Can North Carolina cap a CAPCO insurance-premium tax credit on a first-come-first-served basis, so that once the cap is reached no other insurance company gets the credit, even if they made qualifying venture-capital investments?

Plain-English summary

Representative Wilkins led a 1995 "CAPCO" bill (Certified Capital Company) that would give insurance companies a premium-tax credit when they invest in certified NC venture-capital funds. The unknown variable was how much credit insurers would actually claim. To control fiscal exposure, Wilkins was considering adding a cap: once the total credits hit a ceiling, additional insurers who made qualifying investments would get nothing. The credit would be allocated first-come-first-served. He asked the AG whether that mechanism would survive constitutional review.

The constitutional concern. Art. V § 2 of the NC Constitution requires uniformity within taxed classes: similarly situated taxpayers must be treated similarly. The federal Equal Protection Clause does similar work. A first-come cap means two insurers who make identical qualifying investments could get different tax treatment, with the difference depending entirely on filing order. That looks like non-uniformity.

The AG's analysis. The opinion walks through the doctrine in stages.

1. Hajoca Corp. v. Clayton (1970) is the foundational NC case on tax uniformity. It says uniformity requires "equality in the burden of taxation," in "the mode of assessment, as well as in the rate of taxation." Equality "within the class or for those of like station and condition is all that is required."

2. Assurance Co. v. Gold (1958) identifies the categories of taxes subject to uniformity: property, professions, franchises, and incomes. The insurance premiums tax is a license tax measured by gross premiums, not a pure property tax or income tax. The AG flagged a possible defense that the premiums tax falls outside the uniformity rule's strict reach.

3. Even if uniformity applies, the AG concluded the cap would likely survive challenge. Two key arguments:
   - Notice and opportunity. If the statute is publicly enacted with the cap visible, every insurer has equal advance notice and equal opportunity to file early. The differential treatment results from filing-date discretion, not from the legislature drawing arbitrary lines between insurer classes.
   - Conditions on tax relief. In Ward v. Clayton (1969), NC courts recognized the legislature's broad authority to impose conditions on tax-relief measures. A first-come limit is a "reasonable legislative policy decision," not a prohibited classification.

4. The Hajoca framing of substantive analysis under uniformity, equal protection, and due process as "for all practical purposes the same" lets the AG handle both state and federal constitutional arguments together.

The caveat. The AG was confident the cap survives in the insurance-premiums-license-tax context but more cautious about extending the conclusion to "a pure income tax or similar levy that rested more directly upon an annual accounting." Income taxes have stronger uniformity protections in NC, and the first-come mechanism's appearance of arbitrariness would be harder to defend in that context.

Practical takeaway for the General Assembly. Wilkins could go ahead with the first-come cap as part of the CAPCO bill, with reasonable confidence the structure would survive litigation. The AG's caveat about ultimate judicial resolution remains: only courts can settle constitutional questions definitively.

Currency note

This opinion was issued in 1997. 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.

CAPCO programs have evolved in many states since 1997, with mixed legislative and political histories. NC's CAPCO history specifically went through several iterations. Anyone advising on a current state tax credit allocation mechanism (first-come, lottery, formula, or otherwise) should pull current case law on tax uniformity and equal protection of state tax preferences.

Common questions

Q: What is "CAPCO"?
A: A Certified Capital Company is a state-licensed venture-capital fund. Insurance companies invest in CAPCOs; the state gives the insurers a tax credit on their premium taxes equal to a portion of the investment; the CAPCO then invests in qualifying small or growth-stage businesses in the state. The structure tries to channel insurance industry capital (which is otherwise tightly regulated and conservatively invested) into riskier early-stage business financing.

Q: Why use a "first-come" allocation instead of a pro-rata or lottery method?
A: First-come rewards speed of investment, which arguably gets capital into businesses faster. Pro-rata would dilute the per-insurer credit and might not generate enough incentive. A lottery introduces randomness that some find unfair. The AG opinion does not weigh these policy options; it just answers whether first-come is constitutional.

Q: Couldn't the state structure the credit differently to avoid the constitutional risk?
A: Yes. A pro-rata allocation triggered when claims exceed the cap, or a multi-year smoothing mechanism, would reduce uniformity concerns without giving up the cap. The AG concluded first-come works, but the legislature has flexibility.

Q: What does "license tax" mean in this context?
A: NC taxes insurance companies through G.S. § 105-228.5 by a license tax measured by gross premiums, in lieu of a separate income tax. The Assurance Co. case suggests this kind of license tax may have weaker uniformity protections than a pure income tax. The AG took advantage of that distinction to support the first-come cap.

Q: How does this opinion relate to the Fulton Corp. line of cases?
A: Fulton (1996) is about dormant Commerce Clause challenges to in-state preferences. The CAPCO first-come question is about uniformity within a single class of in-state taxpayers (all insurers paying NC premium tax). Different doctrine, different analysis. The AG treats them separately; this opinion does not cite Fulton.

Background and statutory framework

NC's insurance premiums license tax dates back generations. § 105-228.5 imposes the tax on premiums collected from NC business; § 105-228.3 sets definitions and scope; § 105-228.10 (which the CAPCO bill would rewrite) sets out credits against the premiums tax. Tax credits against the premiums tax are scored against the state's general fund.

