NORTH CAROLINA
REGISTER
Volume 17, Issue 1
Pages 1 - 112
July 1, 2002
This issue contains documents officially filed through June 10, 2002.
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. IN ADDITION
Revenue - Tax Review Board.................................1 - 18
II. RULE-MAKING PROCEEDINGS
Agriculture
Veterinary Division..............................................19
Health and Human Services
Health Services, Commission for.........................19
III. PROPOSED RULES
Environment and Natural Resources
Environmental Management................................47 - 72
Wildlife Resources Commission..........................72
Health and Human Services
Facility Services...................................................21 - 26
Medical Assistance...............................................26 - 43
Medical Care Commission...................................20 - 21
Insurance
Home Inspector Licensure Board.........................43 - 46
Labor
Elevator and Amusement Device Bureau.............46 - 47
IV. TEMPORARY RULES
Administration
State Construction................................................73 - 76
Commerce
Banks, Commissioner of......................................76 - 78
Environment and Natural Resources
Environmental Management................................79 - 80
Radiation Protection.............................................81
Wildlife Resources Commission..........................80 - 81
Health and Human Services
Facility Services...................................................78 - 79
Health Services, Commission for.........................81 - 91
V. CONTESTED CASE DECISIONS
Index to ALJ Decisions............................................92
Text of Selected Decisions
00 OSP 1216.........................................................93 - 102
01 OSP 1612.........................................................103 - 112
01 OSP 1388.........................................................93 - 102
VI. CUMULATIVE INDEX........................................1 - 48
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
10
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
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
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19
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21
22
26
28
30
31
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44
45
46
48
50
52
53
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56
57
58
60
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62
63
69
64
68
65
66
Note: Title 21 contains the chapters of the various occupational licensing boards. 16:13
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NORTH CAROLINA REGISTER
Publication Schedule for January 2002 – December 2002
Filing Deadlines
Notice of
Rule-Making Proceedings
Notice of Text
Temporary Rule
volume & issue number
issue date
last day for filing
earliest register issue for publication of text
earliest date for public hearing
end of
required comment period
deadline to
submit to RRC
for review at
next meeting
first legislative
day of the next
regular session
end of
required
comment
period
deadline to submit to RRC
for review at
next meeting
first legislative
day of the next
regular session
270th day from issue date
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non-substantial economic impact
substantial economic impact
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 RULE-MAKING PROCEEDINGS
END OF COMMENT PERIOD TO A NOTICE OF RULE-MAKING PROCEEDINGS: This date is 60 days from the issue date. An agency shall accept comments on the notice of rule-making proceeding until the text of the proposed rules is published, and the text of the proposed rule shall not be published until at least 60 days after the notice of rule-making proceedings was published.
EARLIEST REGISTER ISSUE FOR PUBLICATION OF TEXT: The date of the next issue following the end of the comment period.
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 30 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.
IN ADDITION
17:01 NORTH CAROLINA REGISTER July 1, 2002
1
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.
STATE OF NORTH CAROLINA BEFORE THE
TAX REVIEW BOARD
COUNTY OF WAKE
IN THE MATTER OF:
The Proposed Assessment of Unauthorized )
Substance Tax dated February 2, 2001 by )
the Secretary of Revenue of North Carolina )
) ADMINISTRATIVE DECISION
) Number: 380
vs. )
)
Timmie Joe Tucker )
Taxpayer )
This matter was heard before the Tax Review Board (hereinafter "Board") in the City of Raleigh, North Carolina on Thursday, February 14, 2002, upon Timmie Joe Tucker's (hereinafter "Taxpayer") petition for administrative review of the Final Decision of the Assistant Secretary of Revenue entered on September 13, 2001, sustaining the assessment of unauthorized substance tax for the period of February 2, 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. David J. Adinolfi, II, Associate 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 on February 2, 2001. The notice related to a proposed assessment of tax, penalty and interest in the amount of $1,748.53 based upon the possession of 23.8 grams of cocaine. At the request of Taxpayer's counsel, the administrative hearing was conducted via written communication in lieu of meeting in person. The written record upon which the Assistant Secretary based his decision was closed on July 12, 2001. On September 13, 2001, the Assistant Secretary entered his decision that sustained the proposed assessment. Thereafter, the Taxpayer, through counsel, timely filed a notice and petition for administrative review of the Assistant Secretary's final decision with the Tax Review 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 cocaine without the proper stamps affixed?
2. Is the Taxpayer subject to the assessment of unauthorized substance tax?
EVIDENCE
The evidence submitted to the Assistant Secretary and included in the record for the Board's review is stated as follows:
1. US-1 Form BD-10, Notice of Unauthorized Substance Tax Assessment, dated February 2, 2001.
2. US-2 Letter from the Taxpayer's attorney, dated February 26, 2001, requesting a hearing.
3. US-3 Letter to the Taxpayer's attorney, dated March 29, 2001, advising him that his client's Administrative Tax Hearing was scheduled for June 29, 2001.
4. US-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.
5. US-5 Investigation report by the Guilford County Sheriff's Office, including the SBI lab report. IN ADDITION
17:01 NORTH CAROLINA REGISTER July 1, 2002
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6. US-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.
The Taxpayer, through counsel, submitted a letter and three documents to present the Taxpayer's objection to the unauthorized substance tax assessment.
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 February 2, 2001, in the sum of $1,200.00 tax, $480.00 penalty and $68.53 interest, for a total proposed liability of $1,748.53, based on possession of 23.8 grams of cocaine.
2. The Taxpayer made a timely objection and application for a hearing.
3. On May 19, 2000, the Taxpayer possessed 23.8 grams of cocaine.
4. No tax stamps were purchased for or affixed to the cocaine as required by law.
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 and that burden was not met.
3. Liability for the Unauthorized Substance Excise Tax is created by possession, not ownership, of a controlled substance.
4. The Taxpayer possessed 23.8 grams of cocaine on May 19, 2000 and was therefore a dealer as that term is defined in G.S. 105-113.106(3).
5. The Taxpayer is liable for $1,200.00 tax, $480.00 penalty and 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 G.S. 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. Since the Taxpayer failed to provide any evidence to overcome the presumption, the assessment is correct.
The Board having conducted a hearing in this matter and having considered the petition, the brief, the final decision and the documents of record, concludes that the Assistant Secretary properly sustained the proposed assessment against the Taxpayer in this matter.
WHEREFORE, THE BOARD ORDERS that the Assistant Secretary's final decision be confirmed in every respect.
Made and entered into the ___17__ day of April 2002.
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
17:01 NORTH CAROLINA REGISTER July 1, 2002
3
STATE OF NORTH CAROLINA BEFORE THE
TAX REVIEW BOARD
COUNTY OF WAKE
IN THE MATTER OF:
The Proposed Corporate ) Franchise and Income Tax ) Assessments for the Fiscal )
Years of January 31, 1992 )
through January 31, 1994 )
by the Secretary of Revenue )
of North Carolina )
) ADMINISTRATIVE DECISION
vs. ) Number: 381 )
A&F Trademark, Inc., ) Caciqueco, Inc., ) Expressco, Inc., )
Lanco, Inc., )
Lernco, Inc., )
Limco Investments, Inc., )
Limtoo, Inc., )
Structureco, Inc. )
V. Secret Stores, Inc. )
This matter was heard before the Tax Review Board (hereinafter "Board") in the City of Raleigh, Wake County, North Carolina, in the office of the State Treasurer on Thursday, February 14, 2002, upon the Petition of A&F Trademark, Inc., Caciqueco, Inc., Expressco, Inc., Lanco, Inc., Lernco, Inc., Limco Investments, Inc., Limtoo, Inc., Structureco, Inc., and V. Secret Stores, Inc. ("hereinafter Taxpayers") for administrative review of the Final Decision of Michael A. Hannah, Assistant Secretary of the North Carolina Department of Revenue, entered on September 19, 2000, sustaining the Department's proposed assessment of corporate franchise and income taxes for fiscal year ended January 31, 1994.
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.
Paul H. Frankel, Hollis L. Hyans, and Craig B. Fields of Morrison & Foerster, LLP, and Jasper L. Cummings, Jr., of Alston & Bird, LLP represented the Taxpayers at the hearing. Kay Miller Hobart, Assistant Attorney General, represented the Secretary of Revenue at the hearing.
