IMT, Inc. v. City of Lumberton , 366 N.C. 456 ( 2013 )

IN THE SUPREME COURT OF NORTH CAROLINA
No. 127A12
FILED 8 MARCH 2013
IMT, INC. d/b/a THE INTERNET BUSINESS CENTER
v.
CITY OF LUMBERTON
CITY OF LUMBERTON
v.
G&M COMPANY, LLC d/b/a INTERNET CAFÉ SWEEPSTAKES AND WINNER’S
CHOICE
CITY OF LUMBERTON
v.
DANIEL PAUL STORIE d/b/a SWEEP-NET INTERNET BUSINESS CENTER
E.Z. ACCESS OF N.C., LLC
v.
CITY OF LUMBERTON
Appeal pursuant to N.C.G.S. § 7A-30(2) from the decision of a divided panel
of the Court of Appeals, ___ N.C. App. ___, 724 S.E.2d 588 (2012), affirming two
grants of summary judgment on 10 May 2011, and two grants of summary
judgment on 6 June 2011, all in favor of the City of Lumberton and entered by
Judge Robert Frank Floyd, Jr. in Superior Court, Robeson County. Heard in the
Supreme Court on 13 November 2012.
Kilpatrick Townsend & Stockton LLP, by Adam H. Charnes, Richard S.
IMT, INC. V. CITY OF LUMBERTON
Opinion of the Court
Gottlieb, and Richard D. Dietz; and Grace, Tisdale & Clifton, P.A., by Michael
A. Grace and Christopher R. Clifton, for plaintiff-appellants IMT, Inc. and
E.Z. Access of N.C., LLC and defendant-appellant G&M Company, LLC; and
Law Offices of Lonnie M. Player, Jr., PLLC, by Lonnie M. Player, Jr., for
plaintiff-appellants IMT, Inc. and E.Z. Access of N.C., LLC and defendant-
appellants G&M Company, LLC and Daniel Paul Storie.
James C. Bryan for appellee City of Lumberton.
Jeanette K. Doran and Tyler Younts for North Carolina Institute for
Constitutional Law, amicus curiae.
Kimberly S. Hibbard, General Counsel, and Gregory F. Schwitzgebel, III,
Senior Assistant General Counsel, for North Carolina League of
Municipalities, amicus curiae.
MARTIN, Justice.
The question before this Court is whether the City of Lumberton’s privilege
license tax violates the Just and Equitable Tax Clause of Article V, Section 2(1) of
the North Carolina Constitution. While the decision to levy a privilege license tax is
within the discretion of legislative entities, any tax so levied must be just and
equitable. Because the Just and Equitable Tax Clause is a substantive
constitutional protection against abuse of the taxing power, we hold that the City of
Lumberton’s tax increase of at least 59,900% exceeds constitutional bounds.
The parties in this case are the City of Lumberton (the City) and four
companies that run promotional sweepstakes as part of their business plans. Under
N.C.G.S. §§ 105-109(e) and 160A-211, the City is authorized to levy privilege license
taxes on companies doing business within the city limits. In 2010, the City
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IMT, INC. V. CITY OF LUMBERTON
Opinion of the Court
amended its existing privilege license tax on “[a]ny for-profit business or enterprise,
whether as a principal or an accessory use, where persons utilize electronic
machines . . . to conduct games of chance, including . . . sweepstakes.” The prior tax
for these companies was a flat $12.50 per year. The new tax for these companies
was $5,000 per business location plus $2,500 per computer terminal within each
business location—making the minimum tax owed by each cyber-gambling
establishment $7,500.1 This change from a flat $12.50 to a $7,500 minimum
imposes a 59,900% minimum increase per business location. In comparison, of the
forty-four categories of privilege license taxes imposed by the City, the second
highest was $500 for “Circuses, Menageries, Wild West, [and] Dog and Pony Shows”
that visited town the same week as the county fair.
The new terms of the privilege tax dramatically increased the amount each
company owed, ranging from $75,000 to $137,500.2 The new tax represented an
increase of approximately 600,000%–1,100,000% in the amount billed to the
companies. Two of the four companies in this appeal filed complaints against the
City, challenging the tax as unconstitutional. The City filed complaints against the
other two companies for failure to pay the tax. In all four cases, the parties filed
cross-motions for summary judgment. The trial court granted summary judgment
1 This minimum amount owed assumes one business location and a single computer
terminal.
2 The amounts levied were based on the companies’ multiple business locations
($5,000 each) and multiple computer terminals ($2,500 each).
