March 6, 1997
Representative Phil Baddour, Jr. North Carolina General Assembly House of Representatives Room 501, Legislative Office Building Raleigh, North Carolina 27601-1096
Re: Advisory Opinion: effect of statutory exclusion of intangible personal property from ad valorem tax base upon appraisal of real and personal property; leasehold interests in exempted real property; House Bill 295
Dear Representative Baddour:
Your letter of 25 February 1997 enclosed a copy of recently introduced House Bill 295 ("the bill"). The bill makes conforming changes to the Machinery Act in order to exempt intangible personal property, per se, from ad valorem taxation. You indicate that the purpose behind the legislation is to exempt "goodwill" and other types of intangibles "from being taxed in themselves," but that the legislation is not intended "to preclude their consideration in valuing real property." Nevertheless, you request our opinion whether the bill may in some respect limit consideration of goodwill and other intangibles when appraising real property. In a later telephone conversation, you further request that we extend our analysis to include possible limitations the bill might impose upon the valuation of leasehold interests.
The legislature’s sovereign right to classify property for taxation is limited only by constitutional principles of uniformity. In re Appeal of Martin, 286 N.C. 66, 74, 209 S.E.2d 766 (1974); North Carolina Constitution, Art. V, §2. House Bill 295 constitutes a rational exercise of legislative power to exclude from the property tax base a natural class of property, intangible, leaving real and personal property separately taxable as distinct classes. Except for two minor suggestions, we believe the bill’s substantive provisions make the necessary adjustments to the Machinery Act to eliminate intangibles as a distinct type of property subject to property taxes, while preserving the current existing techniques for valuing real property.
As currently written, the bill would profit taxation of leasehold interests in exempted real property since section 1 exempts all types of intangibles. Section 1 would need to be specifically amended to enable taxing units to continue to assess such leasehold interests.
Technically the bill does not affect the existing methodologies for appraising real property. Nevertheless, to emphasize the limited scope of the bill and its relationship to other types of property, perhaps a declaration of intent would be helpful. It would simply provide in essence that nothing within the bill is intended to affect the appraisal and assessment of real property, tangible personal property, or public service company property subject to the Machinery Act. We would be pleased to assist you with the drafting of a purpose clause if you desire such help.
Andrew A. Vanore, Jr. Chief Deputy Attorney General
George W. Boylan
Special Deputy Attorney General