If the NC Court of Appeals' ruling in Fulton v. Justus that the intangibles tax provision in G.S. § 105-203 is unconstitutional under the Commerce Clause stands on appeal, what is the State's refund exposure, and would the proposed Senate Bill 1245 substitute exclusion fraction fix the constitutional defect?

Plain-English summary

Senator Dennis J. Winner asked about Senate Bill 1245 and the consequences of possible further review of the North Carolina Court of Appeals' June 15, 1993 decision in Fulton v. Justus. The AG's response addressed two uncertainties: what a later appellate ruling might do to the intangibles-tax provision in G.S. § 105-203, and whether a proposed replacement formula would withstand a Commerce Clause challenge.

The opinion said further review could cover the taxable-percentage provision's constitutionality, its severability, and whether a decision would apply prospectively or retroactively. One realistic possibility was that G.S. § 105-203 would be struck down in full and the ruling would reach tax year 1993 or earlier years. Another was that only the taxable-percentage provision would fall, but with effect for 1993 rather than 1994.

If the whole section were invalidated for 1993 or earlier years, the AG expected refund requests. She believed G.S. § 105-267's requirement to demand a refund within thirty days after payment would limit the State's refund obligation. The constitutionality of that demand rule was itself at issue in Swanson v. State, then pending before the North Carolina Supreme Court.

The proposed committee substitute for Senate Bill 1245 would replace the taxable-percentage provision with an exclusion fraction based on the issuing corporation's property subject to specified North Carolina taxes. The AG saw no meaningful distinction between the formulas and believed a Commerce Clause challenge to the proposed fraction would succeed under the Court of Appeals' analysis in Fulton. The opinion did not set out a separate mathematical comparison of the two formulas.

Currency note

This opinion assessed a proposal and pending litigation in July 1993. Check the final legislation and later court decisions before applying its analysis to a current tax question.

Background and statutory framework

The opinion describes the existing taxable-percentage provision in G.S. § 105-203 and a proposed committee substitute using an exclusion fraction. It does not reproduce either formula. The AG's comparison rested on her judgment that the proposed fraction did not meaningfully differ from the provision at issue in Fulton.

The potential refund issue depended on what a later appellate court decided about the tax provision and the years to which that decision applied. The AG also identified an unresolved challenge to G.S. § 105-267, the statute she believed would limit refund demands to thirty days after payment.

Common questions

Did the AG say the committee substitute fixed the Commerce Clause problem?

No. She saw no meaningful difference between its exclusion fraction and the existing taxable-percentage provision and believed a challenge would succeed under the Court of Appeals' Fulton analysis.

Did the opinion explain which share of corporate property would be taxed under each formula?

No. It identified the basis of the proposed exclusion fraction but did not set out the tax calculation or compare which property each formula favored.

Were refunds certain after the Court of Appeals' ruling?

The opinion treated further appellate review as open. It said refund requests would follow if a later ruling invalidated G.S. § 105-203 in its entirety and applied to 1993 or earlier years. The AG believed the thirty-day demand requirement in G.S. § 105-267 would limit the State's obligation, while a separate constitutional challenge to that requirement remained pending.

Citations

• N.C.G.S. § 105-203 (taxable-percentage provision discussed in Fulton)
• N.C.G.S. § 105-267 (refund-demand provision)
• Fulton v. Justus, North Carolina Court of Appeals decision of June 15, 1993
• Swanson v. State, pending before the North Carolina Supreme Court when the opinion was issued

Source

• Landing page: https://ncdoj.gov/opinions/senate-bill-1245/

Original opinion text

July 13, 1993

HAND DELIVERY ATTORNEY-CLIENT PRIVILEGED COMMUNICATION Senator Dennis J. Winner Legislative Office Building Room 523 Raleigh, North Carolina 27603

Re: Advisory Opinion; Senate Bill 1245

Dear Senator Winner:

The Attorney General has asked that I reply to your letter of July 7, 1993, requesting an opinion concerning Senate Bill 1245 and the consequences of a possible appeal from the June 15 decision of the North Carolina Court of Appeals in Fulton v. Justus.

If there is further appellate review in Fulton, it could encompass all of the issues raised by the case, including the constitutionality of the taxable percentage provision of G.S. § 105-203, the severability of the taxable percentage provision, and the prospective or retroactive application of a decision on those questions. Because of the broad range of potential results, there is a realistic possibility that G.S. § 105-203 would be stricken in its entirety and that the ruling would apply to the 1993 taxable year or to earlier years. It is also possible that only the taxable percentage provision would be invalidated, but that the ruling would be effective for tax year 1993 rather than 1994, as the current opinion provides.

In the event of an appellate decision holding G.S. § 105-203 unconstitutional in its entirety and applying to 1993 or prior taxable years, taxpayers who will have paid tax under the present statute for the affected years will request refunds. I believe the State's obligation to make refunds under such circumstances would be limited by G.S. § 105-267, which requires a demand for the refund of an illegal or invalid tax to be made within thirty days after payment. You should also be aware that the constitutionality of G.S. § 105-267 is at issue in Swanson v. State, now pending before the North Carolina Supreme Court.

The most recent proposed committee substitute for Senate Bill 1245 would replace the present taxable percentage provision with an exclusion fraction based on the proportion of the issuing corporation's total property subject to ad valorem and intangible personal property tax in North Carolina. I see no meaningful distinction between the two formulas, and I believe that a Commerce Clause challenge to the proposed exclusion fraction would be successful under the Court of Appeals' analysis in Fulton.

Marilyn R. Mudge, Assistant Attorney General