North Carolina Business Court: Department Of Revenue Violated State Constitution In Attempting To Collect A Tax Penalty

The Business Court spanked the Department  of Revenue again last week, just after a ruling two weeks ago when it said in another case that the DOR's position was "harsh, and potentially fatal. . . ."  This time, in Delhaize America, Inc. v. Lay, 2011 NCBC 2, Judge Tennille ruled that the attempted imposition of a $1 million tax penalty by the DOR not only violated the taxpayer's due process rights, but also a provision of the state Constitution which requires the power of taxation to be exercised in "a just and equitable manner." 

Delhaize, the North Carolina operator of Food Lion grocery stores, was audited by the DOR after it restructured its operations by placing its trademarks, trade names, service marks, and other assets in an out of state subsidiary named Food Lion Florida (FLFL).  Delhaize paid royalties and fees to FLFL, and those were repaid to Delhaize in the form of non- taxable dividends. This resulted in "income distortions," Op. ¶23, and the payment of less tax by Delhaize.

Read this article in its entirety on North Carolina Business Litigation Report, a blog for lawyers focusing on issues of North Carolina business law and the day-to-day practice of business litigation in North Carolina courts.