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IMT, INC. V. CITY OF LUMBERTON
Opinion of the Court
for the City in each case.
The cases were consolidated at the Court of Appeals in IMT, Inc. v. City of
Lumberton, ___ N.C. App. ___, 724 S.E.2d 588 (2012). Addressing the Just and
Equitable Tax Clause, the majority reviewed the City’s tax under this Court’s
sparse precedent to determine whether the tax “amount[ed] to a prohibition” of the
companies’ businesses. Id. at ___, 724 S.E.2d at 595 (citing State v. Razook, 179
N.C. 708, 710, 103 S.E. 67, 68 (1920)). The majority noted that “[t]he only evidence
[the companies] presented [was] the new amount of the privilege license tax on
[their] businesses in comparison to the privilege license tax on [their] businesses in
previous years as well as in comparison to the privilege license tax on other
businesses.” Id. at ___, 724 S.E.2d at 596. The majority then noted that the
companies “presented no additional evidence that the privilege license tax was
prohibitive on their particular businesses.” Id. at ___, 724 S.E.2d at 596. Because
“such evidence does not prove the tax’s invalidity,” id. at ___, 724 S.E.2d at 596
(citing Razook, 179 N.C. at 711, 103 S.E. at 69), the majority affirmed the decisions
of the trial court, id. at ___, 724 S.E.2d at 596. The dissent, however, reasoned,
“[T]he discrepancy between the tax imposed by the Ordinance upon Cyber
Gambling establishments and all other businesses, while not conclusive evidence of
the inequity of the tax, makes summary judgment improper.” Id. at ___, 724 S.E.2d
at 597 (Hunter, Robert C., J., dissenting).
The companies challenged the constitutionality of the privilege license tax
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IMT, INC. V. CITY OF LUMBERTON
Opinion of the Court
levied on their cyber-gambling establishments. The question before this Court is
whether the City’s privilege license tax violates the Just and Equitable Tax Clause
of Article V, Section 2(1) of the North Carolina Constitution. We review an appeal
from summary judgment de novo. E.g., In re Will of Jones, 362 N.C. 569, 573, 669
S.E.2d 572, 576 (2008).
“The power of taxation shall be exercised in a just and equitable manner, for
public purposes only, and shall never be surrendered, suspended, or contracted
away.” N.C. Const. art. V, § 2(1). This provision “is a limitation upon the legislative
power.” Foster v. N.C. Med. Care Comm’n, 283 N.C. 110, 126, 195 S.E.2d 517, 528
(1973). In the past, we have construed two of the three limitations enumerated
therein. The Public Purpose Clause limits the State’s ability to use tax revenue for
private enterprises. See Maready v. City of Winston-Salem, 342 N.C. 708, 716, 467
S.E.2d 615, 620 (1996); Foster, 283 N.C. at 126-27, 195 S.E.2d at 528-29. Similarly,
the Contracting Away Clause limits the State’s ability to delegate its taxing power.
See Bailey v. State, 348 N.C. 130, 147-48, 500 S.E.2d 54, 64 (1998). The Just and
Equitable Tax Clause, however, has avoided a similarly thorough analysis.
While the Just and Equitable Tax Clause has been cited in several decisions,
it has not been directly addressed as a substantive claim in its own right. The City
argues that a challenge to the amount of a tax is not a justiciable claim under the
Clause. We disagree. Our cases under both the Public Purpose Clause and the
Contracting Away Clause show that these constitutional provisions impose distinct
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Opinion of the Court
and enforceable limitations on the manner in which government entities may
exercise their taxing power. See Foster, 283 N.C. at 127, 195 S.E.2d at 528-29 (“We
hold that the expenditure of public funds raised by taxation to finance . . . the
construction of a hospital facility to be privately operated, managed and controlled
is not an expenditure for a public purpose and is prohibited by Article V, § 2(1) of
the Constitution of North Carolina.”). Treating the Just and Equitable Tax Clause
as mere precatory language, rather than as a substantive limitation like the Public
Purpose and Contracting Away Clauses, would create internal inconsistency within
this constitutional provision. The people of North Carolina placed the Just and
Equitable Tax Clause in their Constitution, and we are not at liberty to selectively
dismiss its relevance.
Several cases relied upon by the parties and by the Court of Appeals were
decided before the adoption of the Just and Equitable Tax Clause in 1935. Those
cases concerned common law challenges to taxes. In State v. Danenberg, we
considered whether a license tax on businesses selling “near beer” (low-alcohol beer)
was “unreasonable and prohibitory.” 151 N.C. 718, 721, 66 S.E. 301, 303 (1909).