STATEMENT OF FACTS
The Taxpayers are nine wholly-owned subsidiaries of the Limited Stores, Inc. (the "Limited") an Ohio corporation. The Limited also owns 100% of eight retail companies. Those companies are: Lane Bryant, Inc.; Lerner, Inc.; Victoria's Secret, Inc., Cacique, Inc.; Abercrombie & Fitch, Inc.; Limited Too, Inc.; Express, Inc.; and Structure, Inc.
The Limited and the wholly-owned eight retail subsidiaries are doing business in North Carolina and pay corporate income and franchise taxes here. During the year at issue, the Limited and the eight retail subsidiaries operated over 130 retail locations in North Carolina.
Taxpayers were incorporated in Delaware to hold the trademarks owned by the Limited and the related retail companies. The marks owned by the Taxpayers include "The Limited," "Limited Too," "Victoria's Secrets," "Express," "Structure," "Cacique," "Abercrombie and Fitch," "Lane Bryant," and "Lerner." The marks are a form of intangible personal property. The Taxpayers do not own or lease any real property or tangible personal property in any state except Delaware. The Taxpayers have no employees in any state. The Taxpayers received the marks they own in separate I.R.C. Section 351 tax-free exchanges with the related retail companies. In these exchanges, the related retail companies transferred the marks to the Taxpayers for little or no consideration. The Taxpayers then entered into a licensing agreement with the corresponding related retail companies. The licensing agreements authorized the related retail companies to continue to use the marks they had previously owned in exchange for royalty payments to the Taxpayers. These agreements required the retail stores to pay Taxpayers a royalty fee based on the percentage of the retail companies' gross sales. The Limited and the related retail companies deducted these royalty payments from their income for North Carolina tax purposes. IN ADDITION
17:01 NORTH CAROLINA REGISTER July 1, 2002
4
Taxpayers then loaned these royalty payments back to the related companies for use in their retail operations. Taxpayers charged the retail companies a market rate of interest, which generated further deductions for the related retail companies.
Taxpayers did not pay any income tax to any state on any of the income received from the related retail companies. For the year at issue (1994), Taxpayers recorded $301,067,619 in royalty income and $122,031,344 in interest income from the related retail companies. This accounted for 100% of Taxpayers' income.
STATEMENT OF CASE
The Department of Revenue issued proposed notices of tax assessments, which the Taxpayers protested. On June 9, 10, and June 11, 1998, a three-day administrative hearing was held before Michael A. Hannah, the Assistant Secretary of Revenue. On September 19, 2000, the Assistant Secretary issued the Final Decision. In the Final Decision, the Assistant Secretary cancelled the assessments for the Taxpayers' fiscal years ended January 31, 1992 and January 31, 1993, which were fiscal years that began prior to the November 2, 1992 effective date of the Administrative Rule. The Assistant Secretary also waived all penalties asserted by the Department of Revenue against the Taxpayers. However, the Assistant Secretary sustained the Department of Revenue's assessment of corporate franchise and income tax against the Taxpayers for the fiscal year ended January 31, 1994. In this Final Decision, the Assistant Secretary concluded that the Taxpayers were doing business in North Carolina. He also concluded that the contractual relationship between the Taxpayers and their Licensees created an agency relationship and that all of the activities that the Licensees were required to perform under the license agreements were attributable to Taxpayers. Additionally, the Assistant Secretary concluded that Taxpayers were "excluded corporations" under G.S. 105-130.4(a)(4), and are therefore required to use a single sales factor as their apportionment formula under G.S. 105-130.4(r) & (l). The Assistant Secretary also determined that the Taxpayers could be required to be included in combined reports with their related Licensees. On December 15, 2000, Taxpayers filed with the Board a Petition for Administrative Review of the Final Decision pursuant to G.S. 105-241.2.
ISSUES
The issues considered by the Board upon administrative review of this matter are stated as follows:
1. Whether the Taxpayers were "doing business" in this State within the meaning of G.S. 105-130.3 and G.S. 105-114 so as to be subject to the corporate income and franchise tax.
2. Whether the Taxpayers were "excluded corporations" within the meaning of G.S. 105-130.4(a)(4).
EVIDENCE
The evidence presented at the hearing before the Assistant Secretary of Revenue and included in the record for the Board's review is attached as Exhibit A and is incorporated by reference herein.
FINDINGS OF FACT
The Board reviewed the following findings of facts made by the Assistant Secretary in his final decision:
1. The Taxpayers are nine non-domiciliary corporations headquartered in Delaware.
2. The Taxpayers are wholly-owned subsidiaries of the Limited, Inc. ("Limited").
3. The Limited is primarily engaged in the nationwide retail sale of men's, women's, and children's clothing and accessories.
4. The Limited's principal place of business and commercial domicile is located in Columbus, Ohio.
5. The Limited started in business in 1963 and has expanded to over 5,000 stores nationwide and 12 separate retail operating subsidiaries.
6. The Limited and its retail operating subsidiaries ("related retail companies") own and operate all of their stores; none are franchised.
7. The Taxpayers own and license trademarks, tradenames, and service marks ("marks") and the goodwill associated with these marks to the Limited and its related retail companies, nine of which are located in North Carolina.
8. The nine related retail companies operating in North Carolina are: (1) The Limited Stores, Inc.; (2) Cacique, Inc.; (3) Express, Inc.; (4) Lane Bryant, Inc.; (5) Lerner, Inc.; (6) Limited Too, Inc.; (7) Structure, Inc.; (8) Victoria's Secret, Inc.; and (9) Abercrombie & Fitch.
9. The nine related retail companies operating in North Carolina have over 130 retail locations in North Carolina; these companies extensively use the Taxpayers' marks at these locations.
10. The marks owned by the Taxpayers were all previously owned by either the Limited or one of the Limited's related retail companies.
11. The Taxpayers license their marks to the nine related retail companies operating in North Carolina as follows:
IN ADDITION
17:01 NORTH CAROLINA REGISTER July 1, 2002
5
Taxpayer Related Retail Company
Limco Investments, Inc. The Limited, Inc.
Caciqueco, Inc. Cacique, Inc.
Expressco, Inc. Express, Inc.
Lanco, Inc. Lane Bryant, Inc.
Lernco, Inc. Lerner, Inc.
Limtoo, Inc. Limited Too, Inc.
Structureco, Inc. Structure, Inc.
V. Secret Stores, Inc. Victoria's Secret, Inc.
A&F Trademark, Inc. Abercrombie & Finch, Inc.
12. The structure of the Limited, the Taxpayers, and the related retail companies is illustrated on the following chart:
IN ADDITION
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Lernco, Inc.
Owns the mark “Lerner” and licenses it to Lerner, Inc.
V. Secret Stores, Inc.
Owns the mark “Victoria’s Secret” and licenses it to Victoria’s Secret, Inc.
Limco Investments, Inc.
Owns the marks “The Limited,” “Limited Express,” and “Limited Too;” licenses the mark “The Limited” to The Limited, Inc; licenses the mark “Limited Express” to Expressco, Inc.; and licenses the mark “Limited Too” to Limtoo, Inc.
A&F Trademark, Inc.
Owns the mark “Abercrombie & Fitch” and licenses it to Abercrombie & Fitch, Inc.
Caciqueco, Inc.
Owns the mark “Cacique” and licenses it to Cacique, Inc.
Limtoo, Inc.
Is licensed by Limco to use "Limited Too” mark; in turn, licenses the mark to Limited Too, Inc.
Expressco, Inc.
Is licensed by Limco to use “Express” mark; in turn, licenses the mark to Express, Inc.
Structureco, Inc.
Owns the mark “Structure” and licenses it to Structure, Inc.
Lanco, Inc
Owns the mark “Lane Bryant” and licenses it to Lane Bryant, Inc.
Lerner, Inc.
Related retail company acquired by The Limited, Inc.
Victoria’s Secret, Inc.
Related retail company acquired by The Limited, Inc.
Abercrombie & Fitch, Inc.
Related retail company acquired by The Limited, Inc.
Cacique, Inc.
Related retail company and former division of Limited, Inc.
Limited Too, Inc.
Related retail company and former division of Limited, Inc.
Express, Inc.
Related retail company and former division of Limited, Inc.
Structure, Inc.
Related retail company and former division of Express, Inc.
Lane Bryant, Inc.
Related retail company acquired by The Limited, Inc.
The Limited, Inc.
