Case Title: Fulton Corp. v. Faulkner

Citation: 481 S.E.2d 8

Docket Number: 

State: north-carolina

Court: North Carolina Supreme Court

Date: 1997-02-10T00:00:00Z

Document:
481 S.E.2d 8 (1997)
FULTON CORPORATION
v.
Janice H. FAULKNER, Secretary of Revenue.
No. 305A93-2.

Supreme Court of North Carolina.
February 10, 1997.
*9 Womble Carlyle Sandridge & Rice, PLLC, by Jasper L. Cummings, Jr., Raleigh, for plaintiff-appellee.
Michael F. Easley, Attorney General, by Andrew A. Vanore, Jr., Chief Deputy Attorney General, Edwin M. Speas, Jr., Senior Deputy Attorney General, Thomas F. Moffitt, Special Deputy Attorney General, and Marilyn R. Mudge, Assistant Attorney General, for defendant-appellant.
Womble Carlyle Sandridge & Rice, PLLC, by G. Eugene Boyce, of counsel, Raleigh, amicus curiae.
WEBB, Justice.
This case brings to the Court the question of the remedy to be applied after a portion of the intangibles tax statute has been declared unconstitutional. The Court of Appeals held that the part of the statute which was unconstitutional should be severed and that the balance of the statute should be enforced. This would leave the intangibles tax to be enforced without any reduction for income taxes paid to this State. We believe the Court of Appeals was correct in this holding.
In determining whether an unconstitutional part of a statute should be severed and the rest of the statute enforced, we look first at the intention of the General Assembly. If the legislature intended that the constitutional part of the statute be enforced after the other part has been declared unconstitutional, and if the separate parts of the statute are not so interrelated and mutually dependent that one part cannot be enforced without reference to another, the offending part must be severed and the rest of the statute enforced. Flippin v. Jarrell, 301 N.C. 108, 117, 270 S.E.2d 482, 488 (1980); Constantian v. Anson County, 244 N.C. 221, 228, 93 S.E.2d 163, 168 (1956).
The General Assembly has stated its intention. N.C.G.S. § 105-215 provided in part:
N.C.G.S. § 105-215 (1992) (repealed 1995). We believe this section shows clearly that the General Assembly intended that if any part of the statute providing for an intangibles tax was declared unconstitutional, that part should be severed from the statute, and the balance of the statute should be enforced.
In this case, the offending portion of the intangibles tax statute and the other parts of the statute were not so interrelated or mutually dependent that the imposition of the tax could not be done without reference to the offending part. The valid part is complete in itself and capable of enforcement.
The plaintiff argues that the United States Supreme Court in this case declared the entire intangibles tax unconstitutional. We do not agree with this interpretation. The Supreme Court noted that the Court of Appeals had addressed the issue of severability and decided that the clause required severance of the taxable percentage deduction. Fulton v. Faulkner, ___ U.S. at ___ n. 12, *10 116 S. Ct.  at 862 n. 12, 133 L. Ed. 2d  at 815 n. 12. The Court gave no indication that applying the severability clause in that manner would contravene its holding or that a tax on corporate stock is per se unconstitutional. To the contrary, the Court's language and reasoning revealed the intangibles tax violated the Commerce Clause because of the discriminatory portionthe taxable percentage deduction. It gave no reason to believe that absent the discriminatory deduction, the tax would violate the Commerce Clause.
The defendant asserts and the plaintiff agrees that it was the intention of the General Assembly that if the taxable percentage reduction were to be held unconstitutional, it should not be severed from N.C.G.S. § 105-203, and the whole section must fail. They concede that N.C.G.S. § 105-215 provides for the severance of any part of the statute which is declared unconstitutional. They say, relying on State ex rel. Andrews v. Chateau X, Inc., 296 N.C. 251, 259-60, 250 S.E.2d 603, 609 (1979), judgment vacated on other grounds, 445 U.S. 947, 100 S. Ct. 1593, 63 L. Ed. 2d 782 (1980), and Sheffield v. Consolidated Foods Corp., 302 N.C. 403, 421-22, 276 S.E.2d 422, 434-35 (1981), that the "presence of a severability clause is not conclusive but provides some guidance to the courts as to legislative intent." They say we must look at all relevant parts of the statute to discern legislative intent.
