Coley v. State

Decision Date30 June 2006
Docket NumberNo. 607A05.,607A05.
Citation631 S.E.2d 121
CourtNorth Carolina Supreme Court
PartiesDiana L. COLEY, Gerald L. Bass, John Walter Bryant, Ronald C. Dilthey, and All Other Taxpayers Similarly Situated v. STATE of North Carolina and Norris Tolson, Secretary of Revenue.

Boyce & Isley, P.L.L.C., by G. Eugene Boyce and Philip R. Isley, Raleigh, for plaintiff-appellants.

Roy Cooper, Attorney General, by Kay Linn Miller Hobart, Special Deputy Attorney General, for defendant-appellees.

EDMUNDS, Justice.

In this case, we consider whether the provision of the North Carolina Constitution that forbids a retrospective tax on "acts previously done" applies to a midyear tax increase on income. For the reasons given below, we hold that Article I, Section 16 of the North Carolina Constitution applies to such an increased tax but that the increase here is not unconstitutionally retrospective. Accordingly, we modify and affirm the opinion of the Court of Appeals.

On 26 September 2001, Governor Michael Easley signed into law Session Law 2001-424, titled the "Current Operations and Capital Improvements Appropriations Act of 2001." Current Operations and Capital Improvements Act, ch. 424, 2001 N.C. Sess. Laws 1670. Section 34.18.(a) of this Session Law rewrote portions of N.C.G.S. § 105-134.2(a) and enacted a temporary new income tax bracket for individuals with high incomes, increasing the highest marginal tax rate from 7.75 percent to 8.25 percent. Id., sec. 34.18.(a) at 2108-10. Pursuant to Section 34.18.(b), the new bracket became "effective for taxable years beginning on or after January 1, 2001" and, at the time of its passage, was scheduled to expire "for taxable years beginning on or after January 1, 2004." Id., sec. 34.18.(b) at 2110.

Plaintiffs filed their 2001 personal income tax returns under protest, then on 25 April 2003 filed suit under N.C.G.S. § 105-267 in Wake County Superior Court as "citizens and taxpayers of the State of North Carolina." Plaintiffs' complaint was a purported class action on behalf of themselves and all persons similarly situated. They sought a judgment declaring that the above-cited portion of Section 34.18.(b) of Session Law 2001-424 violates the provision of Article I, Section 16 of the North Carolina Constitution that states: "No law taxing retrospectively sales, purchases, or other acts previously done shall be enacted." In addition, plaintiffs prayed for refunds on all "taxes paid on wages, earnings and other taxable income ... for the 271 day period [from] January 1, 2001 through September 28, 2001" or, in the alternative, "refunds for all excess taxes paid on acts done during the entire year." The matter was designated as exceptional by the Chief Justice pursuant to Rule 2.1 of the General Rules of Practice for the Superior and District Courts.

Defendants filed consolidated motions to dismiss and to strike portions of the complaint. Plaintiffs subsequently filed motions for judgment on the pleadings and for summary judgment. Following a hearing on all these motions, the trial court filed a memorandum of decision and on 6 August 2004 entered an order denying plaintiffs' motion for summary judgment and allowing defendants' motion to dismiss pursuant to N.C.G.S. § 1A-1, Rule 12(b)(6). Plaintiffs entered notice of appeal to the Court of Appeals and, on 4 October 2005, a divided panel affirmed the trial court's ruling. Coley v. State, ___ N.C.App. ___, 620 S.E.2d 25 (2005). Plaintiffs appeal to this Court on the basis of the dissent.

We review the trial court's dismissal of plaintiffs' suit to determine "whether the allegations of the complaint, if treated as true, are sufficient to state a claim upon which relief can be granted under some legal theory." Thompson v. Waters, 351 N.C. 462, 463, 526 S.E.2d 650, 650 (2000). Plaintiffs contend that Section 34.18 of Session Law 2001-424 is retrospective because it requires payment of taxes on income earned from 1 January 2001 to the date of the law's signing on 26 September 2001, thereby taxing income-producing "acts previously done." Defendants respond that the legislation taxes income, not "acts," and thus falls outside the purview of the constitutional prohibition. Accordingly, we must make two related inquiries. First, is Session Law 2001-424 a tax upon acts, or, phrased differently, does Article I, Section 16 apply to an increase in income tax rates? Second, if so, does Session Law 2001-424 tax retrospectively? See Unemployment Comp. Comm'n v. Wachovia Bank & Tr. Co., 215 N.C. 491, 501, 2 S.E.2d 592, 599 (1939).

