July 27, 1998
Senator Hugh Webster 21st District Senate Minority Whip North Carolina General Assembly Room 1101 Legislative Building Raleigh, North Carolina 27601-2808
Re: Advisory opinion: Constitutionality of Senate Bill 1569; incentives for new businesses; development zones; air courier hubs; recycling facilities; investment tax credits; sales and property tax exemptions
Dear Senator Webster:
By recent letter you request our opinion as to the constitutionality of Senate Bill 1569 ("the Bill"). The proposed legislation runs 24 pages and contains 19 substantive provisions with various effective dates. Due to its length, we address only those features likely to present substantial constitutional issues.
The requirements of "uniformity" and "equal protection" are basically the same under both the state and federal constitutions. Four County Membership Corp. v. Powers, 96 N.C. App. 417, 424 (1989). If a statutory classification does not burden the exercise of a fundamental right, the government need only show that the classification has "some rational basis." White v. Pate, 308
N.C. 759, 766 (1983). Statutes which do not restrict basic freedoms or disadvantage a suspect class enjoy a presumption of validity. Id.
Section 1 of the Bill in part redefines "air courier services" as presently used in Article 3A of Chapter 105 to limit that term to persons providing air delivery of "individually" addressed parcels. Such companies qualify for extensive income and franchise tax credits, are granted lower rates of taxation and/or exemption from sales taxes, and are given ad valorem tax immunity for aircraft used in such activities. Sec. 7, 8, and 9. We believe that valid governmental interests may be served by granting tax preferences to entities that provide delivery services by air, as opposed to that by rail, bus or otherwise. See, e.g., In re Assessment of Taxes, 312 N.C. 211, 220 (1989), where the Court found no constitutional infirmity with a sales tax exemption for newspapers dependent upon method of distribution. The term "air courier services" is taken directly from a federal publication which classifies various providers of transportation services. From the materials we have been able to examine, the meaning or significance of "individually addressed" parcels is unclear. The full federal definition suggests that the classification relates generally to the weight of the transferred materials. If the airline industry has naturally evolved into types of carriers determined by the weight or bulk of the delivered parcel, a tax preference recognizing these differences would not be unreasonably narrow.
Section 1 also adds a tax incentive concept new to North Carolina in the form of "development zones." These demographical areas are intended to work in tandem with the "enterprise tiers" currently allowed under G.S. 105-129.3. The Bill appears to adequately set legislative standards for selection of development zones by state and local officials, and consequently, for the tax advantages which automatically flow from such designations. Accordingly, recognition of these areas does not appear to constitute an impermissible surrender of the power of taxation as forbidden by the North Carolina Constitution.
In Section 12 the Bill provides franchise and income tax credits for machinery and equipment purchased or leased for use at "major" or "large" recycling facilities. Three-fourths of the products manufactured by these plants must satisfy minimum criteria as to waste material content. Whether a facility is major, large, or otherwise, depends upon the amount invested in construction of the plant and the jobs created.
Major facilities are granted greater tax credits than are large plants, and only they qualify for tax credits equal to transportation expenses incurred if their particular location prevents them from utilizing "ocean barges or ships." Proposed G.S. 105-129.20. Moreover, only major facilities receive an ad valorem tax exemption for real and personal property, and qualify for substantial sales tax preferences, including exemption for purchases of electricity, reduced rates of tax for specific types of personal property, and refunds for other kinds, such as lubricants and general building supplies. Sec. 13-16, 18.
An increasing deluge of waste threatens the environment and stretches the state’s available landfill and waste retention sites. Encouragement of waste recovery thru allowance of tax preferences for recycling facilities thus appears to further a legitimate governmental interest. While the bill establishes dramatic differences in tax benefits predicated primarily upon investment cost, equal protection principles accord considerable deference to how economic legislation is shaped. On this record, we cannot conclude that the increased economic stimulus and environmental benefits generated by the biggest recycling plants do not justify the additional preferences which the Bill provides only to major facilities. See, e.g. Zupanic v. Limbach, 58 Ohio St.3d 130 (1991) (constitutional uniformity not abridged by statute which classified electrical power plant by cost and applied to only one existing facility).
Finally, we would be remiss if we did not mention the apparent major change imposed by Bailey
v. State of North Carolina, 348 N.C. 130 (1998) upon the General Assembly’s traditional powers to provide rationally based tax preferences. The majority in Bailey held that the state is empowered to enter into contracts for tax exemption, and once made they are protected by the impairment clause of the federal constitution. Id. p. 148. Whether a "contract" for a tax preference has been created is determined upon an ad hoc basis, based upon the totality of the circumstances. Id. p. 146. In Bailey, the Court found that the plaintiffs possessed a valid contract for a tax exemption because they had been "induced" to take certain valid acts, which benefitted the State and, accordingly, had secured "vested rights" which could not be diminished later. Id. pp. 144-46.
Bailey instructs that unless tax exemption provisions are sunsetted or otherwise overtly limited in duration, they may become permanent in certain situations. Some tax preferences within Senate Bill 1569 are sunsetted, others are not. However, Section 12 curiously is sunsetted but with the "expectation and intent" that the legislature will "postpone" the designated sunset date. See Sec.
19. Given Bailey, the legal effect of a declared intent to delay a statute’s termination date is unclear to us.
We hope the foregoing is helpful.
signed by:
Andrew A. Vanore, Jr. General Counsel
George W. Boylan
Special Deputy Attorney General