March 6, 1997
Representative Michael S. Wilkins North Carolina House of Representatives Room 1220, Legislative Office Building Raleigh, North Carolina 27601-2808
Re: Advisory Opinion; constitutionality of insurance premiums tax credit allowed upon "first come" basis; N.C. Constitution, Art. V, §2; G.S. 105-228.3, et seq.
Dear Representative Wilkins:
We understand from your recent letter that during the 1995 legislative session you were lead sponsor of the "CAPCO" bill, a proposal to grant premium tax credits to insurance companies for investments in certain qualified venture capital companies. Unsure as to the extent of the initial investments, and the amount of tax credit that might be claimed, you are considering adding to the bill a limiting provision as to the availability of the credit. Under the amendment, the first companies that make eligible investments receive the credit up to a maximum amount, and after that cap is met, no other companies will receive any credit.
In lieu of income taxes, G.S. 105-228.5 levies a license tax upon insurers measured by "gross premiums" derived from business conducted within North Carolina during the preceding calendar year. Smaller companies pay the tax annually, larger insurers, quarterly. As we understand the proposed credit, it will substantially rewrite present G.S. 105-228.10 to provide a credit against premiums taxes equal to the amount of qualifying capital invested during the taxable year.
Art. V, §2 of the North Carolina Constitution in essence provides that no class of property shall be taxed except by uniform rule, uniformly applicable throughout the state. The constitutional rule of uniformity applies to the taxation of property, professions, franchises and incomes. Assurance Co. v. Gold, Comr. of Insurance, 249 N.C. 461, 443, 103 S.E.2d 344 (1958). "Uniformity" implies "equality in the burden of taxation," in "the mode of assessment, as well as in the rate of taxation." Hajoca Corp. v. Clayton, Comr. of Revenue, 277 N.C. 560, 569, 178 S.E. 2d 481 (1970). "Equality within the class or for those of like station and condition is all that is required to meet the test of constitutionality. . . ." Id., p. 568.
If the credit is enacted with a first-come-first-served provision, it may be challenged by a taxpayer who made a qualifying investment but received no credit because the cap was reached before his return was processed. The plaintiff in such an action would claim that the credit statute unlawfully distinguishes between otherwise identical groups of taxpayers based only on the sequence in which they filed their tax returns. This result, plaintiff would contend, violates Art. V, § 2, of the North Carolina Constitution or the Equal Protection Clause of the U.S. Constitution. If the claim were grounded only on the state constitution, the State would contend that the license tax on insurance carriers is not among the taxes identified in Assurance Co. as being subject to the rule of uniformity. However, if this defense were rejected or if the plaintiff’s claim were based on equal protection, the court would consider the merits of the uniformity issue. The substantive analysis would be the same regardless of the constitutional provision
relied upon by the taxpayer. See Hajoca, supra at 569, noting that "the requirements of
‘uniformity,’ ‘equal protection,’ and ‘due process,’ are, for all practical purposes, the same under
both the State and Federal Constitutions.”
We believe the State could successfully defend a suit of this type by arguing that duly enacted
legislation enjoys a strong presumption in favor of validity, Hajoca, supra, and that the plaintiff
can make no showing to overcome that presumption. It would be the State’s position that all
taxpayers who are in a position to make qualifying investments are presumed to have notice of
the statutory conditions associated with the credit and, therefore, have an equal opportunity to
comply with those conditions and file their returns promptly. The State would further argue that
the courts have long recognized the legislature’s authority to impose conditions on measures
relieving taxpayers of liability, Ward v. Clayton, 5 N.C. App. 53, 167 S.E.2d 808 (1969), aff’d.,
276 N.C. 411, 172 S.E.2d 531 (1970), and that conditioning the availability of the credit on
requesting it before the cap is reached is a reasonable legislative policy decision.
Of course, only the judiciary can ultimately resolve constitutional issues. Although allocating a
credit upon a first-come basis is unusual, we believe that ultimately the State would probably
prevail against a "uniformity" challenge raised in this context. Our opinion, however, might be
otherwise if we were construing a pure income tax or similar levy that rested more directly upon
an annual accounting.
Andrew A. Vanore, Jr.
Chief Deputy Attorney General