NC Ass'n of Electronic Tax Filers, Inc. v. Graham

• Decision Date: 07 May 1993
• Docket Number: No. 228PA92.,228PA92.
• Citation: 429 S.E.2d 544,333 N.C. 555
• Parties: NORTH CAROLINA ASSOCIATION OF ELECTRONIC TAX FILERS, INC., and Rocket Refund, Inc. v. William T. GRAHAM, Commissioner of Banks, North Carolina Banking Commission.
• Court: North Carolina Supreme Court

429 S.E.2d 544

333 N.C. 555

NORTH CAROLINA ASSOCIATION OF ELECTRONIC TAX FILERS, INC., and Rocket Refund, Inc. v. William T. GRAHAM, Commissioner of Banks, North Carolina Banking Commission.

No. 228PA92.

Supreme Court of North Carolina.

May 7, 1993.

Kennedy, Kennedy, Kennedy & Kennedy by Harvey L. Kennedy and Harold L. Kennedy, III, Winston-Salem, for plaintiffs-appellants.

Michael F. Easley, Atty. Gen. by Philip A. Lehman, Asst. Atty. Gen., and L. McNeil Chestnut and Mercedes Oglukian, Raleigh, for defendant-appellee.

North Carolina Legal Services Resource Center, Inc. by Gregory C. Malhoit, Raleigh, and North State Legal Services, Inc. by Carlene McNulty, Hillsborough, for North Carolina Clients Council, amicus curiae.

PARKER, Justice.

Plaintiffs filed this action for a declaratory judgment asserting that the Refund Anticipation Loan Act, N.C.G.S. §§ 53-245 to 53-254 (effective Oct. 1, 1990), violates both the Supremacy Clause and the Commerce Clause of the United States Constitution and asking that the Act be declared unconstitutional on its face and in its application to refund anticipation loans made by out-of-state national banks. Plaintiffs moved for summary judgment; the trial court denied plaintiffs' motion and entered summary judgment in favor of defendant. The court concluded (i) there are no genuine issues of material fact and (ii) the Refund Anticipation Loan Act violates neither the Supremacy Clause nor the Commerce Clause of the United States Constitution. On 16 July 1992 this Court granted plaintiffs' petition for discretionary review. Before this Court plaintiffs again contend the Act violates the Supremacy Clause and the Commerce Clause. We disagree and affirm summary judgment for defendant.

Plaintiffs are North Carolina corporations, each with its principal place of business in Southern Pines, North Carolina. Plaintiff Association is composed of North Carolina businesses participating in the Internal Revenue Service Electronic Filing Program for Form 1040, which permits taxpayers to file income tax returns electronically. Plaintiff Rocket Refund is a member of the Association. Members of plaintiff Association also accept and facilitate refund anticipation loan ("RAL") applications utilizing the loan services of out-of-state national banks. To determine the validity of plaintiffs' arguments that the Refund Anticipation Loan Act violates the Supremacy and Commerce Clauses of the United States Constitution, we need at the outset to examine pertinent revenue procedures and the provisions of the Act itself.

To be accepted into the Electronic Filing Program for Form 1040, an applicant must complete an application, undergo testing of its transmitting capability, pass a suitability check, receive a letter of acceptance and obtain a filing or transmitter identification number. Rev.Proc. 91-69, 1991-2 C.B. 893, 894 (effective Jan. 1, 1992); see also Rev. Proc. 90-62, 1990-2 C.B. 659, 660 (effective Jan. 1, 1991). Once accepted, a participant becomes an electronic filer and is categorized as an electronic return originator, a software developer, a transmitter, or some combination thereof. Rev.Proc. 91-69, 1991-2 C.B. at 894. Revenue procedures inform electronic filers "of their obligations to the Internal Revenue Service, taxpayers, and other participants." Id. at 893. Responsibilities of electronic filers include ensuring that complete returns are accurately and efficiently filed and complying with all publications and notices of the Electronic Filing Systems Office. Id. at 895. If an electronic filer charges a fee for transmission of a tax return, the fee may not be based on a percentage of the refund amount. Id. Penalties are provided for disclosure or use of tax return information. Id. at 896. In addition, electronic filers who also meet the definition of income tax preparers may be subjected to preparer penalties. Id. The Internal Revenue Service ("the Service") monitors electronic filers for conformity with revenue procedures; this monitoring includes checking on (i) timely receipt and legibility of forms and (ii) quality of transmission, including rejections, errors and other defects. Id. at 899. The Service also monitors complaints about filers. The Service may issue a warning letter describing specific corrective action for deviations from Revenue Procedure 91-69 or may immediately suspend a filer from the program. Id.

