When the State diverted some quarterly franchise-tax distributions from cities to cover a budget deficit in 2001-2002, did cities regain the right to levy their own local franchise taxes on electric power companies starting July 1, 2002?
Plain-English summary
NC's franchise tax on electric power companies (§ 105-116) is paid to the State quarterly. Under § 105-116.1(b), the Secretary of Revenue is supposed to distribute a specified share to cities within 75 days after the end of each calendar quarter. The legislature paired the state-administered franchise tax with a prohibition in § 105-116(e): cities may not levy their own franchise taxes on power companies "so long as there is a distribution to cities from the tax imposed by this section."
In fiscal year 2001-2002, the State distributed the September and December 2001 quarterly shares to cities but withheld the March and June 2002 distributions to help close the State budget deficit. Governor Easley invoked his constitutional emergency-budget powers (N.C. Const. art. III, § 5(3)) to direct the diversion. Secretary Tolson asked the AG whether the partial distributions left cities free, beginning July 1, 2002, to enact their own franchise taxes on power companies.
Senior Deputy AG Reginald Watkins (with Special Deputy AG George Boylan) said no. Three reasons:
The annual nature of the tax means partial distribution still counts. § 105-116 imposes an annual franchise tax. Under § 105-114(a3), the tax is for the State fiscal year. Cities did in fact receive distributions in two of the four quarters. So during fiscal year 2001-2002 there "has been a distribution to them" within the meaning of § 105-116(e), and the statutory bar on city franchise taxes still applied.
Strict construction of municipal taxation. A city's taxing authority is "strictly construed" (Kenny Co. v. Brevard, 1940). Cities can tax only when the legislature has unambiguously authorized them to do so. A tax imposed without authority is illegal (Redevelopment Comm. v. Guilford County, 1968). Where the statute conditions city taxing authority on a no-distribution scenario, ambiguity goes against the city.
The Governor's emergency powers do not unwind the statute. § 105-116(e) was enacted against the background of the Governor's constitutional power to manage budget crises (State v. Emery, 1944). The legislature understood that temporary distribution suspensions can happen. A presumptively temporary diversion under emergency budget powers does not automatically transfer taxing authority back to cities. The statutory mechanism normally requiring distribution still exists; the Governor's pause does not nullify it.
The AG framed the answer as advisory rather than declarative ("for several reasons we advise that the legislative prohibition continues to bar municipalities from imposing similar franchise taxes"). Direct authority was scant because the 1949-era prohibition had never been judicially construed.
Currency note
This opinion was issued in 2002. 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 overhauled its utility franchise tax framework in the years after this opinion (the gross-receipts tax structure has been replaced and replaced again, with significant changes around 2014). Today's electric utility taxation runs through a different mechanism, and the city/state distribution rules have been redesigned. Anyone evaluating the current state of municipal authority to tax electric utility gross receipts should consult the current Chapter 105 and any recent AG opinions.
Background and statutory framework
State preemption of municipal taxes on regulated utilities. NC has long structured regulated utility taxation at the state level, with cities receiving distributions from the state-collected tax instead of imposing their own. This pattern avoids the chaos of dozens of competing local tax bases on a regulated, interstate-style industry. § 105-116(e) operationalizes the preemption.
The 1949 origin. The prohibition against municipal franchise taxes can be traced to 1949, but in over 50 years no court had construed it. That made the AG's analysis particularly important as a working interpretation.
Annual tax vs. quarterly distribution. The tax is annual (§ 105-114(a3)). The distribution mechanism is quarterly (§ 105-116.1(b)). The AG read § 105-116(e)'s "so long as there is a distribution" language against the annual structure: if any distribution happens within the fiscal year, the bar applies.
Strict construction of taxation power. NC courts have consistently held that municipal taxing power, being a delegated power, is strictly construed against the city. Kenny Co. v. Brevard (1940) is canonical. The doctrine cuts hard against an interpretation that would allow cities to invent new taxing authority from a temporary shortfall.
Constitutional emergency budget powers. N.C. Const. art. III, § 5(3) gives the Governor the authority to reduce State expenditures to keep the budget balanced. That power necessarily includes choosing which planned distributions to defer. The exercise of that power is temporary; the underlying statutory distribution scheme remains in place.
Common questions
Q: What was the practical effect of this opinion?
A: Cities could not enact local franchise taxes on power companies to make up for the lost state distributions. They had to absorb the revenue shortfall through other means: spending cuts, reserves, or other revenue. The opinion told municipal finance officers to stop planning around the assumption that the bar had lifted.
