NORTH CAROLINA
REGISTER
Volume 18, Issue 8
Pages 500 - 674
October 15, 2003
This issue contains documents officially filed
through September 24, 2003.
Office of Administrative Hearings
Rules Division
424 North Blount Street (27601)
6714 Mail Service Center
Raleigh, NC 27699-6714
(919) 733-2678
FAX (919) 733-3462
Julian Mann III, Director
Camille Winston, Deputy Director
Molly Masich, Director of APA Services
Ruby Creech, Publications Coordinator
Linda Dupree, Editorial Assistant
Dana Sholes, Editorial Assistant
Rhonda Wright, Editorial Assistant
IN THIS ISSUE
I. EXECUTIVE ORDERS
Executive Orders 52 – 53 ..............................................500 - 501
II. IN ADDITION
Voting Rights Letter.......................................................502
Revenue - Tax Review Board Decisions...................503 - 533
Building Code Council ................................................534 - 536
III. PROPOSED RULES
Administration
Domestic Violence Commission..............................537 - 542
Environment and Natural Resources
Coastal Resources Commission...............................604 - 605
Environmental Management.....................................551 - 604
Parks and Recreation, Div. of...................................606 - 608
Health and Human Services
Medical Assistance.....................................................542
Justice
Criminal Justice Education and Training
Standards Commission.........................................542 - 551
Licensing Boards
Certified Public Accountant Examiners, Bd. of....608 - 609
Cosmetic Art Examiners ...........................................609 - 613
Real Estate Commission............................................613 - 626
State Personnel
State Personnel Commission....................................626 - 630
IV. APPROVED RULES ...................................................631 - 666
Environment and Natural Resources
Wildlife Resources Commission
Health and Human Services
Social Services Commission
Justice
Criminal Justice Education and Training Standards Commission
Labor
OSHS
Licensing Boards
Dental Examiners, Board of
Locksmith Licensing Board
Transportation
Highways, Division of
V. RULES REVIEW COMMISSION..........................667 - 670
VI. CONTESTED CASE DECISIONS
Index to ALJ Decisions.................................................671 - 674
For the CUMULATIVE INDEX to the NC Register go to:
http://oahnt.oah.state.nc.us/register/CI.pdf
North Carolina Register is published semi-monthly for $195 per year by the Office of Administrative Hearings, 424 North Blount Street, Raleigh, NC
27601. North Carolina Register (ISSN 15200604) to mail at Periodicals Rates is paid at Raleigh, NC. POSTMASTER: Send Address changes to
the North Carolina Register, 6714 Mail Service Center, Raleigh, NC 27699-6714.
NORTH CAROLINA ADMINISTRATIVE CODE CLASSIFICATION SYSTEM
The North Carolina Administrative Code (NCAC) has four major subdivisions of rules. Two of these, titles and
chapters, are mandatory. The major subdivision of the NCAC is the title. Each major department in the North
Carolina executive branch of government has been assigned a title number. Titles are further broken down into
chapters which shall be numerical in order. The other two, subchapters and sections are optional subdivisions to
be used by agencies when appropriate.
TITLE/MAJOR DIVISIONS OF THE NORTH CAROLINA ADMINISTRATIVE CODE
TITLE DEPARTMENT LICENSING BOARDS CHAPTER
1
2
3
4
5
6
7
8
9
10A
11
12
13
14A
15A
16
17
18
19A
20
*21
22
23
24
25
26
27
28
Administration
Agriculture
Auditor
Commerce
Correction
Council of State
Cultural Resources
Elections
Governor
Health and Human Services
Insurance
Justice
Labor
Crime Control & Public Safety
Environment and Natural Resources
Public Education
Revenue
Secretary of State
Transportation
Treasurer
Occupational Licensing Boards
Administrative Procedures (Repealed)
Community Colleges
Independent Agencies
State Personnel
Administrative Hearings
NC State Bar
Juvenile Justice and Delinquency
Prevention
Acupuncture
Architecture
Athletic Trainer Examiners
Auctioneers
Barber Examiners
Certified Public Accountant Examiners
Chiropractic Examiners
Employee Assistance Professionals
General Contractors
Cosmetic Art Examiners
Dental Examiners
Dietetics/Nutrition
Electrical Contractors
Electrolysis
Foresters
Geologists
Hearing Aid Dealers and Fitters
Landscape Architects
Landscape Contractors
Locksmith Licensing Board
Massage & Bodywork Therapy
Marital and Family Therapy
Medical Examiners
Midwifery Joint Committee
Mortuary Science
Nursing
Nursing Home Administrators
Occupational Therapists
Opticians
Optometry
Osteopathic Examination & Reg. (Repealed)
Pastoral Counselors, Fee-Based Practicing
Pharmacy
Physical Therapy Examiners
Plumbing, Heating & Fire Sprinkler Contractors
Podiatry Examiners
Professional Counselors
Psychology Board
Professional Engineers & Land Surveyors
Real Estate Appraisal Board
Real Estate Commission
Refrigeration Examiners
Respiratory Care Board
Sanitarian Examiners
Social Work Certification
Soil Scientists
Speech & Language Pathologists & Audiologists
Substance Abuse Professionals
Therapeutic Recreation Certification
Veterinary Medical Board
1
2
3
4
6
8
10
11
12
14
16
17
18
19
20
21
22
26
28
29
30
31
32
33
34
36
37
38
40
42
44
45
46
48
50
52
53
54
56
57
58
60
61
62
63
69
64
68
65
66
Note: Title 21 contains the chapters of the various occupational licensing boards.
NORTH CAROLINA REGISTER
Publication Schedule for July 2003 – December 2003
FILING DEADLINES NOTICE OF TEXT PERMANENT RULE TEMPORARY
RULES
Volume &
issue
number
Issue date Last day
for filing
Earliest date for
public hearing
End of required
comment
period
Deadline to submit
to RRC
for review at
next meeting
Earliest Eff.
Date of
Permanent Rule
Delayed Eff. Date of
Permanent Rule
(first legislative
day of the next
regular session)
270th day from publication
in the Register
17:13 01/02/03 12/06/02 01/17/03 03/03/03 03/20/03 05/01/03 05/10/04 09/29/03
17:14 01/15/03 12/19/02 01/30/03 03/17/03 03/20/03 05/01/03 05/10/04 10/12/03
17:15 02/03/03 01/10/03 02/18/03 04/04/03 04/21/03 06/01/03 05/10/04 10/31/03
17:16 02/17/03 01/27/03 03/04/03 04/21/03 04/21/03 06/01/03 05/10/04 11/14/03
17:17 03/03/03 02/10/03 03/18/03 05/02/03 05/20/03 07/01/03 05/10/04 11/28/03
17:18 03/17/03 02/24/03 04/01/03 05/16/03 05/20/03 07/01/03 05/10/04 12/12/03
17:19 04/01/03 03/11/03 04/16/03 06/02/03 06/20/03 08/01/03 05/10/04 12/27/03
17:20 04/15/03 03/25/03 04/30/03 06/16/03 06/20/03 08/01/03 05/10/04 01/10/04
17:21 05/01/03 04/09/03 05/16/03 06/30/03 07/21/03 09/01/03 05/10/04 01/26/04
17:22 05/15/03 04/24/03 05/30/03 07/14/03 07/21/03 09/01/03 05/10/04 02/09/04
17:23 06/02/03 05/09/03 06/17/03 08/01/03 08/20/03 10/01/03 05/10/04 02/27/04
17:24 06/16/03 05/23/03 07/01/03 08/15/03 08/20/03 10/01/03 05/10/04 03/12/04
18:01 07/01/03 06/10/03 07/16/03 09/02/03 09/22/03 11/01/03 05/10/04 03/27/04
18:02 07/15/03 06/23/03 07/30/03 09/15/03 09/22/03 11/01/03 05/10/04 04/10/04
18:03 08/01/03 07/11/03 08/16/03 09/30/03 10/20/03 12/01/03 05/10/04 04/27/04
18:04 08/15/03 07/25/03 08/30/03 10/14/03 10/20/03 12/01/03 05/10/04 05/11/04
18:05 09/02/03 08/11/03 09/17/03 11/03/03 11/20/03 01/01/04 05/10/04 05/29/04
18:06 09/15/03 08/22/03 09/30/03 11/14/03 11/20/03 01/01/04 05/10/04 06/11/04
18:07 10/01/03 09/10/03 10/16/03 12/01/03 12/22/03 02/01/04 05/10/04 06/27/04
18:08 10/15/03 09/24/03 10/30/03 12/15/03 12/22/03 02/01/04 05/10/04 07/11/04
18:09 11/03/03 10/13/03 11/18/03 01/02/04 01/20/04 03/01/04 05/10/04 07/30/04
18:10 11/17/03 10/24/03 12/02/03 01/16/04 01/20/04 03/01/04 05/10/04 08/13/04
18:11 12/01/03 11/05/03 12/16/03 01/30/04 02/20/04 04/01/04 05/10/04 08/27/04
18:12 12/15/03 11/20/03 12/30/03 02/13/04 02/20/04 04/01/04 05/10/04 09/10/04
EXPLANATION OF THE PUBLICATION SCHEDULE
This Publication Schedule is prepared by the Office of Administrative Hearings as a public service and the computation of time periods are not to be deemed binding or controlling.
Time is computed according to 26 NCAC 2C .0302 and the Rules of Civil Procedure, Rule 6.
GENERAL
The North Carolina Register shall be published twice
a month and contains the following information
submitted for publication by a state agency:
(1) temporary rules;
(2) notices of rule-making proceedings;
(3) text of proposed rules;
(4) text of permanent rules approved by the Rules
Review Commission;
(5) notices of receipt of a petition for municipal
incorporation, as required by G.S. 120-165;
(6) Executive Orders of the Governor;
(7) final decision letters from the U.S. Attorney
General concerning changes in laws affecting
voting in a jurisdiction subject of Section 5 of
the Voting Rights Act of 1965, as required by
G.S. 120-30.9H;
(8) orders of the Tax Review Board issued under
G.S. 105-241.2; and
(9) other information the Codifier of Rules
determines to be helpful to the public.
COMPUTING TIME: In computing time in the
schedule, the day of publication of the North Carolina
Register is not included. The last day of the period so
computed is included, unless it is a Saturday, Sunday,
or State holiday, in which event the period runs until
the preceding day which is not a Saturday, Sunday, or
State holiday.
FILING DEADLINES
ISSUE DATE: The Register is published on the first
and fifteen of each month if the first or fifteenth of
the month is not a Saturday, Sunday, or State holiday
for employees mandated by the State Personnel
Commission. If the first or fifteenth of any month is
a Saturday, Sunday, or a holiday for State employees,
the North Carolina Register issue for that day will be
published on the day of that month after the first or
fifteenth that is not a Saturday, Sunday, or holiday for
State employees.
LAST DAY FOR FILING: The last day for filing
for any issue is 15 days before the issue date
excluding Saturdays, Sundays, and holidays for State
employees.
NOTICE OF TEXT
EARLIEST DATE FOR PUBLIC HEARING: The
hearing date shall be at least 15 days after the date a
notice of the hearing is published.
END OF REQUIRED COMMENT PERIOD
(1) RULE WITH NON-SUBSTANTIAL
ECONOMIC IMPACT: An agency shall accept
comments on the text of a proposed rule for at least
60 days after the text is published or until the date of
any public hearings held on the proposed rule,
whichever is longer.
(2) RULE WITH SUBSTANTIAL ECONOMIC
IMPACT: An agency shall accept comments on the
text of a proposed rule published in the Register and
that has a substantial economic impact requiring a
fiscal note under G.S. 150B-21.4(b1) for at least 60
days after publication or until the date of any public
hearing held on the rule, whichever is longer.
DEADLINE TO SUBMIT TO THE RULES
REVIEW COMMISSION: The Commission shall
review a rule submitted to it on or before the
twentieth of a month by the last day of the next
month.
FIRST LEGISLATIVE DAY OF THE NEXT
REGULAR SESSION OF THE GENERAL
ASSEMBLY: This date is the first legislative day of
the next regular session of the General Assembly
following approval of the rule by the Rules Review
Commission. See G.S. 150B-21.3, Effective date of
rules.
EXECUTIVE ORDERS
18:08 NORTH CAROLINA REGISTER October 15, 2003
500
EXECUTIVE ORDER NO. 52
Food Safety and Security Task Force
SECTION 1. Establishment. The North Carolina
Food Safety and Security Task Force is hereby established.
SECTION 2. Purpose. The purpose of the Task Force
is to coordinate interagency and public-private efforts to enhance
protection of the State's food supply system and its agricultural
industry.
SECTION 3. Membership. The Task Force shall
consist of the following members, or their designees:
(1) The Commissioner of Agriculture.
(2) The Secretary of Environment and Natural
Resources.
(3) The Secretary of Health and Human Services.
(4) The Secretary of Crime Control and Public
Safety.
(5) The Attorney General.
(6) The Chancellor of North Carolina State
University.
(7) The Chancellor of North Carolina Agricultural
and Technical State University.
(8) Representatives of other government agencies,
private industry and other public members
invited to participate by the Task Force.
The Commissioner of Agriculture and the
Secretary of Health and Human Services shall
serve as co-chairs of the Task Force.
SECTION 4. Duties. The North Carolina Food Safety
and Security Task Force shall:
(1) Assess the vulnerability of the State's food
system to criminal and terrorist acts and make
recommendations for:
a. Improved safety and security of the
food supply system.
b. Terrorism threat reduction measures.
c. Improvement of food safety and
security mitigation and response plans.
d. Training for key stakeholders in the
State's food supply system.
(2) Recommend legislation needed to improve the
ability of State departments and agencies to
protect the safety and security of the State's food
supply and the agricultural industry base,
including legislation to protect sensitive and
proprietary information of the State's food supply
system, safety and security vulnerability
information, and security plans, that, if
compromised, would heighten the exposure of
the State's food supply system to criminal or
terrorist acts.
(3) Recommend budget, staffing and resource
adjustments necessary to improve the capability
of State departments and agencies to protect the
safety and security of the State's food supply
system and agricultural industrial base.
SECTION 5. The Food Safety and Security Task
Force shall prepare a preliminary report no later than June 1,
2004 and shall prepare a final report no later than 15 December
2004. These reports shall include any recommendations,
including proposed legislation, for changes in laws, rules, and
programs that the Task Force determines to be appropriate to
enhance food safety and security in the State.
SECTION 6. The Office of State Budget and
Management shall assist the Task Force in its efforts to obtain
State and Federal funding necessary to carry out its duties.
This order shall be effective immediately.
Done in the Capital City of Raleigh this the 12th day of
September, 2003.