(formerly The Limited Stores, Inc.) IN ADDITION
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13. The Taxpayers purposefully utilize at least 130 retail locations in North Carolina to prominently display their marks, advertise apparel bearing their marks, and avail themselves of the North Carolina marketplace.
14. The Taxpayers' marks are permanently affixed to the 130 retail locations throughout North Carolina.
15. The related retail companies filed North Carolina franchise and income tax returns for the tax years January 1992 through January 1994 pursuant to G.S. 105-130 et seq.
16. The related retail companies reduced their North Carolina tax liability by deducting accrued royalty and interest expenses "paid" by journal entries to Taxpayers, thus producing substantial tax savings.
17. The Taxpayers accrued royalty and interest income on their books for tax years 1992 through 1994.
18. The Taxpayers did not file North Carolina franchise or income tax returns for tax years 1992 through 1994.
19. The Taxpayers did not pay any corporate income tax in Delaware or in any other state on their substantial royalty income and interest income deducted by the related retail companies.
Creation of Taxpayers
20. In its early years of operation, the Limited developed and cultivated intangible intellectual property including trademarks, tradenames, service marks, and associated goodwill.
21. Mr. Frank Colucci, Taxpayers' trademark counsel, testified that a trademark as defined under trademark law is "any name, word, symbol or device which one manufacturer or provider of services uses to distinguish his goods or services from like goods or services of another." (T. 6/9/98, p. 232).
22. The Limited incurred substantial expenses in the development of its marks. The expenses were deducted from the Limited's gross income in the determination of its federal taxable income.
23. The Limited's North Carolina taxable income was also reduced by the expenses associated with the development of its marks because the Limited's North Carolina net income was based on its federal taxable income.
24. The value and significance of the trademark "The Limited" increased as the number of the Limited's stores increased.
25. All of the Limited's marks were registered, monitored, policed, and defended against infringement by the Limited's own in-house legal counsel prior to the formation of Taxpayers.
26. Officers of the Limited, including Mr. Kenneth Gilman, the Executive Vice-President and Chief Financial Officer of the Limited, concluded that the creation of a separate trademark holding company was the best way to protect the trademark from being "knocked off." (T. 6/9/98, p. 45).
27. The Limited's Board of Directors authorized the establishment of a separate trademark company to hold the trademark "The Limited."
28. On December 19, 1980, Articles of Incorporation were filed with the Delaware Secretary of State incorporating Limco Investments, Inc. ("Limco").
29. Limco held its first Board of Directors' meeting on January 29, 1981.
30. At this meeting, the Board authorized a tax-free exchange of assets for stock between the Limited and Limco in accordance with I.R.C. § 351, which is a common method of capitalizing subsidiaries.
31. Also on January 29, 1981, Limco issued 100 shares of its common stock, par value $1.00 per share, to the Limited for $100. In addition, the Limited made a $10,000 capital contribution to Limco.
32. The Limited became the sole shareholder of Limco.
33. By written Assignment dated January 28, 1981 The Limited assigned its marks and associated goodwill to Limco.
34. The Limited received little or no consideration for the transfer of its marks and goodwill to Limco.
35. The Limited did not have its trademark valued by a third party for a determination of the trademark's actual worth before assigning the trademark to Limco.
36. Both Limco and the Limited filed registration statements with the United States Patent and Trademark Office reporting the change in ownership of the trademark "The Limited" together with the goodwill established by the trademark from the Limited to Limco.
37. Limco did not register the trademark "The Limited" with the North Carolina Secretary of State's Office.
38. On January 29, 1981, the same day that the Limited assigned its marks and related goodwill to Limco, Limco and the Limited entered into a licensing agreement whereby Limco granted the Limited the right to use its marks in the Limited's retail operations.
39. Limco received, under the terms of the licensing agreement, royalties in the amount of 5% of the Limited's retail sales.
40. On January 29, 1981, the same day that the Limited assigned its marks and related goodwill to Limco, Limco and the Limited entered into a loan agreement whereby Limco agreed to loan the Limited money on a secured or unsecured basis, in an amount not to exceed $2,000,000. The loan agreement required the Limited to repay Limco any outstanding loan balance in 90 days and required the Limited to accrue and pay interest at the current prime rate.
41. The Limited acquired several retail establishments specializing in varying areas of apparel and began to operate these companies as wholly-owned subsidiaries. The acquired retail companies were: (1) Lane Bryant, Inc. ("Lane Bryant"), specializing in apparel for large size women; (2) Victoria's Secret, Inc. ("Victoria's Secret"), specializing in ladies' lingerie; (3) Lerner, Inc. ("Lerner"), specializing in women's apparel at a budget price; and (4) Abercrombie & Fitch, Inc. ("Abercrombie & Fitch"), specializing in upscale, casual clothing.
42. The marks owned by each of the acquired retail companies had name recognition and associated goodwill prior to acquisition of the retail companies by the Limited. IN ADDITION
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43. The Limited created separate trademark companies in a manner consistent with the tax-free creation of Limco.
44. The trademark holding company, Lanco, Inc. ("Lanco"), was incorporated in Delaware on December 15, 1982.
45. The retail company, Lane Bryant, assigned its trademark "Lane Bryant," together with the goodwill of the business symbolized by the trademark, to Lanco by a written Assignment recorded with United States Patent and Trademark Office.
46. Lane Bryant received little or no consideration from Lanco for its trademarks.
47. Lane Bryant did not have its trademark valued by a third party for a determination of the trademark's actual worth before assigning the trademark to Lanco.
48. The trademark holding company, Lernco, Inc. ("Lernco"), was incorporated in Delaware on May 2, 1985.
49. The retail company, Lerner, assigned its trademark "Lerner," together with the goodwill of the business symbolized by the trademark, to Lernco by written Assignment recorded with the United States Patent and Trademark Office.
50. Lerner did not have its trademark valued by a third party for a determination of the trademark's actual worth before assigning the trademark to Lernco.
51. Lerner received little or no consideration from Lernco for its trademarks.
52. The trademark holding company, A&F Trademark, Inc. ("A&F Trademark"), was incorporated in Delaware on February 2, 1988.
53. The retail company, Abercrombie & Fitch, assigned its trademark "Abercrombie & Fitch," together with the goodwill of the business symbolized by the trademark, to A&F Trademark by written Assignment recorded with the United States Patent and Trademark Office.
54. Abercrombie & Fitch received little or no consideration from A&F Trademark for its trademarks.
55. Abercrombie & Fitch did not have its trademark valued by a third party for a determination of the trademark's actual worth before assigning the trademark to A&F Trademark.
56. The trademark holding company, V. Secret Stores, Inc. ("V. Secret"), was incorporated in Delaware on December 1, 1988.
57. The retail company, Victoria's Secret, assigned its trademark "Victoria's Secret," together with the goodwill of the business symbolized by the trademark, to V. Secret by written Assignment recorded with the United States Patent and Trademark Office.
58. Victoria's Secret received little or no consideration from V. Secret for its trademarks.
59. Victoria's Secret did not have its trademark valued by a third party for a determination of the trademark's actual worth before assigning the trademark to V. Secret.
60. In addition to acquiring retail companies, the Limited developed its own retail companies by incorporating various business segments or divisions operated by the Limited. The retail divisions incorporated as wholly-owned subsidiaries of the Limited were: (1) Express, Inc. ("Express"), specializing in younger women's apparel; (2) Cacique, Inc. ("Cacique"), specializing in an older, more sophisticated type of lingerie; and (3) Limited Too, Inc. ("Limited Too"), specializing in clothing for young girls.
61. The trademark holding company, Expressco, Inc. ("Expressco"), was incorporated in Delaware on September 9, 1987.
62. On September 10, 1987, Expressco issued 100 shares of its common stock, par value $1.00 per share, to the trademark holding company, Limco, in exchange for $100. In addition, Limco made a $20,000 capital contribution to Expressco.
63. Also on September 10, 1987, Limco granted Expressco a non-exclusive license to use the tradename "Limited Express" or "Express" and the right to sub-license these tradenames to other companies.
64. Limco did not charge Expressco any royalty fee for the use of its mark "Express."
65. Limco did not have its trademark valued by a third party for a determination of the trademark's actual worth before licensing the trademark to Expressco.
66. The trademark holding company, Limtoo, Inc. ("Limtoo"), was incorporated in Delaware on August 1, 1991.
67. On December 31, 1991, Limtoo issued 100 shares of its common stock, par value $1.00 per share, to the trademark holding company, Limco, in exchange for $100. In addition, Limco made a $10,000 capital contribution to Limtoo.
