NC Supreme Court cements cigarette maker Philip Morris’ $340,000 tax bill
AI-generated summary reviewed by our newsroom.
- NC Supreme Court ruled that only state courts may decide tax law constitutionality.
- Philip Morris must pay $340K in taxes after Business Court revived state’s audit.
- Ruling restricts administrative judges from hearing constitutional tax disputes.
In a major blow to tobacco giant Philip Morris, the North Carolina Supreme Court ruled on Friday that administrative courts have no power to overturn state tax laws.
The decision cemented a $340,000 tax bill against the company and clarified that only state courts — not administrative judges —can rule on constitutional challenges to N.C. tax laws, according to the court opinion.
Philip Morris previously operated a cigarette plant in Concord and still does business in North Carolina. It argued the N.C. Office of Administrative Hearings could consider whether a tax law was unconstitutional. However, the state’s highest court disagreed, siding with the N.C. Department of Revenue and reinforcing the limited power of administrative bodies in tax disputes.
Case background
The dispute began when Philip Morris USA, Inc. filed a challenge against the N.C. Department of Revenue for an additional franchise tax assessment, a fee for the privilege of doing business in the state. It’s based on a company’s “capital base” — its assets. The larger a company’s capital base, the more tax it pays.
The core of the legal disagreement is over franchise tax payments from 2012 to 2014.
The state law allowed a corporation to lower its tax bill by subtracting debt owed to it by a related company such as a subsidiary or parent. However, this was only permitted if the related company also paid state franchise taxes.
According to the court, Philip Morris did not follow this rule correctly. It didn’t subtract the money it owed to its related companies, even though those companies weren’t part of the state’s franchise tax.
A 2016 audit from the state’s revenue department found Philip Morris owed $344,994 in unpaid taxes, penalties, and interest. Philip Morris borrowed money from and loaned money to various affiliates of its parent Altria Group. Some of these affiliates were subject to North Carolina’s franchise tax, but others were not, according to court records.
In 2020, Philip Morris filed a petition with the Office of Administrative Hearings for a contested case hearing. The company argued the department’s application of the franchise statute violated the Commerce Clause of the U.S. Constitution which limits the ability of states to restrict interstate commerce.
NC court rulings
The judge for the administrative hearings office agreed with Philip Morris, which reversed the department’s assessment. The Department of Revenue then asked judicial review, and the case was assigned to the North Carolina Business Court.
The Business Court reversed the administrative office’s decision. The court determined N.C. General Statute 105-241.17, which governs such challenges, does not authorize the office of administrative hearings to examine the constitutionality of a tax rule.
The N.C. Supreme Court held that the statute, when interpreted correctly, requires the Office of Administrative Hearings to dismiss a case when the sole issue is the constitutionality of a tax statute. The court reasoned that the phrase “and not the application of a statute” in the law is meant to differentiate between constitutional challenges and technical challenges regarding the misapplication of a statute, not between different types of constitutional challenges.
Representatives from the state’s attorney general’s office did not respond to requests for comments from The Charlotte Observer.
Altria, the parent company of Philip Morris, said in a statement to the Observer that the ruling addressed a novel question under North Carolina law. The company says it doesn’t plan to appeal the recent court decision, which was limited to a procedural matter.
Instead, Philip Morris will move forward by refiling their complaint to address the specific technical issue. It noted that this step is required under the law as clarified by the Supreme Court.
“We look forward to getting the case decided on the merits,” the company said.
About Philip Morris
Founded in London in 1847, Philip Morris has been the top cigarette manufacturer in the U.S. since 1983. Now based in Richmond, Virginia, the company produces well-known brands like Marlboro, Parliament, Virginia Slims, and L&M.
According to the company, Philip Morris’s share of the U.S. cigarette market is close to 46%. Philip Morris USA is a subsidiary of Altria, a Fortune 500 company that reported more than $24 billion in net revenue in 2024.
The company also has a history in the Charlotte region, having been one of the biggest employers and taxpayers in Cabarrus County before its cigarette plant closed in 2009. The facility operated for about 16 years in Concord, near the Charlotte Motor Speedway, and employed close to 3,000 workers.