___________________________________
Michael F. Easley
Governor
ATTEST:
____________________________________
Elaine F. Marshall
Secretary of State
EXECUTIVE ORDER NO. 53
EMERGENCY RELIEF FOR DAMAGE
CAUSED BY HURRICANE ISABEL
WHEREAS, I have proclaimed that a state of
emergency and threatened disaster exists in North Carolina due
to Hurricane Isabel thereby justifying an exemption from 49
C.F.R. 390-397 (Federal Motor Carrier Safety Regulations); and
WHEREAS, under the provisions of N.C.G.S. 166A-4
and 166A-6(c)(3), the Governor, with the concurrence of the
Council of State, may regulate and control the flow of vehicular
traffic and the operation of transportation services; and
WHEREAS, with the concurrence of the Council of
State, I have found that if vehicles bearing food, equipment, and
supplies to relieve our hurricane-stricken counties must adhere
to the registration requirements of N.C.G.S. 20-86.1 and 20-382,
fuel tax requirements of N.C.G.S. 105-449.47, and the size and
weight requirements of N.C.G.S. 20-116 and N.C.G.S. 20-118
citizens in those counties will likely suffer losses and, therefore,
invoke an imminent threat of widespread damage within the
meaning of N.C.G.S. 166A-4.
NOW THEREFORE, pursuant to the authority vested
in me as Governor by the Constitution and the laws of the State
of North Carolina, and with the concurrence of the Council of
State IT IS ORDERED:
EXECUTIVE ORDERS
18:08 NORTH CAROLINA REGISTER October 15, 2003
501
Section 1. The North Carolina State Highway
Patrol shall waive certain size and weight restrictions and
penalties therefore arising under N.C.G.S. 20-116 and N.C.G.S.
20-118, and certain registration requirements and penalties
therefore arising under N.C.G.S. 20-86.1, 20-382, 105-449.47,
105-449.49 for vehicles transporting food, equipment, and
supplies along our highways to North Carolina’s hurricane-stricken
counties.
Section 2. Notwithstanding the waivers set forth
above, size and weight restrictions and penalties have not been
waived under the following conditions:
(A) When the vehicle weight exceeds the
maximum gross weight criteria established
by the manufacturer (GVWR) or 90,000
pounds gross weight, whichever is less.
(B) When the tandem axle weight exceeds
42,000 pounds and the single axle weight
exceeds 22,000 pounds.
(C) When a vehicle/vehicle combination exceeds
12 feet in width and a total overall vehicle
combination length of 75 feet from bumper
to bumper.
Section 3. Vehicles referenced under section 1
shall be exempt from the following registration requirements:
(A) The $50.00 fee listed in N.C.G.S. 105-449.49
for a temporary trip permit is waived for the
vehicles described above. No quarterly fuel
tax is required because the exception in
N.C.G.S. 105-449.45(a)(1) applies.
(B) The registration requirement under N.C.G.S.
20-382 concerning intrastate and interstate for-hire
authority is waived; however, vehicles
shall maintain the required limits of insurance.
(C) Non-Participants in North Carolina’s
International Registration Plan will be
permitted into North Carolina in accordance
with the spirit of the exemptions identified by
this Executive Order.
Section 4. The size and weight exemption for
vehicles will be allowed on all routes designated by the North
Carolina Department of Transportation, except those routes
designated as light traffic roads under N.C.G.S. 20-118. This
order shall not be in effect on bridges posted pursuant to
N.C.G.S. 136-72.
Section 5. The rules and regulations limiting the
hours operators of commercial motor vehicles may drive are
suspended for a duration of the motor carrier’s or driver’s direct
assistance in providing emergency relief or 30 days from the
date of the initial declaration of the emergency, whichever is
less.
Section 6. The waiver of regulations under 49
C.F.R. 390-397 (Federal Motor Carrier Safety Regulations) does
not apply to the CDL and Insurance Requirements. This waiver
shall be in effect for 30 days or for the duration of the
emergency, whichever is less.
Section 7. The North Carolina State Highway
Patrol shall enforce the conditions set forth in Sections 1, 2 and 3
in a manner, which would best accomplish the implementation
of this rule without endangering motorists in North Carolina.
Section 8. Upon request, exempted vehicles will
be required to produce identification sufficient to establish that
its load will be used for emergency relief efforts associated with
Hurricane Isabel.
This Executive Order is effective immediately and shall
remain in effect for thirty (30) days.
Done in the Capitol City of Raleigh, North Carolina this
16th day of September, 2003.
______________________________
Michael F. Easley
Governor
ATTEST:
______________________________
Elaine F. Marshall
Secretary of State
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
502
Note from the Codifier: This Section contains public notices that are required to be published in the Register or have been
approved by the Codifier of Rules for publication.
U.S. Department of Justice
Civil Rights Division
JDR:JR:TGL:nj:jdh Voting Section – NWB.
DJ 166-012-3 950 Pennsylvania Ave., N.W., Room 7254
2003-2388 Washington, D.C. 20530
September 12, 2003
Mr. Gary O. Bartlett
Executive Director, State Board of Elections
P.O. Box 27255
Raleigh, NC 27611-7256
Dear Mr. Bartlett:
This refers to the revision to the List Maintenance Procedures of the Administration of Voter Registration Manual, including,
among other things, the list maintenance schedule, the procedures concerning active/inactive voters, and removal procedures; the
implementation of absentee ballot requests using the Statewide Election information Management System (SEIMS); and the
temporary rule prohibiting municipal financing of election campaigns for the State of North Carolina, submitted to the Attorney
General pursuant to Section 5 of the Voting Rights Act, 42 U.S.C. 1973c. We received your submission on July 16, 2003.
The Attorney General does not interpose any objection to the specified changes. However, we note that Section 5 expressly
provides that the failure of the Attorney General to object does not bar subsequent litigation to enjoin the enforcement of the changes.
See the Procedures for the Administration of Section 5 (28 C.F.R. 51.41).
Sincerely,
Joseph D. Rich
Chief, Voting Section
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
503
STATE OF NORTH CAROLINA BEFORE THE
TAX REVIEW BOARD
COUNTY OF WAKE
IN THE MATTER OF:
The Proposed Assessment of Sales and Use )
Tax for the period February 1, 1998 through )
December 31, 2001, by the Secretary of )
Revenue of North Carolina )
) ADMINISTRATIVE DECISION
) Number: 407
)
vs. )
)
Paul Tyler IV Enterprises, Incorporated )
This Matter was heard before the Regular Tax Review Board (hereinafter "Board") in the City of Raleigh, Wake County,
North Carolina, on Thursday, January 30, 2003, upon a petition filed by Paul Tyler IV Enterprises, Inc. (hereafter "Taxpayer") for
administrative review of the Final Decision of the Assistant Secretary of Revenue entered on June 24, 2002, sustaining the sales and
use tax assessment imposed against the Taxpayer for the period of February 1, 1998 through December 31, 2001.
Chairman Richard H. Moore, State Treasurer, presided over the hearing with ex officio member Jo Anne Sanford, Chair,
Utilities Commission and duly appointed member, Noel L. Allen, Attorney at Law participating.
Attorney Matthew E. Bates appeared at the hearing on behalf of the Taxpayer. George W. Boylan, Special Deputy Attorney
General, appeared at the hearing on behalf of the Secretary of Revenue.
STATEMENT OF CASE
The Taxpayer is a corporation that operates an adult nightclub making retail sales of alcoholic beverages. On February 9,
2001, an auditor with the Department completed an examination of the Taxpayer's records. The examining auditor, in comparing the
Taxpayer's purchase records to taxable sales reported, determined that the Taxpayer was substantially understating and underpaying its
sales tax liability on monthly sales and use tax returns. Since the Taxpayer did not keep accurate records of sales of beer and alcoholic
beverages, the Department of Revenue prepared an assessment of additional tax, penalty and interest due based upon the best
information available.
Pursuant to G.S. 105-241.1, the Department mailed a Notice of Sales and Use Tax Assessment to the Taxpayer on February
21, 2001, assessing tax, penalty and interest in the total amount of $20,276.45. The Taxpayer, through counsel, objected to the
assessment in a letter dated March 7, 2001, and timely requested a hearing before the Secretary of Revenue. On June 24, 2002, the
Assistant Secretary issued his final decision that sustained the assessment of tax, penalty and interest against the Taxpayer for the
period at issue.
Pursuant to N.C. Gen. Stat. § 105-241.2, Taxpayer’s attorney timely filed a notice of intent and petition for administrative
review of the Assistant Secretary’s Final Decision with the Tax Review Board. As stated in the Petition, the Taxpayer’s objection to
the assessment is based upon the method used by the Department of Revenue to determine Taxpayer’s taxable retail sales of alcoholic
beverages. The Taxpayer does not contest the deficiency attributed to beer sales.
ISSUE
The issue to be considered by the Board on review of this matter is stated as follows:
Is the assessment correct and properly proposed against the Taxpayer and based on the best information available?
EVIDENCE
The Tax Review Board reviewed the following evidence presented by the parties at the hearing before the Assistant Secretary
of Revenue:
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
504
1. Copy of memorandum dated May 16, 2001, from Secretary of Revenue to the Assistant Secretary of Administrative
Hearings, designated Exhibit E-1.
2. Copy of face sheet of audit report and auditor's comments dated February 9, 2001, designated Exhibit E-2.
3. Copy of the Notice Sales and Use Tax Assessment dated February 21, 2001, designated Exhibit E-3.
4. Copy of letter dated March 7, 2001, with attachments from the Taxpayer's attorney to the Sales and Use Tax Division,
designated Exhibit E-4.
5. Copy of letter dated April 2, 2001, from the Sales and Use Tax Division to the Taxpayer's attorney, designated Exhibit E-5.
6. Copy of letter dated April 6, 2001, from the Taxpayer's attorney to the Sales and Use Tax Division, designated Exhibit E-6.
7. Copy of letter dated April 25, 2001, from the Sales and Use Tax Division to the Taxpayer's attorney, designated Exhibit E-7.
8. Copy of letter dated June 4, 2001, from the Sales and Use Tax Division to the Taxpayer's attorney, designated Exhibit E-8.
9. Copy of letter dated June 7, 2001, from the Taxpayer's attorney to the Sales and Use Tax Division, designated Exhibit E-9.
10. Copy of letter dated June 20, 2001, from the Sales and Use Tax Division to the Taxpayer's attorney, designated Exhibit E-10.
11. Copy of letter dated June 29, 2001, from the Taxpayer's attorney to the Sales and Use Tax Division and attachments,
designated Exhibit E-11.
12. Copy of letter dated July 13, 2001, from the Sales and Use Tax Division to the Taxpayer's attorney, designated Exhibit E-12.
13. Copy of letter dated July 17, 2001, from the Taxpayer's attorney to the Sales and Use Tax Division and attached affidavit
from an employee of the Taxpayer dated July 30, 2001, designated Exhibit E-13.
14. Copy of letter dated August 21, 2001, from the Sales and Use Tax Division to the Taxpayer's attorney, designated Exhibit E-
14.
15. Copy of letter dated September 12, 2001, from the Taxpayer's attorney to the Revenue Field Auditor and attached power of
attorney dated September 10, 2001, designated Exhibit E-15.
16. Copy of letter dated September 25, 2001, from the Taxpayer's attorney to the Revenue Field Auditor, designated Exhibit E-
16.
17. Copy of letter dated November 9, 2001, from the Sales and Use Tax Division to the Taxpayer's attorney, designated Exhibit
E-17.
18. Copy of letter dated November 20, 2001, from the Taxpayer's attorney to the Sales and Use Tax Division, designated Exhibit
E-18.
19. Copy of letter dated November 28, 2001, fro m the Sales and Use Tax Division to the Taxpayer's attorney, designated Exhibit
E-19.
20. Copy of Appendix 5B from an Internal Revenue Service publication, designated Exhibit E-20.
21. Copy of Schedule E-2 of the Sales and Use Tax audit report titled Additional Taxable Sales Analysis, designated Exhibit E-
21.
22. Copy of letter dated January 18, 2002, from the Assistant Secretary of Revenue to the Taxpayer's attorney, designated Exhibit
E-22.
23. Copy of letter dated February 12, 2002, from the Assistant Secretary of Revenue to the Taxpayer's attorney, designated
Exhibit E-23.
24. Copy of Brief for Tax Hearing, prepared by the Sales and Use Tax Division, designated Exhibit E-24.
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
505
25. Copy of affidavit from Jeffrey L. Brock, designated Exhibit TP-1.
26. Copy of brief for tax hearing presented by the Taxpayer's attorney, designated Exhibit TP-2.
27. Copy of affidavit from Shannon O'Melia, designated Exhibit TP-3.
FINDINGS OF FACTS
The Board reviewed and considered the following findings of fact entered by the Assistant Secretary in his decision regarding
this matter:
1. The Taxpayer was engaged in business making retail sales of alcoholic beverages during the audit period.
2. Guidelines issued by the Internal Revenue Service provide that the 750 milliliter bottles purchased by the Taxp ayer should
yield between 16.9 and 33.9 drinks per bottle of liquor. The Department used a figure of 20 drinks per bottle to compute the
sales tax liability on sales of mixed drinks.
3. To determine the Taxpayer's retail sales of liquor, the total number of bottles of liquor purchased, based on records
maintained by the North Carolina Alcoholic Beverage Commission, were multiplied by the number of drinks per bottle, times
the average sales price of mixed drinks. The Taxpayer testified that mixed drinks sold for between $4.75 and $6.50 each.
The Department used a figure of $5.00 per mixed drink to compute the sales tax liability.
4. To determine the Taxpayer's retail sales of beer, the total numbers of bottles of beer sold, based on the Taxpayer’s purchase
records, were multiplied by the average sales price per bottle of beer. The Taxpayer testified that beer sold for between $2.75
and $3.75 a bottle. A figure of $3.00 was used as the average sales price per bottle in computing the tax liability.
5. The Department assessed sales tax on the Taxpayer's additional sales of beer and mixed drinks.
6. The Notice of Sales and Use Tax Assessment was mailed to the Taxpayer on February 21, 2001.
7. The Taxpayer protested the assessment and timely requested a hearing before the Secretary of Revenue.
CONCLUSIONS OF LAW
The Board reviewed and considered the following conclusions of law made by the Assistant Secretary in his decision
regarding this matter:
1. The Taxpayer was a retailer and at all material times engaged in the business of making retail sales of beer and mixed drinks
subject to sales tax.
