Republicans, Democrats split in NC Supreme Court tax ruling

The North Carolina Supreme Court has sided with tobacco company Philip Morris in an $8.7 million tax dispute with the state Revenue Department. The decision showcased a clear split between the court’s Republican and Democratic justices.

Republicans who make up the court’s 5-2 majority proved more skeptical than their Democratic colleagues about government bureaucrats’ role in the tax fight.

The case stems from actions dating back more than two decades. A North Carolina General Assembly controlled by Democrats created a cigarette export tax credit in 1999. State lawmakers, still led by Democrats, amended the law four years later.

Philip Morris and state revenue officials disagree about whether the 2003 amendment limited the amount of tax credits the company could generate in any single year. The disagreement prompted a multimillion-dollar difference of opinion about Philip Morris’ state tax bills for 2013 and 2014.

Republican justices took issue with the Revenue Department’s actions.

“[I]t is undisputed that the Department interpreted the original version of the Export Credit Statute as permitting unlimited credits calculated based on cigarette exports, which could then be carried forward,” Justice Tamara Barringer wrote for the majority. “In fact, as found by the trial court, the Department conceded that Philip Morris’ current interpretation of ‘credit allowed’ is consistent with the Department’s prior interpretation” of the law before 2003.

“The Department now argues that the 2003 Amendment revised the statute to limit export credits generated to six million dollars each year. We disagree,” Barringer explained.

Beyond simple disagreement, Barringer’s opinion chided the government for its inconsistent approach toward export tax credit rules.

“Moreover, the Department’s representations and actions do not support its current position,” she wrote. “Despite acknowledging the ability to ‘generate’ credits ‘above the $6 million cap’ in its 2008 economic incentives report, … the Department now argues that the 2003 Amendment always created a limit on export credits ‘generated.’ Yet the Department has repeatedly failed to act in accordance with this interpretation or even announce its change in position.”

The high court’s two Democrats dissented from the ruling favoring Philip Morris. The amended law’s “plain language” limited the amount of credits the company could generate in a single year, wrote Justice Allison Riggs.

The dissenting opinion also criticized Barringer’s treatment of revenue staffers.

“I am troubled by the scolding tone with which the majority addresses the Department,” Riggs wrote. “Here, it seems plain to me that regardless of the Department’s prior interpretations, the Department’s current interpretation is consistent with the clear intent and purpose of the law at issue here. I do not see any grounds for inferring bad intent or actions on the part of the Department for honoring the intent of the legislature.”

Yet Barringer’s words will set a precedent for future disputes pitting taxpayers and everyday citizens against state government agencies.

“Simply put, the Department’s actions amount to an abrupt reversal of policy without notice to the public or taxpayers,” Barringer wrote. “The actions here lacked transparency and are plainly contrary to the trust the public deserves from its government. This conduct is unacceptable.”

“As mandated by statute and recognized by the Department in its own publications, citizen taxpayers must be able to rely on the representations of the Department,” the majority opinion continued. “Businesses need consistency and clarity to operate efficiently.”

“The Department should consistently, plainly, and publicly interpret and apply revenue statutes and regulations for all taxpaying citizens. This is a statutory mandate,” Barringer added.

Revenue officials claimed in their dispute with Philip Morris that the 2003 state law set a new restriction on export tax credits. “Yet the Department has repeatedly failed to act in accordance with this interpretation or even announce its change in position,” Barringer concluded. “Philip Morris is entitled to rely on these representations and actions.”

It’s unlikely that the specific circumstances of Philip Morris’ tax dispute will crop up again in North Carolina. Yet one can imagine other instances when a taxpayer and the state Revenue Department will reach different conclusions about provisions of state law.

More broadly, it’s certain that North Carolinians will continue to challenge other state agencies’ interpretations of statutes that limit freedoms and restrict individuals’ actions. When those disputes reach courtrooms, Barringer’s “scolding tone” could prove beneficial.

It’s not too much to ask government to “consistently, plainly, and publicly interpret and apply” laws that govern so many aspects of our daily lives. The current state Supreme Court has signaled in the Philip Morris case that it will hold state agencies to that high standard.

Mitch Kokai is senior political analyst for the John Locke Foundation.