Fulton Corp. v. Justus

Decision Date15 June 1993
Docket NumberNo. 9210SC15,9210SC15
Citation430 S.E.2d 494,110 N.C.App. 493
CourtNorth Carolina Court of Appeals
PartiesFULTON CORPORATION, Plaintiff, v. Betsy Y. JUSTUS, Secretary of Revenue, Defendant.

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

Atty. Gen. Lacy H. Thornburg by Asst. Atty. Gen., Marilyn R. Mudge, Raleigh, for defendant-appellee.

COZORT, Judge.

Plaintiff filed suit challenging the constitutionality of North Carolina's intangibles tax levied on ownership of corporate stock. Plaintiff contends the provision violates the Commerce Clause of the United States Constitution by increasing the tax liability for shares of stock of corporations which have business activities, property locations, and tax liabilities outside of North Carolina; and by lessening the tax liability for shares in corporations whose business and property are largely or completely in North Carolina. The superior court granted summary judgment for the defendant Secretary of Revenue. We find the taxing scheme violates the Commerce Clause, and we reverse. We further find that the provisions of the taxing scheme are severable, and we strike the portion of N.C.Gen.Stat. § 105-203 which gives a reduction in intangibles tax liability under the taxable percentage provision.

We begin with an overview of North Carolina's intangibles tax on corporate stock and other related tax statutes. (Several sections in Chapter 105 were amended in the 1991 and 1992 sessions of the General Assembly. None of the amendments affect the resolution of the issues presented in this case. For convenience to the reader, all references are to the most recent version of the statutes.) Pursuant to N.C.Gen.Stat. §§ 105-130 through 105-130.41 (1992), North Carolina imposes an income tax on corporations doing business in North Carolina. If a corporation does business only in North Carolina, then one hundred percent of the corporation's business income is taxed in North Carolina. N.C.Gen.Stat. § 105-130.3 (1992). If a corporation does business in North Carolina and other states, then only that percentage of business income apportioned to North Carolina is taxable here. N.C.Gen.Stat. § 105-130.4(b) (1992). A corporation's business income is apportioned on the basis of three factors: (1) the corporation's total sales in North Carolina divided by the corporation's total sales everywhere during the income year; (2) 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; and (3) the total amount paid by the corporation in North Carolina during the income year as compensation divided by the total amount paid by the corporation everywhere during the income year. N.C.Gen.Stat. § 105-130.4(i) through (l )(3). The first factor, sales, is double-weighted in the apportionment formula. Id. A multistate corporation's nonbusiness income, such as rents, royalties, interest, and gains and losses, is subject to North Carolina income tax if the income has some connection to the state; for example, North Carolina is the corporation's principal place of business or the situs of the non-business activities or investments. N.C.Gen.Stat. § 105-130.4(c)-(h) (1992).

Pursuant to N.C.Gen.Stat. § 105-198 through § 105-217 (1992), North Carolina imposes an intangibles tax on accounts receivable; bonds, notes, and other evidences of debt; beneficial or equitable interests in foreign trusts; and shares of stock. N.C.Gen.Stat. § 105-203 (1992) provides 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 (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) [T]he 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....

The provision beginning with "less the proportion of the value" is commonly referred to as the taxable percentage provision, which is the subject of plaintiff's challenge.

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 non-business 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. The tax is collected by the state, made part of the General Fund, and is available for appropriation to the taxpayer's resident county. N.C.Gen.Stat. § 105-213.1 (1992).

Plaintiff is a North Carolina corporation which, as of 31 December 1990, held stock in six corporations. Of the six corporations, only Food Lion, a multistate corporation, conducted business in North Carolina. Since forty-six percent of Food Lion's net income was subject to North Carolina corporate income tax for the 1990 taxable period, the taxable percentage of plaintiff's stock in Food Lion was fifty-four percent. The taxable percentage of plaintiff's stock in the remaining five corporations was one hundred percent. On 8 January 1991, plaintiff filed an intangible personal property tax return and remitted $10,884.00. On 1 May 1991, plaintiff filed suit in Wake County Superior Court seeking a refund of the $10,884.00 paid in intangibles tax, a declaratory judgment that N.C.Gen.Stat. § 105-203 is unconstitutional, and attorneys' fees. Both parties moved for summary judgment. Judge Dexter Brooks granted summary judgment for the Secretary of Revenue.

