NC Chamber backs taxpayer in legal dispute with Revenue Department | Eastern North Carolina Now

    Publisher's Note: This post appears here courtesy of the Carolina Journal. The author of this post is CJ Staff.

    The North Carolina Chamber Legal Institute is backing a business taxpayer's case against the state Revenue Department. The dispute has made its way to North Carolina's highest court.

    The NC Supreme Court will decide whether the Revenue Department had legal authority to block a tax credit for a company known as FSC II. The company attempted to claim a state "mill machinery exemption" for purchased equipment used to create hot mix asphalt.

    In a friend-of-the-court brief filed Wednesday, the Chamber's legal group cited its concerns about the Revenue Department's actions. The brief asks justices to prevent the Revenue Department "from enforcing an unpromulgated rule against a taxpayer in direct violation of Section 150B-18 of the North Carolina Administrative Procedure Act."

    "Permitting a state agency to enforce such a secret rule would threaten North Carolina's business climate, undermine the political accountability of state agencies and erode the public's confidence that their government will treat them fairly," wrote attorney William Nelson.

    The dispute reaches back to tax years from 2012 to 2014. At that time, state law allowed a manufacturing industry or plant to pay a privilege tax on mill machinery, parts, or accessories stored, used, or consumed in North Carolina. That tax was lower than the general sales tax. The General Assembly repealed the credit in 2018.


    FSC II worked primarily in public infrastructure and commercial sitework construction as a contractor, according to the Revenue Department's brief in the case. The company bought equipment to make the asphalt product for its own paving projects. FSC also sold 15% to 20% of its hot mix asphalt to other companies.

    The Revenue Department rejected FSC's attempt to claim the mill machinery exemption. The company sued and secured a favorable ruling from the state Business Court.

    Now Revenue officials seek a reversal of that decision from the NC Supreme Court.

    "One fundamental rule-of-law principle requires that binding norms be formulated openly and in advance," Nelson wrote in support of FSC. "When rules are 'fixed and announced beforehand,' citizens can 'foresee with fair certainty how the [government] will use its coercive powers in given circumstances' and 'plan [their] affairs on the basis of this knowledge.'"

    "The importance of this principle to economic growth is obvious," Nelson added. "Players need to know the rules of the game before they roll the dice. When government agencies can exact penalties for the transgression of secret rules, even the most daring entrepreneurs will be reluctant to commit their capital into the future."

    "Making rules openly and in advance also ensures a measure of political accountability from agencies not subject to direct democratic control," the Chamber's brief continued.

    "[A] taxpayer must satisfy two requirements to come within the mill machinery exemption. The taxpayer must be a 'manufacturing industry or plant,' and the items purchased must be 'mill machinery.' The Department does not contest that the items FSC purchased are 'mill machinery' but denies that FSC is a 'manufacturing industry or plant,'" Nelson explained.


    "The statutes do not define 'manufacturing industry or plant,' but this Court has held that a manufacturer is a person who converts raw materials into new products through skill and labor," the Chamber brief added.

    "The Department does not dispute that FSC created a new product out of raw materials using skill and labor. That would seem to make FSC a manufacturer and bring this case to an end," Nelson wrote. "However, the Department insists that to claim the exemption FSC must satisfy a third requirement not found in the statute: its primary purpose must be selling its manufactured products to third parties."

    "The Record in this case shows that the Department developed this primary purpose requirement internally," he added. "The APA expressly forbids the enforcement of such an unpromulgated rule."

    "In this case, the Department is seeking to do exactly what the APA forbids," Nelson argued. "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 ... obligations."

    Nelson argued that the "primary purpose requirement" should have been written ahead of time, reviewed by the state Rules Review Commission, and published in the North Carolina Register.

    The Chamber's legal group looked beyond the narrow dispute over one company's decade-old tax bill.

    "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," Nelson wrote. "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," he added. "A state agency's short-sighted disregard of fundamental principles of fairness for the sake of a fleeting victory will not go unnoticed or unremarked upon by our sister states. If the Department is permitted to assess tax against a taxpayer for the violation of a rule it did not, and could not, know, a rule keptsecret merely to skirt the mildly irksome requirements of APA rulemaking, North Carolina's reputation as a safe destination for capital will be seriously impugned, and the people of this State will pay the price."

    The state Supreme Court has not yet scheduled oral arguments for NC Department of Revenue v. FSC II.