2. The Taxpayer did not keep suitable records of sales of tangible personal property as required in G.S. 105-164.22.
3. The assessment was based on the best information available.
4. A proposed assessment is presumed to be correct.
5. The burden is upon a taxpayer who takes exception to an assessment to overcome that presumption.
6. The evidence presented by the Taxpayer was not sufficient to overcome the presumption of correctness.
7. The Notice of Proposed Assessment for the period of February 1, 1998 through December 31, 2001 was issued pursuant to
G.S. 105-241.1.
DECISION
The scope of administrative review for petitions filed with the Tax Review Board is governed by G.S. 105-241.2(b2). After
the Tax Review Board conducts an administrative hearing, this statute provides in pertinent part:
IN ADDITION
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506
(b2). "The Board shall confirm, modify, reverse, reduce or
increase the assessment or decision of the Secretary."
Assessments of tax are presumed to be correct and the taxpayer has the burden to show that the assessment is not proper.
Upon a review of the record, the Board concludes that the Taxpayer failed to furnish sufficient evidence to show that the assessment is
not proper. Thus, the Board having conducted an administrative hearing in this matter, and having considered the petition, the briefs,
the whole record and the Assistant Secretary's final decision, concludes that the findings of fact made by the Assistant Secretary were
supported by competent evidence in the record; that based upon the findings of fact, the Assistant Secretary's conclusions of law were
fully supported by the findings of fact; therefore the decision of the Assistant Secretary should be confirmed.
WHEREFORE, THE BOARD ORDERS that the Assistant Secretary's final decision be confirmed in every respect.
Made and entered into the 23rd day of April 2003.
TAX REVIEW BOARD
Signature
Richard H. Moore, Chairman
State Treasurer
Signature
Jo Anne Sanford, Member
Chair, Utilities Commission
Signature
Noel L. Allen, Appointed Member
IN ADDITION
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507
STATE OF NORTH CAROLINA BEFORE THE
TAX REVIEW BOARD
COUNTY OF WAKE
IN THE MATTER OF:
The Refund Claim for Corporate Income )
and Franchise Taxes for the years ending )
December 31, 1996 through December 31, )
1998 filed by ) ADMINISTRATIVE DECISION
) Number: 408
The Betaseron Foundation, Inc. )
vs. )
N.C. Department of Revenue )
This Matter was heard before the Regular Tax Review Board (hereinafter "Board") in the City of Raleigh, Wake County,
North Carolina, on Thursday, January 30, 2003, upon a petition filed by The Betaseron Foundation, Inc. (hereafter "Taxpayer") for
administrative review of the Final Decision of the Assistant Secretary of Revenue entered on December 21, 2001, sustaining the North
Carolina Department of Revenue's denial of Taxpayer's refund claims for corporate income and franchise taxes for taxable years
ending December 31, 1996 through December 31, 1998.
Jo Anne Sanford, ex officio member and Chair of the Utilities Commission presided over the hearing with duly appointed
member, Noel L. Allen, Attorney at Law participating. Since Chairman Richard H. Moore, State Treasurer, was not present at the
hearing on January 30, 2003, the Board reviewed this matter on April 22, 2003 and rendered the following decision.
Attorney Joseph D. Joyner, Jr., appeared at the hearing on behalf of the Taxpayer. Kay Linn Miller Hobart, Assistant
Attorney General, appeared at the hearing on behalf of the Secretary of Revenue.
STATEMENT OF CASE AND FACTS
The Taxpayer was formed in Delaware as a non-stock, nonprofit corporation for the purpose of providing Betaseron
medication to individuals afflicted by multiple sclerosis who otherwise could not afford the cost of the medication since they were
uninsured or underinsured. Taxpayer has a funding agreement with the manufacturer of the Betaseron drug, Berlex Laboratories,
whereby Berlex provides financial assistance to the Taxpayer. Under the terms of this agreement, the Taxpayer agreed to take on the
administrative responsibilities of the two programs run by Berlex in exchange for Berlex’s agreement to make the Betaseron drug
available to the patients in the two programs.
Taxpayer has no tangible personal property, no real property and no employees. All operations and administrative functions,
including the obligations under the agreement, are carried out by Lash Group, a third party healthcare consulting firm, that is located
in Charlotte, NC. Because of a dispensing agreement entered into by Taxpayer with Healthcare Delivery Systems, Inc., Taxpayer
never takes possession of the drugs sold to the patients and does not incur an expense for cost of goods sold. Rather, Taxpayer incurs
an expense relating to the dispensing agreement with Lash Group.
On July 7, 2000, the Taxpayer filed amended North Carolina Franchise and Corporate Income Tax Returns for the taxable
years 1996 through 1998 and claimed refunds of franchise and corporate income taxes paid and interest thereon on the basis that
Taxpayer was a charitable organization exempt from tax under G.S. 105-125(a)(1) and 105-130.11(a)(3). The Department of Revenue
denied Taxpayer’s request for refunds and the Taxpayer requested a hearing before the Assistant Secretary. On December 21, 2001,
the Assistant Secretary issued his decision, which sustained the Department of Revenue's denial of Taxpayer's refund claims.
ISSUES
The issues considered by the Board on review of this matter are stated as follows:
1. Whether Taxpayer qualifies for exemption from North Carolina franchise and corporate income tax under the provisions of
G.S. 105-125(a)(1) and 105-130.11(a)(3)?
2. Whether the taxpayer is "doing business" in North Carolina so as to be subject to the North Carolina corporate franchise and
income tax imposed under G.S. 105-122 and G.S. 105-130.3?
3. Whether Taxpayer is entitled to apportion its income to North Carolina and other states as a multistate corporation pursuant
to G.S. 105-130.4(b)?
EVIDENCE
The Tax Review Board reviewed the following evidence presented by the parties at the hearing before the Assistant Secretary
of Revenue:
IN ADDITION
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508
1. Taxpayer's North Carolina Franchise and Corporate Income Tax Return for the 1996 Tax Year, designated as D-1.
2. Taxpayer's North Carolina Franchise and Corporate Income Tax Return for the 1997 Tax Year, designated as D-2.
3. Taxpayer's North Carolina Franchise and Corporate Income Tax Return for the 1998 Tax Year, designated as D-3.
4. Taxpayer's Amended North Carolina Franchise and Corporate Income Tax Return for the 1996 Tax Year, designated as D-4.
5. Taxpayer's Amended North Carolina Franchise and Corporate Income Tax Return for the 1997 Tax Year, designated as D-5.
6. Taxpayer's Amended North Carolina Franchise and Corporate Income Tax Return for the 1998 Tax Year, designated as D-6.
7. Informational Brochures on Taxpayer, designated as D-7.
8. Copy of a Letter dated July 10, 2000 from Eugene H. Schlaman to William H. Daniel, (former) Director, Corporate, Excise &
Insurance Tax Division, designated as D-8.
9. Copy of a Letter dated July 25, 2000 from Eugene H. Schlaman to Bobby L. Weaver, Jr., designated as D-9.
10. Copy of a Memorandum dated July 25, 2000 from John W. Sadoff, Jr., John A. Norman and Lisa Krawcyk, designated as D-
10.
11. Copy of a Letter dated August 21, 2000 from Bobby L. Weaver, Jr. to Eugene H. Schlaman, designated as D-11.
12. Copy of a Letter dated December 7, 2000 from Eugene H. Schlaman to Bobby L. Weaver, Jr. and William H. Daniel,
designated as D-12.
13. Copy of a Letter dated January 5, 2001 from Bobby L. Weaver, Jr. to Eugene H. Schlaman, designated as D-13.
14. Copy of a Letter dated April 13, 2001 from Eugene H. Schlaman to William H. Daniel, designated as D-14.
15. Copy of a Letter dated April 24, 2001 from Bobby L. Weaver, Jr. to Eugene H. Schlaman, designated as D-15.
16. Hearing Information Sheet from Taxpayer dated May 22, 2001, designated as D-16.
17. Copy of a Letter dated May 25, 2001 from Bobby L. Weaver, Jr. to Eugene H. Schlaman, designated as D-17.
18. Copy of a Letter dated June 7, 2001 from Eugene J. Cella to Eugene H. Schlaman, designated as D-18.
19. Copy of a Letter dated June 18, 2001 from Bobby L. Weaver, Jr. to Eugene H. Schlaman, designated as D-19.
20. Copy of a Letter dated August 16, 2001 with Attachments #1 through #15 from Eugene H. Schlaman to Bobby L. Weaver,
Jr., designated as D-20.
21. The Betaseron Foundation, Inc.'s Unsigned Board Meeting Minutes dated June 17, 1996. (Attachment # 1 in Eugene H.
Schlaman's Letter dated August 16, 2001), designated as D-21.
22. Taxpayer's Unsigned Board Meeting Minutes dated July 17, 1996. (Attachment # 2 in Eugene H. Schlaman's Letter dated
August 16, 2001), designated as D-22.
23. Taxpayer's Unsigned Board Meeting Minutes dated September 13, 1996. (Attachment # 3 in Eugene H. Schlaman's Letter
dated August 16, 2001), designated as D-23.
24. 1999 Report of Independent Public Accountants. (Attachment # 4 in Eugene H. Schlaman's Letter dated August 16, 2001),
designated as D-24.
25. 1998 Report of Independent Public Accountants. (Attachment # 5 in Eugene H. Schlaman's Letter dated August 16, 2001),
designated as D-25.
26. 1997 Report of Independent Public Accountants. (Attachment # 6 in Eugene H. Schlaman's Letter dated August 16, 2001),
designated as D-26.
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
509
27. Taxpayer's Program Overview. (Attachment # 7 in Eugene H. Schlaman's Letter dated August 16, 2001), designated as D-
27.
28. Taxpayer's Agreement for "Underinsured" Patients. (Attachment # 8 in Eugene H. Schlaman's Letter dated August 16,
2001), designated as D-28.
29. Taxpayer Funding Agreement. (Attachment # 9 in Eugene H. Schlaman's Letter dated August 16, 2001), designated as D-29.
30. Administrative and Technical Services Agreement between the Lash Group, Inc. and Taxpayer. (Attachment # 10 in Eugene
H. Schlaman's Letter dated August 16, 2001), designated as D-30.
31. Distribution System Agreement between Healthcare Delivery Systems, Inc. and Taxpayer. (Attachment # 11 in Eugene H.
Schlaman's Letter dated August 16, 2001), designated as D-31.
32. Certificate of Incorporation of The Howard Apple Foundation, Inc. (Attachment # 12 in Eugene H. Schlaman's Letter dated
August 16, 2001), designated as D-32.
33. Bylaws of The Howard Apple Foundation, Inc. (Attachment # 13 in Eugene H. Schlaman's Letter dated August 16, 2001),
designated as D-33.
34. Certificate of Amendment for Taxpayer. (Attachment # 14 in Eugene H. Schlaman's Letter dated August 16, 2001),
designated as D-34.
35. Bylaws of Taxpayer. (Attachment # 15 in Eugene H. Schlaman's Letter dated August 16, 2001), designated as D-35.
36. North Carolina Department of Revenue Hearing Brief Submitted by the Corporate, Excise and Insurance Tax Division to
Eugene J. Cella, Assistant Secretary of Revenue, on August 27, 2001, designated as D-36.
Submitted by Taxpayer:
1. Taxpayer's Brief for Tax Administrative Hearing dated August 27, 2001 with Exhibits A through P, designated as T-1.
2. Exhibit A - Original Articles of Incorporation, designated as T-2.
3. Exhibit B - Original Bylaws, designated as T-3.
4. Exhibit C - Amended Articles of Incorporation, designated as T-4.
5. Exhibit D - Amended Bylaws, designated as T-5.
6. Exhibit E - Board of Directors Meeting Minutes - Taxpayer (June 17, 1996; July 17, 1996; September 13, 1996), designated
as T-6.
7. Exhibit F - Program Overview - Taxpayer, designated as T-7.
8. Exhibit G - Diagram of Payment Procedures, designated as T-8.
9. Exhibit H - Program Adoption Agreement between Taxpayer and Berlex Laboratories, Inc, designated as T-9.
10. Exhibit I - Funding Agreement between Taxpayer and Berlex Laboratories, Inc, designated as T-10.
11. Exhibit J - Administrative and Technical Services Agreement between Taxpayer and The Lash Group, Inc, designated as T-
11.
12. Exhibit K - Distribution System Agreement between Taxpayer and Healthcare Delivery Systems, Inc, designated as T-12.
13. Exhibit L - Process Design Document for Taxpayer, designated as T-13.
14. Exhibit M - Report of Independent Public Accountants - April 2, 1999, designated as T-14.
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
510
15. Exhibit N - Report of Independent Public Accountants - April 1, 1998, designated as T-15.
16. Exhibit 0 - Report of Independent Public Accountants - March 27, 1997, designated as T-16.
17. Exhibit P - Department of Revenue letter dated August 21, 2000 denying the refund claims, designated as T-17.
18. Copy of a Letter dated September 24, 2001 from Eugene H. Schlaman to Eugene J. Cella, designated as T-18.
FINDINGS OF FACTS
The Board reviewed and considered the following findings of fact entered by the Assistant Secretary in his decision regarding
this matter:
1. Taxpayer, formerly known as The Howard Apple Foundation, Inc., was organized in the State of Delaware on September 28,
1994 as a non-stock, not-for-profit, sub-chapter C corporation.
2. Taxpayer amended its articles of incorporation and officially changed its name to its current name on October 7, 1994.
3. Article III of the original Certificate of Incorporation states that "The [Foundation] is a nonprofit organization organized and
operated exclusively for charitable and educational purposes within the meaning of Sec. 501(c)(3) of the Internal Revenue
Code of 1986, as amended...."
4. Taxpayer's Bylaws specifically state that Taxpayer "...(a) shall not carry on any other activities not permitted to be carried on
by a Corporation exempt from Federal income tax under Section 501(c)(3) of the Internal Revenue Code of 1986 and (b)
shall not (i) engage in any act of self-dealing (as defined in Section 4941 (d) of the Internal Revenue Code of 1986), (ii)
retain any excess business holdings, (iii) make any investments in such manner as to subject the Corporation to tax under
Section 4944 of the Internal Revenue Code of 1986, and from making any taxable expenditures...." The Bylaw also provide
that Taxpayer was established to provide assistance to individuals who could not otherwise afford the cost of Betaseron
medication for the treatment of multiple sclerosis.
5. Taxpayer provides the medication based on the patient's ability to pay. In most cases, the cost of the drug is covered by the
patient's insurance company. However, in certain cases, the drug may be provided free to the patient. Taxpayer is authorized
to solicit, receive and administer funds for this purpose.
6. Funding of Taxpayer comes from the following sources: (i) interest income (2%); (ii) patient participation payments which
operate similar to medical co-payments (5%); and (iii) private insurance carriers such as Blue Cross Blue Shield (93%).