68. Limco became the sole shareholder of Limtoo.
69. On September 9, 1991, Limco granted to Limtoo a non-exclusive license to use the trademark "Limited Too".
70. Limtoo licensed the tradename "Limited Too" from Limco, the Limited's wholly-owned subsidiary that owned the trademark.
71. Limco did not charge Limtoo any royalty fee for the use of its mark "Limited Too".
72. Limco did not have its trademark valued by a third party for a determination of the trademark's actual worth before licensing the trademark to Limtoo.
73. The trademark holding company, Structureco, Inc. ("Structureco"), was incorporated in Delaware on August 1, 1991.
74. On December 11, 1991, Structureco issued 100 shares of its common stock, par value $1.00 per share, to Express for $100. In addition, Express made a $20,000 capital contribution to Structureco.
75. Express is the sole shareholder of both Structure and Structureco.
76. On December 11, 1991, Express assigned the trademark "Structure" together with its associated goodwill to Structureco.
77. Also on December 11, 1991, Structureco licensed the tradename "Structure" to Express under the terms of a Related Company Agreement.
78. Structureco did not charge Express any royalty fee for the use of its mark "Structure".
79. Structureco did not have its trademark valued by a third party for a determination of the trademark's actual worth before licensing the trademark to Express or Structure.
80. The trademark holding company Caciqueco, Inc. ("Caciqueco") was incorporated in Delaware on August 1, 1991. IN ADDITION
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81. On September 9, 1991, Caciqueco issued 100 shares of its common stock, par value $1.00 per share, to the Limited for $100. In addition, the Limited made a $10,000 capital contribution to Caciqueco.
82. Also on September 9, 1991, the Limited assigned to Caciqueco the trademark "Cacique" together with its associated goodwill.
83. On January 1, 1991, Caciqueco licensed the trade name "Cacique" to Cacique under the terms of a Related Company Agreement.
84. The Limited did not have its trademark valued by a third party for a determination of the trademark's actual worth before assigning the trademark to Caciqueco.
85. All corporate formalities required by Delaware laws were observed in the creation of each Taxpayer.
86. Taxpayer and its corresponding related retail companies properly filed registration statements with the United States Patent and Trademark Office indicating the transfer to the Assignee of the right, title, and interest in the trademarks together with the goodwill of the business connected with the use of the marks.
87. The Taxpayers did not register their trademarks or tradenames with the North Carolina Secretary of State, relying instead on the registrations with the United States Patent and Trademark Office.
88. Upon the creation or acquisition of each Taxpayer and the tax-free assignment or grant of a license to use or sublicense the marks, each Taxpayer would license or sublicense the use of the marks back to the respective related retail company pursuant to a related company licensing agreement.
89. Each related company licensing agreement followed the format established by the original Limco licensing agreement.
90. Each related company licensing agreement entered into between a Taxpayer and the related retail company gave the related retail company a non-exclusive license to use the Taxpayer's trademarks, tradenames, service marks, and associated goodwill in its retail operations throughout the United States.
91. Each related company licensing agreement required the related retail company to pay the Taxpayer a set royalty fee based upon the related retail company's retail sales.
92. The related retail companies used Taxpayers' trademarks, tradenames, and service marks and their associated goodwill in North Carolina to promote and enhance their business in North Carolina.
93. Mr. Kenneth Gilman, President of all the Taxpayers, testified that Taxpayers' trademarks were sewn in the label of the clothes sold at the retail locations in North Carolina. (T. 6/9/98, p. 75).
94. The Taxpayers' marks were used by the related retail companies located in North Carolina in their store layout, their merchandising, and their advertising.
95. The Taxpayers' ownership of the marks did not affect the use of the marks in North Carolina in the eyes of the public consumer who continued to purchase apparel from the retail locations and who were unaware that the marks had been assigned to Taxpayers.
96. Mr. Kenneth Gilman testified that there were no changes in the relationship of the customer and the related retail companies as a result of the assignment of the marks to Taxpayers. (T. 6/9/98, pp. 149-150).
97. Mr. Kenneth Gilman testified that as long as a related retail company operated in accordance with the licensing agreements, the day-to-day operations of the related retail company did not change with the creation of Taxpayers and the assignment of the marks. (T. 6/9/98, pp. 148-149).
98. Neither the Taxpayers nor any of the related retail companies made any public announcements notifying the public of either the formation of Taxpayers or the assignment of the marks to Taxpayers.
99. The shareholders of the Limited were not notified that the marks and the goodwill associated with the marks had been assigned to Taxpayers.
100. Employees of the related retail companies were not notified that the marks and goodwill associated with the marks had been assigned to Taxpayers.
101. After the assignment of the marks, Taxpayers depended upon the same consumer recognition and customer loyalty for the production of their income that had existed prior to the transfer of the marks.
102. At no time during the audit period did the Limited's annual reports or its Form 10-Ks disclose the formation of Taxpayers or the transfer to Taxpayers of marks valued at approximately $1.2 billion dollars.
103. The Limited's January 30, 1993, Form 10-K included a footnote "A," which reads: "[T]he names of certain subsidiaries are omitted since such unnamed subsidiaries considered in the aggregate as a single subsidiary would not constitute a significant subsidiary as of January 30, 1993."
104. The Taxpayers were not listed as subsidiaries of the Limited on the January 30, 1993 Form 10-K.
105. Mr. Kenneth Gilman testified that the intercompany transactions occurring during the audit period between Taxpayers (producing over $1 billion in income) and the related retail companies (producing over $203 million in losses) were not significant enough to be disclosed in the footnotes of the Limited's annual report financial statements. (T. 6/9/98, pp. 117-123).
Organization of Taxpayers
106. Each of the Taxpayers elected a Board of Directors, the composition of which changed from time to time during the audit period
107. The Board of Directors was generally the same for each Taxpayer.
108. The Taxpayers' Board of Directors consisted of Mr. Kenneth Gilman, President, Mr. Louis Black, an attorney, Mr. Roger Thompson, a banking executive, and Mr. Edward Jones, an accountant from Delaware Corporate Management. IN ADDITION
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109. Mr. Kenneth Gillman testified that he did not believe that he had attended a board meeting of the Taxpayers in over 10 years. (T. 6/9/98, p. 160).
110. Mr. Kenneth Gillman testified that he delegated his responsibilities as board member of the Taxpayers to Mr. Tim Lyons, Vice-President of Taxes for the Limited. (T. 6/9/98, pp. 56-57).
111. The Taxpayers compensated Board members not associated with the Limited for board meetings attended but did not compensate the Board members directly employed by the Limited.
112. Mr. Kenneth Gilman testified that neither he nor Mr. Tim Lyons as executives of the Limited were permitted to receive compensation for services performed for any subsidiary of the Limited. (T. 6/9/98, p. 125).
113. Mr. Louis Black testified that each of Taxpayers' boards on which he served compensated him fifty dollars ($50) for each board meeting attended. (T. 6/9/98, pp. 208-209).
114. The Taxpayers' expenses associated with the compensation of board members averaged $600 per year per Taxpayer.
115. The Taxpayers' Board of Directors met quarterly and they discussed such things as royalty rates, interest rates, and the authorized lending limits between the Taxpayers and the related retail companies.
116. The Taxpayers' board members authorized increased lending limits for the related retail companies as needed when the balance of the related retail companies' outstanding notes receivable reached authorized lending limits.
117. The Taxpayers' Board of Directors meetings were held at Mr. Louis Black's office, not at the Taxpayers' leased office space.
118. The Taxpayers' corporate records, such as minutes, charters, and by-laws, were kept in Mr. Louis Black's office, not at the Taxpayers' leased office space.
119. The Taxpayers held annual stockholders' meetings as required by Delaware law and adopted appropriate resolutions, including the election of officers and directors.
120. The Taxpayers' officers or board members did not prepare yearly business plans for the operations of Taxpayers.
121. The Taxpayers did not own or lease any real property or any tangible personal property in any state except Delaware.
122. The Taxpayers subleased shared office space from Delaware Corporate Management in a building located in Delaware.
123. The Taxpayers shared office equipment and office supplies.
124. The Taxpayers' primary office address was 1105 Market Street, Delaware; approximately 670 companies not related to the Limited or its wholly-owned subsidiaries list this same address as their primary office address.
