North Carolina Electric Membership Corporation Exempt from Sales and Use Tax

A North Carolina electric membership corporation (EMC) was granted a refund of franchise and sales and use taxes paid on sales of electricity as they were deemed exempt under a special act enacted by the North Carolina Legislature over 35 years ago. At the time the special act was passed, another act withdrew public agency status for all other EMCs, exposing them to state and local taxation. As the EMC in question was the sole provider of electricity to residents of a remote island, the special act continued its status as a public agency. The North Carolina Department of Revenue (DOR) did not impose taxes on the EMC for over 35 years. However, the DOR began assessing sales taxes against the EMC after an amendment was made to a sales tax provision requiring all electricity suppliers to remit sales tax on sales of electricity. In addition, the DOR imposed a franchise tax against the EMC, claiming that the special act only provided an exemption for property taxes. The North Carolina Court of Appeals rejected the DOR’s position, stating that the legislative history of the act clearly indicated that the Legislature intended for the EMC to be exempt from franchise and sales and use taxes. The court also rejected the DOR’s position that its current interpretation of the law should take precedence, stating that the DOR’s previous recognition of the exemption was adapted at the time the statute was enacted and was therefore a more reasonable interpretation. The court also rejected the DOR’s position that the EMC shouldn’t be refunded the sales tax as it didn’t demonstrate that it had refunded or credited the tax to the purchasers of the electricity as required by statute. The court stated that the statute in effect when the EMC instituted the refund didn’t impose that requirement, clearing them of any such obligation. The DOR is required to grant a refund of franchise and sales and use taxes paid with interest to the EMC. (Cape Hatteras Electric Membership Corp. v. North Carolina Department of Revenue, North Carolina Court of Appeals, No. COA10-271, March 1, 2011)

Posted on April 19, 2011