7. Taxpayer has an exclusive funding agreement with the Betaseron manufacturer, Berlex Laboratories, Inc. ("Berlex"),
whereby Berlex provides financial assistance to Taxpayer.
8. Under the terms of this agreement, Taxpayer agreed to take on administrative responsibilities for two charitable programs
formerly run by Berlex in exchange for Berlex's commitment to make the Betaseron drug available to patients of these two
programs. Berlex also agreed to make funds available to Taxpayer to assist with operations.
9. Taxpayer has no tangible personal or real property and no employees.
10. All operations and administrative functions of Taxpayer are carried out by an unrelated third-party healthcare consulting firm,
The Lash Group.
11. The Lash Group is located in Charlotte, North Carolina.
12. The Lash Group specializes in providing technical and administrative services to charitable medical foundations.
13. Taxpayer's documents, including the organization's bylaws and all agreements with the Lash Group, Berlex and HDS, list a
North Carolina address (4828 Parkway Plaza Boulevard, Charlotte, North Carolina 28217) as either the principal office or the
contact address of the Foundation.
14. Taxpayer has a "Dispensing Agreement" with Healthcare Delivery Systems, Inc. ("HDS"), an unrelated third-party service
provider.
15. HDS is responsible for various aspects of product handling.
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
511
16. HDS purchases the Betaseron drug from Berlex at a price that is discounted from wholesale ($5.00 per dose).
17. The local pharmacies order the drug from HDS, and HDS places the order with Berlex. The Betaseron drug is shipped
directly to the pharmacy from Berlex.
18. Taxpayer does not take possession of the drug as inventory for resale and it does not incur cost of goods sold. Instead, it
incurs an annual expense related to the dispensing service provided by HDS.
19. This expense is reflected on Taxpayer's federal return as "Other Deductions-Distributions" (line 26, page 1, statement 2).
This expense, according to Taxpayer, is its payment to HDS for the drugs HDS purchases from Berlex.
20. HDS's charge for all other services related to the "Dispensing Agreement" (e.g., patient qualification, screening procedures,
maintenance of program files) is captured as "Other Deductions-Product Handling" (line 26, page 1, statement 2).
21. For federal and state income tax purposes, Taxpayer elected to be treated as a "C" corporation.
22. During the June 17, 1996 meeting of Taxpayer's Board of Directors, the accounting firm of Arthur Andersen made a
presentation concerning the potential tax exempt status of Taxpayer.
23. At the board meeting, an attorney with the law firm of Reed and Smith noted the following consequences of requesting tax
exempt status for Taxpayer: (i) Berlex would not be allowed to loan money to Taxpayer; (ii) Taxpayer could solicit funding
from sources other than Berlex; (iii) Berlex could not sell the Betaseron drug to Taxpayer; and (iv) Berlex could contribute
the drug to Taxpayer and take a charitable contribution deduction since Taxpayer would have tax-exempt status.
24. In a meeting of Taxpayer's Board of Directors on September 13, 1996, the Board unanimously agreed not to seek the exempt
status based on "the concerns raised by representatives from Berlex."
25. Taxpayer has never applied for nor qualified as a tax exempt entity for federal income tax purposes.
26. In tax years 1996, 1997 and 1998, Taxpayer had federal taxable income in the amounts of $1,976,734, $2,270,589 and
$778,199, respectively, and paid federal income tax in the amounts of $672,090, $772,000 and $264,588, respectively.
27. On July 7, 2000, Taxpayer filed amended North Carolina Franchise and Corporate Income Tax returns for the tax years
ending December 31, 1996 through December 31, 1998, claiming exemptions from the franchise and corporate income tax
under G.S. §§ 105-125(a)(1) and 105-130.11(a)(3), respectively, and seeking a total refund of $418,430.
28. Taxpayer submitted a letter on July 10, 2000 presenting facts pertaining to Taxpayer to the Division and requested a ruling as
to whether Taxpayer qualified for exemption from North Carolina corporate franchise and income tax under the provisions of
G.S. 105-125(a)(1) and 105-130.11(a)(3).
29. The Division ruled in a letter dated August 21, 2000 that Taxpayer was not entitled to exemption from North Carolina
franchise and corporate income tax because it was not organized and operated for "charitable" purposes since it did not
operate for a public purpose, but rather served a private interest.
30. The Division denied the request for a refund by letter dated January 5, 2001.
31. Taxpayer timely protested the Division's denial of the refund and requested a hearing before the Secretary of Revenue
pursuant to G.S. 105-266.1 by letter dated April 13, 2001.
CONCLUSIONS OF LAW
The Board reviewed and considered the following conclusions of law made by the Assistant Secretary in his decision
regarding this matter:
1. G.S. 105-125(a)(1) provides an exemption from the franchise tax for corporations that are organized and operated as a
charitable, religious, fraternal, benevolent, scientific, or educational corporation not operated for profit.
2. G.S. 105-130.11(a)(3) provides an exemption from the corporate income tax imposed under G.S. 105-130.3 for corporations
that are organized as a charitable corporation not operated for profit, no part of the organization's net earnings of which inure
to the benefit of a shareholder or person.
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
512
3. G.S. 105-228.90(1b) defines "Code" as the Internal Revenue Code as enacted as of a specified date, including any provisions
enacted as of that date which become effective either before or after that date.
4. IRC 501(c)(3) provides for the exemption from taxation of: "corporations…organized and operated exclusively
for…charitable… purposes… no part of the net earnings of which inures to the benefit of any private shareholder or
individual."
5. Pursuant to Federal Tax Regulation Section 1.501(a)-1, the words 'private shareholder or individual' as used in Section 501 of
the Code refer to persons having a personal and private interest in the activities of the organization.
6. Section 1.501(c)(3)-1(d)(1)(ii) of the Federal Tax Regulations provides that an organization is not organized or operated
exclusively for one or more exempt purposes unless it serves a public rather than a private interest.
7. G.S. 105-130.11 and 105-125 prohibit against private inurement.
8. A Section 501(c)(3) organization is classified as either a public charity or a private foundation.
9. In order to receive public charity status, an organization must be either: (i) a public charity, according to IRC 509(a)(1); (ii) a
publicly supported organization, according to IRC 509(a)(2); or (iii) a supporting organization, according to IRC 509(a)(3).
10. Under IRC § 509(a)(1), a public charity must receive at least one-third (33 1/3%) of its support, excluding income received in
the exercise or performance by such organization of its charitable purpose, from the general public or a governmental unit.
11. All of Taxpayer's funding during the relevant period, with the exception of fees received from the sale of Betaseron, came
from Berlex. Taxpayer would not have qualified as a public charity under IRC 509(a)(1).
12. Under IRC 509(a)(2), a publicly supported organization must receive more than one-third (33 1/3%) of its support from the
general public and must not receive more than one-third of its support from investment income.
13. Taxpayer received a minimal amount of investment income in the form of interest income and, for the past three years, has
received more than one-third of its support from the general public. However, as stated above, Berlex provided significant
contributions to Taxpayer. These contributions would not be included as public support and would most likely have
disqualified Taxpayer as an IRC 509(a)(2) entity for the relevant period.
14. Supporting organizations as defined in IRC 509(a)(3) are those that are not publicly supported, but which are organized and
operated solely for the benefit of an organization described in IRC 509(a)(1) or (a)(2).
15. Taxpayer is not related to or operated to support any organization described in IRC 509(a)(1) or (a)(2). Therefore, it would
not have qualified for tax-exempt status under IRC 509(a)(3).
16. Taxpayer may have qualified for tax exemption as a private foundation under IRC 509(c)(3) had it applied.
17. Under the private foundation rules, various transactions, described in IRC 4941(d), between a foundation and a disqualified
person trigger the self-dealing excise tax.
18. Under IRC 4946(a)(1), a disqualified person includes a substantial contributor as defined in IRC 507(d).
19. IRC 507(d)(2)(A) defines a substantial contributor as "any person who contributed or bequeathed an aggregate amount of
more than $5,000 to the private foundation, if such amount is more than 2 percent of the total contributions and bequests
received by Taxpayer before the close of the taxable year of Taxpayer in which the contribution or bequest is received by
Taxpayer from such person."
20. Berlex has contributed millions to Taxpayer and would be considered a substantial contributor under IRC 507(d) and a
disqualified person for purposes of the self-dealing rules.
21. If Taxpayer had been granted exemp tion as a private foundation under IRC 509(c)(3) by the Internal Revenue Service,
Taxpayer, its managers, and Berlex (a "disqualified person") would have been subject to excise taxes.
22. According to IRC 4941(d)(1)(A), the "sale or exchange, or leasing, of property between a private foundation and a
disqualified person" is an act of self-dealing.
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23. Berlex sells Betaseron regularly to Taxpayer for a nominal price. These sales of Betaseron to Taxpayer constitute an act of
self-dealing, subject to the taxes imposed under IRC 4941.
24. The "lending of money or other extension of credit between a private foundation and a disqualified person" is an act of self-dealing
pursuant to IRC 4941(d)(1)(B).
25. Any loans between Berlex and Taxpayer would, therefore, also be considered acts of self-dealing, subject to the taxes under
IRC 4941.
26. The self-dealing excise tax has two potential levels of taxation.
27. The first level of the self-dealing excise tax is the initial tax in IRC 4941(a). The Internal Revenue Service can impose an
initial tax of 5 or 10 percent of the amount involved on the self-dealer or private foundation. A first-tier tax of 2 1/2 percent
of the amount involved, up to $10,000, can also be assessed against an organization's managers. The initial tax is always
assessed on a self-dealing transaction.
28. The second-tier tax of 200 percent on the self-dealer and 50 percent on the foundation manager can also be imposed. In the
case of a prohibited taxable expenditure, the second-tier tax equals 200 percent of the amount involved. The second level
occurs only if the self-dealing transaction is not corrected within a prescribed time.
29. In order for a self-dealing transaction to be corrected, IRC 4941(e)(3) requires the undoing of the transaction to the extent
possible, but in any case placing the private foundation in a financial position not worse than that in which it would be if the
disqualified person were dealing under the highest fiduciary standards.
30. There is no evidence that Taxpayer attempted to correct any self-dealing transactions that occurred during the refund period.
31. Under Reg. 1.507-1(c)(4), repeated and willful self-dealing by a private foundation will result in the revocation of the
organization’s tax exempt status.
32. The purchase and distribution of the Betaseron drug under the circumstances present in the instant case is incident to a
commercial operation and does not constitute "charitable" within the meaning of G.S. 105-125 and 105-130.11.
33. The taxpayer is subject to the general business franchise tax in accordance with G.S. 105-122.
34. The taxpayer is subject to income taxation in this State in accordance with G.S. 105-130 et. seq.
35. Under G.S. 105-130.3 for the 1996, 1997 and 1998 tax years, the income tax is imposed on the State net income of every C
corporation doing business in this State at 7.75%, 7.5% and 7.25%, respectively, of the corporation's State net income.
36. T17 NCAC 5C.0102 defines "doing business" in pertinent part as "[t]he maintenance of an office or other place of business in
North Carolina."
37. "State net income" means the taxpayer's federal taxable income as determined under the Code, adjusted as provided in G.S. §
105-130.5 and, in the case of a corporation that has income from business activity that is taxable both within and without this
State, allocated and apportioned to this State as provided in G.S. § 105-130.4.
38. G.S. 105-130.4(a)(2) defines "commercial domicile" as the principal place from which the trade or business of the taxpayer is
directed or managed.
39. Taxpayer's "commercial domicile" is in North Carolina because it is directed and managed by the Lash Group in Charlotte,
North Carolina.
40. For purposes of allocation and apportionment, a corporation is taxable in another State if (i) the corporation's business
activity in that state subjects it to a net income tax or a tax measured by net income or (ii) that state has jurisdiction based on
the corporation's business activity in that state to subject the corporation to a tax measured by net income regardless whether
that state exercises its jurisdiction.
41. Pursuant to G.S. 105-130.4(b), "business activity" is defined to include any activity by a corporation that would establish a
taxable nexus pursuant to 15 United States Code Section 381.
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42. 15 United States Code Section 381, mo re commonly known as Public Law 86-272, restricts a state from imposing a net
income tax on income derived within its borders from interstate commerce when the only activity within a state is the
solicitation of orders of tangible property, the order is sent out of the state for approval or rejection, and the goods are shipped
from a point outside the state.
43. Solicitation of orders for purposes of Public Law 86-272 includes the entire process associated with inviting an order, not just
those activities absolutely essential to solicitation.
44. Taxpayer does not have any taxable business activities outside of North Carolina pursuant to Public Law 86-272 and is
therefore not entitled to the apportionment provisions of G.S. 05-130.4(b).
45. The denial of the refunds requested on the amended returns and the proposed assessment of corporate franchise tax were
proper under the laws and the facts.
DECISION
The scope of administrative review for petitions filed with the Tax Review Board is governed by G.S. 105-241.2(b2). After
the Tax Review Board conducts an administrative hearing, this statute provides in pertinent part:
(b2). "The Board shall confirm, modify, reverse, reduce or
increase the assessment or decision of the Secretary."
Taxpayer filed amended North Carolina Franchise and Corporate Income Tax returns for the taxable years 1996 through
1998, claiming exemptions from the franchise and corporate income tax under G.S. 105-125(a)(1) and 105-130.11(a)(3). The
Taxpayer is seeking a total refund of $418,430 for the years at issue. Since this is a refund claim, the Taxpayer has the burden to show
that it is entitled to the refund and that it falls within the statutory provisions granting the exemptions. From a review of the record,
the Board concludes that the Taxpayer failed to show that it is entitled to the refund and that it falls within the statutory provisions
granting the exemptions. Therefore, the Board after conducting an administrative hearing in this matter, and after considering the
petition, the briefs, the whole record and the Assistant Secretary's final decision, concludes that the findings of fact made by the
Assistant Secretary in the final decision are supported by competent evidence in the record; that based upon the findings of fact, the
Assistant Secretary's conclusions of law were fully supported by the findings of fact; therefore the final decision of the Assistant
Secretary should be confirmed.
WHEREFORE, THE TAX REVIEW BOARD ORDERS that the Assistant Secretary's final decision be confirmed in
every respect.
Made and entered into the 2nd day of July 2003.