The plaintiff and defendant contend that the General Assembly, since the inception of the intangibles tax, has never intended to tax all stocks and that by severing the unconstitutional part of N.C.G.S. § 105-203, the Court of Appeals has broadened the tax contrary to the legislative will. They argue that the taxable percentage deduction has always been an essential element of the tax and an expression of the legislative intent not to tax all shares of corporate stock. They argue that we should hold all of N.C.G.S. § 105-203 unconstitutional.
We do not agree with the parties' interpretation of Andrews and Sheffield. Andrews involved an action to abate a nuisance. We held that assuming one of the remedies provided in the statute was unconstitutional, it could be severed from the statute and the other remedies enforced. We said that severability depended on the will of the General Assembly. Andrews, 296 N.C. at 259-60, 250 S.E.2d  at 608-09. We did not say how that will was to be discovered, but simply referred to the portion of the statute which provided for severability. Sheffield dealt with disclosures required by the North Carolina Tender Offer Disclosure Act, N.C.G.S. ch. 78B (1977). In that case we held that the Act did not apply to purchases of stock in the open market. The plaintiff argued that because of a severability clause in the statute, the disclosure requirement nevertheless applied. It contended that partial application of the statute was mandated by the severability clause. We held that this was not the intention of the General Assembly. We do not believe Sheffield or Andrews is authority for the proposition that a severability clause is not conclusive as to the intention of the General Assembly.
Even assuming arguendo that the parties are correct, looking beyond the severability clause and at the entire act to determine the will of the General Assembly does not help the plaintiff. The General Assembly has said by the severability clause that the unconstitutional part of the statute should be severed. The parties have made good arguments as to why it should not be severed, but they do not overcome the plain meaning of the statute. We affirm that part of the opinion of the Court of Appeals which holds that the unconstitutional part of N.C.G.S. § 105-203 be severed. Fulton Corp. v. Justus, 110 N.C.App. at 504, 430 S.E.2d  at 501.
We reverse that part of the opinion of the Court of Appeals which holds that the rule of this case should not be applied retroactively. Id. at 504-05, 430 S.E.2d  at 501-02. In reaching this result, the Court of Appeals relied on our opinion in Swanson v. North Carolina, 329 N.C. 576, 407 S.E.2d 791, on reh'g, 330 N.C. 390, 410 S.E.2d 490 (1991). On 18 June 1993, three days after the Court of Appeals decided this case, the United States Supreme Court handed down Harper v. Virginia Dep't of Taxation, 509 U.S. 86, 113 S. Ct. 2510, 125 L. Ed. 2d 74 (1993). Ten days later, the Supreme Court issued an order vacating our opinion in Swanson in *11 light of Harper. Swanson v. North Carolina, 509 U.S. 916, 113 S. Ct. 3025, 125 L. Ed. 2d 713 (1993). The United States Supreme Court held in Harper that its application of a rule of federal law requires every court to give retroactive effect to that decision. We are thus required by Harper to apply the law retroactively in this case. Whether to enforce the tax as to all shareholders is within the province of the General Assembly.
The General Assembly may forgive this tax if it so chooses. We do not have the authority to do so.
We affirm that part of the decision of the Court of Appeals which holds that the unconstitutional part of N.C.G.S. § 105-203 must be severed and the balance of the section enforced. We reverse that part of the decision which holds that the rule of this case should not be enforced retroactively.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.
ORR, Justice, dissenting.