125. Mr. Louis Black testified that an employee of Delaware Corporate Management doing work for or on behalf of Taxpayers used Taxpayers' subleased office space, "if they [were] used by anyone at all." (T. 6/9/98; p. 227).
126. The Taxpayers' rental expense associated with the subleased office space in Delaware approximated $240 per year for each Taxpayer.
127. The subleased office space was not permanently assigned to Taxpayers, but instead was rotated much like a time share-arrangement.
128. The Taxpayers hired no employees in any state.
129. The Taxpayers outsourced all of their accounting, legal, banking and administrative services.
130. The law of firm of Morris, Nichols, Arsht & Tunnel, of which Mr. Louis Black was a partner, was hired as legal counsel for Taxpayers.
131. Delaware Corporate Management, of which Mr. Ed Jones was an employee, was hired as Taxpayers' accounting firm.
132. As board member and principal executive in charge of Taxpayers' accounting services, Mr. Ed Jones was limited to signing checks not to exceed $500.
133. The Taxpayers contracted with Mr. Frank Colucci of the firm Colucci & Umans as their trademark counsel.
134. The Taxpayers maintained checking accounts in their own names.
135. The Taxpayers used their checking accounts to pay operating expenses such as legal and accounting bills.
136. The Taxpayers did not incur substantial ordinary and necessary business expenses such as postage, telephone, or utilities for their business operations in Delaware.
137. The Taxpayers contracted with Delaware Corporate Management, a "nexus service provider" to perform services on their behalf in Delaware.
138. Services performed by Delaware Corporate Management for the Taxpayers included: (1) providing officers and directors located in the State of Delaware; (2) providing office space; (3) mail forwarding; (4) filing annual Delaware Franchise Tax Returns; (5) maintaining the operating checkbook; and (6) scheduling use of a shared conference room.
Operations of the Taxpayers
139. The Taxpayers' Board of Directors agreed to license their marks to the related retail companies pursuant to licensing agreements.
140. The Taxpayers' trademark counsel, Mr. Frank Colucci, assisted in drafting licensing agreements between the Taxpayers, as licensor, and the related retail companies, as licensees.
141. Mr. Frank Colucci testified that all of the Taxpayers' licensing agreements were basically the same in terms of the legal requirements imposed on both the licensee and licensor. (T. 6/9/98, p. 243).
142. Each licensing agreement granted the related retail company a non-exclusive license to use all of the Taxpayer's marks in its retail operations.
143. The terms of each licensing agreement required the related retail company to pay a royalty fee of between 5% and 6% of its retail operating gross sales to Taxpayers in return for continued use of the marks. IN ADDITION
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144. Each licensing agreement allowed the related retail company to continue using the Taxpayer's name in conducting its business in the same manner as before the creation of the Taxpayer.
145. Initially, the royalty rates charged by the Taxpayers to the related retail companies were estimated by Taxpayers' trademark counsel based upon his knowledge of licensing agreements between unrelated third parties and what he believed to be a reasonable royalty based on a fair, arms-length transaction.
146. Dr. Irving Plotkin, the Taxpayers' expert witness, testified that: "When you deal with a transaction between a related party, the transaction itself is not arm's length. It cannot be - it could not have come about by an arm's length negotiation." (T. 6/11/98, pp. 68-69).
147. Dr. Plotkin testified that: "The [intercompany] agreement should have never been described as an arm's length agreement, because [it] couldn't have been." (T. 6/11/98, p. 70).
148. The Taxpayers eventually solicited trademark valuation studies from third parties, which they used to establish the royalty rate, charged.
149. The Taxpayers were required on occasion to amend the royalty rates charged to the related retail companies to correspond with the royalty rates determined by the third party valuation studies.
150. The values of the marks as determined by the trademark valuation reports were dependent upon the "on-going" retail operations of the related retail companies.
151. The royalty rate charged to the related retail companies as determined by the trademark valuation reports was between 5% and 6%.
152. The Taxpayers were completely dependent upon the operations of the related retail companies, including the ones located in North Carolina, for the production of their income because the royalty rates charged by the Taxpayers were based on a percentage of the related retail companies' operating sales.
153. A royalty fee was not charged for the use of the marks when a license or sublicense agreement was entered into between two Taxpayers.
154. Neither the Limited nor any of its subsidiaries licensed or sublicensed marks to foreign subsidiaries.
155. The Taxpayers' Profit and Loss Statements for the years at issue did not include any foreign source royalty income.
156. Royalty income received from foreign subsidiaries is considered gross income and fully taxable for federal corporate income tax purposes pursuant to I.R.C. § 951.
157. The only time the Taxpayers, as licensors, charged a royalty fee for the use of their marks to an affiliated company, as a licensee, was when a state tax benefit could be obtained by the licensee.
158. Each licensing agreement entered into between a related retail company, as licensee, and a Taxpayer, as licensor, required the related retail company to make quarterly royalty payments for the use of the trademarks.
159. The related retail companies did not pay the royalty fees to Taxpayers or tender any cash remittances to Taxpayers in settlement of the royalties charged.
160. Each related retail company accrued a royalty expense deduction based on a percentage of sales.
161. Mr. Kenneth Gilman testified that the royalty payments due under the licensing agreements were made by accounting journal entry. No checks were written nor were there any physical transfers of funds between the parties. The related retail companies therefore "paid" their royalty fees to Taxpayers via accounting journal entries. (T. 6/9/98, p. 93).
162. The North Carolina taxable income of each of the related retail companies was significantly reduced by the deduction of accrued royalty expenses.
163. The Taxpayers accrued but never received payment for royalties from the respective related retail companies.
164. The accrued royalty receivables for each of the Taxpayers increased on a yearly basis corresponding closely to the amount of accrued royalty payables recorded on the books of the related retail companies.
165. The related retail companies' accrued royalty receivables were never collected.
166. The Taxpayers paid no state income tax to Delaware or any state on the accrued royalty receivables.
167. The Taxpayers' expenses were miniscule in relation to their accrued income. For example, Limco's total expenses for the three years at issue were $729,175, which is 0.2% of its total accrued income of $311,952,574 during the same period. Of Limco's total expenses, legal expenses alone equaled $687,754 or 94.32% of total expenses.
168. Limco's remaining expenses of $41,421 for the three years at issue were immaterial and are summarized as follows: (1) Delaware franchise fees - $150; (2) accounting services - $31,052; (3) telephone expenses - $1,102; (4) rental expenses - $ 720; (5) Director's fees - $2,300; (6) custodial expenses to Delaware Trust Management - $3,520; (6) depreciation expenses - $1,862; (7) other miscellaneous expenses - $714.
169. The Taxpayers neither declared nor paid a dividend to the Limited or to any of the related retail companies during the audit period.
170. The Taxpayers entered into loan agreements whereby Taxpayers loaned their excess operating funds to the related retail companies in the form of notes receivable.
171. Mr. Kenneth Gilman testified that the primary source of lending to the related retail companies was the earnings of Taxpayers. (T. 6/9/98, pp. 105-106).
172. Mr. Louis Black testified that Taxpayers earned their money by charging the related retail companies royalties for the use of Taxpayers' marks and by receiving interest through loaning the related retail companies money. (T. 6/9/98, p. 179).
173. The Taxpayers' Board of Directors, including Mr. Louis Black, authorized loans to the related retail companies in amounts comparable to the cumulative amount of royalties the related retail companies accrued during the tax year. IN ADDITION
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174. Despite authorizing loans to the related retail companies in excess of $100 billion, Taxpayers' Board Member, Mr. Louis Black, testified that he had not reviewed the Limited's 10-K or its annual reports. (T. 6/9/98, p. 201).
175. The notes, which were generally 180-day promissory notes, contained standard provisions such as loan amount, interest rate, due date, and names of the parties.
176. All notes bore a market rate of interest.
177. The Taxpayers earned interest income on the notes to the related retail companies.
178. The related retail companies did not pay any outstanding principal or interest on the notes to the Taxpayers during the audit period.
179. The related retail companies accrued an interest expense deduction on their outstanding notes receivable.
180. The interest charges were settled by accounting journal entries.
181. As notes matured, the Taxpayers made the required journal entries and issued new notes to the related retail companies.
182. The Taxpayers' Board of Directors increased the authorized lending limits of the related retail companies once the related retail companies' outstanding notes receivable balances reached authorized limits.
