If North Carolina enacts House Bill 295 to exempt intangible personal property (like goodwill) from ad valorem taxation, does the bill as drafted also accidentally exempt leasehold interests in real property that is itself exempt from tax, and does it constrain how appraisers may consider goodwill when valuing real property?

Plain-English summary

Representative Phil Baddour, Jr., asked the AG to review House Bill 295 of the 1997 NC Session, which would conform the Machinery Act to exempt intangible personal property from ad valorem taxation. The legislative purpose was narrow: stop intangibles like goodwill from being taxed "in themselves," without disturbing the use of goodwill as a factor in valuing real property. Baddour wanted to know whether the bill would in some respect limit consideration of goodwill and intangibles when appraising real property. Later by phone, he extended the question to ask whether the bill might also constrain the valuation of leasehold interests.

Chief Deputy AG Andrew A. Vanore, Jr. and Special Deputy AG George W. Boylan delivered a constructive review. The legislature has wide latitude to classify property for taxation, subject only to the uniformity requirement in Article V, § 2 of the NC Constitution. Per In re Appeal of Martin, 286 N.C. 66, 209 S.E.2d 766 (1974), classification is fine as long as the classifications are themselves taxed uniformly. The bill, by exempting a natural class (intangible personal property) and leaving real and personal property as separately taxable distinct classes, is a rational exercise of legislative classification power. So no uniformity problem.

But two drafting issues needed attention.

Drafting issue 1: leasehold interests in exempt real property. Section 1 of the bill, as written, exempts all types of intangibles. A leasehold interest is, doctrinally, an intangible property right. If the real property the leasehold sits on is itself exempt from ad valorem taxation (a publicly-owned building leased to a private user, for example), historically NC tax law has treated the private leaseholder's interest as taxable to capture the value of the private use of public property. Section 1's blanket intangibles exemption, if left unchanged, would also exempt those leasehold interests, defeating that long-standing taxation mechanism. The fix is straightforward: Section 1 needs language carving out leasehold interests from the intangibles exemption to preserve their taxability.

Drafting issue 2: the real-property appraisal question. Technically, the bill does not change how real property is appraised. Appraisers may still consider goodwill, location value, and other intangible factors when valuing the real property itself; the bill only blocks taxing intangibles as a separate base. But because the relationship between intangibles and real-property valuation is conceptually delicate, the AG recommended adding a declaration of intent. The proposed clause: "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." The AG offered drafting help if desired.

The opinion is a small but useful example of the AG functioning as legislative counsel for bill drafting. The substantive conclusion is favorable to the bill (it is constitutionally fine, properly classifies, and doesn't disturb real-property appraisal), but two specific drafting clarifications are flagged to forestall predictable interpretation problems.

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.

Whether HB 295 of the 1997 Session was ultimately enacted in this form, and how the legislature handled the leasehold concern, is a separate question. Current NC property tax law (codified in Chapter 105, Subchapter II) reflects whatever amendments did pass. Anyone working on the intangibles exemption today should pull current Chapter 105 and consult a property tax attorney.

Common questions

Q: What is the "Machinery Act"?
A: Subchapter II of Chapter 105 of the NC General Statutes, formally titled "Listing, Appraisal, and Assessment of Property and Collection of Taxes on Property." It is the comprehensive code governing how counties (and some cities) assess and collect property taxes. The "Machinery" label is a historical artifact; it refers to the assessment machinery, not heavy equipment.

Q: Why does NC tax leasehold interests in exempt real property?
A: Because otherwise a private party using publicly-owned property pays no property tax on the value it gets. If, say, a private restaurant leases space in a state-owned airport terminal, the underlying real property is tax-exempt (state-owned). NC's tax code historically treats the private leaseholder's possessory interest as a taxable interest to capture the value of the private use of public land. Without that mechanism, public-private leases of exempt property would create a tax gap.

Q: How does goodwill relate to real property valuation?
A: A business's goodwill reflects intangible value (customer base, location desirability, brand). Goodwill is itself a separate intangible asset of the business. But when an appraiser is valuing the real property the business sits on, location-driven goodwill can be reflected in the comparative-sales method (because the location makes the property more valuable in the marketplace). The 1997 bill's purpose was to stop taxing goodwill as such, without blocking appraisers from considering location and reputation factors that show up in market-derived real-property valuations.

Q: What is the uniformity rule in Art. V, § 2?
A: NC's constitutional rule that property tax classifications must be uniform and equitable within a class. The legislature can classify property differently (e.g., real, personal, intangible) and apply different rules to each, but within a class the tax has to be applied uniformly. The legislature cannot just tax one taxpayer's intangibles and not another's.

Q: Is the AG's role here unusual?
A: Not at all. The AG often serves as a legal sounding board for legislators on pending bills. The AG's opinion is not binding on the legislature (or on courts), but it provides a careful legal review that flags constitutional and drafting issues before enactment. Legislators value this service because it surfaces problems while there's still time to fix them.

Background and statutory framework

NC's property tax system distinguishes among real property, tangible personal property, public service company property, and intangible personal property. Intangibles include things like goodwill, stocks and bonds, accounts receivable, leasehold rights, and other intangible economic interests. Historically, NC had taxed intangibles, often at low rates and with complex carve-outs. Over time the legislature moved toward exempting most intangibles outright, citing administrative complexity and the bias intangibles taxation created against capital formation.

HB 295 of the 1997 Session was part of that broader trend, structurally cleaning up the Machinery Act to remove intangibles from the tax base. The drafting concern in the opinion is a classic example of how broad statutory language can have unintended secondary effects. Leasehold interests are technically intangible (a right to use property is not a tangible thing), so a blanket intangibles exemption catches them. But leasehold interests in exempt real property are functionally similar to private ownership for tax-burden purposes, and have been part of the tax base under existing law. Letting them slip out of the base via an oversight in the bill would be a meaningful policy change, perhaps not intended by the bill's sponsors.

The opinion's recommendation, amend Section 1 to preserve leasehold taxability, is the kind of targeted fix that legislative drafting offices can quickly implement. The proposed purpose clause is similarly a small drafting addition with significant interpretive value: it tells future tax administrators and courts that the bill is narrow.

Citations

• House Bill 295 (1997 NC Session) (proposed conforming changes to the Machinery Act to exempt intangible personal property)
• The Machinery Act (NC General Statutes Chapter 105, Subchapter II; ad valorem property tax)
• North Carolina Constitution, Art. V, § 2 (uniformity requirement for property tax classifications)
• In re Appeal of Martin, 286 N.C. 66, 209 S.E.2d 766 (1974) (NC Supreme Court; legislature's sovereign right to classify property for taxation, limited by constitutional uniformity principles)

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