TAX REVIEW BOARD
Signature
Richard H. Moore, Chairman
State Treasurer
Signature
Jo Anne Sanford, Member
Chair, Utilities Commission
Signature
Noel L. Allen, Appointed Member
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
515
STATE OF NORTH CAROLINA BEFORE THE
TAX REVIEW BOARD
COUNTY OF WAKE
IN THE MATTER OF:
The Proposed Assessment of Sales and Use )
Tax for the period of January 1, 1998 through )
September 30, 2000, by the Secretary of )
Revenue of North Carolina ) ADMINISTRATIVE DECISION
) Number: 409
)
vs. )
)
HiTech Performance Engine and Machine, Inc. )
This Matter was heard before the Regular Tax Review Board (hereinafter "Board") in the City of Raleigh, Wake County,
North Carolina, on Thursday, January 30, 2003, upon a petition filed by HiTech Performance Engine and Machine, Inc. (hereafter
"Taxpayer") for administrative review of the Final Decision of the Assistant Secretary of Revenue entered on January 22, 2002,
sustaining the sales and use tax assessment imposed against the Taxpayer for the period of January 1, 1998 through September 30,
2000.
Jo Anne Sanford, ex officio member and Chair of the Utilities Commission presided over the hearing with duly appointed
member, Noel L. Allen, Attorney at Law participating. Since Chairman Richard H. Moore, State Treasurer, was not present at the
hearing on January 30, 2003, the Board reviewed this matter on April 22, 2003 and rendered the following decision.
Attorney John F. Hanzel appeared at the hearing on behalf of the Taxpayer. Kay Linn Miller Hobart, Assistant Attorney
General, appeared at the hearing on behalf of the Secretary of Revenue.
STATEMENT OF CASE
The Taxpayer is in the principal business of rebuilding racecar engines pursuant to performance service agreements for racing
teams during the audit period. The Taxpayer would charge its customers a fee for its labor in rebuilding the engines. In some
instances, the Taxpayer made retail sales of engine parts and separately stated the sales price for the parts installed in the engines on
the customers' invoices. In other instances, the Taxpayer did not sell parts, but instead furnished and installed new parts on customer-owned
engine blocks for a rebuilding fee under the service agreement.
The Taxpayer purchased engine repair parts exempt from sales or use tax pursuant to Certificates of Resale issued to its
vendors. The Taxpayer either sold these parts to customers, separately stating the sales price on the invoices, or used the engine parts
to rebuild its customers engines as agreed upon in the service contract.
Pursuant to G.S. 105-241.1, the Department mailed a Notice of Proposed Assessment to the Taxpayer assessing tax, penalty
and interest in the total amount of $30,539.01. The proposed assessment resulted from the Taxpayer's failure to collect and remit sales
tax on its taxable retail sales of engine parts and its failure to accrue and remit the 4% State and 2% local use tax due on purchases of
equipment for use from out-of-state vendors. The Taxpayer objected to the assessment in a letter dated July 28, 2001, and timely
requested a hearing before the Secretary of Revenue. On January 22, 2002, the Assistant Secretary issued his final decision that
sustained the assessment of tax and interest, but waived the penalty imposed against the Taxpayer. Pursuant to G. S. 105-241.2,
Taxpayer's attorney timely filed a notice of intent and petition for administrative review of the Assistant Secretary's Final Decision
with the Tax Review Board.
ISSUES
The issues considered by the Board on review of this matter are stated as follows:
1. Was the Taxpayer a manufacturer?
2. Was the Taxpayer liable for use tax at the 1% State tax rate on its equipment purchases?
3. Was the Taxpayer liable for sales tax on its separately itemized sales of parts on invoices to customers?
EVIDENCE
The Tax Review Board reviewed the following evidence presented by the parties at the hearing before the Assistant Secretary
of Revenue:
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
516
1. Copy of memorandum dated May 16, 2001, from the Secretary of Revenue to the Assistant Secretary of Administrative
Hearings, designated as Exhibit E-1.
2. Copy of face sheet of auditor’s report and comments dated June 25, 1999, designated as Exhibit E-2.
3. Copy of Notice of Sales and Use-Audit Tax Assessment dated July 5, 1999, designated as Exhibit E-3.
4. Copy of letter dated July 19, 1999 from the Taxpayer to the Department, designated as Exhibit E-4.
5. Copy of letter dated August 5, 1999 from the Sales and Use Tax Division to the Taxpayer, designated as Exhibit E-5.
6. Copy of letter dated March 27, 2000 from the Sales and Use Tax Division to the Field Operations Division, designated as
Exhibit E-6.
7. Copy of letter dated April 20, 2000 from the Sales and Use Tax Division to the Taxpayer, designated as Exhibit E-7.
8. Copy of letter dated May 10, 2000 from the Taxpayer to the Sales and Use Tax Division, designated as Exhibit E-8.
9. Copy of letter dated May 24, 2000 from the Sales and Use Tax Division to the Taxpayer, designated as Exhibit E-9.
10. Copy of letter dated October 19, 2000 from the Taxpayer to the Sales and Use Tax Division, designated as Exhibit E-10.
11. Copy of letter dated November 22, 2000 from the Sales and Use Tax Division to the Taxpayer, designated as Exhibit E-11.
12. Copy of letter dated June 7, 2001 from the Assistant Secretary of Revenue to the Taxpayer, designated as Exhibit E-12.
13. Copy of NCAC T17 :07B .0202(a) , designated as Exhibit E-13.
14. Copy of NCAC T17 :07B .0406, designated as Exhibit E-14.
15. Copy of Master Hatcheries, Inc., V. Coble, 286 N.C. 518, 212 S.E. 2d 150 (1975), designated as Exhibit E-15.
FINDINGS OF FACTS
The Board reviewed and considered the following findings of fact entered by the Assistant Secretary in his decision regarding
this matter:
1. The Taxpayer operated as a retailer engaged in the business of rebuilding racing engines during the audit period.
2. The Taxpayer primarily received engines from customers that required rebuilding in order to be used by such customers in
NASCAR races.
3. The Taxpayer built some new engines for lease, which represented less than 25% of its business.
4. The Taxpayer purchased parts used in rebuilding customers’ engines, exempt from sales or use tax based on Certificates of
Resale issued to vendors.
5. When the Taxpayer rebuilt customers' engines, it operated under a performance type service agreement 75% of the time. In
some cases the firm separately stated the sales of new parts it installed in the customers' engines.
6. The Taxpayer did not charge sales tax on invoices issued to customers when the sales price of parts installed on the customer-owned
engines was separately stated. The Department assessed sales tax on these repair parts.
7. In cases where the Taxpayer did not separately charge customers for parts used to rebuild customers' engines, the Taxpayer
failed to accrue and remit use tax on the cost price of such parts. Although the auditor failed to assess use tax on these parts,
the Department advised the Taxpayer of its liability for use tax on the cost of the parts by letter dated April 20, 2000.
8. The Taxpayer purchased equipment used in its operations without payment of sales or use tax to the vendors and failed to
accrue and remit any use tax due on these purchases. The Department assessed use tax on the cost price of the equipment
purchased from out-of-state vendors who did not charge sales tax.
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
517
9. The Notice of Proposed assessment was mailed to the Taxpayer on July 5, 1999.
10. The Taxpayer filed a written request for a hearing and notified the Department that it objected to the assessment on July 19,
1999.
CONCLUSIONS OF LAW
The Board reviewed and considered the following conclusions of law made by the Assistant Secretary in his decision
regarding this matter:
1. The Taxpayer was, at all material times during the audit period, a retailer engaged in the business of making retail sales of
tangible personal property subject to sales tax. The Taxpayer was also engaged in the business of rebuilding engines
pursuant to service agreements during the audit period.
2. The Taxpayer was not classified as a manufacturer since it did not manufacture new and different products for sale during the
audit period.
3. Because the Taxpayer's operation did not constitute "manufacturing," its purchases of equipment were not subject to the 1%
State tax within G.S. 105-164.4(a)(1d) or 105-164.4A(2).
4. The general rate of state tax and applicable local tax is due on the cost of equipment purchased for use in the Taxpayer's
operations.
5. The Taxpayer was liable for sales tax on its retail sales of repair parts sold to customers and installed in their engines. The
Taxpayer should have accrued and paid use tax on the cost of parts furnis hed and installed upon customers’ engines pursuant
to its service agreements, notwithstanding that the auditor failed to assess such tax.
DECISION
The scope of administrative review for petitions filed with the Tax Review Board is governed by G.S. 105-241.2(b2). After
the Tax Review Board conducts an administrative hearing, this statute provides in pertinent part:
(b2). The Board shall confirm, modify, reverse, reduce or
increase the assessment or decision of the Secretary."
Assessments of tax are presumed to be correct and the taxpayer has the burden to show that the assessment is not proper.
Upon a review of the record, the Board concludes that the Taxpayer failed to furnish sufficient evidence to show that the assessment is
not proper. Thus, the Board having conducted an administrative hearing in this matter, and having considered the petition, the briefs,
the whole record and the Assistant Secretary's final decision, concludes that the findings of fact made by the Assistant Secretary were
supported by competent evidence in the record; that based upon the findings of fact, the Assistant Secretary's conclusions of law were
fully supported by the findings of fact; therefore the decision of the Assistant Secretary should be confirmed.
WHEREFORE, THE TAX REVIEW BOARD ORDERS that the Assistant Secretary's final decision be confirmed in
every respect.
Made and entered into the 2nd day of July 2003.
TAX REVIEW BOARD
Signature
Richard H. Moore, Chairman
State Treasurer
Signature
Jo Anne Sanford, Member
Chair, Utilities Commission
Signature
Noel L. Allen, Appointed Member
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
518
STATE OF NORTH CAROLINA BEFORE THE
TAX REVIEW BOARD
COUNTY OF WAKE
IN THE MATTER OF:
The Proposed Assessment of Franchise )
Tax for the period of August 1, 1997 )
through July 31, 1998 by the Secretary )
of Revenue of North Carolina ) ADMINISTRATIVE DECISION
) Number: 410
)
vs. )
)
Cisco Systems Sales and Services, Inc. )
This Matter was heard before the Regular Tax Review Board (hereinafter "Board") in the City of Raleigh, Wake County,
North Carolina, on Thursday, January 30, 2003, upon a petition filed by Cisco Systems Sales and Services, Inc. (hereinafter
"Taxpayer") for administrative review of the Final Decision of the Assistant Secretary of Revenue entered on August 22, 2002,
sustaining the franchise tax assessment, plus penalties and interest for the period of August 1, 1997 through July 31, 1998.
Chairman Richard H. Moore, State Treasurer, presided over the hearing with ex officio member Jo Anne Sanford, Chair,
Utilities Commission and duly appointed member, Noel L. Allen, Attorney at Law participating.
Michael A. Hannah, Senior Manager with Deloitte & Touche, LLP and John P. Murphy, Manager with Cisco Systems Inc.
were present at the hearing on behalf of the Taxpayer. George W. Boylan, Special Deputy Attorney General, appeared at the hearing
on behalf of the Secretary of Revenue.
Following the hearing, the Tax Review Board took this matter under review and agreed to render a decision at its next
meeting. During the April 22, 2003 Tax Review Board meeting, the members, after considering the Taxpayer's petition, the briefs and
record of the proceeding before the Assistant Secretary, rendered the following decision:
STATEMENT OF CASE
Cisco Systems, Inc. (hereinafter "Cisco") is the parent corporation of Cisco Systems Sales and Services, Inc. (hereinafter
"Taxpayer"). The two corporations seek review of the Final Decision of the Assistant Secretary of Revenue entered on August 22,
2002 that denied Cisco a tax credit for investment in machinery and equipment made during its 1996 taxable year.
Cisco is an international company that develops, manufactures, sells and supports networking products that connect various
devices with computer networks. Cisco is engaged in research and development activities at its Research Triangle Park facility. In
1996, Cisco placed in service machinery and equipment at its Research Triangle Park facility for fiscal year ended July 26, 1997.
Thereafter, Cisco submitted requests to the North Carolina Employment Security Commission (NCESC) and North Carolina
Department of Commerce (NCDC) for qualification for the William S. Lee Credit Program ("Bill Lee Credits"). Upon receipt of the
Certificate of Eligibility from NCDC, Cisco computed the amount of Bill Lee Credits that it was entitled for the purchase of the
machinery and equipment at its Research Triangle Park facility for the fiscal year ended 1997.
On May 11, 1999, the Taxpayer filed its North Carolina franchise tax return and claimed an installment of the tax credit for
investment in the machinery and equipment that was placed in service at its Research Triangle Park facility. If the credit is available
to Cisco, unused installments may also be claimed by the Taxpayer for subsequent tax years.
On March 14, 2001, the Department of Revenue issued a proposed assessment against the Taxpayer for additional franchise
tax in the amount of $49,704, plus penalties in the amount of $12,426 and accrued interest for Taxpayer's fiscal year ended July 25,
1998. The proposed assessment was based upon the Department of Revenue's disallowance of the tax credit installment claimed by
the Taxpayer on its franchise tax return for fiscal year ended July 1998. Taxpayer objected to proposed assessment and requested a
hearing before the Secretary of Revenue. On August 22, 2002, the Assistant Secretary issued the Final Decision that sustained the
assessment of tax, penalties and interest imposed in this matter. Thereafter, the Taxpayer filed a petition for administrative review of
the Final Decision with the Board pursuant to N.C. Gen. Stat. § 105-241.2.
ISSUE
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
519
The issue to be considered by the Board on review of this matter is stated as follows:
Is Cisco entitled to a tax credit for investing in machinery and equipment during its 1996 taxable year, thereby enabling
Taxpayer to utilize any remaining installments of a credit that remained after Cisco transferred the property in question to it during the
1997 tax year?
EVIDENCE
The Tax Review Board reviewed the following evidence presented by the parties at the hearing before the Assistant Secretary
of Revenue:
Submitted by the Division
1. Taxpayer's 1997 North Carolina Franchise and Income Tax Return, designated as CD-1.
2. Taxpayer's 1998 North Carolina Franchise and Income Tax Return, designated as CD-2.
3. Notice Of Corporate Franchise Tax Assessment dated March 14, 2001, designated as CD-3.
4. Field Auditor's Report dated December 5, 2000, designated as CD-4.
5. Letter from M. W. Massey, Administrative Officer, to Taxpayer dated June 20, 2000, designated as CD-5.
6. Letter from Taxpayer to the Department of Revenue dated April 11, 2001, designated as CD-6.
7. Letter from Jonathan K. Tart, Administrative Officer, to Taxpayer dated May 15, 2001, designated as CD-7.
8. Letter from Taxpayer to William M. Daniel, former Director of the Corporate, Excise and Insurance Tax Division, dated June
7, 2001, designated as CD-8.
9. Letter from Taxpayer to Jonathan K. Tart dated June 18, 2001, designated as CD-9.
10. Letter from Eugene J. Cella, Assistant Secretary of Revenue, to Taxpayer dated December 14, 2001, designated as CD-10.
