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 SB 1245 substitute exclusion fraction fix the constitutional defect?

Plain-English summary

Senator Dennis J. Winner asked the AG to evaluate Senate Bill 1245 and the consequences of a possible appeal from the June 15, 1993 NC Court of Appeals decision in Fulton v. Justus. Assistant AG Marilyn R. Mudge handled the response on behalf of the AG.

The starting point was Fulton v. Justus itself. The Court of Appeals decision affected the taxable-percentage provision of G.S. § 105-203, the intangibles tax statute. Further appellate review (NC Supreme Court) could reach all the issues, including the constitutionality of the taxable-percentage provision, its severability from the rest of the statute, and whether any ruling would apply prospectively or retroactively. The range of possible outcomes was broad. The AG flagged a realistic possibility that G.S. § 105-203 could be struck down in its entirety and that the ruling could apply to the 1993 taxable year or to earlier years. It was also possible that only the taxable-percentage provision would fall, but with a 1993-effective ruling rather than the 1994-effective date the existing Court of Appeals opinion seemed to provide.

On refund exposure: If a final appellate decision invalidated G.S. § 105-203 in whole or in part and applied to 1993 or prior taxable years, taxpayers who had paid under the present statute for those years would seek refunds. The State's refund obligation would be limited by G.S. § 105-267, which requires a demand for refund of an illegal or invalid tax to be made within thirty days after payment. That 30-day window has historically been the State's structural protection against open-ended refund liability. The AG flagged that the constitutionality of § 105-267 itself was at issue in Swanson v. State, then pending before the NC Supreme Court. If Swanson invalidated § 105-267, the refund-exposure picture would change dramatically because the 30-day cap would be gone.

On the proposed fix: The most recent committee substitute for SB 1245 replaced the existing 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 NC. The AG's flat conclusion: no meaningful distinction between the two formulas. A Commerce Clause challenge to the proposed exclusion fraction would likely succeed under the Court of Appeals' analysis in Fulton.

The opinion is short and direct. The legislative drafters were trying to thread the constitutional needle by repackaging the taxable percentage as an exclusion fraction. The AG read the math and concluded the repackaging did not change the underlying problem: both formulas discriminated against out-of-state economic activity in a way the Court of Appeals had already rejected. A new substitute that just shifted the discrimination's label was not going to fix the substantive problem.

The opinion also illustrates one of the AG's quieter functions: giving the legislature realistic litigation risk assessments on pending tax legislation. The AG did not tell Senator Winner what to do. The AG laid out the appellate possibilities, the refund-exposure mechanics, and the substantive constitutional problem with the substitute. The legislature was free to enact SB 1245 anyway, but with eyes open.

Currency note

This opinion was issued in 1993. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

NC's intangibles tax was repealed in 1995, two years after this opinion, so the specific tax framework the AG analyzed no longer exists. G.S. § 105-267 (the refund-demand statute) has been amended. The Fulton v. Justus decision and the Swanson case have since been decided and shaped subsequent NC tax-litigation doctrine. Anyone with a current NC state-tax constitutional question should consult current Chapter 105, current case law, and counsel familiar with NC tax-litigation.

Common questions

Q: What was the substantive Commerce Clause problem with the intangibles tax?
A: The intangibles tax fell on intangible property (corporate stock, for example), and the taxable-percentage provision computed the taxable share in a way that, the Court of Appeals concluded in Fulton v. Justus, discriminated against out-of-state economic activity. The Commerce Clause prohibits state taxes that discriminate against or unduly burden interstate commerce. The mechanics of the discrimination are too fact-specific to summarize without the full Fulton opinion in hand.

Q: Why did the AG say the substitute exclusion fraction was no better?
A: Because the exclusion fraction did the same work as the taxable-percentage provision, just expressed differently. If the taxable percentage discriminated against out-of-state activity by including a certain proportion of value in the tax base, an exclusion fraction excluding only the in-state proportion did the inverse. Either way, the in-state share is what got taxed and the out-of-state share was treated more favorably. The Commerce Clause challenge would succeed against the substitute on the same reasoning that succeeded against the original.

Q: What is the 30-day demand rule in G.S. § 105-267, in plain terms?
A: Under the statute as it stood, a taxpayer who wanted a refund of an illegally collected tax had to demand the refund within 30 days of paying it. If the taxpayer missed the 30-day window, the refund right was lost. The rule served as a structural cap on the State's exposure when a tax was later declared invalid: only the small slice of taxpayers who had timely demanded refunds could collect.

Q: What was Swanson v. State about?
A: Swanson was pending before the NC Supreme Court at the time of the opinion. It challenged the constitutionality of § 105-267 itself (the 30-day demand rule), presumably on due process grounds. If the NC Supreme Court invalidated § 105-267, the State's refund exposure on any later-invalidated tax statute would not be capped by the 30-day rule, dramatically increasing the State's liability.

Q: Did the AG suggest a way to fix the intangibles tax?
A: No, the opinion did not propose a structural fix. It said the specific repackaging in the SB 1245 substitute would not work. A real fix would have required either changing the substantive treatment of in-state versus out-of-state activity to satisfy the Commerce Clause or moving away from this style of tax. The legislature ultimately repealed the intangibles tax in 1995, suggesting the policy judgment was to abandon rather than to repair.

Q: How does the AG's "Attorney-Client Privileged" label affect the opinion's public status?
A: The original letter was sent under attorney-client privilege between the AG (as legal adviser to state officials) and Senator Winner. The opinion is nonetheless published on the NC DOJ website as part of the historical AG opinions archive, presumably because privilege was waived or because the matter became public during the legislative process. The label reflects the original communication context, not the document's present public status.

Background and statutory framework

The intangibles tax was one of NC's traditional tax instruments, designed to capture wealth in intangible form (stocks, bonds, certain receivables) that real-property and income taxes did not reach. The tax had a long history of constitutional litigation, including challenges from out-of-state taxpayers and from in-state taxpayers holding interests in out-of-state companies. The Commerce Clause has been a persistent constraint on state taxes that turn on the location of the underlying economic activity.

Fulton v. Justus was the immediate trigger for SB 1245. The Court of Appeals' decision created an urgent question: could the legislature fix the constitutional problem before the NC Supreme Court could grant review and entrench the holding, or before refund demands could mount? SB 1245 was the legislative response. The AG's opinion is the bad-news messenger: the substitute formula did not solve the constitutional problem and the State's refund exposure depended on how the appellate process resolved both the underlying tax and the refund-window statute.

The intangibles tax was repealed in 1995. That repeal mooted the constitutional questions and largely defused the refund-exposure concern (going forward; refund claims for already-paid taxes were governed by the rules in effect when paid).

Citations

• N.C.G.S. § 105-203 (intangibles tax; taxable-percentage provision invalidated in Fulton v. Justus)
• N.C.G.S. § 105-267 (refund-demand statute; 30-day window after payment; constitutionality challenged in Swanson v. State)
• Fulton v. Justus, NC Court of Appeals decision dated June 15, 1993 (invalidating taxable-percentage provision of § 105-203 under Commerce Clause)
• Swanson v. State, pending before NC Supreme Court (constitutionality of § 105-267 refund-window statute)

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