According to Section 9 of Revenue Procedure 91-69, "Direct Deposit of Refunds," a taxpayer expecting to receive a refund may file a return electronically and elect to have the refund deposited directly into a bank account. Id. at 897; see also Rev.Proc. 90-62, 1990-2 C.B. at 662. Section 10 of Revenue Procedure 91-69 recognizes that often taxpayers borrow against expected refunds:

.01 A Refund Anticipation Loan (RAL) is money borrowed by a taxpayer that is based on a taxpayer's anticipated income tax refund. The Service has no involvement in RALs. This is a contract between the taxpayer and the lender. An acknowledgement from the Service that a taxpayer's return is accepted for processing is not a guarantee to either the taxpayer or a lender that the taxpayer will receive a refund or what the amount of any refund might be.

Rev.Proc. 91-69, 1991-2 C.B. at 897. By contrast, the predecessor procedure, Revenue Procedure 90-62, provided simply, "The Service has no involvement in RALs. This is a contract between the taxpayer and the financial institution." Rev.Proc. 90-62, 1990-2 C.B. at 663. Section 10 of Revenue Procedure 91-69 also provides as follows:

.02 Any entity that is involved in the Electronic Filing Program, including a financial institution that accepts direct deposits of income tax refunds, has an obligation to every taxpayer who applies for an RAL to ensure that the taxpayer understands that an RAL is in fact a loan, and not a substitute for or a quicker way of receiving an income tax refund. Consequently, if a direct deposit is not made as originally anticipated by the taxpayer, the taxpayer may be liable for additional interest or fees.

Rev.Proc. 91-69, 1991-2 C.B. at 898. Other language in Section 10 regulating electronic filers facilitating RALs includes (i) a provision requiring written consent of the taxpayer before the filer may disclose tax information to a lender and (ii) a prohibition against guaranteeing the amount of the refund or the date it will be issued. Id. at 898.

The Refund Anticipation Loan Act defines an RAL as "a loan that the creditor arranges to be repaid directly from the proceeds of the debtor's income tax refund." N.C.G.S. § 53-246(8) (Supp.1992). Creditors are those who make RALs, id. § 53-246(4); and facilitators are those who process, receive, or accept for delivery an application for an RAL or a check in payment of RAL proceeds or otherwise facilitate the making of RALs, id. § 53-246(6). RAL fees are "charges, fees, or other consideration charged or imposed by" creditors or facilitators. Id. § 53-246(9). RAL fees are distinct from charges for nonloan services such as preparation or electronic filing of returns. Id.

The Act requires persons handling RAL applications to register with the North Carolina Commissioner of Banks. Id. § 53-247(a). Banks, savings associations or credit unions doing business under North Carolina or United States law are specifically exempted. Id. § 53-247(c). Failure to register constitutes a misdemeanor punishable by imprisonment of up to sixty days, a fine of up to $2,000, or both. Id. § 53-247(b). Registration procedures include submitting an application and fee of $250.00 for each office wherein RALs will be facilitated. Id. § 53-248(a). In addition the Commissioner must find "that the responsibility and general fitness of the applicant are such as to command the confidence of the community and to warrant belief that the business of facilitating RALs will be operated" in accord with the Act. Id. If not renewed, registration expires on 31 December following the date issued; and the renewal fee is $100.00. Id. § 53-248(b).

Registrants are subject to additional regulation, in that they must file fee schedules, id. § 53-249(a); post them prominently, id. § 53-249(c); and make full disclosure to debtors, id. § 53-249(d). More specifically, registrants must disclose

examples of the annual percentage rates, as defined by the Truth In Lending Act, 15 U.S.C. § 1607 and 12 C.F.R. Section 226.22, for refund anticipation loans of five hundred dollars ($500.00), seven hundred fifty dollars ($750.00), one thousand dollars ($1,000), one thousand five hundred dollars ($1,500), two thousand dollars ($2,000), and three thousand dollars ($3,000). Regardless of disclosures of the annual percentage rate required by the Truth In Lending Act, if the debtor is required to establish or maintain a deposit account with the creditor for receipt of the debtor's tax refund to offset the amount owed on the loan, the maturity of the loan for the purpose of determining the annual percentage rate disclosure under this section shall be assumed to be the estimated date when the tax refund will be deposited in the debtor's account.

Id. § 53-249(d)(6).

In addition, acts specifically prohibited include (i) misrepresentation of a material factor or condition of an RAL; (ii) failing to arrange for an RAL promptly upon application; (iii) engaging in fraud; (iv) facilitating an RAL for which the fee is different from that posted or filed with the Commissioner or has been determined to be unconscionable; (v) demanding part of the loan proceeds for check cashing, credit insurance, or other goods or services unrelated to preparing and filing returns or facilitating RALs; and (vi) arranging for a secured interest in property other than the debtor's refund proceeds. Id. § 53-250. Upon finding that any conduct of a registrant may be in violation of the Act or that a registrant has engaged in an unfair or deceptive act or practice, the...