- The North Carolina Supreme Court ruled, 5-2, in favor of Philip Morris in the tobacco company's dispute with the state Revenue Department over an $8.7 million tax bill.
- The dispute involved a state tax credit for exported cigarettes. Philip Morris and the Revenue Department disagreed over whether the company could use millions of dollars in taxes generated in one year to offset tax bills in later years.
- Justice Tamara Barringer wrote for the court's majority that the law was ambiguous. She also cited the Revenue Department's changing interpretation of the company's ability to carry tax credits forward from one year to the next.
The North Carolina Supreme Court has ruled in favor of Philip Morris in the tobacco company’s legal battle with the state Revenue Department over an $8.7 million tax bill. The decision Friday split the court, 5-2, along party lines.
The dispute involved export tax credits Philip Morris claimed on tax returns dating back a decade.
“The specific issue before the Court is whether the ‘credit allowed’ in N.C.G.S. § 105-130.45(b) (2003) (repealed effective 1 January 2018) limits the Export Credits claimed by Philip Morris such that the citizen taxpayer cannot carry forward to future years the Export Credits generated in prior years,” wrote Justice Tamara Barringer for the Supreme Court’s Republican majority.
“Philip Morris and the Department each argue that the plain meaning of the statute supports their respective positions; however, since neither party’s textual analysis provides a univocal interpretation, we find the statute ambiguous,” Barringer wrote.
“[W]e hold that any generated Export Credit in excess of the annual statutorily defined cap may be carried forward for the succeeding ten years,” she added.
Barringer emphasized the Revenue Department’s changing interpretation of the law establishing the export credit. Legislators approved the original law in 1999 and amended it in 2003.
“[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. 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 N.C.G.S. § 105-130.45 before the 2003 Amendment,” Barringer wrote.
“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 added. “The Legislature — as demonstrated by the language in the Amendment — made clear that the Amendment is designed to prevent ‘double dipping’ by a surviving corporation and a merged corporation, thus prohibiting both from taking advantage of the same credit and carryforward on their separate income tax returns. The only change to the carryforward provision is the extension of the carryforward period from five to ten years.”
“Moreover, the Department’s representations and actions do not support its current position,” she added. “Despite acknowledging the ability to ‘generate’ credits ‘above the $6 million cap’ in its 2008 economic incentives report mandated by subsection (f) of the Export Credit Statute, 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.”
Justice Allison Riggs wrote for the court’s dissenting Democrats.
“The plain language of the amended version of the statute unambiguously says the amount of credit a taxpayer can generate in a given year under N.C.G.S. § 105-130.45(b) ‘may not exceed six million dollars.’ While I agree with the majority that the phrase ‘credit allowed’ has different meanings in different subsections of N.C.G.S. § 105-130.45, reading the statute in context, I do not agree that the different meanings create ambiguity in the statute,” Riggs explained.
“I am troubled by the scolding tone with which the majority addresses the Department,” Riggs added. “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.”
The N.C. Revenue Department argued in a June 2023 court filing that Philip Morris misread state law while trying to avoid an $8.7 million tax bill.
The Richmond, Virginia-based company argued that it’s entitled to take $7.2 million in tax credits. The department disagreed. With penalties, the Revenue Department said Philip Morris owed $8.7 million. A trial judge ruled in favor of the department in September 2022.
“For tax years 2005, 2006, and 2007, Philip Morris calculated its Export Credits generated in the amount of $28,767,799, $27,374,957, and $14,310,414 respectively, far exceeding the $6,000,000 limit,” according to a Revenue Department brief. “Philip Morris then improperly attempted to carry forward the unauthorized credits to its 2013 and 2014 corporate tax returns.”
“Through this appeal, Philip Morris now continues to lobby for better treatment than its competitor RJ Reynolds by attempting to question the statutory construction of an unambiguous statute.” the Revenue Department’s lawyers argued.
The legal battle stemmed from an audit of Philip Morris’ corporate income and franchise tax returns from 2012 to 2014. The state Revenue Department disallowed tobacco export credits the company claimed for all three years.
The company challenged the department’s ruling administratively and in court. The current dispute involves credits from 2013 and 2014.
In court documents, Philip Morris pointed back even further in time. “In 1999, the General Assembly adopted economic development legislation to provide export tax credits to cigarette manufacturers,” according to the tobacco company’s brief. “All parties agree that, under the original version of N.C.G.S. § 105-130.45 (the “Export Credit Statute”), the taxpayer could generate an unlimited amount of export tax credits based on its volume of cigarette sales, but could claim only $6 million in export tax credits per year. The General Assembly relied on the phrase ‘credit allowed’ in this statute to describe the amount of export tax credit a taxpayer could claim in any year.”
Then-Gov. Mike Easley called a special legislative session in 2003. Part of the purpose was to extend the export tax credit past 2004, according to the Philip Morris brief. But the General Assembly also developed an “enhanced credit statute” tied to jobs.
RJ Reynolds was in the process of acquiring Brown and Williamson Tobacco Company. Lawmakers wanted to help RJR if it increased in-state employment by at least 800 jobs. But the new laws also included provisions designed to ensure that RJR did not fare better than competitors like Philip Morris if it failed to meet the job goals.
Philip Morris’ brief claimed a recent change in state government’s interpretation of the 2003 language generated the current legal dispute.
“Philip Morris always has interpreted the phrase ‘credit allowed,’ as used in the Export Credit Statute and the Amended Export Credit Statute, to denote how much credit a taxpayer may claim in a given year,” according to the filing. “For more than a decade, the North Carolina Department of Revenue never disputed Philip Morris’ interpretation. Now, the Department asserts that the phrase ‘credit allowed,’ as used in the Amended Export Credit Statute, creates not just a cap on the amount of credits that a taxpayer may claim, but also a cap on the amount of credits a taxpayer may generate in a given tax year.”
“The plain meaning of ‘credit allowed’ supports Philip Morris’ interpretation,” the company added. “The word ‘allowed’ has an ordinary meaning that connotes a permissive right to use or claim something. Both federal and North Carolina courts have applied the ordinary meaning of ‘allowed’ in tax cases. The phrase ‘credit allowed,’ as used in the Amended Export Credit Statute, should thus be given the same meaning that it has always had — a limit on the amount of tax credits that a taxpayer may claim annually, not a limit on annual credit generation.”
Philip Morris cited the history of both the 1999 and 2003 laws. “This evidence confirms the
General Assembly’s intent for the Amended Export Credit Statute to enhance credits, not limit them, as the Department now contends,” according to the brief.
The Revenue Department failed to challenge Philip Morris’ interpretation of the 2003 law for more than a decade. The department’s changing interpretation first surfaced in 2018, when it audited the company’s 2012-2014 tax returns.
“It was not until August 2020 that the Department advanced its newfound interpretation” of the law, according to the brief. “But even then, it failed to articulate a clear or accurate position. It determined that the Amended Export Credit Statute had clarified ‘the pre-existing requirement … that the amount of Tobacco Export Credits a taxpayer could generate in any single tax year could not exceed $6,000,000,’ which it said was supported by ‘the General Assembly’s contemporaneously prepared summary of the 2003 Statute.’”
But “everyone agrees” the cited provision in state law “never restricted credit generation,” Philip Morris argued. “The amended language thus could not ‘clarify’ a non-existent provision. Moreover, the General Assembly never created a document to support the Department’s interpretation.”
“This history does not support the Department’s claim that the Amended Export Credit Statute was always intended to create a new limit on credit generation,” Philip Morris’ lawyers concluded. “Rather, it shows that the Department concocted this interpretation as a newfound means of upholding the assessments and penalties against Philip Morris.”