The majority applies a plain-meaning analysis to the statute in question and concludes that the taxable percentage deduction contained in N.C.G.S. § 105-203 should be severed and the remainder of the statute upheld as applied. The opinion states that "[t]he General Assembly has said by the severability clause that the unconstitutional part of the statute should be severed." However, this Court has rejected such a plain-meaning analysis in determining whether an unconstitutional provision may be severed and the remainder of the statute upheld. In State ex rel. Andrews v. Chateau X, Inc., 296 N.C. 251, 250 S.E.2d 603 (1979), judgment vacated on other grounds, 445 U.S. 947, 100 S. Ct. 1593, 63 L. Ed. 2d 782 (1980), this Court prescribed the utilization of a two-part test for deciding the issue of severability:
Id. at 259, 250 S.E.2d  at 608. Because I believe that the majority's holding in this case is contrary to the intent of the North Carolina legislature, I respectfully dissent.
In State v. Waddell, 282 N.C. 431, 194 S.E.2d 19 (1973), this Court also addressed the issue of severability and enunciated the following principle:
Id. at 442, 194 S.E.2d  at 27 (quoting 16 Am.Jur.2d Constitutional Law § 186 (1964)). In support of our position in the present case, the Court in Waddell went on to note that "`[w]hen exceptions, exemptions, or provisos in a statute are found to be invalid, the entire act may be void on the theory that by striking out the invalid exception the act has been widened in its scope and therefore cannot properly represent the legislative intent.' " Id. at 443, 194 S.E.2d  at 27 (quoting J.G. Sutherland, Statutes and Statutory Construction § 2412 (Frank E. Horack, Jr., ed., 3d ed. 1943)).
In this case, as the remaining intangibles tax on stock is clearly capable of standing on its own, it is an examination of the legislative intent which compels the conclusion that the taxable percentage deduction is not severable. Although the presence of a severability clause provides some guidance as to legislative intent, State ex rel. Andrews v. Chateau X, Inc., 296 N.C. at 260, 250 S.E.2d  at 609, it is not conclusive. In Sheffield v. Consolidated Foods Corp., 302 N.C. 403, 276 S.E.2d 422 *12 (1981), this Court discussed the presence of a severability clause and commented that
Id. at 421, 276 S.E.2d  at 434.
In determining that the severability clause could not be applied in Sheffield, the Court applied the following well established canon of statutory construction:
Id. at 421-22, 276 S.E.2d  at 434 (quoting Jones v. Board of Educ., 185 N.C. 303, 307, 117 S.E. 37, 39 (1923) (citation omitted)). The Court concluded that "[w]e will not apply the severability clause to vary and to contradict the express terms of a statute, for we cannot believe the Legislature intended such a result." Id. at 422, 276 S.E.2d  at 434.
In the present case, the taxable percentage deduction is contained in the provision of the intangibles tax which applies to stocks. N.C.G.S. § 105-203 provides in pertinent part:
N.C.G.S. § 105-203 (1992) (repealed 1995). In Fulton Corp. v. Justus, 338 N.C. 472, 450 S.E.2d 728 (1994), this Court explained the procedure involved in calculating the intangibles tax on stock as follows:
Id. at 475, 450 S.E.2d  at 730. For a more detailed discussion of the application of the intangibles tax on stock, see Fulton v. Justus, 338 N.C. 472, 450 S.E.2d 728. Because of the process involved in calculating the intangibles tax on stock, the elimination of the taxable percentage deduction would subject all stock in North Carolina companies to a full tax burden under N.C.G.S. § 105-203.
