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Revenue Department defends legal fight over taxing asphalt equipment
Publisher's Note: This post appears here courtesy of the Carolina Journal. The author of this post is CJ Staff.
The state Revenue Department defends its refusal to grant a "mill machinery" tax exemption in a dispute that has reached North Carolina's highest court.
It's a case that has attracted interest from the state's leading business interest group.
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 brief filed Tuesday, the department's lawyers made their case for denying the tax break.
"The Appellee FSC II, LLC, is a contractor that produces its own Hot Mixed Asphalt (HMA) and consumes the vast majority of its HMA in its own construction projects," Revenue Department lawyers wrote. "FSC acquired equipment to produce HMA without paying the corresponding use tax on its out-of-state purchases."
"FSC argues that N.C. Gen. Stat. § 105-187.51 entitles it to the lower rate of tax, known as the mill machinery exemption, on its purchases of HMA Equipment, even though that exemption only applies to taxpayers that buy equipment to manufacture goods for sale to third parties, not for their own use," the Revenue Department brief continued. "FSC argues, however, that N.C. Gen. Stat. § 105-187.51 contains no express requirement that taxpayers principally or primarily sell the products that they produce to receive the exemption, that there is no case law that supports such a requirement, and that such a rule would be contrary to principles of statutory construction."
The Revenue Department rebuts that claim. "But there is no indication in the language of N.C. Gen. Stat. § 105-187.51, its legislative history, or in the case law suggesting that a taxpayer which is not a 'manufacturing industry or plant' can be entitled to the mill machinery exemption," according to the brief. "It is the burden of the taxpayer to bring itself into the exemption. The burden has not been met here."
State lawyers also emphasize the case's potential impact on tax collection. "The tax imposed on sales is a vital source of revenue for North Carolina; safeguarding that source is as important as ever, particularly with the corporate income tax rate phasing out to zero," according to the Revenue Department brief. "An important safeguard is the placing of the burden on taxpayers seeking exemptions from sales tax to show they fall within it. ... This case illustrates the important role of this burden, which FSC cannot meet."
The North Carolina Chamber Legal Institute filed a friend-of-the-court brief in the case on Aug. 2. The Chamber's legal group backs the taxpayer seeking the exemption.
The Chamber brief asks state Supreme Court 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 replaced the privilege tax in 2018 with a tax exemption.
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."
The state Supreme Court has not yet scheduled oral arguments for NC Department of Revenue v. FSC II.
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The state Revenue Department defends its refusal to grant a "mill machinery" tax exemption in a dispute that has reached North Carolina's highest court.
It's a case that has attracted interest from the state's leading business interest group.
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 brief filed Tuesday, the department's lawyers made their case for denying the tax break.
"The Appellee FSC II, LLC, is a contractor that produces its own Hot Mixed Asphalt (HMA) and consumes the vast majority of its HMA in its own construction projects," Revenue Department lawyers wrote. "FSC acquired equipment to produce HMA without paying the corresponding use tax on its out-of-state purchases."
"FSC argues that N.C. Gen. Stat. § 105-187.51 entitles it to the lower rate of tax, known as the mill machinery exemption, on its purchases of HMA Equipment, even though that exemption only applies to taxpayers that buy equipment to manufacture goods for sale to third parties, not for their own use," the Revenue Department brief continued. "FSC argues, however, that N.C. Gen. Stat. § 105-187.51 contains no express requirement that taxpayers principally or primarily sell the products that they produce to receive the exemption, that there is no case law that supports such a requirement, and that such a rule would be contrary to principles of statutory construction."
The Revenue Department rebuts that claim. "But there is no indication in the language of N.C. Gen. Stat. § 105-187.51, its legislative history, or in the case law suggesting that a taxpayer which is not a 'manufacturing industry or plant' can be entitled to the mill machinery exemption," according to the brief. "It is the burden of the taxpayer to bring itself into the exemption. The burden has not been met here."
State lawyers also emphasize the case's potential impact on tax collection. "The tax imposed on sales is a vital source of revenue for North Carolina; safeguarding that source is as important as ever, particularly with the corporate income tax rate phasing out to zero," according to the Revenue Department brief. "An important safeguard is the placing of the burden on taxpayers seeking exemptions from sales tax to show they fall within it. ... This case illustrates the important role of this burden, which FSC cannot meet."
The North Carolina Chamber Legal Institute filed a friend-of-the-court brief in the case on Aug. 2. The Chamber's legal group backs the taxpayer seeking the exemption.
The Chamber brief asks state Supreme Court 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 replaced the privilege tax in 2018 with a tax exemption.
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."
The state Supreme Court has not yet scheduled oral arguments for NC Department of Revenue v. FSC II.
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