May 22, 1996
John H. Kerr, III, Co-Chair Senate Finance Committee North Carolina General Assembly Room 526, Legislative Office Building Raleigh, North Carolina 27601-2808
Re: Advisory Opinion; tax credits; insurance companies which invest in venture capital companies that invest in North Carolina businesses; House Bill 995; Commerce Clause
Dear Senator Kerr:
In light of Fulton Corp. v. Faulkner, — U.S. —, 133 L.Ed.2d 796 (1996) ("Fulton"), you inquire whether House Bill 995, now pending before the Senate Finance Committee ("the bill"), would withstand analysis under the Commerce Clause. The bill adds new "articles" to Chapters 53A and 105 of the General Statutes. Section 4 of the bill grants to insurance companies credits against gross premium taxes for investments in North Carolina capital companies. Section 3 restricts investments by capital companies to businesses headquartered in the state, which operate primarily here or do substantially all their production in North Carolina, and which employ a majority of their employees in the state.
The Commerce Clause forbids regulatory and taxation provisions which favor local interests at the expense of interstate commerce. It assures a national marketplace by prohibiting economic protectionism or "measures designed to benefit in-state economic interests by burdening out-ofstate competition." Associated Industries of Mo. v. Lohman, 511 U.S. —, 128 L.Ed.2d 639 (1994). The Commerce Clause precludes discrimination between transactions "on the basis of some interstate element." Boston Stock Exchange v. State Tax Comm’n, 429 U.S. 318, 332, 50 L.Ed.2d 514 (1977). State laws which discriminate on their face against interstate commerce are "virtually per se invalid." Oregon Waste Systems, Inc. v. Department of Environmental Quality of Ore., 511 U.S. —, 128 L.Ed.2d 13, 21 (1994).
The Supreme Court has consistently applied the Commerce Clause to invalidate tax preferences granted local products and industries, but denied similar property and activity situated outside the jurisdiction. See, e.g., Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 82 L.Ed.2d 200 (1984) (wine manufactured locally taxed more favorably than that produced elsewhere); New Energy Co. v. Limbach, 486 U.S. 269, 100 L.Ed.2d 302 (exemption from sales tax for ethanol produced locally); Armco, Inc. v. Hardesty, 467 U.S. 638, 81 L.Ed.2d 540 (1984) (local manufacturing exempted from state privilege tax that resident and nonresident wholesalers required to pay).
Fulton illustrates the pervasive reach of the Commerce Clause. There the value of shares of stock subject to North Carolina’s intangible tax was reduced proportionately by the amount of business the issuing company transacted in this state. Concluding that there was "no doubt" that the tax discriminated against interstate commerce, the Court advised:
A regime that taxes stock only to the degree that its issuing corporation participates in interstate commerce favors domestic corporations over their foreign competitors in raising capital among North Carolina residents and tends, at least, to discourage domestic corporations from plying their trades in interstate commerce.
Fulton, 133 L.Ed.2d 806. (Emphasis added).
House Bill 995, overly simplified, stimulates businesses with a substantial North Carolina presence through the use of tax credits. On its face, the bill appears to directly conflict with Fulton’s admonition against legislation which favors domestic entities over their foreign competitors in raising investment capital.
However, there are limited circumstances where the Commerce Clause is not implicated by state laws which undoubtedly affect national commerce. In Western & S.L.I. Co. v. Bd. of Equalization, 451 U.S. 648, 653, 68 L.Ed.2d 514 (1981) the Court held that Congress had removed all Commerce Clause limitations on the authority of the states to regulate and tax the business of insurance. Since House Bill 995 only provides tax credits to insurance companies and not to taxpayers in other industries, we believe the bill is immune from a Commerce Clause challenge.
We hope the foregoing is helpful. If we can otherwise assist, please call upon us.
Reginald L. Watkins Senior Deputy Attorney General
George W. Boylan
Special Deputy Attorney General