The genesis of the constitutional provision in question was legislation creating criminal liability for failure to pay taxes on previous purchases. See John V. Orth, The North Carolina State Constitution: A Reference Guide 53 (1993) [hereinafter Orth, State Constitution] (noting that the rationale for the ban on retrospective tax laws "would seem to be similar to that for ... retrospective criminal laws"). Specifically, in State v. Bell, this Court upheld the conviction of the defendant, a merchant who refused to pay a tax levied on all purchases made by those "buying or selling goods, wares or merchandise of whatever name or description." 61 N.C. 76, 81, 61 N.C. (Phil.) 76, 80 (1867). Although the statute was ratified on 18 October 1865, it "was to apply and operate during the twelve months next preceding the first of January, 1866." Id. at 82, 61 N.C. (Phil.) at 80. The defendant offered to pay the tax on his purchases made after 18 October 1865, but he refused to pay taxes on purchases before that date and was convicted of a misdemeanor. Id. at 82, 61 N.C. (Phil.) at 81.

On appeal, the defendant argued that the tax was unconstitutional and void either as an ex post facto law or as a retrospective law "against the spirit ... of the Constitution." Id. at 82-83, 61 N.C. (Phil.) at 81-82. We observed that ex post facto laws apply only "to matters of a criminal nature" and held that the law was prospective "in respect to [the defendant's] criminality" because the defendant could avoid all criminal liability by paying the tax. Id. at 83, 61 N.C. (Phil.) at 81-82. We then discussed the State's "large and essential power" to tax, id. at 85, 61 N.C. (Phil.) at 86, and reasoned that without some particular "repugnancy to the Constitution of the United States or of the State," id at 84, 61 N.C. (Phil.) at 83, we could "see nothing to prevent the people from taxing themselves [retrospectively], either through a convention or a legislature," id. at 85-86, 61 N.C. (Phil.) at 86. Accordingly, the defendant's conviction was affirmed.

Shortly after we issued our opinion in Bell, the North Carolina Constitutional Convention of 1868 convened. The Journal from the Convention illustrates that preliminary versions of the draft Constitution contained in the Declaration of Rights a provision against ex post facto laws. Journal of the Constitutional Convention of the State of North Carolina 168, 213 (Raleigh, Joseph W. Holden 1868) [hereinafter Convention Journal]. However, the provision did not include a prohibition against retrospective taxation until delegate William B. Rodman,1 an attorney, moved to add the following language: "No law taxing retrospectively sales, purchases, or other acts previously done ought to be passed." Id. at 216. As detailed below, plaintiffs argue that Rodman's personal papers2 indicate that he was aware of the Bell decision and suggest that the holding in that case influenced his motion. Rodman's amendment was adopted, and the final version, "Retrospective laws, punishing acts committed before the existence of such laws, and by them only declared criminal, are oppressive, unjust, and incompatible with liberty; wherefore, no ex post facto law ought to be made. No law taxing retrospectively, sales, purchases, or other acts previously done, ought to be passed[,]" appeared in Article I, Section 32 of the Constitution approved in April of 1868. Id. at 216, 230; see also Orth, State Constitution 13.

In November of 1970, North Carolina voters ratified a revised and amended state constitution generally known as the 1971 Constitution. See Stephenson v. Bartlett, 355 N.C. 354, 367, 562 S.E.2d 377, 387 (2002) (citing John L. Sanders, Our Constitutions: An Historical Perspective, in Elaine F. Marshall, N.C. Dep't of Sec'y of State, North Carolina Manual 1999-2000, at 125, 134). Article I, Section 32, while remaining in the Declaration of Rights, was renumbered as Section 16 and the language slightly altered, with the word "shall" replacing "ought to." N.C. Const. art. I, § 16.

Plaintiffs contend that the increased income tax imposed in Session Law 2001-424 violates this provision. They take an historical approach, arguing that Rodman's papers demonstrate that he proposed amendments to the 1868 Constitutional Convention relating to retrospective taxation. According to plaintiffs, under Rodman's leadership, the Convention initially considered an amendment to Article I, Section 32 stating that "sales, purchases and other transactions previously done" could not be taxed retrospectively, but ultimately chose to use the broader term "other acts" in lieu of "other transactions." Plaintiffs then maintain that the Convention's decision to use the more expansive term "acts" signals the Framers' intent that the earning of income is an "other act[ ]" that cannot be taxed retrospectively.

Although the papers cited by plaintiffs are provocative and may well reflect the evolution of Rodman's thoughts as he experimented with alternative versions of his amendment, the Journal of the Convention does not indicate...

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