183. The notes receivable contained no mechanism by which the Taxpayers could collect the loan debt from the related retail companies.
184. The Taxpayers made no attempt at collecting the outstanding notes receivable during the audit period.
185. The Taxpayers instructed their custodian, Wilmington Trust, to make no attempt to collect the outstanding notes.
186. The Taxpayers' Yearly Statements of Account reflecting the asset value of Taxpayers' outstanding notes were marked "Notes - Do Not Collect."
187. The Taxpayers did not loan money to or borrow money from any unrelated third party.
188. The North Carolina taxable income of the related retail companies was reduced by the deduction of the accrued royalty and interest expenses that were never paid.
189. The Taxpayers paid no state income tax to Delaware or any state on the royalty or interest income.
190. The Taxpayers earned 100% of their ordinary gross income from two sources: (1) the royalties charged to the related retail companies for the use of Taxpayers' marks and (2) interest earned from outstanding loans issued to the related retail companies.
191. The Taxpayers recorded royalty income totaling $957,442,830 and interest income totaling $236,728,978 from the related retail companies for the tax years at issue, broken down as follows:
YEAR ROYALTY INCOME INTEREST INCOME
1/92 $298,494,228 $ 58,610,029
1/93 349,880,983 56,087,605
1/94 301,067,619 122,031,344
Total $949,442,830 $236,728,978
192. Pursuant to I.R.C. § 1501, the Taxpayers filed a consolidated federal income tax return with their parent, the Limited, for tax years ended January 1992, January 1993, and January 1994.
193. The intercompany royalty and interest transactions that occurred between Taxpayers and the related retail companies had no tax effect on the federal taxable income of the Limited because of required intercompany eliminations.
194. The intercompany royalty and interest transactions that occurred between Taxpayers and the related retail companies significantly decreased the North Carolina taxable income of the related retail companies.
The Licensing Agreements
195. The Taxpayers had incurred none of the costs and had performed none of the activities that, in any manner, had created, enhanced, or protected the value of the marks prior to the assignment of the marks to Taxpayers.
196. "Naked assignment" is a term used in trademark law that describes the assignment of a trademark without its associated goodwill.
197. Mr. Frank Colucci, Taxpayers' trademark counsel, testified that it is illegal in the United States to assign trademarks without assigning the goodwill associated with the trademarks. (T. 6/9/98, p. 279).
198. Mr. Frank Colucci testified that goodwill is an accumulation of everything that the public perceives about a trademark - good, bad, or indifferent (T. 6/9/98, p. 280).
199. Mr. Frank Colucci testified that the goodwill the Taxpayers' assigned to the related retail companies had been created by the related retail companies. (T. 6/9/98, p. 280).
200. Mr. Frank Colucci testified that, after the assignment of the marks to the Taxpayers, the only way to maintain the goodwill associated with the marks was to use the marks. Mr. Frank Colucci stated that, "You use the trademark and, through the use of the trademark, you either maintain the goodwill or you don't maintain the goodwill." (T. 6/9/98, p. 280).
201. Mr. Frank Colucci testified that the trademarks were used by the related retail companies wherever they had stores and businesses. (T. 6/9/98, p. 280).
202. If Taxpayers did not take appropriate measures to monitor the related retail companies' use of their marks, Taxpayers risked abandonment of their marks, thereby enabling third parties to use the marks in whatever manner they desired.
203. The trademark law concept of "naked licensing" requires the owner of a trademark that permits another company to use its trademark to ensure that the public is not deceived with respect to the nature and quality of the goods sold under the mark. IN ADDITION
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204. Mr. Frank Colucci testified that a licensing agreement is the contractual basis by which the licensor of a trademark or tradename controls the nature and quality of the goods and services sold by a licensee using the trademark or tradename. (T. 6/9/98, p. 241).
205. Mr. Frank Colucci testified that a court could invalidate a mark and refuse to enforce a mark if the owner of the mark does nothing to protect the public trust with respect to the nature and quality of the goods sold under the mark. (T. 6/9/98, p. 237).
206. Mr. Frank Colucci testified that "the whole idea of having a related company [licensing agreement is] that there be controls over an agent quality of the goods . . . so that the public being accustomed with a mark being used on one line of goods or services, now that it was given to another company, would not be confused or deceived." (emphasis added) (T. 6/9/98, pp. 236-237).
207. The Taxpayers relied upon the related retail companies to ensure that the public was not deceived with respect to the nature and quality of goods sold under Taxpayers' marks.
208. The Taxpayers, owners of the marks, controlled the use of the marks in North Carolina and the nature and quality of goods sold under the marks by the related retail companies in North Carolina.
209. The related retail companies performed activities in North Carolina on behalf of the Taxpayers, including the following: (1) the preparation of quarterly inspection reports regarding the activities of the retail location; (2) establishment of store layout and design; (3) selecting the merchandise that would bear Taxpayers' marks; (4) regularly advertising apparel and merchandise in this State bearing Taxpayers' marks; (5) inspecting merchandise bearing Taxpayers' marks; (6) reporting trademark violations; and (7) establishing and maintaining Taxpayers' economic market in North Carolina.
210. The activities performed in North Carolina on behalf of the Taxpayers were significantly associated with Taxpayers' ability to establish and maintain a market in North Carolina.
211. Mr. Kenneth Gilman testified that: "[I]t's important to protect the trademark because it's the identity of the company. It's one of the ways that you differentiate what you are as a company and what you represent; what you're selling; what you're trying to accomplish in a commercial marketplace from other people." (T. 6/9/98, p. 71).
212. The Taxpayers' commercial marketplace was in part located in North Carolina.
213. The Taxpayers' marks were displayed on the North Carolina retail locations of the related retail companies.
214. The related retail companies' activities, including marketing products bearing Taxpayer's trademarks and tradenames, maintaining the quality of the apparel sold under Taxpayers' marks, and otherwise providing retail customers with a quality shopping experience, inures to and enhances the value of Taxpayers' trademarks and tradenames in North Carolina.
215. Mr. Frank Colucci testified that he monitored "how the trademarks [were] used by the retailers" in his capacity as trademark counsel for both Taxpayers and the related retail companies. (T. 6/9/98, pp. 254-255).
216. Mr. Frank Colucci testified that representatives of the retailers as well as representatives of Taxpayers sent Mr. Frank Colucci or Mr. Frank Colucci's staff into the retail stores to monitor the use of Taxpayers' trademarks by the related retail companies. (T. 6/9/98, p. 260).
217. The Taxpayers, as owners of the marks, had the power to determine which retail companies used their marks and where they could be used.
218. The Taxpayers, as owners of the marks, had the power to control to whom the marks were licensed, what license fees were charged, and when the licensing agreements expired.
219. The Taxpayers, as owners of marks, had the right to dictate the manner in which the trademarks and tradenames were displayed at the retail locations throughout North Carolina.
220. The Taxpayers knowingly and purposefully granted the retail companies a license to use their marks in connection with retail operations worldwide, including in North Carolina.
221. The licensing agreements provided that all products sold by the related retail companies bearing Taxpayers' trademarks and tradenames had to be consistent with the high standards of quality and excellence established over the years by the related retail companies with respect to their trademarks and tradenames.
222. Sections 2.1 through 2.3 of the licensing agreements provided that Taxpayers' trademarks or tradenames had to be used by the related retail companies in accordance with the following terms and conditions: (1) the retailer would use its best efforts, skill, and diligence in the operation of its Stores, and would regulate its employees so that they will be courteous and helpful to the public; (2) the retailer would use its best efforts, skill, and diligence to ensure that the quality of all apparel sold under or in connection with the trademark or tradenames would not be less than the standard of quality previously established by the retail companies; and (3) the retailer would operate its stores in accordance with reasonable business standards and would provide a standard of service not less than the standard of quality previously established by the retail companies.
223. Section 3.1 of the licensing agreements provided that each retail store operated by a related retail company had to inspect the store at least once each year and had to notify Taxpayers of the inspections in a written statement verifying that the inspections took place.
224. The Taxpayers did not physically inspect any stores in North Carolina and rarely, if ever, visited any store outside of Delaware.
225. Store employees at the North Carolina retail locations of the related retail companies acted as quality assurance inspectors and performed all inspections of apparel bearing Taxpayers' marks to ensure the quality of the goods sold under Taxpayers' marks in North Carolina.