The 1995 CAPCO bill was part of a national wave of state CAPCO programs in the 1990s and 2000s, modeled on Louisiana's pioneering 1983 program. The federal tax code does not provide a national parallel; CAPCO is a state-level innovation.

Citations

• N.C. Const. Art. V, § 2 (uniformity of taxation within classes)
• N.C. Gen. Stat. § 105-228.3, et seq. (insurance premiums tax framework)
• N.C. Gen. Stat. § 105-228.5 (insurance premiums license tax)
• N.C. Gen. Stat. § 105-228.10 (credits against premiums tax; subject of CAPCO bill)
• Assurance Co. v. Gold, 249 N.C. 461, 103 S.E.2d 344 (1958) (categories of taxes subject to uniformity)
• Hajoca Corp. v. Clayton, 277 N.C. 560, 178 S.E.2d 481 (1970) (uniformity analysis foundation)
• Ward v. Clayton, 5 N.C. App. 53, 167 S.E.2d 808 (1969), aff'd 276 N.C. 411 (1970) (legislative authority to condition tax relief)

Source

• Landing page: https://ncdoj.gov/opinions/constitutionality-of-insurance-premiums-tax-credit-allowed-upon-first-come-basis/

Original opinion text

March 6, 1997

Representative Michael S. Wilkins
North Carolina House of Representatives
Room 1220, Legislative Office Building
Raleigh, North Carolina 27601-2808

Re: Advisory Opinion; constitutionality of insurance premiums tax credit allowed upon "first come" basis; N.C. Constitution, Art. V, §2; G.S. 105-228.3, et seq.

Dear Representative Wilkins:

We understand from your recent letter that during the 1995 legislative session you were lead sponsor of the "CAPCO" bill, a proposal to grant premium tax credits to insurance companies for investments in certain qualified venture capital companies. Unsure as to the extent of the initial investments, and the amount of tax credit that might be claimed, you are considering adding to the bill a limiting provision as to the availability of the credit. Under the amendment, the first companies that make eligible investments receive the credit up to a maximum amount, and after that cap is met, no other companies will receive any credit.

In lieu of income taxes, G.S. 105-228.5 levies a license tax upon insurers measured by "gross premiums" derived from business conducted within North Carolina during the preceding calendar year. Smaller companies pay the tax annually, larger insurers, quarterly. As we understand the proposed credit, it will substantially rewrite present G.S. 105-228.10 to provide a credit against premiums taxes equal to the amount of qualifying capital invested during the taxable year.

Art. V, §2 of the North Carolina Constitution in essence provides that no class of property shall be taxed except by uniform rule, uniformly applicable throughout the state. The constitutional rule of uniformity applies to the taxation of property, professions, franchises and incomes. Assurance Co. v. Gold, Comr. of Insurance, 249 N.C. 461, 443, 103 S.E.2d 344 (1958). "Uniformity" implies "equality in the burden of taxation," in "the mode of assessment, as well as in the rate of taxation." Hajoca Corp. v. Clayton, Comr. of Revenue, 277 N.C. 560, 569, 178 S.E. 2d 481 (1970). "Equality within the class or for those of like station and condition is all that is required to meet the test of constitutionality. . . ." Id., p. 568.

If the credit is enacted with a first-come-first-served provision, it may be challenged by a taxpayer who made a qualifying investment but received no credit because the cap was reached before his return was processed. The plaintiff in such an action would claim that the credit statute unlawfully distinguishes between otherwise identical groups of taxpayers based only on the sequence in which they filed their tax returns. This result, plaintiff would contend, violates Art. V, § 2, of the North Carolina Constitution or the Equal Protection Clause of the U.S. Constitution. If the claim were grounded only on the state constitution, the State would contend that the license tax on insurance carriers is not among the taxes identified in Assurance Co. as being subject to the rule of uniformity. However, if this defense were rejected or if the plaintiff's claim were based on equal protection, the court would consider the merits of the uniformity issue. The substantive analysis would be the same regardless of the constitutional provision relied upon by the taxpayer. See Hajoca, supra at 569, noting that "the requirements of 'uniformity,' 'equal protection,' and 'due process,' are, for all practical purposes, the same under both the State and Federal Constitutions."

We believe the State could successfully defend a suit of this type by arguing that duly enacted legislation enjoys a strong presumption in favor of validity, Hajoca, supra, and that the plaintiff can make no showing to overcome that presumption. It would be the State's position that all taxpayers who are in a position to make qualifying investments are presumed to have notice of the statutory conditions associated with the credit and, therefore, have an equal opportunity to comply with those conditions and file their returns promptly. The State would further argue that the courts have long recognized the legislature's authority to impose conditions on measures relieving taxpayers of liability, Ward v. Clayton, 5 N.C. App. 53, 167 S.E.2d 808 (1969), aff'd., 276 N.C. 411, 172 S.E.2d 531 (1970), and that conditioning the availability of the credit on requesting it before the cap is reached is a reasonable legislative policy decision.

Of course, only the judiciary can ultimately resolve constitutional issues. Although allocating a credit upon a first-come basis is unusual, we believe that ultimately the State would probably prevail against a "uniformity" challenge raised in this context. Our opinion, however, might be otherwise if we were construing a pure income tax or similar levy that rested more directly upon an annual accounting.

Andrew A. Vanore, Jr.
Chief Deputy Attorney General