RALEIGH—Raleigh lawyer Gene Boyce, who has sued the state of North Carolina five times and won all five lawsuits, is at it again. But this time he has four lawsuits pending against the government. Decisions are expected soon in some of those cases.

CJ: You’ve got four lawsuits pending against the state on various… are they tax-issue related?

Boyce: They are all tax- and constitutional-law related, yes.

CJ: You had told me that all four were coming to a head. Can you give me a rundown?

Boyce: We have been working on all four of them and all of them are about to come to a disposition by the trial court. The probability is that whichever side wins or loses, all four cases will go to the North Carolina Supreme Court ultimately. The first case is a retrospective tax case that came about in September 2001, when the legislature, in response to the governor’s plea to raise more money, increased the top tax rate of 7.75 percent and raised it up 8.25 percent for three years. It has now been extended. It was supposed to be a temporary tax; it has now been extended for another three years. But, in any event, the constitutional inference is they made that tax retroactive or retrospective back to January 1st and there is a clear prohibition…

CJ: The issue is that they enacted it at what point in time?

Boyce: They enacted it on September 26, 2001, but they made it retroactive to January 1, 2001. The constitution in North Carolina is very clear that no tax retrospectively… no law retrospectively taxing any sales purchases or other acts previously done shall be enacted. North Carolina and Delaware have an explicit prohibition against back taxing. Some of the other states have ruled it unconstitutional on the basis of impairment of contract or lack of due process because of retrospective applications.

CJ: So your suit seeks to recover just those nine months of retrospectivity or for the whole year?

Boyce: Yes, I’ve just gotten something specific from the Department of Revenue and there are approximately 85,300 taxpayers in that category and I am told that the amount of taxes involved is something over $63 million for that nine-month period. That case has just been decided, that the rule will be a class action by the four main plaintiffs on behalf of the 85,000 taxpayers. That case is almost ready for trial and after the class notice, the mandatory class notice goes out, it will probably be tried sometime, hopefully, in mid-October.

CJ: Any idea, how long it will last?

Boyce: It has already been pretty much agreed by parties and the judge that it is a pure question of law, there will be no jury trial. It will be probably a day or two-day trial, at the most.

CJ: How long would you expect for the judge to render a decision?

Boyce: I would expect a very expedited decision. The judge has already been in the case and has studied it, and it is a pure question of law for him to decide, up or down.

CJ: Does that mean a black- and-white issue?

Boyce: It is pretty much a black-and-white issue. The state has two defenses, both of which they have tried before in a prior case and the Supreme Court answered those defenses against the state in the Wachovia case in 1939. The state’s defense is fairly straightforward and simple. They say, number one, the Congress makes tax laws retrospective to the first of the year, and if the Congress can do it, then the state legislature can do it. The response to that is the U.S. Constitution has no antiretrospective tax provision in it, so that is the material difference. The other defense that the state has already asserted and lost on one time before is that taxes are not paid until April 15, when you file your return. That is based on very old law that the legislature relied on. I’ve seen those legal opinions, those cases they relied on pre-dated the withholding tax system that came into effect during World War II in about 1943, and as we all know, we begin paying taxes at the first of the year on payroll… and self-employed people start paying on a quarterly basis beginning in April of the tax year. So, taxes are collected way ahead of April 15, as a matter of fact, the money is spent, collected and spent, long before the tax-return due date.

CJ: Can you briefly explain the highway trust case and the state of that one?

Boyce: The facts in that case have been stipulated, to a large extent, by the parties, and we expect for that to have a trial date of the third week in October. That case is the one in which the ultimate result was that the governor took $80 million out of the Highway Trust Fund and the suit is brought for the purpose of restoring that money to the trust fund.

The basis for that suit is twofold. Number one, you don’t take money out of trust and use it contrary to the trust purposes. Number two, the main constitutional objection is, the North Carolina Constitution says, when a tax law is passed it has to specifically tell the people what that tax is for, and second, once that tax is collected that tax money has to be spent for the purpose which is stated in the law, for which it was collected. In this case, the $80 million was paid by taxpayers in the form of automobile license tax, gasoline tax, lease-car tax, tax on purchase of vehicles. That money was designated for the specific highways construction and urban loops specified in the law and opposition is the money has to be spent for the purpose it was collected.

CJ: Where does that case stand right now?

Boyce: That case will probably be tried the third week in October. It’s ready for trial. It will take probably two days to try that case. It’s a nonjury case, and pure questions of law.

CJ: Does recent actions by the governor, and I guess supported by the legislature, of the $700 million for his Moving Ahead Project, moving funds to fix up roads in the state.

Boyce: That might become an issue; it is not currently an issue in the lawsuit because that happened a year or so after the lawsuit was commenced. It could possibly become an issue. It all depends on whether it can be made clear as to whether that money which is being spent is a prospective expenditure of prospected funds, rather than a retrospective expenditure of money that is already in the trust fund. There is also an issue on the… in that instance an issue on which the purposes the bonds were voted on and whether or not any bond money that is voted on for a specific purpose can be applied, particularly by a governor, to a different purpose.

