After the U.S. Supreme Court struck down North Carolina's intangibles tax on stock, can the General Assembly refund the tax to people who paid it but never filed a formal protest?

Plain-English summary

Senator John Kerr asked the AG a politically pointed question. The U.S. Supreme Court had recently struck down North Carolina's intangibles tax on stock in Fulton Corp. v. Faulkner, 516 U.S. 325 (1996). Many North Carolina shareholders had paid the unconstitutional tax over the years without protest. The General Assembly was considering legislation that would (a) prohibit the Secretary of Revenue from collecting outstanding intangibles tax liabilities and (b) refund or credit payments made by taxpayers who had paid without filing a formal protest under NCGS 105-267. Kerr wanted to know whether the refund-without-protest piece was constitutional.

Chief Deputy AG Andrew Vanore, for AG Easley, said no. The exclusive emoluments clause in Article I, Section 32 of the NC Constitution barred such refunds.

The constitutional text is short: "No person or set of persons is entitled to exclusive or separate emoluments or privileges from the community but in consideration of public services." The clause means that the legislature cannot hand out money to particular people or groups unless there is either (a) a public-service purpose, or (b) a pre-existing legal obligation that the legislature is recognizing rather than creating.

The two-prong Emerald Isle test (Town of Emerald Isle v. State, 320 N.C. 640 (1987)) sets the modern framework: an exemption survives the emoluments clause if (1) it promotes the general welfare rather than individual benefit, and (2) there is a reasonable basis for the legislature to conclude the exemption serves the public interest.

Refunding intangibles tax to taxpayers who paid without protest fails both prongs. There is no general-welfare purpose to be served by reimbursing taxpayers who chose not to challenge an unconstitutional tax. The "public service" the taxpayer rendered was just paying a tax that turned out to be invalid, which is not a service in the constitutional sense. Other ostensible bases (fairness, equity, restitution) do not satisfy the test either.

Brown v. Comrs. of Richmond County, 223 N.C. 744 (1943), nails the point. In that case, the General Assembly abolished a Recorders' Court and then tried to pay the elected judge the salary he would have earned for the remainder of his term. The Supreme Court held the payment unconstitutional: "[A] municipality cannot lawfully make an appropriation of public monies except to meet a legal and enforceable claim, and can make no payment upon a claim which exists merely by reason of some moral or equitable obligation which a generous, or even a just, individual, dealing with his own monies, might recognize as worthy of some reward."

The same logic applies to non-protesting intangibles taxpayers. They have no legal claim (because they did not perfect it through protest); they performed no public service (paying tax is not a service); the legislature cannot transform a moral or equitable sympathy into a constitutional refund. The proposed refund would be a constitutionally prohibited gift.

What the legislature could do: refund taxpayers who did file timely protests (because those have legal claims for refund of unconstitutional tax). Both the Fulton invalidation and the protests give those taxpayers a legal entitlement. The non-protesting taxpayers are simply out of the refund chain.

This opinion is one of the more politically uncomfortable AG opinions of the era. Fulton had created a popular sentiment that all intangibles taxpayers deserved their money back. Vanore's job was to tell the legislature what the constitution actually permitted, which was a smaller universe than the political conversation wanted.

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. The intangibles tax has been repealed since Fulton. The exclusive emoluments clause and its case law are still active; the Emerald Isle two-prong test and Brown v. Richmond County remain the framework for evaluating legislative gratuities. Anyone evaluating a current proposal for a tax refund or special-class benefit should consult the current statutes and recent cases applying the emoluments clause.

Background and statutory framework

North Carolina's exclusive emoluments clause traces to the 1776 Declaration of Rights and has been carried forward through every state constitution since. Its purpose is anti-corruption and anti-favoritism: the legislature cannot single out private parties for cash gifts, special privileges, or contractual perks unrelated to public service. The clause has been used to invalidate legislative paychecks to former officeholders whose offices were abolished (Brown), payments to private individuals for unspecified services, and special tax exemptions that benefit only one company.

The clause is not absolute. The Supreme Court has consistently allowed special-class benefits when they fit one of two safe harbors:

1. Deferred compensation for public services rendered. Hinton v. State Treasurer upheld special loan programs to World War I veterans. Brumley v. Baxter upheld a donation of municipal land for a World War II veterans center. Bridges v. City of Charlotte characterized state retiree benefits as deferred payments for past public service. The connection between the benefit and the past service is what saves these cases.

