Taxpayers, whether individuals or corporate, have a right to a remedy for any erroneous and unlawful tax collection. The legal requirement in challenging a tax collection, however, must be precisely followed for a claim to succeed. In a Nov. 16 decision, the N.C. Court of Appeals clarified how corporations may go about challenging decisions by the Augmented Tax Review Board.
In 1991, Central Telephone Company sold subsidiaries in Iowa and in Minnesota. Under North Carolina’s income tax apportionment scheme, it would levy corporate income tax on a significant portion of the revenue from the sales. Central Telephone challenged the apportionment.
North Carolina has two separate tax review panels. The first is the regular Tax Review Board, a three-member panel that hears appeals from decisions of the secretary of revenue as an “appellate administrative agency having quasi-judicial authority.” Decisions of the regular Tax Review Board may, in turn, be appealed to Superior Court.
The second panel is the Augmented Tax Review Board. The ATRB’s function is to “consider petitions from corporate taxpayers for use of alternate allocation formulas in determining tax bases for” income taxes. The ATRB is “augmented” in that it has a fourth voting member — secretary of Revenue — in addition to the three members of the regular Tax Review Board.
Central Telephone’s petition was turned down by the ATRB. The company then sought to appeal the decision to Superior Court. The court, however, dismissed the appeal, contending it lacked jurisdiction to hear the case. The N.C. Court of Appeals agreed with the lower court that Central Telephone’s action was exactly the wrong approach in challenging the ATRB’s decision. The correct approach, the appeals court held, was for Central Telephone to pay the tax and then sue the state.
“The plain, unambiguous language of [the] statute requires the petitioner to pay the tax and file a civil action in superior court against the Secretary,” wrote Judge Douglas McCullough for the court. “Pursuant thereto, a ‘trial’ is held to determine whether the Secretary’s tax assessment was correct. Therefore, the superior court determines this issue pursuant to its original jurisdiction.”
The appellate court also took note of a phrase in the ATRB’s regulation that Central Telephone had used to argue that it could appeal. The regulation states:
“When the Secretary of Revenue asserts liability under the formula adjustment decision of the board, an aggrieved corporation may pay the tax and bring a civil action for recovery under the provisions of G.S. 105-241.4. On appeal the superior court will view the hearing record of the augmented board. This record will consist of claimant’s petition, brief, evidence, documents, and papers and the final decision of the board.”
The appeals court found this section “inconsistent.” “The first half of the regulation requires the aggrieved corporation to pay its tax and bring a civil action… However, the last two sentences of N.C. Admin. Code tit. 20, r. 4.0310 seem to confer appellate jurisdiction upon the superior court, where the court will consider only the record of the ATRB hearing. We can find no statutory authority for the creation of this appellate jurisdiction… To the extent this regulation is inconsistent with its statutory authority, we hold it to be invalid and without legal effect.”
The case is In re Petition of Central Tel. Co., (03-1313).
Michael Lowrey is associate editor of Carolina Journal.