The North Carolina Court of Appeals has handed down a decision that has to be causing quite the stir at the NC DOR. It is certainly true that this decision is potentially far-reaching. It’s also a very surprising decision.
Anyone who has any use tax assessment pending in NC or has been assessed use tax in the last four years should take notice now. You could have a refund coming to you.
Let’s Set the Stage
Say you sell optional maintenance agreements. You decide to collect tax on the sale of maintenance agreements. If you collect tax on the sales of the agreements, it makes complete sense that no tax would be owed on parts that are used and/or transferred to your customers when you perform the warranty service. This is logical. But in some states, the converse is true (usually the ones who do not tax labor in general). That is, no tax is due upon the sale of the agreement itself, but use tax is due on the parts that are used in providing the warranty service.
Such is the case in NC. No tax is due on the sale of maintenance agreements; and use tax is due on parts used in performing warranty service. But, let’s say you collected tax on the sale of the agreement but did not pay tax on the parts used and now you’re under audit in NC. You make the completely logical argument that NC got their money, in fact NC probably got more from you than they would have if you had paid tax on the parts. You argue that NC should only tax you to the extent that cost of parts exceeds the revenue on optional maintenance agreements. Sounds like a valid argument, right?
It does, but NC is no different from most states in saying, first, that if you collect tax in error, you have to refund that money to your customers before they will pay it back to you. Second, NC would say (as would most states) that it’s a separate matter altogether that you owe tax on parts used in the service performed. NC would assess you a use tax on those parts and give you no refund or credit for the tax collected on the agreement sales. Even if the sale of the agreements were to the very same customer for whom you used parts in providing the warranty service.
The Double Standard of the State
Most states adhere to the theory that it would be unjust enrichment if a company were able to keep money it collected in error from its customers. When viewed from another viewpoint, the unjust enrichment theory is not without merit. For example, an unscrupulous retailer could simply tax everything it sells knowing that most people will pay tax whenever charged. Then that retailer would only remit tax on things that are actually taxable. And state governments don’t like anyone but themselves keeping tax on nontaxable items. So, it does make sense that a state government would make it illegal for companies to keep sales taxes they’ve collected on nontaxable sales. It would be unjust enrichment and only the state can be unjustly enriched.
But, what about this situation? Is the company selling the maintenance agreements unjustly enriched here? They paid the tax on the sale of the maintenance agreements over to the state. It seems like if anything, NC is the only unjustly enriched party here.
The company fought the matter. My guess is that they were advised that they had little chance of prevailing. I’m also guessing that the NC DOR was supremely confident in their position. But the taxpayer did not go to battle without at least some ammo. They had an argument based in North Carolina sales tax statute (Sec. 105-164.41) which says: “If upon examination of any return made under this Article, it appears that an amount of tax has been paid in excess of that properly due, then the amount in excess shall be credited against any tax or installment thereof then due from the taxpayer, under any other subsequent return, or shall be refunded to the taxpayer by the Secretary out of any funds appropriated for that purpose.” (emphasis added.)
The problem was of course that NC had an even more specific statute that seemed to say, very specifically, that in this scenario, you can’t offset use tax with sales tax improperly collected. It would have appeared to all parties that this taxpayer’s hopes were slim to none.
Here’s why this matters
First they went to the administrative hearing level and lost in a summary judgment. I’m sure no one was surprised that they lost at that level. Then the taxpayer filed for a judicial review of the agency decision with the Wake County Superior Court.
The Superior Court overruled the administrative decision, stating that the company was entitled to an offset against the use tax liability in the amount of tax charged on the optional agreements. The refund granted amounted to nearly $200,000 before penalty and interest.
The DOR must have been shocked by the courts decision. They appealed it to the next level.
But the appeals court affirmed the trial court.
The appeals court acknowledged the more specific statute, but held that statute did not apply to the specific transactions at hand and therefore 106-164.41 applied and the company should be allowed to use the tax improperly collected sales tax to offset the use tax.
Obviously, this was a big deal indeed for the company in this case, but it could have far-reaching impacts in NC.