226. The North Carolina retail operating store employees, in their capacity as quality assurance inspectors, prepared inspection reports based on the operations of the related retail companies in this State. IN ADDITION
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227. Mr. Kenneth Gilman testified that the employees of the related retail companies performed inspections of the stores located in North Carolina in order to adhere to quality standards mandated by the licensing agreements and to demonstrate compliance with the licensors' requirements. (T. 6/9/98, pp. 86-88).
228. Section 3.1.2 of the licensing agreements provided that the related retail companies were responsible for, at their own cost and expense, correcting any deficiencies found in the quality of the products sold bearing Taxpayers' trademarks.
229. Section 4 of the licensing agreements provided that the related retail companies had to make available to Taxpayers samples of all advertising or other literature, packages, and labels bearing Taxpayers' tradename or trademarks.
230. Mr. Frank Colucci testified that he monitored all advertising associated with Taxpayers' trademarks and tradenames in his capacity as trademark counsel for both the related retail companies and Taxpayers. (T. 6/9/98, pp. 254-255).
231. In reviewing the advertising samples submitted by the related retail companies, Mr. Frank Colucci looked to ensure that Taxpayers' marks were used in a consistent manner and to ensure that the use did not infringe on other marks.
232. Section 11.1 of the licensing agreements required the related retail company to defend Taxpayers' marks against infringement by third parties at its own cost and expense.
233. Section 11.2 of the licensing agreements provided that if the related retail company was made party to a legal proceeding based upon a claim that one of Taxpayers' marks infringed upon a third party's mark, the related retail company had to, at its own cost and expense, defend its use of the licensed mark.
234. Prior to the formation of Taxpayers, the marks associated with the related retail companies were registered, monitored, and defended against infringement by the related retail companies themselves.
235. The Taxpayers continually updated the trademark filings and registrations with the United States Patent and Trademark Office in order to ensure that Taxpayers' rights in the marks were preserved.
236. Mr. Frank Colucci testified that his office filed with the United States Patent and Trademark Office every six years an affidavit "saying that [the] trademarks [were] still in use. Otherwise, [the trademarks would] be automatically cancelled." (T. 6/9/98, pp. 262-263).
237. Mr. Kenneth Gilman, President of the Limited, testified that the related retail companies located in North Carolina used Taxpayers' marks on a daily basis. (T. 6/9/98, pp. 74-75).
The Assessments
238. The Limited was contacted in March, 1995 by Mr. Al Milak, Revenue Field Auditor in the Interstate Audit Division, regarding the activities of the Limited and its affiliates in this State.
239. An on-site audit for corporate franchise and income tax was conducted in August 1995.
240. The auditors determined that Taxpayers, subsidiaries of the Limited, were doing business in this State and subject to corporate income and franchise taxation in this State pursuant to G.S. 105-114, 105-122, 105-130.1, and 105-130.3.
241. The Taxpayers were not filing corporate franchise and income tax returns.
242. The auditor requested on October 23, 1995 that Taxpayers file and pay North Carolina franchise and income tax, apportioning their income liability to this State as an excluded corporation pursuant to G.S. 105-130.4(a)(4) and 105-130.4(r).
243. The Taxpayers did not voluntarily file North Carolina franchise and income tax returns and refused to provide the auditors with sufficient information necessary to compute Taxpayers' North Carolina corporate liability.
244. Jeopardy assessments of corporate income and franchise taxes were issued for tax years January 1992, January 1993, and January 1994 under the authority of G.S. 105-241.1(g) on March 26, 1996 and on April 2, 1996.
245. The Taxpayers were assessed income and franchise taxes calculated on royalty and interest income derived from sources within North Carolina.
246. For each Taxpayer during the audit period, the franchise assessments of tax, penalties, and interest are as follows:
Franchise Tax Assessments
A&F Trademark, Inc. $ 3,963
Caciqueco, Inc. $ 1,025
Expressco, Inc. $ 37,264
Lanco, Inc $ 37,296
Lernco, Inc. $ 31,949
Limco Investments, Inc. $ 124,966
Limtoo, Inc. $ 44,142
Structureco, Inc. $ 1,071
V. Secret Stores, Inc. $ 27,176
Total $ 308,852
247. For each Taxpayer during the audit period, the corporate income tax assessments of tax, penalties, and interest are as follows:
Income Tax Assessments
A&F Trademark, Inc. $ 116,401
Caciqueco, Inc. $ 58,452
Expressco, Inc. $ 953,765
Lanco, Inc $ 580,231 IN ADDITION
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Lernco, Inc. $ 766,775
Limco Investments, Inc. $ 1,331,052
Limtoo, Inc. $ 128,766
Structureco, Inc. $ 82,479
V. Secret Stores, Inc. $ 666,909
Total $ 4,684,830
248. The jeopardy income tax assessments were based on the best information available to the auditor. That information was Taxpayers' separate entity, "pro-forma" federal taxable income, Federal Line 28, as reflected on the Limited's consolidated 1120 tax return.
249. The proposed assessments were based on the State's assertion that Taxpayers were doing business in North Carolina by virtue of their activities of licensing intangibles for use in North Carolina and using in-state representatives in furtherance of their business activities.
250. On April 22, 1996, Taxpayers timely protested the proposed corporate income and franchise tax assessments and reserved the right to a hearing before the Secretary of Revenue.
251. An application for hearing was timely filed on August 18, 1997.
252. An Administrative Tax Hearing before the Secretary of Revenue was conducted by the hearings' officer on Monday, June 9 through Wednesday, June 11, 1998 in the Revenue Building on 501 North Wilmington Street.
253. On June 11, 1998, the hearings' officer granted Taxpayers' motion to waive all penalties associated with all three-tax years at issue.
CONCLUSIONS OF LAW
The Board reviewed the following conclusions of law made by the Assistant Secretary in his final decision:
1. The Taxpayers are subject to corporate income taxation in this State pursuant to G.S. 105-130 et seq.
2. The Taxpayers are subject to franchise taxation in this State pursuant to G.S. 105-114 et seq.
3. G.S. 105-130.3 imposes a tax upon the State net income of every C corporation doing business in this State.
4. The Taxpayers are C corporations.
5. G.S. 105-122 imposes a franchise tax upon every corporation domesticated under the laws of this State or doing business in this State.
6. The Taxpayers are not domesticated under the laws of this State.
7. For franchise tax purposes, "doing business" is defined as "[e]ach and every act, power or privilege exercised or enjoyed in this State, as an incident to, or by virtue of the powers and privileges granted by the laws of this State."
8. North Carolina Administrative Rule 17 NCAC 05C .0102 was promulgated by the Secretary of Revenue under authority of G.S. 105-262 and 105-264 to interpret G.S. 105-130.3.
9. Administrative Rule 17 NCAC 05C .0102 is prima facie correct.
10. Administrative Rule 17 NCAC 05C .0102 defines "doing business," in pertinent part, as "the operation of any business enterprise or activity in North Carolina for economic gain, including, but not limited to . . . the owning, renting, or operating of business or income-producing property in North Carolina including, but not limited to . . . [t]rademarks [and] tradenames."
11. The Taxpayers own intangible property in the form of trademarks, tradenames, and service marks and the goodwill associated with these marks.
12. There is no such thing as property in a trademark except as a right appurtenant to an established business or trade in connection with which the mark is employed.
13. A trademark has no independent significance apart from the goodwill it symbolizes; if there is no established business and no goodwill, a trademark symbolizes nothing.
14. A trademark cannot exist apart from the going business in which it is used.
15. Trademark rights are wholly dependent upon actual use.
16. The actual use of a symbol as a trademark in the sale of goods creates and builds up rights in a mark.
17. Lack of actual use can result in loss of legal rights in the mark, known as "abandonment."
18. The Taxpayers licensed their intangible property, in the form of trademarks, tradenames, service marks and associated goodwill, to the related retail companies for use in this State.
19. If a trademark owner licenses the mark, the owner must control the nature and quality of the goods sold under the mark and must at all costs avoid deceiving the public.
20. The concept of quality control has been incorporated into the Lanham Act by the "related company" doctrine.
21. Under the Lanham Act, a "related company" is "any person whose use of the mark is controlled by the owner of the mark with respect to the nature and quality of the goods or services on or in connection with which the mark is used."
22. If the owner controls the use of the mark by the licensee, the owner obtains the benefits of Section 5 of the Lanham Act, and the licensee's use of the mark is attributed to and inures to the benefit of licensor, the owner of the mark.
