, heretofore created and now existing under and by virtue of the provisions of Chapter 117 of the General Statutes of North Carolina, being presently engaged in supplying electric service to the inhabitants of Hatteras Island under circumstances...