2. General-welfare exemptions that incidentally benefit a group. Town of Emerald Isle v. State (1987) is the modern test articulating this branch: an exemption is constitutional if it "is intended to promote the general welfare rather than the benefit of the individual" and "there is a reasonable basis for the legislature to conclude the granting of the exemption serves the public interest." A property tax exemption for nonprofit hospitals fits this branch because the public benefits from the hospital's existence even though only the hospital owner is technically receiving the benefit.

Tax refunds to wrongly-collected unconstitutional taxes do not fit either safe harbor. The taxpayer rendered no public service (paying tax is a duty, not a service). The general welfare is not promoted by refunding individual taxpayers (the public has no stake in the refund beyond fairness sentiment). So the only basis for a refund is a pre-existing legal claim, which under NCGS 105-267 required a timely protest.

NCGS 105-267 is North Carolina's general protest-and-claim statute for tax refunds. A taxpayer who believes a tax was unconstitutionally collected must file a protest within the specified period (typically with the return or within a short window after payment). Without a protest, the right to refund lapses. This procedural barrier exists to give the State certainty about tax collections; the legislature has consistently chosen to require protests rather than to expose the treasury to retroactive refunds without notice.

The AG's analysis applies these long-standing rules to the Fulton aftermath. Taxpayers who filed timely protests had legal claims; they were entitled to refund. Taxpayers who paid without protesting had no legal claim, and the legislature could not constitutionally manufacture one in their favor.

Common questions

Could the General Assembly refund the protesting taxpayers but not the non-protesters?

Yes, and that is precisely the constitutional path. Protesting taxpayers have a legal claim under Fulton plus their protests under NCGS 105-267. The legislature can recognize and pay that legal claim without running into the emoluments clause. The 1997 opinion implicitly assumes this is the route the legislature would take.

Why doesn't the Fulton invalidation itself create a legal claim for everyone?

Because procedural rules govern when constitutional claims must be raised. NCGS 105-267 required a protest. The Supreme Court's later invalidation of the tax does not retroactively waive the protest requirement. A taxpayer who slept on his protest rights lost them. The Fulton ruling does not awake those rights for taxpayers who did not preserve them.

Could the General Assembly waive the protest requirement retroactively?

The AG opinion does not directly address that, but the implication is no. Waiving the protest requirement would just be another way of doing what the legislature wants to do (refund non-protesters), and the emoluments clause would still bar it. The protest requirement was a procedural safeguard, but allowing the legislature to retroactively dissolve safeguards in order to create gratuitous refunds is the same problem.

Has this opinion been applied to other unconstitutional tax refunds since 1997?

The Brown and Emerald Isle framework continues to govern. North Carolina's case law on legislative refunds following Fulton and other tax-invalidation cases has tracked the AG opinion's reasoning. Anyone considering a current tax refund proposal in NC has to satisfy the Emerald Isle test or identify a pre-existing legal obligation; otherwise the emoluments clause is a live bar.

What about taxpayers who paid the intangibles tax but no one told them about the protest requirement?

The AG opinion takes the protest requirement as binding regardless of taxpayer ignorance. The State's notice obligations are satisfied by enacting and publishing the statute. A taxpayer who paid intangibles tax without consulting NCGS 105-267 bears the consequence of not preserving the claim. The legislature cannot retroactively excuse that under the emoluments clause.

Could a federal court order require the refunds?

Maybe, in narrow circumstances. McKesson Corp. v. Florida Alcohol & Tobacco Div., 496 U.S. 18 (1990), held that a state must provide some meaningful remedy when it collects an unconstitutional tax. Federal courts have held that prospective enforcement plus a refund-on-protest system satisfies McKesson. NCGS 105-267 is North Carolina's mechanism. McKesson did not require refunding non-protesters; it required some adequate remedy. NC's protest system is the remedy.

Source

• Landing page: https://ncdoj.gov/opinions/providing-credits-or-refunds-to-individuals-who-paid-intangibles-taxes/

Citations

• N.C. Const. art. I, § 32 (and art. I, § 7 predecessor)
• N.C. Gen. Stat. § 105-267
• Simonton v. Lanier, 71 N.C. 498 (1874)
• Plott v. Ferguson, 202 N.C. 446 (1932)
• Town of Emerald Isle v. State, 320 N.C. 640 (1987)
• Leete v. County of Warren, 341 N.C. 116 (1995)
• Hinton v. State Treasurer, 193 N.C. 496 (1927)
• Brumley v. Baxter, 225 N.C. 691 (1945)
• Bridges v. City of Charlotte, 221 N.C. 472 (1942)
• Brown v. Comrs. of Richmond County, 223 N.C. 744 (1943)
• Fulton Corp. v. Faulkner, 516 U.S. 325 (1996) (background)