11. Letter from Taxpayer to Eugene J. Cella dated January 3, 2002, designated as CD-11.
12. Section 1(a) and Section 1(c) of Senate Bill 748; 2001 General Assembly, designated as CD-12.
13. Section 3.3 of Chapter 13, House Bill 18; 1996 General Assembly, designated as CD-13.
14. Company Overview of Cisco, designated as CD-14.
15. Pages 584 and 585 of North American Industry Classification Manual, 1997 edition, designated as CD-15.
16. Certificates of Eligibility issued by the North Carolina Department of Commerce to Parent, designated as CD-16.
17. Schedule K from Taxpayer's 1997 Federal Income Tax Return, designated as CD-17.
18. Page 370 of Standard Industrial Classification Manual, designated as CD-18.
19. Pages 993 and 994 of North American Industry Classification Manual, 1997 edition, designated as CD-19.
Submitted by the Taxpayer
1. Fax Cover Sheet from Employment Security Commission of North Carolina to Taxpayer and Pages 298 and 299 from
Standard Industrial Classification Manual, designated as TP-1.
2. Page 961 of North American Industry Classification Manual, 1997 edition, designated as TP-2.
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
520
3. Page 316 of North American Industry Classification Manual, 1997 edition, designated as TP-3.
4. Page 975 of North American Industry Classification Manual, 1997 edition, designated as TP-4.
5. Letter dated March 11, 1998 from Parent to the Department of Commerce with Attachments, designated as TP-5.
6. Taxable Year 1996 Certification Issued by Department of Commerce to Parent, designated as TP-6.
7. Taxable Years 1997 and 1998 Certifications Issued by Department of Commerce to Parent, designated as TP-7.
8. Letter from Julie R. Stiles, Interstate Examination Division, to Taxpayer dated December 5, 2000, with related attachments,
designated as TP-8.
9. Document titled Information on Tax Incentives Under the William S. Lee Quality Jobs and Business Expansion Act published
by the North Carolina Department of Revenue, designated as TP-9.
10. Document titled Credit for Investing in Machinery and Equipment from Department of Revenue Web Page, designated as
TP-10.
Submitted by the Assistant Secretary of Revenue:
1. Brief for Tax Hearing submitted by the Corporate, Excise and Insurance Tax Division, designated as S-1.
2. Objection to Proposed Assessment of Corporate Franchise Tax submitted by Taxp ayer, designated as S-2.
3. Supplemental Brief in Support of Objection to Proposed Assessment of Corporate Franchise Tax dated March 21, 2002
submitted by Taxpayer, designated as S-3.
4. Letter from Michael A. Hannah to Eugene J. Cella dated March 29, 2002, designated as S-4.
5. Letter from Eugene J. Cella to Michael A. Hannah dated April 11, 2002, designated as S-5.
6. Post-Hearing Brief submitted by the Corporate, Excise and Insurance Tax Division, designated as S-6.
7. Cross-Brief in Reply in Support of Objection to Proposed Assessment of Corporate Franchise Tax dated May 24, 2002
submitted by Taxpayer, designated as S-7.
FINDINGS OF FACTS
Based upon the record, the Tax Review Board makes the following findings of fact:
1. Cisco is the Parent Corporation of Taxpayer.
2. During its 1996 taxable year, Cisco placed certain business property in service at a facility located in North Carolina’s
Research Triangle Park. This facility was part of Cisco’s research and development operations.
3. Subsequent to its 1996 investment in business property placed in service at Research Triangle Park, Cisco submitted a form
entitled "Request for Department of Commerce Certification for Participation in the William S. Lee Tax Credit Incentives,"
hereinafter referred to as the "Participation Request," to the Secretary of Commerce for its 1996 taxable year. Cisco indicated
on the form that it had placed $13,065,707 of machinery and equipment into service during the 1996 taxable year.
4. Cisco formed Taxpayer as a subsidiary and transferred ownership of the business property at the research and development
facility in Research Triangle Park to Taxpayer in 1997.
5. The Taxpayer was engaged in research and development at its Research Triangle Park facility during its 1997 taxable year.
The new machinery and equipment at the Research Triangle Park facility was used in Cisco’s primary business of
developing, manufacturing and selling computer network equipment.
6. The Taxpayer timely filed its franchise tax return for the tax period ending July 31, 1998, on May 11, 1999, under an
approved extension of time to file.
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
521
7. The Taxpayer claimed an installment of a tax credit for investing in machinery and equipment on its 1997 North Carolina
Franchise and Income Tax Return for business property used at its Research Triangle Park facility during that tax year.
8. The Division disallowed the installment of the machinery and equipment credit taken by Taxpayer against its franchise tax
liability.
9. A proposed assessment of additional franchise tax, a twenty-five percent late-filing penalty, a twenty-five percent negligence
penalty, and accrued interest was mailed to Taxpayer on March 14, 2001.
10. The Taxpayer timely filed an objection to the proposed assessment and timely requested an administrative tax hearing
pursuant to G.S. 105-241.1.
11. On February 19, 2002, Eugene Cella, the Assistant Secretary of Revenue conducted an administrative tax hearing regarding
the proposed assessment. On August 22, 2002, Assistant Secretary Cella issued a Final Decision sustaining the assessment of
tax, penalties and interest against the Taxpayer for the period at issue.
12. Pursuant G.S. 105-241.2, the Taxpayer filed a petition with the Tax Review Board requesting administrative review of the
Final Decision entered by Assistant Secretary Cella on August 22, 2002.
CONCLUSIONS OF LAW
Based upon the record in this matter, the Tax Review Board concludes as a matter of law:
1. The Tax Review Board has jurisdiction to review this matter on Taxpayer's petition and to determine if Cisco is entitled to a
tax credit for investing in machinery and equipment during its 1996 tax year, thereby enabling Taxpayer to utilize any
remaining installments of credit that remained after Cisco transferred the property at issue to the Taxpayer during the 1997
tax year.
2. Article 3A of Chapter 105 of the General Statutes, as effective for the 1996 tax year and hereinafter referred to as "the Act",
encourages taxpayers in certain types of businesses to either move their business into the State or to expand their business
activities in the State by offering tax credits for investments in the businesses. Qualifying businesses when the Act was first
enacted included manufacturing and processing, warehousing and distribution, and data processing. To be eligible for the
credits, the taxpayer had to be primarily engaged in a qualifying business and conducting that business activity in this State.
3. The Act allows a machinery and equipment tax credit for investing in business property in the State that is used in
manufacturing and processing, warehousing and distribution, or data processing.
4. Cisco is an international company that develops, manufactures, sells and supports networking products that connect various
devices with computer networks. Cisco is engaged in research and development activities at its Research Triangle Park
facility. The machinery and equipment acquired by Cisco and transferred to the Taxpayer are used in an eligible business
activity as defined in G.S. 105-129.4(a) and therefore qualify for the tax credit.
5. The Secretary of Revenue is responsible for enforcing the Revenue Laws of this State, inclusive of the tax credits provided
under the Act, by determining the correctness of a tax return and determining the proper liability of any person for a tax
imposed.
6. The Secretary of Revenue has the authority to determine the correctness of tax credits claimed under the Act by reviewing
any records considered necessary. In addition to being given this authority as part of his responsibility to enforce the
Revenue La ws in general, this authority is specifically declared with respect to the Act in G.S. 105-129.7.
7. The Act requires a taxpayer to meet two general eligibility requirements pertaining to the primary business industry that it
belongs to and the average wage it pays to its employees before it is eligible to participate in the Act.
8. Before claiming a tax credit under the Act on its tax return, a taxpayer submits the Participation Request to the Secretary of
Commerce. The Participation Request is used to provide statistical reports to the General Assembly and to the Department of
Revenue based on the number of Participation Request(s) received.
9. The Participation Request asks a taxpayer to provide information about the business industry that it belongs to and the
average wage paid.
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
522
10. The Department of Commerce endorses a taxpayer's participation in the Act by certifying that a taxpayer's representations on
the Participation Request are consistent with a type of business industry recognized under the Act, and that the average wage
as reported meets or exceeds the applicable county wage standard.
11. The Department of Commerce does not have the authority to conduct an audit to verify that all representations made by the
taxpayer on the Participation Request are true and accurate.
12. The Cisco was entitled to the tax credit for investing in machinery and equipment at the North Carolina facility during its
1996 year.
13. The Act contains a provision for a change in ownership that allows a successor business to take any installment of a credit
that its predecessor could have taken if it had a tax liability.
14. The Taxpayer, as a successor corporation, was entitled to the installment of credit that was claimed against its 1997 franchise
tax liability.
15. The Secretary of Revenue may, upon making a record of the reasons thereof, reduce or waive any penalties.
16. The Department of Revenue was created under the provisions of the Executive Organization Act of 1973. The Secretary of
Revenue's duties include administering the laws enacted by the General Assembly relating to the assessment and collection of
corporate income taxes. As an official of the Executive branch of the government, the Secretary lacks the authority to
determine the constitutionality of legislative acts. The question of constitutionality of a statute is for the judicial branch.
(Insurance Co. v. Gold, 254 NC 168). The constitutionality of the income tax statutes is not within the Secretary's
jurisdiction.
DECISION
The scope of administrative review for petitions filed with the Tax Review Board is governed by G.S. 105-241.2(b2). After
the Tax Review Board conducts an administrative hearing, this statute provides in pertinent part:
(b2). "The Board shall confirm, modify, reverse, reduce or
increase the assessment or decision of the Secretary."
In sustaining the proposed assessment of franchise tax, penalties and interest assessment against the Taxpayer, the Assistant
Secretary concluded that the Taxpayer was not entitled to claim the Bill Lee Credits on the machinery and equipment that Cisco had
placed into service at the Research Triangle Park facility. The Assistant Secretary held that the Taxpayer was not engaged in a
qualified activity at the Research Triangle Park facility and that the certification of eligibility issued by Secretary of Commerce does
not entitle the Taxpayer to utilize Bill Lee Tax Credits.
The record shows that Cisco, the Parent Corporation of the Taxpayer, is an international company that develops,
manufactures, sells and supports networking products that connect various devices with computer networks. Cisco's primary business
is the development, manufacture and sale of computer networking equipment. Cisco placed in service certain business property at that
the Research Triangle Park facility. In 1997, Cisco transferred ownership of the business property at the North Carolina facility to the
Taxpayer.
The Board, upon review the record, concludes that there is sufficient evidence to show that the property used at Research
Triangle Park facility qualified for the Bill Lee Tax Credits because the research and development that occurs at the Research Triangle
Park facility is a necessary, inseparable and integral part of the primary business of manufacturing. Thus, the property is used for an
eligible business activity as defined in the applicable statute and qualifies for the tax credit.
The Board having conducted an administrative hearing in this matter, and having considered the petition, the briefs, the
whole record and the Assistant Secretary's final decision, concludes that the Assistant Secretary erred in sustaining the proposed
assessment of additional franchise tax, penalty and interest in this matter.
WHEREFORE, THE TAX REVIEW BOARD ORDERS AND DECREES that the Final Decision entered by the
Assistant Secretary on August 22, 2002 be Reversed.
Made and entered into the 21st day of July 2003.
TAX REVIEW BOARD
Signature
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
523
Richard H. Moore, Chairman
State Treasurer
Signature
Jo Anne Sanford, Member
Chair, Utilities Commission
Signature
Noel L. Allen, Attorney at Law
Appointed Member
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
524
STATE OF NORTH CAROLINA BEFORE THE
TAX REVIEW BOARD
COUNTY OF WAKE
IN THE MATTER OF:
The Proposed Assessment of Sales and Use )
Tax for the period January 1, 1998 through )
September 30, 2000, by the Secretary of )
Revenue of North Carolina )
) ADMINISTRATIVE DECISION
) Number: 411
)
vs. )
)
Ibialapuye S. Boyle d/b/a S & B Associates )
This Matter was heard before the Regular Tax Review Board (hereinafter "Board") in the City of Raleigh, Wake County,
North Carolina, on Tuesday, April 22, 2003, upon a petition filed by Ibialapuye S. Boyle d/b/a S & B Associates, Inc. (hereafter
"Taxpayer") for administrative review of the Final Decision of the Assistant Secretary of Revenue entered on November 7, 2001,
sustaining the sales and use tax assessment imposed against the Taxpayer for the period of January 1, 1998 through September 30,
2000.
Chairman Richard H. Moore, State Treasurer, presided over the hearing with ex officio member Jo Anne Sanford, Chair,
Utilities Commission and duly appointed member, Noel L. Allen, Attorney at Law participating.
Robert H. Merritt, Jr., Attorney appeared at the hearing on behalf of the Taxpayer. Alexandra M. Hightower, Assistant
Attorney General, appeared at the hearing on behalf of the Secretary of Revenue.
STATEMENT OF CASE AND FACTS
The Taxpayer is a proprietorship engaged in the business of making retail sales of vacuum cleaners. On December 28, 2001,
the Department of Revenue completed a sales tax audit on the Taxpayer's business. The additional tax resulted primarily from the
Taxpayer under reporting sales tax for the audit period. The Department of Revenue mailed the Taxpayer a Notice of Sales and Use
Tax Assessment dated December 19, 2000 in the total amount of $40,852.29. By letter dated January 17, 2001, the Taxpayer, through
counsel, objected to the assessment and requested a hearing before the Secretary of Revenue. After conducting a hearing on
September 18, 2001, the Assistant Secretary rendered his decision sustaining the proposed assessment plus penalty and interest.
Pursuant to G.S. 105-241.2, Taxpayer's attorney timely filed a notice of intent and petition for administrative review of the Assistant
Secretary's Final Decision with the Tax Review Board and requested an administrative hearing regarding this matter.
ISSUE
The issue to be considered by the Board on review of this matter is stated as follows:
Is the assessment correct and properly proposed against the Taxpayer and based on the best information available?
EVIDENCE
The Tax Review Board reviewed the following evidence presented by the parties at the hearing before the Assistant Secretary
of Revenue:
28. Copy of memorandum dated May 16, 2001, from Secretary of Revenue to the Assistant Secretary of Administrative
Hearings, designated Exhibit E-1.
29. Copy of face sheet of audit report dated December 8, 2000, and Explanation of Changes, designated Exhibit E-2.
30. Copy of the Notice Sales and Use Tax Assessment dated December 19, 2000, designated Exhibit E-3.
31. Copy of letter dated January 17, 2001, from the Taxpayer's attorney to the Department of Revenue, designated Exhibit E-4.
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
525
32. Copy of letter dated February 12, 2001, from the Sales and Use Tax Division to the Taxpayer's attorney, designated Exhibit
E-5.
33. Copy of letter dated February 26, 2001, from the Taxpayer's attorney to the Department of Revenue, designated Exhibit E-6.