If your company has been assessed a use tax on purchases in NC, you should also review your sales very closely to see if you’ve ever charged tax improperly on any of your sales in NC. Maybe you charged tax on something that is actually exempt, or you charged the wrong rate even. If so, according to our understanding, you could offset the use tax assessment.
Here is the full decision:
NORTH CAROLINA COURT OF APPEALS
Filed: 21 February 2012
TECHNOCOM BUSINESS SYSTEMS INCORPORATED, Petitioner, v. NORTH CAROLINA DEPARTMENT OF REVENUE, Respondent.
Wake County No. 10 CVS 004398
Appeal by respondent from order entered 7 January 2011 by Judge Ben F. Tennille in Wake County Superior Court. Heard in the Court of Appeals 9 November 2011.
Attorney General Roy A. Cooper, by Assistant Attorney General Tenisha S. Jacobs, for respondent-appellant.
The Wooten Law Firm, by Louis E. Wooten, and Everett Gaskins Hancock LLP, by E.D. Gaskins, Jr., for petitioner appellee.
Where sales taxes were erroneously collected on optional maintenance agreements and paid to the North Carolina Department of Revenue, pursuant to N.C. Gen. Stat. §105-164.11(a), Technocom's use tax liability should be offset by the erroneously collected sales tax. Therefore, we affirm the ruling of the trial court.
Facts and Procedural History
On 26 September 2008, the North Carolina Department of Revenue (“the Department”) issued a Notice of Final Determination (“Final Determination”) to Technocom Business Systems, Incorporated, (“Technocom”), a corporation in the business of selling and leasing office equipment. The Final Determination was the result of an audit performed on Technocom for the period between 1 June 2002 and 31 August 2005.
In the course of its business, Technocom purchases and uses parts, supplies, and materials to fulfill its optional maintenance agreements. It is under these maintenance agreements that Technocom services the equipment that it sells or leases to its customers. Regarding Technocom's tax liability under these maintenance agreements, the Department made the following conclusion:
North Carolina imposes a State and local use tax on tangible personal property purchased inside or outside the State for storage, use or consumption in this State… . Use tax is payable by the person who purchases, leases or rents tangible personal property or who purchases a service.
[Technocom's] use of parts, supplies and materials to fulfill its optional maintenance agreements during the audit period constitutes a taxable use of tangible personal property within the meaning of N.C. Gen. Stat. §105-164.3(49) 1. [Technocom] did not pay sales tax or accrue use tax on these items, and the Department has assessed [Technocom] for the appropriate use tax in its proposed assessment and this final determination.
Between 1 June 2002 and 31 August 2005, Technocom collected sales tax on its optional maintenance agreements. The Department held that these agreements were not subject to sales tax because they did not involve services necessary to complete the sale of tangible personal property under N.C. Gen. Stat. § 105-164.3(37) 2. Technocom stated to the Department that its sales and use tax liability should be offset by the sales tax it collected on its maintenance agreements. In response, the Department stated that it could not refund or credit Technocom pursuant to N.C. Gen. Stat. §105-164.11(a) 3 because there was no proof Technocom had refunded its customers the sales tax it erroneously collected on its optional maintenance agreements.
On 18 November 2008, Technocom filed a petition for contested case hearing in the Office of Administrative Hearings (“OAH”). Thereafter, on 1 May 2009, Technocom also filed a motion for partial summary judgment and the Department filed a motion for summary judgment. By order entered on 16 November 2009, an administrative law judge granted summary judgment in favor of the Department and sustained the Final Determination. The order concluded that no provision of the Revenue Act allowed Technocom to offset its use tax liability with sales tax it erroneously collected from its customers.
The Department, in a final agency decision, upheld the 16 November 2009 decision of the administrative law judge. On 18 March 2010, Technocom filed a petition for judicial review of the final agency decision in Wake County Superior Court.
Following a hearing held 10 December 2010, the superior court reversed the decision of the OAH and the Final Determination of the Department in a 4 January 2011 order. The superior court, in pertinent part, stated:
Transactions that do not generate a windfall and that do not result in the unfair treatment of customers are not included in the meaning of “exempt or nontaxable sales” in Section 105-164.11(a). Because the transactions at issue here are not “exempt or nontaxable sales,” Section 105-164.11(a) is not applicable. The general provision contained in Section 105-164.41 governs the outcome, and Technocom is entitled to a credit against the sales tax paid to the Department during the audit period.
