If North Carolina exempts goodwill and other intangible property from the ad valorem property tax (House Bill 295), can counties still consider those intangible values when appraising real and leasehold property, or does the exemption sweep those considerations away?

Plain-English summary

In early 1997, Representative Phil Baddour introduced House Bill 295, which would have made conforming changes to NC's Machinery Act to exempt intangible personal property from ad valorem property taxation. The legislative purpose was to stop counties from taxing things like goodwill in their own right, but the bill was not meant to forbid counties from considering goodwill (or other intangibles) when valuing real property. Baddour asked the AG whether the bill, as drafted, would inadvertently limit consideration of intangibles in real-property appraisal, and (in a follow-up phone call) whether it might also affect taxation of leasehold interests.

The constitutional baseline. The General Assembly has authority to classify property for tax purposes, limited only by the uniformity principle in Art. V § 2 of the NC Constitution. In re Appeal of Martin (1974) confirms broad legislative classification authority. HB 295 reasonably exercises that power by separating intangible property as a natural class and exempting it from tax, while keeping real and personal property as taxable classes.

The leasehold catch. A leasehold interest is, in NC property tax law, an intangible interest in real property. As drafted, Section 1 of HB 295 would exempt all intangibles. That sweep would inadvertently exempt leaseholds, which historically have been taxed when held in tax-exempt real property (the leasehold tax is how counties recapture some value when, say, a private company leases space in publicly owned property). The AG flagged this and recommended that Section 1 be specifically amended so leasehold interests in otherwise exempt real property remain taxable.

The real-property valuation question. Mechanically, HB 295 does not change how counties appraise real property. Real property is taxed as real property at its full market value, which can reflect goodwill and other intangibles to the extent those affect what a willing buyer would pay. The AG agreed with Representative Baddour's intent: the bill should not be read to limit consideration of intangibles in real-property valuation. To prevent misreading, the AG recommended adding a declaration of intent (a purpose clause) stating that nothing in the bill is intended to affect the appraisal and assessment of real property, tangible personal property, or public service company property subject to the Machinery Act. The AG offered to help draft such a purpose clause.

The bottom line: HB 295 is constitutionally sound and substantively workable. With the leasehold amendment and the purpose clause, it will exempt intangibles cleanly without leaving collateral damage on the rest of the property tax system.

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.

NC's treatment of intangible property tax has evolved considerably since 1997, partly in response to the Fulton Corp. v. Faulkner line of U.S. Supreme Court cases on the dormant Commerce Clause. The general intangibles tax was repealed and the property-tax treatment of intangibles was largely standardized. Anyone working on a current intangibles taxation question should pull the current Machinery Act provisions and recent NC tax case law.

Common questions

Q: What's the difference between an intangibles tax and an income tax?
A: An intangibles tax taxes the value of intangible assets (stocks, bonds, goodwill) the taxpayer owns. An income tax taxes the income generated by those (and other) assets. NC at one point had both kinds of tax. The 1990s wave of constitutional challenges (most famously Fulton) struck down preference structures in the intangibles tax and accelerated the general move toward exempting intangibles outright.

Q: Why would NC want to exempt goodwill from property tax but still let counties value real property at its true market value (including goodwill effects)?
A: Because goodwill tied to a particular business is hard to value in isolation, easy to manipulate, and creates compliance headaches for both taxpayers and assessors. Treating goodwill as a tax-free item simplifies the tax base. At the same time, when a buyer purchases real property that comes with a going business, the price reflects the goodwill embedded in the location and operations; the purchase price (or the assessor's estimate of fair market value) naturally captures that without separately taxing it. The two ideas are reconcilable, but the bill needs to be drafted carefully to make the distinction clear.

Q: What is the "leasehold interest in exempted real property" the AG flagged?
A: When a private business leases space in a tax-exempt building (say, a state-owned office tower), the lessee has a "leasehold interest." NC counties historically taxed those leaseholds at the value of the leasehold (essentially the difference between the rent paid and the market rent), as a way to recapture some tax on commercial activity occurring in otherwise exempt property. A blanket intangibles exemption would accidentally end those leasehold taxes, costing counties revenue and giving lessees an unintended windfall. Fixing the bill's Section 1 prevents that.

Q: Did HB 295 pass?
A: This opinion does not tell us, and the bill's fate is independent of the AG's analysis. To check passage, search the General Assembly's bill history for the 1997 session.

Background and statutory framework

The NC Machinery Act (Chapter 105, Subchapter II) governs property tax administration: classification, listing, valuation, exemption, and collection. Intangible property has shifted in and out of the property tax base over the decades. The 1997 effort to exempt intangibles was part of a broader move to clean up the tax base in the wake of Fulton.

Article V § 2 of the NC Constitution requires that property be taxed by uniform rule within each class; it does not forbid classifying and exempting whole classes of property. Martin (1974) confirms wide legislative discretion in classification.

Citations

• N.C. Const. Art. V, § 2 (uniformity of taxation within classes)
• House Bill 295 (1997 NC General Assembly) (Machinery Act conforming amendments)
• In re Appeal of Martin, 286 N.C. 66, 209 S.E.2d 766 (1974) (legislative classification authority for property tax)

Source

• Landing page: https://ncdoj.gov/opinions/statutory-exclusion-intangible-personal-property-from-ad-valorem-tax-base/

Original opinion text

March 6, 1997

Representative Phil Baddour, Jr.
North Carolina General Assembly
House of Representatives
Room 501, Legislative Office Building
Raleigh, North Carolina 27601-1096

Re: Advisory Opinion: effect of statutory exclusion of intangible personal property from ad valorem tax base upon appraisal of real and personal property; leasehold interests in exempted real property; House Bill 295

Dear Representative Baddour:

Your letter of 25 February 1997 enclosed a copy of recently introduced House Bill 295 ("the bill"). The bill makes conforming changes to the Machinery Act in order to exempt intangible personal property, per se, from ad valorem taxation. You indicate that the purpose behind the legislation is to exempt "goodwill" and other types of intangibles "from being taxed in themselves," but that the legislation is not intended "to preclude their consideration in valuing real property." Nevertheless, you request our opinion whether the bill may in some respect limit consideration of goodwill and other intangibles when appraising real property. In a later telephone conversation, you further request that we extend our analysis to include possible limitations the bill might impose upon the valuation of leasehold interests.

The legislature's sovereign right to classify property for taxation is limited only by constitutional principles of uniformity. In re Appeal of Martin, 286 N.C. 66, 74, 209 S.E.2d 766 (1974); North Carolina Constitution, Art. V, §2. House Bill 295 constitutes a rational exercise of legislative power to exclude from the property tax base a natural class of property, intangible, leaving real and personal property separately taxable as distinct classes. Except for two minor suggestions, we believe the bill's substantive provisions make the necessary adjustments to the Machinery Act to eliminate intangibles as a distinct type of property subject to property taxes, while preserving the current existing techniques for valuing real property.

As currently written, the bill would prohibit taxation of leasehold interests in exempted real property since section 1 exempts all types of intangibles. Section 1 would need to be specifically amended to enable taxing units to continue to assess such leasehold interests.

Technically the bill does not affect the existing methodologies for appraising real property. Nevertheless, to emphasize the limited scope of the bill and its relationship to other types of property, perhaps a declaration of intent would be helpful. It would simply provide in essence that nothing within the bill is intended to affect the appraisal and assessment of real property, tangible personal property, or public service company property subject to the Machinery Act. We would be pleased to assist you with the drafting of a purpose clause if you desire such help.

Andrew A. Vanore, Jr.
Chief Deputy Attorney General

George W. Boylan
Special Deputy Attorney General