34. Copy of letter dated April 11, 2001, from the Sales and Use Tax Division to the Taxpayer's attorney, designated Exhibit E-7.
35. Copy of letter dated April 26, 2001, from the Taxpayer's attorney to the Department of Revenue, designated Exhibit E-8.
36. Copy of letter dated May 7, 2001, from the Sales and Use Tax Division to the Taxpayer's attorney, designated Exhibit E-9.
37. Copy of letter dated June 6, 2001, from the Sales and Use Tax Division to the Taxpayer's attorney, designated Exhibit E-10.
38. Copy of letter dated August 28, 2001, from the Assistant Secretary of Revenue to the Taxpayer's attorney, designated Exhibit
E-11.
39. Copy of Power of Attorney dated September 18, 2001, designated Exhibit TP-1.
40. Copy of Taxpayer's bank statements, deposit slips, loan statement and home equity credit line letter, designated Exhibit TP-2.
41. Copy of letter dated September 18, 2001, from the Taxpayer's attorney to the Assistant Secretary of Revenue, designated
Exhibit TP-3.
42. Copy of letter and attachments dated October 10, 2001, from the Taxpayer's attorney to the Assistant Secretary of Revenue,
designated Exhibit TP-4.
43. Copy of Memorandum dated October 24, 2001, from the Sales and Use Tax Division to Assistant Secretary of Revenue,
designated Exhibit S-1.
FINDINGS OF FACTS
The Board reviewed and considered the following findings of fact entered by the Assistant Secretary in his decision regarding
this matter:
8. The Taxpayer operated as a retailer of vacuum cleaners during the audit period.
9. The gross receipts or sales on Schedule C of the Taxpayer's Federal individual income tax returns for 1998 and 1999
exceeded the gross sales reported on his sales and use tax returns for corresponding periods.
10. The Taxpayer provided no information, which conclusively proved that non-sales amounts were included in gross sales of the
Taxpayer's 1998 and 1999 Federal income tax returns.
11. The notice of assessment was mailed to the Taxpayer on December 19, 2001.
12. The Taxpayer protested the assessment and timely requested a hearing before the Secretary of Revenue.
CONCLUSIONS OF LAW
The Board reviewed and considered the following conclusions of law made by the Assistant Secretary in his decision
regarding this matter:
8. The Taxpayer was at all material times a retailer engaged in the business of making retail sales of tangible personal property
subject to sales tax.
9. All gross receipts of retailers are presumed to be subject to the retail sales tax until otherwise established.
10. In the absence of adequate records disclosing gross sales it shall be the duty of the Secretary to assess a tax upon an
estimation of sales based on the best information available.
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
526
11. A proposed assessment of the Secretary of Revenue is presumed to be correct.
DECISION
The scope of adminis trative review for petitions filed with the Tax Review Board is governed by G.S. 105-241.2(b2). After
the Tax Review Board conducts an administrative hearing, this statute provides in pertinent part:
(b2). "The Board shall confirm, modify, reverse, reduce or
increase the assessment or decision of the Secretary."
Assessments of tax are presumed to be correct and the taxpayer has the burden to show that the assessment is not proper.
Upon a review of the record, the Board concludes that the Taxpayer failed to furnish sufficient evidence to show that the assessment in
this matter is not proper. Thus, the Board having conducted an administrative hearing in this matter, and having considered the
petition, the briefs, the whole record and the Assistant Secretary’s final decision, concludes that the findings of fact made by the
Assistant Secretary were supported by competent evidence in the record; that based upon the findings of fact, the Assistant Secretary's
conclusions of law were fully supported by the findings of fact; therefore the decision of the Assistant Secretary should be confirmed.
WHEREFORE, THE BOARD ORDERS that the Assistant Secretary's final decision be confirmed in every respect.
Made and entered into the 21st day of August 2003.
TAX REVIEW BOARD
Signature
Richard H. Moore, Chairman
State Treasurer
Signature
Jo Anne Sanford, Member
Chair, Utilities Commission
Signature
Noel L. Allen, Appointed Member
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
527
STATE OF NORTH CAROLINA BEFORE THE
TAX REVIEW BOARD
COUNTY OF WAKE
IN THE MATTER OF:
The Proposed Assessment of )
Unauthorized Substance Tax )
dated May 9, 2001 by the )
Secretary of Revenue of ) ADMINISTRATIVE DECISION
of North Carolina ) Number: 412
)
vs. )
)
Gary Lewis Dixon )
Taxpayer )
This matter was heard before the Tax Review Board (hereinafter "Board") in the City of Raleigh, North Carolina on Tuesday,
April 22, 2003, upon Gary Lewis Dixon's (hereinafter "Taxpayer") petition for administrative review of the Final Decision of the
Assistant Secretary of Revenue entered on September 23, 2002, reducing the proposed assessment of unauthorized controlled
substance tax for the period of May 9, 2001.
Chairman Richard H. Moore, State Treasurer, presided over the hearing with Jo Anne Sanford, Chair, Utilities Commission
and duly appointed member, Noel L. Allen, Attorney at Law participating.
The Taxpayer did not appear at the hearing. Michael D. Youth, Assistant Attorney General, represented the Secretary of
Revenue at the hearing.
Pursuant to G.S. 105-113.111(a) and G.S. 105-241.1, a Notice of Unauthorized Substance Tax Assessment was issued to the
Taxpayer by Enforcement Agent Brian Zieverink, of the Unauthorized Substance Tax Division, assessing $70,000.00 tax, $28,080.00
penalty and $4,206.04 interest, for a total liability of $102,486.04. The assessment alleged that the Taxpayer had unauthorized
possession of 180 dosages of hydrocodone and 3,320 dosages of oxycodone between November 2, 1999 and March 26, 2001, without
proper tax stamps affixed to the substances. The Taxpayer protested the assessment and requested a hearing before the Secretary of
Revenue. On May 1, 2002, Eugene J. Cella, Assistant Secretary of Revenue conducted a hearing upon Taxpayer’s timely application
and objection to the proposed assessment. Based upon the evidence presented, the Assistant Secretary issued a final decision reducing
the proposed assessment against the Taxpayer to a total liability of $71,260.00. Thereafter, the Taxpayer timely filed a petition for
administrative review of the final decision with the Board.
ISSUES
The issues considered by the Board on administrative review are this matter are stated as follows:
1. Did the Taxpayer have actual and/ or constructive possession of hydrocodone and oxycodone without the proper tax
stamps affixed?
2. Is the Taxpayer subject to the assessment of unauthorized substance excise tax?
FINDINGS OF FACT
The Board reviewed the following findings of fact made by the Assistant Secretary in the final decision:
1. Assessment of Unauthorized Substance Tax was made against the Taxpayer on May 9, 2001, in the sum of $70,200.00 tax, $28,080.00
penalty and $4,206.04 interest, for a total proposed liability of $102,486.04, based upon unlawful possession of 180 dosages
hydrocodone and 3,320 dosages of oxycodone between November 2, 1999, and March 26, 2001.
2. The Taxpayer made a timely objection and application for a hearing.
3. The Taxpayer admitted that he became addicted to his grandfather's prescription narcotics and that he began forging prescriptions.
4. The Taxpayer stated that he picked up his grandfather's prescription; however, no evidence was introduced to show that the Taxpayer
actually delivered the narcotics to his grandfather.
5. The Taxpayer's grandfather is a cancer patient whose treatment and prescription history records were submitted by the Taxpayer.
There are 14 prescription references in the hospital records that coincide with possession dates in the assessment that are alleged to be
unauthorized. The Taxpayer will be given the benefit of the doubt for these fourteen prescriptions since they may have been
legitimate prescriptions for his grandfather and his grandfather may have actually received all of the pills. On the "Attachment to
Assessment," lines 1, 5, 6, 7, 8, 10, 13, 14, 16, 18, 19, 21, 22 and 38 are stricken from the assessment.
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
528
6. The hydrocodone taxed on lines 37 and 43 of the "Attachment to Assessment" should have been taxed at a rate of $50 per ten dosage
units.
7. Between November 15, 1999, and March 26, 2001, the Taxpayer was in unauthorized possession of at least 180 dosages of
hydrocodone and 2,495 dosages of oxycodone without the proper tax stamps affixed.
CONCLUSIONS OF LAW
The Board reviewed the following conclusions of law made by the Assistant Secretary in his final decision:
1. An assessment of tax is presumed to be correct.
2. The burden is upon the Taxpayer who objects to an assessment to overcome that presumption, and this burden was partially met.
3. The Taxpayer unlawfully possessed at least 180 dosages of hydrocodone and 2,495 dosages of oxycodone between November 15,
1999, and March 26, 2001, and was therefore a dealer as that term is defined in G.S. 105-113.106.
4. The Taxpayer is liable for tax in the sum of $50,900.00 penalty in the sum of $20,360.00, plus accrued interest until date of full
payment.
DECISION
The scope of administrative review for petitions filed with the Tax Review Board is governed by G.S. 105-241.2(b2). After
the Board conducts a hearing this statute provides in pertinent part:
(b2). "The Board shall confirm, modify, reverse, reduce or
increase the assessment or decision of the Secretary."
Pursuant to N. C. Gen. Stat. § 105-241.1(a), a proposed tax assessment is presumed to be correct and the burden is on to the
Taxpayer to rebut that presumption.
From a review of the record, the Taxpayer failed to provide sufficient evidence to overcome the presumption. Thus, the
Board having conducted a hearing in this matter, and having considered the petition, the briefs, the record and the Assistant Secretary's
final decision, concludes that the findings of fact made by the Assistant Secretary were supported by competent evidence in the
record; that based upon the findings of fact, the Assistant Secretary's conclusions of law were fully supported by the findings of fact;
therefore the decision of the Assistant Secretary should be confirmed.
WHEREFORE, THE BOARD ORDERS that the Assistant Secretary's final decision be confirmed in every respect.
Made and entered into the 21st day of August 2003.
TAX REVIEW BOARD
Signature
Richard H. Moore, Chairman
State Treasurer
Signature
Jo Anne Sanford, Member
Chair, Utilities Commission
Signature
Noel L. Allen, Appointed Member
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
529
STATE OF NORTH CAROLINA BEFORE THE
TAX REVIEW BOARD
COUNTY OF WAKE
IN THE MATTER OF:
The Proposed Assessment of Unauthorized )
Substance Tax dated September 17, 2001 by )
the Secretary of Revenue of North Carolina )
) ADMINISTRATIVE DECISION
) Number: 413
vs. )
)
Tommy and Leah Whitsett )
Taxpayers )
This Matter was heard before the Regular Tax Review Board (hereinafter "Board") in the City of Raleigh, Wake County,
North Carolina, on Thursday, January 30, 2003, upon a petition filed by Tommy and Leah Whitsett (hereafter "Taxpayers") for
administrative review of the Final Decision of the Assistant Secretary of Revenue entered on April 29, 2002, sustaining the proposed
assessment of unauthorized substance tax for the period at issue.
Jo Anne Sanford, ex officio member and Chair of the Utilities Commission presided over the hearing with duly appointed
member, Noel L. Allen, Attorney at Law participating. After the meeting, the Board took this matter under advisement until the April
22, 2003 meeting. On April 22, 2003, the Board considered this matter and rendered its decision.
Pursuant to G.S. 105-113.111(a) and G.S. 105-241.1, a Notice of Unauthorized Substance Tax Assessment was issued to the
Taxpayers on September 17, 2001 by Enforcement Agent T. L. Staley, of the Unauthorized Substance Tax Division,
assessing $1,000.00 tax, $400.00 penalty and $6.67 interest, for a total liability of $1,406.67. The assessment alleged that on
September 2, 2001, Mrs. Whitsett in was in unauthorized possession of 43 dosages of OxyContin (oxycodone) and Mr.
Whitsett was in unauthorized possession of marijuana. The Taxpayers protested the assessment and requested a hearing
before the Secretary of Revenue. On February 28, 2002, Eugene J. Cella, Assistant Secretary conducted a hearing upon
Taxpayers' timely applications and objections to the proposed assessment. The Assistant Secretary issued final decisions
sustaining the proposed assessment against the Taxpayers. Thereafter, the Taxpayers timely filed a petition for administrative
review of the final decisions with the Board.
At the hearing before the Assistant Secretary, Mrs. Whitsett testified that she was keeping the OxyContin for your nephew's
wife who was undergoing cancer treatment for the past 3 ½ years. Mrs. Whitsett also presented at statement from her nephew that the
pills belonged to his wife. Mr. Whitsett presented evidence that only his wife was charged criminally with possession of an
unauthorized substance.
ISSUES:
1. Did the Taxpayers have actual/or constructive possession of OxyContin without proper tax stamps affixed?
2. Are the Taxpayers subject to the assessment of unauthorized substance excise tax?
FINDINGS OF FACT
After considering the petition, brief, record and considering the arguments presented by the parties, the Board makes the
following finding of fact:
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
530
1. An Assessment of Unauthorized Substance Tax was made against the Taxpayers on September 17, 2001, in the sum of
$1,000.00 tax, $400.00 penalty and $6.67 interest, for a total proposed liability of $1,406.67, based upon the unlawful
possession of 43 dosages of OxyContin on September 2, 2001.
2. The Taxpayers made a timely objection and application for hearing.
3. The Assistant Secretary, after conducting the hearing, sustained the proposed tax assessment together with penalty and
interest as allowed by law.
4. The Taxpayers filed a timely notice of intent and petition for administrative review with the Board.
5. Based upon the record, the Taxpayers were not in constructive possession of 43 dosages of OxyContin on September 2,
2001.
CONCLUSIONS OF LAW
The Board reviewed the following conclusions of law made by the Assistant Secretary in his decision regarding this matter:
1. An assessment of tax is presumed to be correct.
2. The burden is upon the Taxpayer who objects to an assessment to overcome that presumption.
3. Pursuant to G.S. 105-113.109, a dealer who actually or constructively possesses an unauthorized substance in this State, upon
which the tax has not been paid, is required to purchase and affix the appropriate stamp. Tax is due from the dealer at the time the
dealer comes into possession of the unauthorized substance.
4. The Taxpayers, as a matter of law, are not dealers as that term is defined in G.S. 105-113.109 and are therefore not liable for the
proposed assessment issued against them on September 2, 2001, in the amount of $1,000 tax, together with penalty and interest.
DECISION
The scope of administrative review for petitions filed with the Tax Review Board is governed by G.S. 105-241.2(b2). After
the Board conducts a hearing, this statute provides in pertinent part:
(b2). "The Board shall confirm, modify, reverse, reduce or
increase the assessment or decision of the Secretary."