We reasoned that because the General Assembly had authorized the sale of near
beer in the state, “ ‘the municipalit[y] may not . . . prohibit [its] sale entirely. [It]
may, however, under the usual general-welfare clause, enact reasonable regulations
governing its sale.’ ” Id. (citation omitted). Undergirding our decision was the
principle that cities “cannot, directly, by taxation, prohibit or destroy a business
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IMT, INC. V. CITY OF LUMBERTON
Opinion of the Court
legalized by the State.” Id. (citations omitted). However, giving the license tax “a
presumption of reasonableness,” we concluded “there [were] no facts contained in
the record sufficient to overcome this presumption.” Id. at 724, 66 S.E. at 304. In
Razook, we again addressed whether a license tax was “so unreasonable as to
prohibit the business.” 179 N.C. at 711, 103 S.E. at 68. And again, we stated that
we “ ‘will not review the action of the lawmakers unless an abuse of such [tax-
levying] discretion is obvious.’ ” Id. at 711, 103 S.E. at 69 (citation omitted). The
Court of Appeals’ analysis of the Just and Equitable Tax Clause in the instant case
heavily relied on these cases. See IMT, ___ N.C. App. at ___, 724 S.E. 2d at 595-96
(majority).
We observe that the 1935 amendment to Article V did not incorporate the
“unreasonable and prohibitory” standard from the common law. Instead, the
language ratified by the people stated “[t]he power of taxation shall be exercised in
a just and equitable manner.” N.C. Const. of 1868, art. V, § 3 (1935) (now located in
Article V, § 2); see Act of Apr. 29, 1935, ch. 248, sec. 1, 1935 N.C. Sess. Laws 270,
270. Since its adoption, no decision has rested solely on an interpretation of this
language. The clause has been cited, but our cases have instead focused on other
constitutional limitations in Section 2, such as the Section 2(5) requirement that
taxes be applied uniformly. See In re Martin, 286 N.C. 66, 75-76, 209 S.E.2d 766,
773 (1974); see also Smith v. State, 349 N.C. 332, 340-41, 507 S.E.2d 28, 33 (1998)
(applying “uniform rule” limitation in Section 2(2)).
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IMT, INC. V. CITY OF LUMBERTON
Opinion of the Court
We discussed the Just and Equitable Tax Clause in Nesbitt v. Gill, 227 N.C.
174, 41 S.E.2d 646, aff’d per curiam, 332 U.S. 749, 68 S. Ct. 61 (1947), in which we
considered a challenge to a privilege tax levied on the purchase of horses or mules
purchased for resale. Although the opinion primarily addressed whether the tax
had been uniformly applied, the Court also discussed factors that could be
considered when determining whether a tax was just and equitable, such as size of
the city, sales volume, and exemptions from alternative taxes. Id. at 179-80, 41
S.E.2d at 650-51.
The instant appeal again requires us to determine how the Just and
Equitable Tax Clause operates to limit the taxing power. The constitutional tension
between the affirmative statement of the government’s taxing authority and the
limitation of the Just and Equitable Tax Clause must be resolved in a manner that
protects the citizenry from unjust and inequitable taxes while preserving legislative
authority to enact taxes without exposing the State or its subdivisions to frivolous
litigation. We have articulated this need for balance before:
The pervading principle to be observed by the
General Assembly in the exercise of [the tax] powers is
equality and fair play. It is the will of the people of North
Carolina, as expressed in the organic law, that justice
shall prevail in tax matters, with equal rights to all and
special privileges to none. Of course, it is recognized that
in devising a scheme of taxation, some play must be
allowed for the joints of the machine . . . .
Cnty. of Rockingham v. Bd. of Trs. of Elon Coll., 219 N.C. 342, 344-45, 13
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S.E.2d 618, 620 (1941) (citation and internal quotation marks omitted). The
limitations of Section 2 cannot lightly be brushed aside, for “[t]he legislative
power to tax is limited only by constitutional provisions.” Lenoir Fin. Co. v.
