A Victory at the North Carolina Supreme Court

    From the North Carolina Chamber of Commerce

    We write for the second time in as many business days to again promote the work of the NC Chamber Legal Institute and applaud the broad, bipartisan, unanimous victory handed to the business community by the Supreme Court of North Carolina in a tax case last week.

    The case, NC Dept. of Revenue v. FSC II, LLC, involved the question of who is a “manufacturer” for purposes of the G.S. 105-164.13(5e) exemption from the sales and use tax for “[s]ales of mill machinery or mill machinery parts or accessories to… [a] manufacturing industry or plant.” That exemption has been a part of the sales and use tax statute in some form or fashion since the sales tax was first implemented nearly 100 years ago. The policy behind the exemption is to encourage investment in plants and equipment by manufacturers, which in the long run would increase the property tax base and create jobs.

    The Department of Revenue, in mistaken reliance on In re Clayton Marcus Co., 286 N.C. 215 (1974), a case involving a different sales tax exemption, had adopted and was following an unwritten (and unpublicized) “50% rule” wherein they claimed that a taxpayer is not a “manufacturer” unless the taxpayer sells to third party customers at least 50% of the product it manufactures. Here, DOR claimed that FSC was not entitled to the mill machinery exemption. Although FSC sold hundreds of thousands of dollars of the hot mix asphalt it manufactured to third parties, it used even more in its own paving contracts. In a nutshell, DOR contended that FSC was a contractor, and therefore it could not be a “manufacturing industry or plant” as required to qualify for the exemption.

    In both the Office of Administrative Hearings and at the Business Court, the taxpayer prevailed, but DOR exercised its right of appeal to the NC Supreme Court. The CLI chose to weigh in there with an amicus brief highlighting the business community’s disfavor of DOR developing and applying their “50% rule” without complying with the NC Administrative Procedure Act. From the brief:

    “In this case, the Department is seeking to do exactly what the APA forbids. It has formulated a “policy, guideline, or other interpretive statement,” (i.e., the primary purpose requirement), which a taxpayer must satisfy to claim the mill machinery exemption. The Department is attempting to enforce this requirement against FSC without having complied with any of its Article 2A obligations. Most notably, the primary purpose requirement was not reduced to writing, reviewed by the [Rules Review Commission] or published in the North Carolina Register.”

    CLI’s brief to the Supreme Court was authored by Bill Nelson, Chair of the NC Chamber’s Tax Committee, and a partner at the Smith Anderson Law firm. FSC II was represented by attorneys Robert Womble, Zachary Buckheit, and Lee Hogewood, III, all of NC Chamber member firm K&L Gates. Impressively, the Court did not even author an original opinion in this matter, instead adopting Judge Mark Davis’ Business Court opinion per curium.

    I cannot write any more succinctly or convincingly than Mr. Nelson, who ended the amicus brief by reminding the Court why clear rules, adopted within the constraints of the system established by the state legislature and thereafter evenly enforced, are so important to North Carolina’s business climate:

    “In a globalized world where hundreds of jurisdictions compete for highly mobile capital, maintaining a dependable legal order is critical to the prosperity of our citizens. Economic competition is a serious and constant challenge. The hard work of many individuals and public and private institutions over many generations has produced economic and political conditions in North Carolina that are the envy of many jealous competitors. But this hard-won success must be defended every day.

    The NC Chamber is honored to help play a role in defending our state’s position as a top state for business every day, and we were grateful to have lent our voice to this pivotal victory for a key North Carolina employer and the entire business community.

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