The Board having conducted an administrative hearing in this matter, and having considered the petition, the brief, the record
and the final decisions, concludes that the findings of fact contained in the Assistant Secretary's final decisions are not
supported by competent evidence in the record; that based upon the findings of fact, the Assistant Secretary's conclusions of
law were not fully supported by the findings of fact; therefore the Assistant Secretary's final decisions should be reversed.
WHEREFORE, THE TAX REVIEW BOARD ORDERS that the Assistant Secretary final decisions sustaining the
proposed tax assessment together with interest against the Taxpayers be and are hereby REVERSED.
Made and entered into the 21st day of August 2003.
TAX REVIEW BOARD
Signature
Richard H. Moore, Chairman
State Treasurer
Signature
Jo Anne Sanford, Member
Chair, Utilities Commission
Signature
Noel L. Allen, Attorney at Law
Appointed Member
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
531
STATE OF NORTH CAROLINA BEFORE THE
TAX REVIEW BOARD
COUNTY OF WAKE
IN THE MATTER OF:
The Proposed Assessment of Unauthorized )
Substance Tax dated August 6, 2001 by the )
Secretary of Revenue of North Caro lina )
) ADMINISTRATIVE DECISION
) Number: 414
vs. )
)
Robert Gordon Skwerer )
Taxpayer )
This Matter was heard before the Tax Review Board (hereinafter "Board") in the City of Raleigh, North Carolina, in the
office of the State Treasurer, on Tuesday, April 2003, upon Robert Gordon Skwerer (hereinafter "Taxpayer") petition for
administrative review of the Final Decision of Eugene J. Cella, Assistant Secretary for Administrative Hearings, of the North Carolina
Department of Revenue entered on May 23, 2002, sustaining the assessment of unauthorized substance tax for the period of August 6,
2001.
Chairman Richard H. Moore, State Treasurer, presided over the hearing with Jo Anne Sanford, Chair, Utilities Commis sion
and duly appointed member, Noel L. Allen, Attorney at Law participating.
Attorney David B. Freedman appeared at the hearing on behalf of the Taxpayer. Michael D. Youth, Associate Attorney
General, appeared at the hearing on behalf of the Secretary of Revenue.
Pursuant to G.S. 105-113.111(a) and G.S. 105-241.1, a Notice of Unauthorized Substance Tax Assessment was issued to the
Taxpayer by Enforcement Agent D.C. O'Dell, of the Unauthorized Substance Tax Division, assessing $23,300.00 tax, $9,320.00
penalty and $2,248.78 interest, for a total liability of $34,868.78. The assessment alleged that between May 11, 1999 and April 22,
2001, the Taxpayer, who was a licensed physician at all times relevant to the assessment, fraudulently obtained a total of 4,551
dosages of controlled substances, including alprazolam, lorazepam, clonazepam, dextroamphetamine, amphetamine, temazepam and
diazepam. The Taxpayer protested the assessment and requested a hearing before the Secretary of Revenue. On January 31, 2002,
Eugene J. Cella, Assistant Secretary, conducted a hearing upon Taxpayer's timely application and objection to the proposed
assessment. On May 23, 2002, the Assistant Secretary issued his final decision sustaining the proposed assessment, but reducing the
penalty against the Taxpayer by 50%. Thereafter, the Taxpayer timely filed a petition for administrative review of the final decision
with the Board.
ISSUES
The issues considered by the Board upon administrative review of this matter are stated as follows:
1. Did the Taxpayer have actual and/or constructive possession of alprazolam, lorazepam, clonazepam,
dextroamphetamine, amphetamine, temazepam and diazepam without the proper tax stamps affixed?
2. Is the Taxpayer subject to the assessment of unauthorized substance excise tax?
EVIDENCE
The evidence submitted to the Assistant Secretary and included in the record for the Board's review is stated as follows:
1. Form BD-10, "Notice of Unauthorized Substance Tax Assessment," dated August 6, 2001, designated as US-1.
2. Letter from the Taxpayer's attorney, dated August 29, 2001, requesting a hearing, designated as US-2.
3. Correspondence regarding the scheduling of the hearing, including the following:
§ Letter to the Taxpayer's attorney, dated September 17, 2001, advising him that his client's Administrative Tax
Hearing was scheduled for November 26, 2001.
§ Letter from the Taxpayer's attorney, dated October 26, 2001, requesting that the hearing be continued.
§ Letter to the Taxpayer's attorney dated October 31, 2001, advising him that the hearing had been rescheduled for
January 31, 2002.
4. Form BD-4, "Report of Arrest and/or Seizure Involving Nontaxpaid (Unstamped) Controlled Substances," which names
the Taxpayer as the possessor of the controlled substances, designated as US-4.
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
532
5. The Charlotte-Mecklenburg Police Department’s incident report, designated as US-5.
6. Memorandum from E. Norris Tolson, Secretary of Revenue, dated May 16, 2001, delegating to Eugene J. Cella,
Assistant Secretary of Administrative Hearings, the authority to hold any hearing required or allowed under Chapter 105
of the North Carolina General Statutes, designated as US-6.
FINDINGS OF FACT
The Board reviewed the following findings of fact in the Assistant Secretary's decision in this matter:
1. Assessment of Unauthorized Substance Tax was made against the Taxpayer on August 6, 2001, in the sum of $23,300.00 tax,
$9,320.00 penalty and $2,248.78 interest, for a total proposed liability of $34,868.78 based upon possession of a total of
4,551 dosages of prescription medicines containing the following controlled substances alprazolam, lorazepam, clonazepam,
dextroamphetamine, amphetamine, temazepam and/or diazepam.
2. The Taxpayer made a timely objection and application for hearing.
3. The Taxpayer admitted to having fraudulent prescriptions filled and using the pills for personal consumption.
4. Evidence that the Taxpayer was self-medicating his clinical depression and not selling the pills is sufficiently compelling to
justify a 50% reduction in the total amount of penalty assessed.
5. During the period of May 11, 1999, to April 22, 2001, the Taxpayer came into unauthorized possession of 4,551 dosages of
prescription medicines containing alprazolam, lorazepam, clonazepam, dextroamphetamine, amphetamine, temazepam and
diazepam, without proper tax stamps affixed thereto.
6. Each of the 90 fraudulent prescriptions was for ten or more dosage units.
CONCLUSIONS OF LAW
The Board reviewed the following conclusions of law made by the Assistant Secretary in his decision regarding this matter:
1. An assessment of tax is presumed to be correct.
2. The burden is upon Taxpayer who objects to an assessment to overcome that presumption, and this burden was partially met
with respect to the penalty.
3. Per G.S. 105-113.106 (3), defines "dealer" strictly in terms of the quantity of controlled substances possessed. There is no
requirement that the controlled substances be sold, delivered or in any way distributed to another pers on in order to be
designated a "dealer" under this statute.
4. During the period of May 11, 1999 to April 22, 2001, the Taxpayer came into unauthorized possession of 4,551 dosages of
prescription medicines containing alprazolam, lorazepam, clonazepam, dextroamphetamine, amphetamine, temazepam and/or
diazepam, without proper tax stamps affixed thereto. Each of the 90 discrete instances of possession was a taxable event
involving ten or more dosage units.
5. The Taxpayer is liable for tax in the sum of $23,300.00 and penalty in the sum of $4,660.00, plus accrued interest.
DECISION
The scope of administrative review for petitions filed with the Tax Review Board is governed by G.S. 105-241.2(b2). After
the Board conducts a hearing, this statute provides in pertinent part:
(b2). "The Board shall confirm, modify, reverse, reduce or
increase the assessment or decision of the Secretary."
Pursuant to G.S. 105-241.1(a), a proposed tax assessment is presumed to be correct and the burden is on the Taxpayer to
rebut that presumption. Since the Taxpayer failed to provide any evidence to overcome the presumption, the Assistant
Secretary properly determined that the Taxpayer possessed an unauthorized substance for the period of August 6, 2001.
Thus, the Board having conducted an administrative hearing in this matter, and having considered the petition, the briefs, the
whole record and the Assistant Secretary's final decision, concludes that the findings of fact made by the Assistant Secretary
were supported by competent evidence in the record; that based upon the findings of fact, the Assistant Secretary's
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
533
conclusions of law were fully supported by the findings of fact; therefore the decision of the Assistant Secretary should be
confirmed.
WHEREFORE, THE BOARD ORDERS that the Assistant Secretary's final decision be confirmed in every respect.
Made and entered into the 21st day of August 2003.
TAX REVIEW BOARD
Signature
Richard H. Moore, Chairman
State Treasurer
Signature
Jo Anne Sanford, Member
Chair, Utilities Commission
Signature
Noel L. Allen, Attorney at Law
Appointed Member
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
534
NOTICE OF RULEMAKING AND PUBLIC HEARING
NORTH CAROLINA BUILDING CODE COUNCIL
Notice is hereby given by the N.C. Building Code Council in accordance with G.S. 150B-21.5(d).
Citation to Existing Rule Affected by this Rule-Making: North Carolina Building Code and North Carolina Fire Prevention Code.
Authority for the Rule-making: G.S. 143-136; 143-138.
Reason for Proposed Action: To incorporate changes in the NC Building Code as a result of rulemaking petitions filed with the N.C.
Building Code Council and incorporate changes proposed by the Council.
Public Hearing: December 9, 2003, 1:00 p.m., Wake County Commons, 4011 Carya Drive, Raleigh, N.C.
Comment Procedures: Written comments may be sent to Wanda Edwards, Secretary, N.C. Building Code Council, c/o N.C.
Department of Insurance,322 Chapanoke Road, Suite 200, Raleigh, NC 27603. Comment period expires on December 9, 2003.
Statement of Subject Matter:
1. Revise Section 903.3.1.1 of the North Carolina Fire Prevention Code and the North Carolina Building Code as follows:
903.3.1.1 NFPA 13 sprinkler systems. Where the provisions of this code require that a building or portion thereof be
equipped throughout with an automatic sprinkler system, sprinklers shall be installed throughout in accordance with NFPA
13 except as provided in Section 903.3.1.1.1. 903.3.1.2, 903.3.1.3.
This change is proposed for clarification.
2. Revise Section 907.2.3, Exception 1, of the North Carolina Fire Code and the North Carolina Building Code as follows:
907.2.3 Group E. A manual fire alarm system shall be installed in Group E occupancies. When automatic sprinkler systems or
smoke detectors are installed, such systems or detectors shall be connected to the building fire alarm system.
Exceptions:
1. Group E occupancies with an occupant load of less than 50.
2. Manual fire alarm boxes are not required in Group E occupancies where all the following apply:
2.1 Interior corridors are protected by smoke detectors with alarm verification.
2.2 Auditoriums, cafeterias, gymnasiums and the like are protected by heat detectors or other approved detection
devices.
2.3 Shops and laboratories involving dusts or vapors are protected by heat detectors or other approved detection
devices.
2.4 Off-premises monitoring is provided.
2.5 The capability to activate the evacuation signal from a central point is provided.
2.6 In buildings where normally occupied spaces are provided with a two-way communication system between
such spaces and a constantly attended receiving station from where a general evacuation alarm can be sounded,
except in locations specifically designated by the building official.
This change makes the code consistent with 1999 code.
3. Revise Section 2206.2.3, #2 of the North Carolina Fire Prevention Code as follows:
2206.2.3 Above -ground tanks located outside, above grade. Above-ground tanks shall not be used for the storage of Class
I, II, or IIIA liquid motor fuels except as provided by this section.
1. Above-ground tanks used for outside, above-grade storage of Class I liquids shall be listed and labeled as protected
above-ground tanks and be in accordance with Chapter 34. Such tanks shall be located in accordance with Table
2206.2.3.
2. Above-ground tanks used for above-ground storage of Class II or IIIA liquids are allowed to be protected above-ground
tanks or, when approved by the code official, other above-ground tanks that comply with Chapter 34. Tank
locations shall be in accordance with Table 2206.2.3.
Fleet Vehicle Service Stations:
IN ADDITION
18:08 NORTH CAROLINA REGISTER October 15, 2003
535
When approved by the code official, above-ground storage tanks, 1,100 gallons or less in capacity, may be used to
store Class I liquids at fleet vehicle service stations in accordance with NFPA 30A.
3. Tanks containing motor fuels shall not exceed 12,000 gallons (45,420 L) in individual capacity or 48,000 gallons
(181,680 L) in aggregate capacity. Installations with the maximum allowable aggregate capacity shall be separated
from other such installations by not less than 100 feet (30,480 mm).
3. Above-ground tanks used for above-ground storage of Class II or IIIA liquids are allowed to be protected above-ground
tanks or, when approved by the code official, other above-ground tanks that comply with Chapter 34. Tank
locations shall be in accordance with Table 2206.2.3.
4. Tanks located at farms, construction projects, or rural areas shall comply with Section 3406.2.
4. Tanks containing motor fuels shall not exceed 12,000 gallons (45,420 L) in individual capacity or 48,000 gallons
(181,680 L) in aggregate capacity. Installations with the maximum allowable aggregate capacity shall be separated
from other such installations by not less than 100 feet (30,480 mm).
5. Tanks located at farms, construction projects, or rural areas shall comply with 3406.2.
This code change is proposed for clarification.
4. Revise Section 106 of the North Carolina Fire Prevention Code as follows:
Section 106: Modify the Inspection Schedule only. All other portions remain unchanged.
Once every year Hazardous, Institutional, HighRise, Assembly except those noted below and
Residential except one and two family dwellings and only interior common
areas of dwelling units of multi-family occupancies
Once every two years Industrial and Educational (Except public schools)
Once every three years Assembly occupancies with an occupant load less than 100, Business,
Mercantile, Storage, Churches and Synagogues
The 2002 code requires many establishments to be inspected yearly that were inspected every three years under the 1999 code. This
change would make the current code consistent with the 1999 code.
5. Revise Section 1616.3 of the North Carolina Building Code as follows:
Section 1616.3 Determination of seismic design category. All structures shall be assigned to a seismic design category based
on their seismic use group and the design spectral response acceleration coefficients, SDS and SD1, determined in accordance with
Section 1615.1.3 or 1615.2.5. Each building and structure shall be assigned to the most severe seismic design category in
accordance with Table 1616.3(1) or 1616.3(2) irrespective of the fundamental period of vibration of the structure, T.
Exception: The seismic design category is permitted to be determined from Table 1616.3(1) alone when all of the following
apply:
1. the approximate fundamental period of the structure Ta, in each of the two orthogonal directions determined in
accordance with Section 1617.4.2.1 is less than 0.8Ts determined in accordance with Section 1615.1.4, and
2. equation 16-35 is used to determine the seismic response coefficient, Cs and
3. the diaphragms are rigid as defined in Section 1602.
This change has been approved as a tempor