Currie, 254 N.C. 129, 132, 118 S.E.2d 543, 545, appeal dismissed per curiam,
368 U.S. 289, 82 S. Ct. 375 (1961).
Limitations on the State’s taxing power are necessary to protect the public
from abusive tax policies. Even under the substantial deference given to legislative
tax classifications at common law, our decisions acknowledged that the State could
not use its taxing power to prohibit otherwise legal endeavors. Danenberg, 151 N.C.
at 721, 66 S.E. at 303. Without question, this principle is even more warranted
when the State has been constitutionally charged with “the duty to tax in a just and
equitable manner.” Lenoir Fin., 254 N.C. at 132, 118 S.E.2d at 545. “Taxation
often involves the weighing of social policies and the determination of the respective
values to be assigned various conflicting but legitimate business enterprises; under
the doctrine of the separation of powers such functions have traditionally been
allocated largely to the determination of the legislative branch of government . . . .”
E.B. Ficklen Tobacco Co. v. Maxwell, 214 N.C. 367, 372, 199 S.E. 405, 409 (1938).
While these competing considerations might be difficult to reconcile in
nuanced cases, the case at bar is hardly nuanced. Here, the City’s 59,900%
minimum tax increase is wholly detached from the moorings of anything reasonably
resembling a just and equitable tax. If the Just and Equitable Tax Clause has any
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Opinion of the Court
substantive force, as we hold it does, it surely renders the present tax invalid. In
light of the unusual facts we confront in the present case, and cognizant of the
nearly universal deference by courts to legislative tax classifications, we do not
attempt to define the full parameters of the Just and Equitable Tax Clause’s
limitations on the legislative taxing power. Rather, we conclude the companies here
have shown that the present tax—representing a 59,900% minimum tax increase
upon conduct viewed as putatively lawful at the time of the assessment—
transgressed the boundaries of permissible taxation and constituted an abuse of the
City’s tax-levying discretion. We therefore hold the City of Lumberton’s privilege
tax at issue constitutes an unconstitutional tax as a matter of law and the trial
court erred in granting summary judgment for the City. Accordingly, we reverse
the decision of the Court of Appeals.
In cases arising under the Just and Equitable Tax Clause, trial courts should
look to Nesbitt for guiding factors in assessing such claims. But those factors should
not be viewed as exhaustive. For example, in the instant case, the stark difference
between the amount of tax levied on cyber-gambling establishments and the
amounts levied against other economic activities under the Ordinance militates in
favor of our conclusion that the tax is unjust and inequitable. We do not suggest,
however, that any large increase in a tax, or simply a high tax, would alone be
enough to run afoul of the Just and Equitable Tax Clause. Rather, challenges
under the Just and Equitable Tax Clause must be determined on a case-by-case
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Opinion of the Court
basis.
In the instant case, we have chosen to resolve the substantive claim rather
than remand the issue because—even though trial courts have “institutional
advantages over appellate courts in the application of facts to fact-dependent legal
standards,” Whitacre P’ship v. Biosignia, Inc., 358 N.C. 1, 38, 591 S.E.2d 870, 894
(2004) (citation and internal quotation marks omitted)—the parties here have
forecasted uncontested material facts under Rule 56. In situations like the present
case, in which the material facts necessary to determine the legal question are
uncontested, there is no need for further factfinding.3 Here we address merely a
question of law, which this Court can resolve as capably as a trial court. See N.C.
Dep’t of Env’t & Natural Res. v. Carroll, 358 N.C. 649, 664-65, 599 S.E.2d 888, 897-
98 (2004). We do not assume this task lightly, but we do so here for the sake of
clarity and judicial economy.
We are cognizant that our holding in Hest Technologies, Inc. v. State ex rel.
Perdue, ___ N.C. ___, ___ S.E.2d ___, 2012 WL 6218202 (Dec. 14, 2012) (No. 169A11-
2), alters the contextual landscape for this case. But there are still issues that need
to be resolved, such as the disposition of the taxes that were paid and the
administrative levies that were imposed between the implementation of this tax
While most often it is inappropriate to grant summary judgment to the party with
3
the burden of proof on the underlying issue, the undisputed facts in the record here present
an appropriate opportunity to do so. See Kidd v. Early, 289 N.C. 343, 370, 222 S.E.2d 392,
410 (1976).
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IMT, INC. V. CITY OF LUMBERTON
Opinion of the Court
and our decision in Hest Technologies. Having resolved a legal issue common to
these cases by holding this privilege license tax unconstitutional under the Just and
Equitable Tax Clause, we reverse the decision of the Court of Appeals on that issue
and remand to that court for further remand to the trial court for further
proceedings not inconsistent with this opinion.
REVERSED AND REMANDED.
Justice BEASLEY took no part in the consideration or decision of this case.
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