Opinion ID: 1353617
Heading Depth: 1
Heading Rank: 2

Heading: Monies Collected by the Department of Revenue for Late Filings, Underpayments, and Failure to Comply with Statutory or Regulatory Tax Provisions

Text: Plaintiffs assert that the Court of Appeals erred in holding that payments collected by the Department of Revenue under N.C.G.S. §§ 105-113.89, -163.8, -163.15, -163.41, and -236 for late filings, underpayments, and failure to comply with various provisions of the North Carolina Revenue Act were not subject to Article IX, Section 7. We agree. The Court of Appeals relied on federal case law which, in the context of the Fifth Amendment Double Jeopardy Clause or the Eighth Amendment Excessive Fines Clause, determined that additions to tax under the Internal Revenue Code were remedial in nature in that `[t]hey are provided primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayer's fraud.' N.C. Sch. Bds. Ass'n, 160 N.C.App. at 271, 585 S.E.2d at 430 (quoting Helvering v. Mitchell, 303 U.S. 391, 401, 58 S.Ct. 630, 82 L.Ed. 917, 923 (1938)). [2] The Court of Appeals' reliance on Mitchell is misplaced. Interpretation of our state statutes is not governed by the interpretation of a federal statute by a federal court. Sharpe v. Park Newspapers of Lumberton, Inc., 317 N.C. 579, 584, 347 S.E.2d 25, 29 (1986); Worthington v. Bynum, 305 N.C. 478, 485, 290 S.E.2d 599, 604 (1982). Although the label used in a statute does not determine whether the payment is a penalty within the meaning of the constitution, in discerning the intent of the General Assembly, we look first to the plain words of the statute. Elec. Supply Co., 328 N.C. at 656, 403 S.E.2d at 294. The payments claimed by plaintiffs under Chapter 105 are denominated penalties and are imposed for the taxpayer's failure to file a return or pay a tax as required by the statute. The statutes provide as follows: N.C.G.S. § 105-163.8(a) (2003): A withholding agent who fails to withhold the amount of income taxes required by this Article or who fails to pay withheld taxes by the due date for paying the taxes is subject to the penalties provided in Article 9 of this Chapter. N.C.G.S. § 105-163.15(a) (2003): In the case of any underpayment of the estimated tax by an individual, the Secretary shall assess a penalty in an amount determined by applying the applicable annual rate established under G.S. 105-241.1(i) to the amount of the underpayment for the period of the underpayment. N.C.G.S. § 105-163.41(a) (2003): Except as provided in subsection (d), if the amount of estimated tax paid by a corporation during the taxable year is less than the amount of tax imposed upon the corporation under Article 4 of this Chapter for the taxable year, the corporation must be assessed an additional tax as a penalty in an amount determined.... N.C.G.S. § 105-236 (2003): Penalties assessed by the Secretary under this Subchapter are assessed as an additional tax. Except as otherwise provided by law, and subject to the provisions of G.S. 105-237, the following penalties shall be applicable: .... (3) Failure to File Return.In case of failure to file any return on the date it is due, determined with regard to any extension of time for filing, the Secretary shall assess a penalty equal to five percent (5%) of the amount of the tax if the failure is for not more than one month, with an additional five percent (5%) for each additional month, or fraction thereof, during which the failure continues, not exceeding twenty-five percent (25%) in the aggregate, or five dollars ($5.00), whichever is the greater. (4) Failure to Pay Tax When Due.In the case of failure to pay any tax when due, without intent to evade the tax, the Secretary shall assess a penalty equal to ten percent (10%) of the tax, except that the penalty shall in no event be less than five dollars ($5.00).... (5) Negligence. a. Finding of negligence.For negligent failure to comply with any of the provisions to which this Article applies, or rules issued pursuant thereto, without intent to defraud, the Secretary shall assess a penalty equal to ten percent (10%) of the deficiency due to the negligence. .... (6) Fraud.If there is a deficiency or delinquency in payment of any tax because of fraud with intent to evade the tax, the Secretary shall assess a penalty equal to fifty percent (50%) of the total deficiency. Defendants contend that the Court of Appeals was correct in its analysis and emphasize that the penalties under N.C.G.S. § 105-236 are assessed as an additional tax and that the definitions section of the Revenue Act states that [u]nless the context clearly requires otherwise, the terms `tax' and `additional tax' include penalties and interest as well as the principal amount. N.C.G.S. § 105-228.90(b)(7) (2003). Defendants cite numerous federal cases which relied on Helvering v. Mitchell and urge this Court to adopt the remedial analysis in Mitchell. We are not persuaded, however, that the collection of the penalty as an additional tax is determinative that the penalty is remedial. N.C.G.S. § 105-241.1 provides: (a) Proposed Assessment.If the Secretary discovers that any tax is due from a taxpayer, the Secretary must notify the taxpayer in writing of the kind and amount of tax due and of the Secretary's intent to assess the taxpayer for the tax. The notice must describe the basis for the proposed assessment and identify the amounts of any tax, interest, additions to tax, and penalties included in the proposed assessment. .... (i) Interest.All assessments of tax, exclusive of penalties assessed on the tax, shall bear interest at the rate established pursuant to this subsection from the time the tax was due until paid. Thus, the principal tax, interest, and penalties are treated discretely, and, as with interest, it is only for purposes of assessment, collection and payment that [penalties] should be treated in the same manner as taxes. Holt v. Lynch, 307 N.C. 234, 239, 297 S.E.2d 594, 597 (1982). Defendants' argument, implicit in its reliance on Mitchell, that the penalties are to safeguard the revenue and to reimburse the government for the expense of investigating noncompliance with the revenue laws of the State must also fail. The purpose of interest on deficient or delinquent tax payments is to reimburse for loss of use of the money during the period of delinquency. Further, the enabling legislation for Article IX, Section 7, permits retention of actual costs of collection up to ten percent (10%) of the amount of the penalties collected. N.C.G.S. § 115C-457.2 (2003). Finally, in Shore v. Edmisten , this Court held that payments attributable to the general costs of investigation and prosecution of a citizen's unlawful conduct may not be considered remedial for purposes of Article IX, Section 7. The Court stated that [a] state or a local agency can be the recipient of restitution where the offense charged results in particular damage or loss to it over and above its normal operating costs.... It would not however be reasonable to require the defendant to pay the State's overhead attributable to the normal costs of prosecuting him. 290 N.C. at 633-34, 227 S.E.2d at 559 (citations omitted). Based on the foregoing, we conclude that the penalties assessed pursuant to Chapter 105 of the General Statutes are imposed as a monetary payment for a taxpayer's noncompliance with a mandate of the Revenue Act and that under this Court's decision in Mussallam, they are subject to Article IX, Section 7.