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Tax Law

Pump the Brakes: North Carolina Supreme Court Determines that Brake-Pad Manufacturer Does Not Qualify for Special Apportionment Rule for Public Utilities

The North Carolina Supreme Court affirmed a lower court decision that held that a manufacturer of brake pads used by railroads did not qualify for an exception to the state’s standard three-factor apportionment formula that allows “public utilities” to instead apportion their income using a single-sales factor formula.

In February 2019, the North Carolina Superior Court reasoned that the taxpayer did not meet either of the two statutory requirements for qualifying as a “public utility.” First, the statute requires that a public utility be subject to the control of certain specified entities, including the North Carolina Utilities Commission and the Interstate Commerce Commission. The taxpayer conceded that it was not regulated by any of the specified entities, but argued that it was regulated by a successor to the Interstate Commerce Commission and thus qualified as a public utility. The court disagreed, explaining that the plain language of the statute included only specific, enumerated entities, and did not extend to successor agencies.

Second, the statute requires that a public utility own property used for the transmission of communications or the transportation of goods or persons. The court determined that the taxpayer failed to meet this requirement as well, because the taxpayer did not use the property to transport goods or persons. Rather, the taxpayer sold brake pads to railroads, like Amtrak, who then used the brake pads as part of their own transportation of goods or persons. The court reasoned that the taxpayer’s argument would extend the public-utility exception to every manufacturer or retailer who supplies parts and equipment to public utilities.

Eversheds Observation: Notwithstanding the NC Supreme Court’s decision, the issue of whether companies that are subject to some forms of regulations, e.g., federal versus state regulation, is a recurring issue and can have significant impacts on how taxpayers apportion their income.

Railroad Friction Prods. Corp. v. North Carolina Dep’t Revenue, No. 18 CVS 3868 (N.C. Super. Ct. Feb. 21, 2019), aff’d, No. 278A19 (N.C. Apr. 3, 2020)