The superior court remanded the case to the OAH with instructions to grant partial summary judgment in favor of Technocom, “leaving open the amount of the tax credit to which [Technocom] is entitled” for the OAH's determination. Pursuant to the superior court's order, the administrative law judge entered an order on 3 March 2011 stating the following:
1. [Technocom] is GRANTED partial summary judgment on the following legal issue:
Whether the North Carolina Revenue Laws authorize Technocom to offset its use tax liability on the parts and supplies it provided to customers … with the sales taxes based on the sales of those same Service Agreements it had previously remitted in error to the Department[.]
2. Petitioner is entitled to a tax credit of $192,457.33 on the parts and supplies [Technocom] previously charged, collected and remitted North Carolina sales tax on when it provided such items to its customers … if the Order entered in this matter on 4 January 2011 is affirmed on appeal.
3. No further proceedings at OAH are required in this matter as there is no dispute about the amount of credit [Technocom] would be entitled to if the Order is affirmed on appeal.
The Department appeals the superior court's 4 January 2011 order.
The sole issue on appeal is whether the North Carolina Revenue Laws authorize Technocom to offset its use tax liability with sales taxes erroneously paid by its customers. The Department argues that no provision in the North Carolina Sales and Use Tax Act (“Act”), N.C. Gen. Stat. §§105-164.1 et seq., permits Technocom to claim such a credit against its use tax liability.
An appellate court reviewing a superior court order regarding an agency decision examines the trial court's order for error of law. The process has been described as a twofold task: (1) determining whether the trial court exercised the appropriate scope of review and, if appropriate, (2) deciding whether the court did so properly. When, as here, a petitioner contends the [superior court's] decision was based on an error of law, de novo review is proper.
Holly Ridge Assocs., LLC v. N.C. Dep't of Env't & Natural Res., 361 N.C. 531, 535, 648 S.E.2d 830, 834 (2007) (internal quotation marks and citations omitted).
Because this appeal centers on a close reading of the Act, we must seek “[t]he principal goal of statutory construction [which] is to accomplish the legislative intent.” Lenox, Inc. v. Tolson, 353 N.C. 659, 664, 548 S.E.2d 513, 517 (2001) (citation omitted). “If the language of a statute is clear, the court must implement the statute according to the plain meaning of its terms so long as it is reasonable to do so.” Id.
[T]he Act, with certain exceptions and in pertinent part, imposes upon persons engaged in the business of selling tangible personal property at retail in this state a state sales tax at a rate of three percent of the sales price of each item sold. The Act also imposes a complementary state use tax “upon the storage, use or consumption in this state of tangible personal property purchased within and without this state for storage, use or consumption within this state” at a rate of three percent of the cost of such property “when the same is not sold but used, consumed, distributed or stored for use or consumption in this State. …”
In re Assessment of Additional N.C. & Orange County Use Taxes, etc., 312 N.C. 211, 214, 322 S.E.2d 155, 158 (1984) (citation omitted).
The first purpose of the Act is to generate revenue for the state. Id. This is accomplished by a sales tax which is
imposed upon the retail merchant as a privilege tax for the right to engage in that business. The tax is, however, designed to be passed on to the consumer. The second purpose of the sales and use tax scheme is to equalize the tax burden on all state residents. This is achieved through imposition of the use tax in certain situations where the sales tax is not applicable.
Id. at 214-15, 322 S.E.2d at 158.
“While a sales tax and a use tax in many instances may bring about the same result, they are different in conception.” Colonial Pipeline Co. v. Clayton, 275 N.C. 215, 222, 166 S.E.2d 671, 676 (1969). “A sales tax is assessed on the purchase price of property and is imposed at the time of sale. A use tax is assessed on the storage, use or consumption of property and takes ef[f]ect only after such use begins.” Id. at 223, 166 S.E.2d at 677.