Q: Was this opinion friendly to cities or hostile?
A: Neither, exactly. It applied existing strict-construction doctrine to the new question presented by the diversion. The result was bad news for cities, but the AG was protecting the State preemption scheme that the legislature put in place in 1949.
Q: What would a city have argued for the opposite conclusion?
A: A city could have argued that "distribution" in § 105-116(e) means the full quarterly distribution scheme, not a partial one, and that when the State diverts a distribution, the city's loss should trigger restored taxing authority. The AG's view was that this reading would let the State accidentally surrender state preemption every time a Governor exercised emergency budget powers, which is not what the legislature contemplated.
Q: Could the General Assembly have fixed this by statute?
A: Yes. The legislature could amend § 105-116(e) to specify that any quarter without distribution restores city taxing authority for that quarter, or could enact a one-time authorization. The AG noted that it was interpreting the existing statute, not foreclosing legislative action.
Citations
Statutes and constitutional provisions:
- N.C.G.S. § 105-116 (state franchise tax on electric power companies)
- N.C.G.S. § 105-116(e) (prohibition against municipal franchise taxes when state distribution is made)
- N.C.G.S. § 105-116.1 (distribution to cities)
- N.C.G.S. § 105-116.1(b) (75-day distribution timing)
- N.C.G.S. § 105-114(a3) (fiscal year of the State)
- N.C. Const. art. III, § 5(3) (Governor's emergency budget powers)
Cases:
- Kenny Co. v. Brevard, 217 N.C. 269 (1940) (strict construction of municipal taxation)
- Redevelopment Comm. v. Guilford County, 274 N.C. 585 (1968) (illegal tax if without authority)
- State v. Emery, 224 N.C. 581 (1944) (Governor's constitutional emergency powers)
Source
Original opinion text
RE: Advisory Opinion: Authority of cities to levy local franchise taxes upon electric power companies when they receive only a partial tax distribution for a fiscal year; G.S. §§ 105-116 and 116.1
Dear Secretary Tolson:
G.S. § 105-116 levies an annual franchise tax upon the gross receipts of electric power companies. The tax is imposed for the fiscal year of the State in which it becomes due. G.S. § 105-114(a3). The return is filed quarterly; dependent upon total sales, power companies may pay the tax more frequently. Section 116(b). G.S. § 105-116.1(b) requires that the Secretary of Revenue distribute a specified share of the taxes to cities within 75 days after the end of each calendar quarter. Id.
For fiscal year 2001-2002, cities received franchise tax distributions in September and December, but none in March and June. The Governor directed that March and June distributions be applied to the State budget deficit. The Governor possesses extraordinary constitutional powers to reduce State expenditures to achieve a balanced budget. N.C. Const., Art. III, s.5(3).
G.S. § 105-116(e) provides in pertinent part that municipalities may not levy similar franchise taxes upon power companies "so long as there is a distribution to cities from the tax imposed by this section. . . ."
In light of the foregoing, you request our opinion as to whether a city may levy a local franchise tax upon electric power companies effective July 1, 2002 when it has "received some but not all of a distribution of the state franchise tax in fiscal year 2001-2002."
Scant direct authority exists to aid our analysis. While the prohibition against municipalities levying an independent franchise tax can be traced to 1949, apparently it has never been judicially construed. Nevertheless, for several reasons we advise that the legislative prohibition continues to bar municipalities from imposing similar franchise taxes.
Technically, since the franchise tax is an annual levy, and cities have in fact received full shares of the levy for the previous two quarters, there has been a distribution to them during the fiscal year within the meaning of Section 116(e). The conditions upon which the legislature has elected to confer taxing authority upon a subordinate unit of government simply have not been satisfied. The powers of municipalities "relating to taxation are strictly construed." Kenny Co. v. Brevard, 217 N.C. 269, 272 (1940). A tax imposed without authority is an illegal tax. Redevelopment Comm. v. Guilford County, 274 N.C. 585, 589 (1968).
Moreover, for purposes of statutory construction it is well settled that the legislature enacted Section 116(e) fully aware that its provisions would be interpreted consistent with the exceptional constitutional powers given the Governor in times of economic crisis. State v. Emery, 224 N.C. 581, 585 (1944). The nature of these powers, themselves conditionally limited in duration, further suggests that "so long as" there remains a statutory mechanism normally requiring distribution, a presumptively temporary suspension of reimbursement was not intended to automatically cede taxing authority.
We hope the foregoing is helpful.
Sincerely,
Reginald L. Watkins
Senior Deputy Attorney General
George W. Boylan
Special Deputy Attorney General