N.C. Dep't of Revenue v. Philip Morris U.S. Inc.
| Decision Date | 03 May 2023 |
| Docket Number | 22 CVS 1162 |
| Citation | 2023 NCBC 33 |
| Parties | NORTH CAROLINA DEPARTMENT OF REVENUE, Petitioner, v. PHILIP MORRIS USA, INC., Respondent. |
| Court | Superior Court of North Carolina |
North Carolina Department of Justice, by Ashley H. Morgan, for Petitioner North Carolina Department of Revenue [1].
Parker, Poe, Adams, & Bernstein LLP, by Kay H. Miller and Dylan Z. Ray, for Respondent Philip Morris USA, Inc.
1. THIS MATTER is before the Court on the North Carolina Department of Revenue's Petition for Judicial Review of a Final Agency Decision issued by the Office of Administrative Hearings ("OAH") in a contested tax case, as well as Petitioner's Motion to Strike. Central to the appeal is whether OAH had jurisdiction to render the decision below.
2. Because the Court determines that OAH did not have subject matter jurisdiction to determine the constitutionality of the statute at issue, the Court REVERSES the Final Agency Decision and REMANDS this matter with instructions to DISMISS the case on jurisdictional grounds.
3. Philip Morris USA, Inc. ("Philip Morris") is a corporation domiciled in Virginia and authorized to do business in North Carolina. It is one of an affiliated group of companies owned by Altria Group, Inc. ("Altria Group"). (R.16.)[2]
4. Philip Morris is required to pay an annual franchise tax for the privilege of doing business in this State. See N.C. G.S. § 105-122 (2012). For tax years 2012-14, Philip Morris used its "Capital Base" to calculate its franchise tax in accordance with Section 105-122(b).[3]
5. During the relevant period,[4] Section 105-122 specified that a corporation's Capital Base was to be calculated by first totaling the amount of the company's "issued and outstanding capital stock, surplus, and undivided profits." From that number, deductions were permitted for various liabilities, among them definite and accrued legal liabilities, declared dividends, depreciation reserves, accrued taxes, and reserves for certain environmental or recycling equipment. Id. § 105-122(b).
6. The adjustments were not limited to deductions, however. Relevant here, the statute required that "[e]very corporation doing business in the State which is a parent, subsidiary, or affiliate of another corporation" add to its capital stock, surplus, and undivided profits "all indebtedness owed [by it] to a parent, subsidiary, or affiliated corporation" (an "affiliate payable"). On the other hand, if the corporation loaned capital to its affiliate, the corporation could subtract from its Capital Base the amount of indebtedness owed to it (an "affiliate receivable")-but only "to the extent that the debt [was] included in the tax base of the parent, subsidiary, or affiliated debtor corporation reporting for taxation under the provisions of this section." In other words, in order for a corporation subject to North Carolina's franchise tax to deduct an affiliate receivable, the affiliate receiving the loan had to be subject to North Carolina's franchise tax. See id. § 105-122.
7. During the 2012-14 period, Philip Morris borrowed money from and loaned money to various affiliates of Altria Group. Some of these affiliates were subject to North Carolina's franchise tax, but others were not. (R.62-64.)
8. In 2016, the North Carolina Department of Revenue ("Department") conducted an audit of Philip Morris' franchise tax liability for the 2012-14 tax years. Philip Morris took the position during the audit that it should be able to deduct from its Capital Base any amounts it loaned to its affiliates, regardless of whether the debtors were subject to North Carolina's franchise tax. The Department rejected that position and determined that Philip Morris' deduction of these amounts from its Capital Base had resulted in the underreporting of its tax liability for each of the audited years.[5] (R.10, 58, 62-64, 185.)
9. Following the audit, Philip Morris objected to the proposed assessment and requested further review. (R.9-13.) The company framed the issue for this Court's review in its brief as follows:
[T]he Department calculated the 'affiliated indebtedness' component of the franchise tax base to require the addition of Philip Morris' intercompany 'payables' to all of its affiliates (the creditor corporations) regardless of whether the affiliates filed North Carolina franchise tax returns, but permitted a deduction for Philip Morris' intercompany 'receivables' from its affiliates (the debtor corporations) only if the affiliates were doing business in North Carolina and filing franchise tax returns.