The General Assembly has defined a “sale” as a “transfer for consideration of title or possession of tangible personal property … for consideration of a service.” N.C.G.S. §105-164.3(36) (2009). A sale may include such things as a “lease or rental” or a “transaction in which the possession of property is transferred but the seller retains title or security for the payment of the consideration.” Id. The sales tax collected on the “sales price” includes the “total amount or consideration for which tangible personal property … or services are sold, leased, or rented.” N.C.G.S. §105-164.3(37) (2009). A sales price includes “charges by the retailer for any services necessary to complete the sale.” Id. (emphasis added). A “use”, on the other hand, is the “exercise of any right, power, or dominion whatsoever over tangible personal property … by the purchaser of the property or service.” N.C.G.S. §105-164.3(49) (2009).
In the instant case, Technocom does not dispute that it improperly collected sales tax on amounts charged under its optional maintenance agreements and that Technocom should have paid a use tax in connection with the parts and supplies it provided under those agreements. However, it does argue that pursuant to N.C. Gen. Stat. §105-164.41, the Department is required to issue Technocom a credit against “any” tax. Technocom asserts that the Department should credit the sales taxes made in error against the use tax assessment levied by the Department, particularly, whereas here, the Department seeks to treat the transactions at issue as a “use” for tax purposes but as a “sale” for refund purposes.
N.C.G.S. §105-164.41, titled “Excess payments; refunds[,]” states that “[if] it appears that an amount of tax has been paid in excess of that properly due, then the amount in excess shall be credited against any tax or installment thereof then due from the taxpayer[.]” N.C.G.S. §105-164.41 (2009). On the other hand, N.C. Gen. Stat. §105-164.11 (2009), titled “Excessive and erroneous collections[,]” provides guidance in situations where excessive and erroneous collections are made and, specifically, prohibits the relief sought by Technocom. N.C.G.S. §105-164.11 provides the following:
When the tax collected for any period is in excess of the total amount that should have been collected, the total amount collected must be paid over to the Secretary. When tax is collected for any period on exempt or nontaxable sales the tax erroneously collected shall be remitted to the Secretary and no refund shall be made to a taxpayer unless the purchaser has received credit for or has been refunded the amount of tax erroneously charged.
N.C.G.S. §105-164.11 (2009) (emphasis added).
The rules of “[s]tatutory construction require that a more specific statute controls over a statute of general applicability.” Stewart v. Johnston County Bd. Of Educ., 129 N.C. App. 108, 110, 498 S.E.2d 382, 384 (1998). “When two statutes apparently overlap, it is well established that the statute special and particular shall control over the statute general in nature, even if the general statute is more recent, unless it clearly appears that the legislature intended the general statute to control.” Trustees of Rowan Technical College v. J. Hyatt Associates, Inc., 313 N.C. 230, 238, 328 S.E.2d 274, 279 (1985) (citation omitted).
N.C.G.S. §105-164.41 is the more general statute, applying to any situation where the amount of tax has been paid in excess of that properly due. However, although N.C.G.S. §105-164.11 is a more specific and particular statute, it does not apply to the instant case, as the Department would have us hold. N.C.G.S. §105-164.11 only applies to taxes collected on “exempt or nontaxable sales.” As previously stated, a sale is the transfer of tangible personal property for a consideration to be paid. In its February 2010 Final Agency Decision, the Department concluded that the optional maintenance agreements at issue constituted a taxable use of tangible personal property within the meaning of N.C.G.S. §105-164.3(49) and not a sale. Accordingly, the Department held that the agreements were subject to use taxes and not sales taxes. Therefore, N.C.G.S. § 105-164.11 does not apply. We hold that the general provision in N.C.G.S. §105-164.41 governs the outcome, entitling Technocom to a credit against the sales tax paid to the Department during the audit period. Based on the foregoing, the order of the trial court is affirmed.
Judges ELMORE and STEPHENS concur.
1 N.C.G.S. §105-164.3(49) defines "use" under Article 5 of the General Statutes.
2 N.C.G.S. §105-164.3(37) defines the meaning of "sales price" under Article 5 of the general statutes.
3 N.C.G.S. §105-164.11(a) is titled, "Excessive and erroneous collections."