On appeal, plaintiff argues that the trial court erred in granting summary judgment because the intangibles tax (1) violates the Commerce Clause of the United States Constitution, and (2) violates the Due Process and Equal Protection Clauses of the United States and North Carolina Constitutions. Plaintiff further argues that the trial court erred in denying relief pursuant to 42 U.S.C.S. § 1983 and attorneys' fees pursuant to 42 U.S.C.S. § 1988.

We first consider whether plaintiff-taxpayer has standing to challenge the constitutionality of the statute. In North Carolina, a taxpayer has standing to challenge a tax if " 'the tax levied upon him is for an unconstitutional ... purpose, ... the carrying out of all the challenged provisions "will cause him to sustain personally, a direct and irreparable injury," or [if] he is a member of the class prejudiced by the operation of the statute....' " Orange County v. N.C. Dept. of Transportation, 46 N.C.App. 350, 361, 265 S.E.2d 890, 899, disc. review denied, 301 N.C. 94 (1980) (citations omitted). The United States Supreme Court has recognized, at least implicitly, that a local taxpayer has standing to challenge a tax on the grounds that the tax violates the Commerce Clause. See Goldberg v. Sweet, 488 U.S. 252, 261, 109 S.Ct. 582, 589, 102 L.Ed.2d 607, 617 (1989); Halliburton Oil Well Cementing Co. v. Reily, 373 U.S. 64, 83 S.Ct. 1201, 10 L.Ed.2d 202, reh'g denied, 374 U.S. 858, 83 S.Ct. 1861, 10 L.Ed.2d 1082 (1963); I.M. Darnell & Son Co. v. Memphis, 208 U.S. 113, 28 S.Ct. 247, 52 L.Ed. 413 (1908); Walling v. Michigan, 116 U.S. 446, 6 S.Ct. 454, 29 L.Ed. 691 (1886). We thus find plaintiff has standing to challenge the taxing provisions.

Next, we consider plaintiff's argument that North Carolina's intangibles tax violates the Commerce Clause of the United States Constitution. U.S. Const. art. I, § 8, cl. 3 confers upon Congress the power "[t]o regulate commerce with foreign nations, and among the several states, and with the Indian tribes." Plaintiff argues: (1) that the discrimination appears on the face of the statute; (2) that the tax indirectly discriminates against out-of-state business; and (3) that the compensating tax defense is not available to save the tax. Plaintiff summarizes the discrimination as follows: The more a corporation's business and property are located in North Carolina, the higher is the percentage of its income subject to taxation in this state, and the higher is the percentage of its stock not subject to the intangibles tax. The more a corporation's business and property are located out-of-state, the higher is the percentage of its stock subject to the intangibles tax. Therefore, the tax scheme favors corporations that operate totally or more in North Carolina and disfavors corporations that operate totally or more in other states. Plaintiff cites two possible impacts on interstate commerce. First, plaintiff alleges the tax encourages investors to buy stock in local corporations, thereby possibly affecting the ability of out-of-state corporations to raise capital in North Carolina, thus lessening the trading of stocks in interstate commerce. Second, plaintiff alleges local corporations may be encouraged not to enter interstate commerce in order to avoid the intangibles taxation for their shareholders.

To survive constitutional challenge under the Commerce Clause, a tax must (1) apply to an activity with a substantial nexus with the taxing state, (2) be fairly apportioned, (3) be fairly related to the services provided by the state, and (4) not discriminate against interstate commerce. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S.Ct. 1076, 1079, 51 L.Ed.2d 326, 331, reh'g denied, 430 U.S. 976, 97 S.Ct. 1669, 52 L.Ed.2d 371 (1977). At issue here is the fourth requirement. It is fundamental that "[n]o State may, consistent with the Commerce Clause, 'impose a tax which discriminates against interstate commerce ... by providing a direct commercial advantage to local business.' ...

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    • United States
    • United States Supreme Court
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