CJ: What is the state’s argument on the highway trust?

Boyce: The state’s argument is the governor had a deficit problem, and there is a constitutional provision, when the revenue for a particular fiscal period is not adequate to pay the expenditures for a particular fiscal period the governor shall “effect the necessary economies in expenditures” to correct the deficiencies.

In this case, the governor did not act within the receipts and expenditures of the fiscal year in question. He reached outside the fiscal year and took money out of a trust fund that had been collected in prior years. So the meaning of that provision about balancing the budget is subject to interpretation.

The attorney general interprets it to the governors benefit, and we interpret it to the taxpayers’ benefit. In the highway trust case, there is provision in the recent stature that money taken out of the trust fund, was constituted a loan. The present legislature has made a commitment on behalf of future legislatures that that money will be repaid. That is a significant issue, whether or not the highway trust fund is a lending institution, whether or not the governor or the legislature can borrow money from the trust fund on a promise that it would be paid, or might be repaid.

CJ: Cabarrus County just got hit big-time with the Pillowtex layoffs, right? So they are coincidentally at the head of city-county case.

Boyce: Cabarrus County is the lead plaintiff and they had enough troubles losing all their tax receipts income and they now have been hit again. That case involves the ongoing problem of the legislature enacting appropriate laws permitting the municipalities, the towns and the counties, to collect taxes other than property tax. The legislature has deprived the cities and counties of a source of income that they had been depending on for years.

At the end of the fiscal year, I noted that there was a surplus of $250 million on June 30 of this past year, but I’ve also noted that no effort had been made to repay it in the money that was taken away out of that surplus at the end of the year. What we have evidence that the state took money away from the cities and counties, when they were operating on a $250 million surplus.

CJ: The amount that the state took on those taxes was mitigated by raising the sales tax, right?

Boyce: There was an offer to that effect, some, but not all of the localities opted to enact the sales tax. That was part of the crumbs left on the table by the legislation and the governor. My best information is even with the sales tax it only replenished about 50 percent of that lost income, I’m not positive about the statistics, but I remember reading something to that effect.

CJ: Did any cities and counties drop out of the lawsuit after that sales tax was enacted?

Boyce: No, in fact, I think some came in even after that was enacted. It was partly a stopgap measure to the cities and counties.

CJ: Where does that case stand now?

Boyce: That case is scheduled to be tried in November. There again, that will be a non-jury case, it shouldn’t take more maybe two or three days to try that case. It’s primarily a question of law. The assistant attorney generals that we are working with, we have stipulated probably 80 percent of facts have been stipulated to.

CJ: Now are all of these going to be tried in Raleigh?

Boyce: All of them will be tried in Raleigh. Judge Barnett has the retrospective tax case, retired judge. And retired Judge Robert Farmer has both the city-county and highway trust fund cases. The issues in the ones that Judge Farmer had are basically the same issues. The first issue being the requirement that the law designate the purpose of the tax and that the executive… the legislature must designate the purpose for which we are taxed and the executive branch must spend the money for that purpose. That is the issue in both the highway trust and city-county, and Judge Farmer has both of those cases.

CJ: And last, the tobacco case.

Boyce: The tobacco case has been on the back burner for quite some time. Initially, at the request of the attorney general, but it’s still a viable case. We have held up on that to watch some of the developments particularly some of the activities of the Golden LEAF Foundation.

CJ: What is the basis of the lawsuit, at this point?

Boyce: There are several. Number one, that case is one we refer to as “lunchtime litigation.” It was brought about… twelve o’clock noon during the lunch and recess at the courthouse and resolved about nine minutes past one that same day. It was a $4.6 billion case involving public funds. The basic complaint of the plaintiffs in that case, it was a true violation of separation of powers. The judicial branch and the executive branch got together and entered a judgment that required the legislative branch to enact certain legislation under a threat that the tobacco settlement might fall through if the legislature didn’t act.

An act by March 16 was given a deadline from December of 1998. The judgment was entered and the legislature was imposed a deadline by the executive and judicial branch of March 15, to enact, what turned out to be the legislation that divided up the public funds among three slush funds… three political appointed committees: the Golden LEAF, the Health and Wellness, and the Tobacco Trust.

With half of it going to Golden LEAF and we have been tracking expenditures by Golden LEAF and as we predicted a lot of that money is being spent by a politically appointed committee, way beyond even what some of the legislative leadership expected that money to be spent for. The legal point in that case is that the legislature cannot delegate to spend public funds without putting some fairly clear restrictions on how public money is to be spent.

CJ: And trial action?

Boyce: Because of our schedule, probably December.

Chesser is an associate editor of Carolina Journal.