Further, because plaintiff in this case is a corporate taxpayer, the majority addresses only N.C.G.S. § 105-203(1), the taxable percentage deduction for stock owned by corporations. However, as the Secretary of Revenue's brief notes, the constitutional infirmity in N.C.G.S. § 105-203(1) is also present in N.C.G.S. § 105-203(2), the taxable percentage deduction for stock owned by individuals. Thus, if the taxable percentage deduction which applies to corporations must be severed, it follows that the taxable percentage deduction which applies to stock owned by individuals must also be severed. Under the logic of the majority's decision, excising the discriminatory deduction would eliminate the only unconstitutional feature of N.C.G.S. § 105-203. This would result in the remainder of N.C.G.S. § 105-203 becoming a constitutional tax on all shares of stock owned by corporations and individual taxpayers of North Carolina. Thus, the tax would apply not only to stock in publicly traded companies from around the world, but also to every small, incorporated business in our state. The full tax would also apply to corporate shareholders and individual stockholders. To contend that the legislature would have "passed the residue independently" is to defy the practical and political reality of the impact of such a tax.
When the General Assembly enacted the intangibles tax on stock in 1937, the shares of all corporations that paid taxes in North Carolina were excluded. Act of Jan. 6, 1937, ch. 127, sec. 706, 1937 N.C. Public Laws 170, 331 (an act to raise revenue). It was in 1939 that the General Assembly narrowed the exclusion to the proportion of tax the corporation paid in North Carolina. Act of Mar. 24, 1939, ch. 158, sec. 705, 1939 N.C. Public Laws 176, 359 (an act to raise revenue). In the portion of N.C.G.S. § 105-203 that levies the tax, the 1939 General Assembly stated that "[a]ll shares of stock ... owned by residents of this State ..., with the exceptions herein provided, shall be subject to an annual tax." Id. (emphasis added). The remainder of the statute then listed the exceptions, including the taxable percentage deduction on all shares of stock owned by corporations and individual taxpayers in North Carolina. Thus, the General Assembly has always manifested its intent that the scope of the intangibles tax on shares of stock be narrowed by these exceptions.
Severing the taxable percentage deduction as the majority opinion has done contravenes the intent of the legislature because it expands the scope of N.C.G.S. § 105-203. By severing the deduction, not only publicly traded shares of stock but also shares of stock in closely held corporations which have never before been subject to the intangibles tax on stock are now subject to such taxation.
Further evidence that the majority's decision contravenes the intent of the legislature can be found in the repeal of the intangibles tax in its entiretyincluding N.C.G.S. § 105-203 which became effective on 1 January 1995. Act of Jan. 25, 1995, ch. 41, sec. 1(b), 1995 N.C. Sess. Laws 59, 60 (an act to repeal the intangibles tax and to reimburse local governments for their resulting revenue loss). In the Legislative Research Commission's Report to the General Assembly, the Commission expressed three reasons for repealing the intangibles tax:
Legislative Research Comm'n, Revenue Laws, Report to the 1995 Gen. Assembly of N.C., at 97 (1995) (emphasis added). Because of the repeal of North Carolina's intangibles tax, N.C.G.S. § 105-203, the legislature also amended N.C.G.S. § 105-275, which classifies property that is excluded from the tax base and includes, inter alia, "[s]hares of stock, including shares and units of ownership of mutual funds, investment trusts, and investment funds." N.C.G.S. § 105-275(31c) (1995). The explicit exemption of stock from taxation in the General Statutes clearly illustrates the intent of the legislature.
Thus, although a severability clause is contained in the statute, that alone does not determine that the constitutional portion should remain. Clearly, the legislature did not intend that the scope of N.C.G.S. § 105-203 be broadened. As this Court has recognized, invalidation of some exceptions or exemptions may require an entire statute to fail if severing the invalid provisions would widen the scope of the statute beyond the legislature's intended coverage. State v. Waddell, 282 N.C. at 443, 194 S.E.2d  at 27. This is exactly what severing the taxable percentage deduction and upholding the residue of the tax would do in the present case. Therefore, I conclude that the majority is in error and would agree with both the Secretary of Revenue and the corporate plaintiff that the entire tax must fail and that plaintiff is therefore entitled to a refund.
FRYE and LAKE, JJ., join in this dissenting opinion.