Original opinion text

April 9, 1997

The Honorable John Kerr
North Carolina State Senate
Room 526, Legislative Office Building
Raleigh, North Carolina 27601-2808

Re: Advisory Opinion; Authority of the General Assembly to provide Credits or Refunds to Individuals who paid Intangibles Taxes but did not Comply with N.C.G.S. §105-267; The Exclusive Emoluments Provison of the North Carolina Constitution, Article I, Section 32

Dear Senator Kerr:

You ask whether the exclusive emoluments provision of the North Carolina Constitution prohibits the General Assembly from providing refunds or credits to individuals who paid intangibles taxes but who did not file timely protest as required by N.C.G.S. §105-267. Your question assumes that the General Assembly will enact and the Governor will allow to become law legislation prohibiting the Secretary of Revenue from collecting intangibles tax liability arising from the recent decision of our State Supreme Court in the Fulton case.

For reasons which follow, it is our opinion that it would be unconstitutional for the General Assembly to make any payments to those taxpayers who did not file a timely protest to the payment of the tax as is required by N.C.G.S. §105-267. Because the state has no legal obligation to these taxpayers, any payments would be an exclusive emolument prohibited by Article I, Section 32 of the North Carolina Constitution.

Article I, Section 32 of the North Carolina Constitution provides: "No person or set of persons is entitled to exclusive or separate emoluments or privileges from the community but in consideration of public services." The exclusive emoluments provision of our state constitution bars the legislature from extending special privileges to select individuals or groups of individuals without a corresponding return of public service. Simonton v. Lanier, 71 N.C. 498 (1874); Plott v. Ferguson, 202 N.C. 446 (1932). However, not all special or exclusive emoluments are prohibited by Article I, Section 32. The Supreme Court of North Carolina recently held that "a statute which confers an exemption that benefits a particular group of persons is not an exclusive emolument or privilege within the meaning of Article I, Section 32 if: (1) the exemption is intended to promote the general welfare rather than the benefit of the individual, and (2) there is a reasonable basis for the legislature to conclude the granting of the exemption serves the public interest." Town of Emerald Isle v. State, 320 N.C. 640, 654 (1987). See also Leete v. County of Warren, 341 N.C. 116 (1995).

Applying this test, the Supreme Court of North Carolina has held that government-conferred benefits do not violate Article I, Section 32 in a variety of circumstances even though the benefits were extended exclusively to small groups of individuals. See, Hinton v. State Treasurer, 193 N.C. 496 (1927) (home loan programs to World War I veterans did not violate the emoluments provision); Brumley v. Baxter, 225 N.C. 691 (1945) (donation of municipal land for World War II Veterans Center held not to violate the emoluments provision); Bridges v. City of Charlotte, 221 N.C. 472 (1942) (benefits received by retired state employees are deferred payments of salaries for services rendered and do not violate the emoluments provision).

Our Supreme Court has, however, made it crystal clear that absent a legal obligation or a public service purpose, the legislature may not appropriate funds to a select few, even if the legislature believes it has a moral or equitable obligation to do so. In Brown v. Comrs. of Richmond County, 223 N.C. 744 (1943), the plaintiff was elected to a two-year term of office of Judge of the Recorders' Court of Richmond County. The year after his election, the General Assembly passed a local act abolishing the Recorders' Court. Thereafter, the General Assembly passed a law requiring the Richmond County Board of Commissioners to pay the plaintiff the salary that plaintiff would have earned had the General Assembly not abolished his office. The North Carolina Supreme Court, in interpreting Article I, Section 7, the predecessor to Article I, Section 32 of our present Constitution, held that the plaintiff was not entitled to receive the payment because such compensation would amount to a constitutionally prohibited gift or gratuity of public money.

[T]he Legislature has no power to compel or even to authorize a municipal corporation to pay a gratuity to an individual to adjust a claim where the municipality is under no legal obligation to pay. Nor may it lawfully authorize a municipal corporation to pay gifts or gratuities out of public funds. Brown, 223 N.C. at 746. Continuing, the Brown court reasoned that [a] municipality cannot lawfully make an appropriation of public monies except to meet a legal and enforceable claim, and can make no payment upon a claim which exists merely by reason of some moral or equitable obligation which a generous, or even a just, individual, dealing with his own monies, might recognize as worthy of some reward. Id.

It is our opinion, therefore, that the General Assembly may not constitutionally provide any benefits to those individuals to whom the state has no legal obligation and who have performed no public services, other than having paid the tax.

Should you have any further questions, please advise.

Andrew A. Vanore, Jr.
Chief Deputy Attorney General