The North Carolina Office of Administrative Hearings (OAH) recently found, following a summary judgment motion hearing, that limiting the franchise tax deduction to receivables from affiliates doing business in North Carolina violated the U.S. Constitution. The petitioner argued that limiting the deduction to North Carolina debtors discriminated against interstate commerce in violation of the dormant Commerce Clause of the U.C. Constitution. The dormant commerce clause bars States from imposing undue burdens—including tax burdens—on interstate commerce.

The petitioner in this case was a C-Corporation subject to the North Carolina franchise tax. The petitioner lent and borrowed money from members of its affiliated group, some which did business in North Carolina and some which did not. Petitioner then deducted from its “capital stock base” amounts borrowed from all of its affiliated corporations regardless of location. The North Carolina Department of Revenue claimed that petitioner owed taxes, penalties, and interest because amounts borrowed from its affiliated corporations were deducted, by law, only to the extent that the affiliated corporations do business in North Carolina.

The OAH found that by allowing petitioner a deduction for affiliate receivables only if the debtor pays franchise tax, the statute denied petitioner a deduction where the debtor was not incorporated in and did not do business in North Carolina. Such “differential treatment” based on the location of the debtor’s business violated the dormant commerce clause and was not necessary to achieve the legislative intent of preventing double taxation or otherwise preserving the integrity of the franchise tax. The petitioner’s motion for summary judgment was granted.

Philip Morris USA, Inc. v. NC Department of Revenue, North Carolina Office of Administrative Hearings, No. 20 REV 04215 (12/30/21).