Smith v. State
| Decision Date | 04 December 1998 |
| Docket Number | No. 61A98.,61A98. |
| Citation | 349 N.C. 332,507 S.E.2d 28 |
| Court | North Carolina Supreme Court |
| Parties | Donald L. SMITH, Harold D. Coley, Jr., D. Reid Cottrell, and E. Michael Latta, and All Others Similarly Situated v. STATE of North Carolina, and Muriel K. Offerman, Secretary of Revenue. |
G. Eugene Boyce, Raleigh, and Womble Carlyle Sandridge & Rice, P.L.L.C. by William C. Raper, Charlotte and Keith Vaughan, Winston-Salem, for plaintiff-appellants.
Michael F. Easley, Attorney General by Edwin M. Speas, Jr., Chief Deputy Attorney General; Thomas F. Moffitt, Special Deputy Attorney General; and Marilyn R. Mudge, Assistant Attorney General, Raleigh, for defendant-appellees.
This action arises out of plaintiffs' challenge to the constitutionality of the intangibles tax imposed by the State of North Carolina pursuant to N.C.G.S. § 105-203 during the tax years from 1991 through 1994. Prior to plaintiffs' filing this suit, a similar constitutional challenge was brought by Fulton Corporation, a North Carolina corporation which held stock in six other corporations, only one of which did business in North Carolina. Since the present case was stayed pending the ultimate determination in Fulton, we begin our discussion by reviewing that course of litigation since the resolution in Fulton affects the ultimate result here.
For a number of years, the State of North Carolina imposed an intangibles tax pursuant to N.C.G.S. § 105-203 on the fair-market value of shares of stock owned by North Carolina taxpayers on December 31st of each year. The statute provided, in pertinent part:
N.C.G.S. § 105-203(1) (1992) (repealed 1995).
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 nonbusiness 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.
Fulton Corp. v. Justus, 110 N.C.App. 493, 496, 430 S.E.2d 494, 496 (1993).
On 1 May 1991, Fulton Corporation challenged the constitutionality of the intangibles taxing scheme alleging specifically that N.C.G.S. § 105-203 violates the Commerce Clause of the United States Constitution, as it places a heavier tax burden on stock of corporations not doing business in North Carolina. Further, the plaintiff alleged that the taxing scheme violated its due process and equal protection rights accorded by the United States and North Carolina Constitutions. The trial court granted summary judgment for the defendant Secretary of Revenue, and the plaintiff appealed.
The Court of Appeals subsequently held that the portion of the State's intangibles tax scheme which increases the tax liability for owners of stock in corporations whose business and property is not completely in North Carolina violates the Commerce Clause of the United States Constitution. That language is excised from N.C. Gen.Stat. § 105-203. Plaintiff is entitled to no refund. The trial court's judgment for the defendant is reversed, and the cause is remanded for entry of a judgment declaring the intangibles tax provision at issue in violation of the Commerce Clause. Plaintiff is entitled to no further relief.
Id. at 505, 430 S.E.2d at 502.
On appeal, this Court in Fulton Corp. v. Justus, 338 N.C. 472, 450 S.E.2d 728 (1994), reversed the Court of Appeals. "After carefully reviewing the [U.S.] Supreme Court's jurisprudence in this area of the law, which the Court itself has characterized as a `quagmire,' (citations omitted), we conclude that the tax in question is permissible based on the Court's holding in Darnell." Id. at 476-77, 450 S.E.2d at 731. Thus, this Court, after a thorough review of precedent decided by the United States Supreme Court, concluded that the intangibles taxing scheme as enacted by the legislature was valid and enforceable in its entirety. However, this determination was not final since the United States Supreme Court on 17 April 1995 granted plaintiff's writ of certiorari to review our decision validating the intangibles taxing scheme.
On 21 February 1996, the United States Supreme Court in Fulton Corp. v. Faulkner,1 516 U.S. 325, 116 S.Ct. 848, 133 L.Ed.2d 796 (1996), held:
North Carolina's intangibles tax facially discriminates against interstate commerce.... At the same time, of course, it is true that "a State found to have imposed an impermissibly discriminatory tax retains flexibility in responding to this determination." McKesson [Corp.] v. Division of Alcoholic Beverages & Tobacco, 496 U.S. 18, 39-40 [110 S.Ct. 2238, 2252], 110 L.Ed.2d 17, [38] (1990). In McKesson, for example, we said that a State might refund the additional taxes imposed upon the victims of its discrimination or, to the extent consistent with other constitutional provisions (notably due process), retroactively impose equal burdens [on] the tax's former beneficiaries. A State may also combine these two approaches. Ibid. These options are available because the Constitution requires only that "the resultant tax actually assessed during the contested period reflec[t] a scheme that does not discriminate against interstate commerce." Id., at 41 , 110 L.Ed.2d [at 39].
Fulton, 516 U.S. at 346-47, 116 S.Ct. at 861, 133 L.Ed.2d at 814-15. The case was then remanded to this Court for consideration of remedial issues.
On 10 February 1997, in Fulton Corp. v. Faulkner, 345 N.C. 419, 481 S.E.2d 8 (1997) ("Fulton (on remand)"), this Court stated:
The plaintiff argues that the United States Supreme Court in this case declared the entire intangibles tax unconstitutional. We do not agree with this interpretation. The Supreme Court noted that the Court of Appeals had addressed the issue of severability and decided that the clause required severance of the taxable percentage deduction. Fulton [Corp.] v. Faulkner, [516] U.S. at [347] n. 12 , 133 L.Ed.2d at 815 n. 12. The Court gave no indication that applying the severability clause in that manner would contravene its holding or that a tax on corporate stock is per se unconstitutional. To the contrary, the Court's language and reasoning revealed the intangibles tax violated the Commerce Clause because of the discriminatory portion—the taxable percentage deduction. It gave no reason to believe that absent the discriminatory deduction, the tax would violate the Commerce Clause.
Fulton (on remand), 345 N.C. at 422, 481 S.E.2d at 9-10.
The effect of this Court's decision in Fulton (on remand) was to declare as advocated by the State that portion of the intangibles tax remaining, after severing the unconstitutional portion challenged, a valid and enforceable tax. Thus, the taxes paid by Fulton Corporation were not refundable as a matter of right.
As noted earlier, subsequent to the beginning of the Fulton litigation, plaintiffs in this case similarly filed suit challenging the constitutionality of the intangibles tax levied on corporate stock. On 27 December 1996, the trial court entered an order dated 27 December 1996 certifying two classes of plaintiffs, designated as Class A and Class B.
Class A members consisted of those who paid the intangibles tax for tax years 1991, 1992, 1993, and 1994, and demanded refunds of the tax within thirty days pursuant to the applicable refund statute, N.C.G.S. § 105-267 (1995) (). Class B consisted of taxpayers who paid the intangibles tax for the same years but failed to meet the requirements set forth in N.C.G.S. § 105-267.
On 27 December 1996, the trial court lifted the previous stay and ordered that the action be maintained as a class action on behalf of the two classes discussed above, Class A and Class B.
After this Court's opinion on 10 February 1997 in Fulton (on remand) responding to the ruling of the United States Supreme Court, the State was faced with two choices as noted in the opinion. The State could "enforce" the intangibles tax against all concerned, or the State could "forgive" the taxes imposed. The General Assembly responded by enacting Chapter 17 of the 1997 Session Laws which provides as follows:
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