Philip Morris makes case to state Supreme Court in franchise tax fight

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  • Philip Morris sets forth its latest arguments at the state Supreme Court against the North Carolina Department of Revenue.
  • The tobacco giant argues that revenue officials applied state law unconstitutionally in determining that Philip Morris owed a greater franchise tax liability.
  • Philip Morris and the Revenue Department face a separate state Supreme Court dispute over $8.7 million in disallowed tax credits and penalties.

Tobacco giant Philip Morris urges the state Supreme Court to reverse a ruling that could force the company to pay a higher franchise tax bill. Philip Morris argued in a court filing Monday that the state Revenue Department is applying the law in an unconstitutional way.

This case is distinct from Philip Morris’ ongoing fight with the Revenue Department over an $8.7 million bill tied to disallowed export tax credits.

“Appellee North Carolina Department of Revenue seeks to increase the franchise tax liability of Appellant Philip Morris USA, Inc., in a manner that an administrative law judge correctly determined to be unconstitutional, in violation of the Dormant Commerce Clause of the United States Constitution,’ Philip Morris’ lawyers argued Monday. “Instead of facing that issue before the trial court, the Department argued that the trial court could not hear the merits of the as-applied constitutional challenge for jurisdictional reasons, notwithstanding the Department’s failure to argue to the administrative law judge that she lacked jurisdiction over as-applied constitutional challenges and the Department’s subsequent appeal of the administrative decision to the trial court.”

The dispute involves a state law governing civil lawsuits that challenge state laws as unconstitutional. Challenges can be so-called “facial” challenges or “as-applied” challenges. A facial challenge argues that a law is unconstitutional under all circumstances. An as-applied challenge argues that the law is applied unconstitutionally only in the circumstances of the current legal dispute.

“Relying on N.C.G.S. § 105-241.17, the trial court incorrectly adopted the Department’s new position and remanded the case back to the administrative law judge with instructions to dismiss pursuant to § 105-241.17, which provides for the dismissed case to then be brought immediately back to the same trial court,” the Philip Morris brief explained. “Even though the trial court concluded it lacked authority to reach the constitutional issue, it still made a substantive ruling characterizing the as-applied constitutional challenge at issue as a facial challenge, despite all indications that it was an as-applied challenge outside of the purview of the procedural steps set forth in § 105-241.17.”

“The trial court’s decision contravenes the principles of judicial restraint,” the brief argued. “Seeking to escape this procedural maze of the Department’s creation, Philip Morris USA, Inc., appeals to this Court for resolution of these procedural and substantive issues.”

Philip Morris set out five issues for the state’s highest court to resolve. First, does state law “deprive the Office of Administrative Hearings (“OAH”) of jurisdiction over any type of constitutional challenge to a tax statute, including an as-applied challenge?” Second, did the trial judge “err in issuing an advisory opinion” about the Philip Morris challenge after determining that the court lacked subject matter jurisdiction to deal with the case? 

Third, did the trial court make a mistake by labeling Philip Morris’ complaint a facial constitutional challenge? Fourth, did the trial court make a mistake by ruling that the Office of Administrative Hearings could not exercise authority “over any type of constitutional challenge to a tax statute”? Fifth, did the Revenue Department’s treatment of Philip Morris “violate the Dormant Commerce Clause because it discriminates against interstate commerce”?

Philip Morris offered its latest arguments to the state Supreme Court at the same time the company is pursuing high court action in a separate dispute with the state Revenue Department. In the other case, the company and government agency are battling over $8.7 million in disputed tax credits and penalties.

Neither case has been scheduled yet for oral arguments.