(Respondent's Brief, [ ] 3, ECF No. 24.)
10. On 31 August 2020, the Department issued a Notice of Final Determination upholding its determination and assessing more than $300,000.00 in franchise taxes, penalties, and interest for tax years 2012, 2013, and 2014. (R.16-22.)
11. On 27 October 2020, Philip Morris filed a petition with the Office of Administrative Hearings ("OAH") challenging the tax assessment. (R.1.) In its subsequent motion for summary judgment in that proceeding, Philip Morris argued that Section 105-122(b)'s differing treatment of affiliate receivables, which turned on whether the affiliate was subject to North Carolina's franchise tax, violated the dormant commerce clause of the United States Constitution.[6] Therefore, Philip Morris argued that application of the statute to it was unconstitutional. (R.174-80.)
12. Citing Section 105-241.17 of the North Carolina General Statutes, the presiding administrative law judge ("ALJ") determined that OAH was required "to examine the constitutional claim made by [Philip Morris] to determine if dismissal is appropriate 'because the sole issue [was] the constitutionality of the statute.'" In addition, the ALJ determined that if the issue was "the application of [the] statute," OAH was required to issue a final decision. Conflating the two concepts, the ALJ then concluded, "this tribunal holds that it has jurisdiction to render a final decision in this case because [Philip Morris] has properly claimed that the sole issue in this case is the constitutionality of the statute at issue, as applied to Petitioner, alone." (R.241.)
13. But the tension between the ALJ's treatment of the case as one involving the application of the statute to Philip Morris as opposed to its constitutionality is evident in footnote 6 of the ALJ's opinion. There, the ALJ wrote: (R.245, n.6.) Nevertheless, the ALJ accepted Philip Morris' characterization of its challenge as one involving the application of Section 105-122 only to the company and proceeded to decide the case.
14. After determining that OAH had jurisdiction, the ALJ held that the statute as applied to Philip Morris was unconstitutional because it violated the dormant commerce clause. She found problematic the statute's differing treatment of affiliate indebtedness between companies that were subject to North Carolina's franchise tax and those that were not. To remedy the constitutional infirmity, the ALJ granted Philip Morris' motion for summary judgment and ruled that "[w]hen calculating [Philip Morris'] Capital Base for Franchise Tax liability purposes . . . [the Department] may not apply the second half of the final sentence of Section 105-122(b), which reads: 'to the extent that the debt has been included in the tax base of the parent, subsidiary, or affiliated debtor corporation reporting for taxation under the provisions of this section.'" (R.249.) The ALJ then reversed and rescinded the Department's Notice of Final Determination. (R.249.)
15. The Department petitions this Court for judicial review of the ALJ's decision. (See Petitioner's Brief, ["Pet. Br."] 1, ECF No. 19.) It also moves to strike exhibits that were not made part of the Record but that Philip Morris referenced and attached to its briefing on appeal to this Court. (See Mot. Strike, ECF No. 28.)
16. After filing the petition, the Department moved to bifurcate these proceedings so that the issue of OAH's jurisdiction to render the decision below would be addressed before the merits of the Department's appeal were considered. (Mot. Bifurcate, ECF No. 11.) The Court granted the Department's motion and entered a Scheduling Order on 2 May 2022, requiring, as an initial matter, briefing and oral argument limited to the jurisdictional issue. (Order, ECF No. 18.) The Court has reviewed this briefing and conducted a hearing on 16 November 2022 at which both parties participated through counsel. The jurisdictional issue is now ripe for disposition.
17. When conducting judicial review of a final agency decision "the court shall determine whether the petitioner is entitled to the relief sought in the petition based upon its review of the final decision and the official record." N.C. G.S. § 150B-51(c). The court acts in an appellate capacity to determine whether the evidence supports the agency's findings of fact, whether the findings support the agency's conclusions of law, and whether the conclusions of law are proper statements and applications of the law. See Mann Media, Inc. v. Randolph Cty. Planning Bd., 356 N.C. 1, 12-13 (2002). The Court may reverse or modify a final agency decision if...
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