23. If the owner of a trademark does not exercise sufficient actual control over the use of the mark by the licensee, the owner loses its rights in the mark through abandonment. IN ADDITION
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24. The trademark owner must exercise actual control over the licensee's use of the mark. Mere paper control, such as a quality control provision in a licensing agreement, without actual control is insufficient. The mere legal right to control is insufficient, as is the voluntary exchange of information.
25. Under the related company doctrine, if the Taxpayers exercised sufficient actual control over the operations of the related retail companies in North Carolina with regard to their use of the marks and the nature and quality of the goods sold under the marks, the use by the related retail companies in North Carolina is attributed to and inures to the benefit of the Taxpayers.
26. Absent sufficient actual control by the Taxpayers over the related retail companies' use of the marks in North Carolina and the nature and quality of the goods sold under the marks in this State, the use of the marks by the related retail companies is not attributed to the Taxpayers.
27. If use by the related retail companies of Taxpayers' marks is not attributed to Taxpayers, the marks would be abandoned.
28. The licensing agreements between Taxpayers and the related retail companies created a contractual agency relationship between Taxpayers and the related retail companies.
29. The Taxpayers exercised actual control over the licensees' use of the marks at the 130 North Carolina retail locations and over the nature and quality of the goods sold under the marks by the licensees at these locations.
30. The related retail companies are "related retail companies" under the related company doctrine of trademark law.
31. The related retail companies regularly and systematically used the Taxpayers' marks at the 130 retail locations in North Carolina.
32. The intangibles owned by the Taxpayers and used at the 130 retail locations in this State have acquired a business situs in North Carolina.
33. The Taxpayers own income-producing property in North Carolina.
34. The regular and systematic use of the Taxpayers' marks by the related retail companies at the 130 retail locations in North Carolina is attributed to and inures to the benefit of Taxpayers, thereby protecting and preserving the value and existence of the marks and associated goodwill, Taxpayers' only assets.
35. The use of Taxpayers' marks by the related retail companies in North Carolina is essential to the continued existence of the marks.
36. The quality control and trademark protection activities performed by employees of the related retail companies in North Carolina to protect Taxpayers' marks are attributed to and inure to the benefit of Taxpayers.
37. The activities performed by employees of the related retail companies in North Carolina to assist in maintaining the goodwill associated with Taxpayers' marks are attributed to and inure to the benefit of Taxpayers.
38. The related retail companies, in performing the activities of quality control and protection and preservation of Taxpayers' marks and associated goodwill, act as Taxpayers' agents or representatives in North Carolina.
39. The activities of the related retail companies, acting as Taxpayers' agents or representatives, enable Taxpayers to maintain and enhance a market in this State for merchandise bearing Taxpayers' marks.
40. The Taxpayers' primary source of income, the royalty fees, is dependent upon business activity conducted by employees of the related retail companies in North Carolina, which activity Taxpayers control.
41. Taxpayers purposefully availed themselves of the benefits of an economic market in North Carolina.
42. The Taxpayers regularly and systematically exploited the North Carolina marketplace for economic gain.
43. The Taxpayers' business activities were purposefully directed towards residents of North Carolina.
44. The Taxpayers operate income-producing business property in North Carolina.
45. The Taxpayers are operating a business activity or enterprise in this State for economic gain.
46. The Taxpayers are "doing business" in this State for corporate income tax purposes.
47. The Taxpayers are "doing business" in this State for corporate franchise tax purposes.
48. The Taxpayers received more than 50% of their income from investments in or dealing in intangible property.
49. The Taxpayers are "excluded corporations" under G.S. 105-130.4(a)(4).
50. The Taxpayers must apportion their business income using the sales factor as determined under G.S. 105-130.4(a)(l).
51. The proposed assessments of corporate income and franchise tax were proper under G.S. 105-241.1.
DECISION
Taxpayers have petitioned this Board for administrative review of the final decision issued by the Assistant Secretary on September 19, 2000 sustaining the assessment of corporate franchise and income tax for Taxpayers' fiscal year ended January 31, 1994. 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 an administrative hearing, this statute provides in pertinent part: "the Board shall confirm, modify, reverse, reduce or increase the assessment or decision of the Secretary."
When reviewing the Assistant Secretary's Final Decision, the Board must determine, based upon the record, whether the Assistant Secretary properly concluded: (1) that the Taxpayers were "doing business" in this State within the meaning of G.S. 105-130.3 and G.S. 105-114 so as to be subject to the corporate income and franchise tax; and (2) that the Taxpayers were "excluded corporations" within the meaning of G.S. 105-130.4(a)(4).
The Taxpayers' principle arguments for reverse of the Assistant Secretary's Final Decision were: (1) until the recent enactment of legislation, the statute did not authorize taxation of the Taxpayers, (2) physical presence in a state is a constitutional prerequisite for taxation; and (3) since the Taxpayers are not physically present in North Carolina they cannot be taxed by North IN ADDITION
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Carolina. Taxpayers' subsidiary arguments include: (1) no agency relationships exist between the Taxpayers and the related retail entities to which they have licensed their tangible property; and (2) Taxpayers are not "excluded corporations" under G.S. 105-130.4(a).
Upon review of the record, the facts show that Taxpayers are nine wholly-owned subsidiaries of the Limited Stores, Inc. (the "Limited") an Ohio corporation. The Limited also owns 100% of eight retail companies. Those companies are: Lane Bryant, Inc.; Lerner, Inc.; Victoria's Secret, Inc., Cacique, Inc.; Abercrombie & Fitch, Inc.; Limited Too, Inc.; Express, Inc.; and Structure, Inc. The Limited and the wholly-owned eight retail subsidiaries are doing business in North Carolina and pay corporate income and franchise taxes here. During the year at issue, the Limited and the eight retail subsidiaries operated over 130 retail locations in North Carolina.
Taxpayers were incorporated in Delaware to hold the trademarks owned by the Limited and the related retail companies. The marks owned by the Taxpayers include "The Limited," "Limited Too," "Victoria's Secrets," "Express," "Structure," "Cacique," "Abercrombie and Fitch," "Lane Bryant," and "Lerner." The marks are a form of intangible personal property. The Taxpayers do not own or lease any real property or tangible personal property in any state except Delaware. The Taxpayers have no employees in any state. The Taxpayers received the marks they own in separate I.R.C. Section 351 tax-free exchanges with the related retail companies. In these exchanges, the related retail companies transferred the marks to the Taxpayers for little or no consideration. The Taxpayers then entered into a licensing agreement with the corresponding related retail companies. The licensing agreements authorized the related retail companies to continue to use the marks they had previously owned in exchange for royalty payments to the Taxpayers. These agreements required the retail stores to pay Taxpayers a royalty fee based on the percentage of the retail companies' gross sales. The Limited and the related retail companies deducted these royalty payments from their income for North Carolina tax purposes. Taxpayers then loaned these royalty payments back to the related companies for use in their retail operations. Taxpayers charged the retail companies a market rate of interest, which generated further deductions for the related retail companies. Taxpayers did not pay any income tax to any state on any of the income received from the related retail companies. For the year at issue (1994), Taxpayers recorded $301,067,619 in royalty income and $122,031,344 in interest income from the related retail companies. This accounted for 100% of Taxpayers' income. The net effect of both of these separate transactions upon each related retail company was to significantly reduce the company's taxable income in the states in which it did business by both the royalty payment and the interest expense charged by the Taxpayers.
This Board notes that G.S. 105-122 imposes a franchise tax on every corporation incorporated, domesticated or doing business in this State. For franchise tax purposes, "doing business" is defined as [e]ach and every act, power, or privileges granted by the laws of this State." (See G.S. 105-114(b)(3).) G.S. 105-130.3 imposes a tax upon the State net income of every C corporation doing business in the State. Although the term "doing business" is not defined by statute for corporate income tax purposes, the Secretary has promulgated an administrative rule defining this term. G.S. 105-262 and G.S. 105-264 authorize the Secretary to adopt administrative rules interpreting all laws he administers. Administrative Rule 17 NCAC 5C .0102 provides, in pertinent part, that "the term 'doing business' means the operation of any business enterprise or activity in North Carolina for economic gain, including, but not limited to .…. the owning, renting or operating of business or income-producing property in North Carolina including but not limited to ….. [t]rademarks [and] tradenames." Thus, Administrative Rule 17 NCAC 5C .0102 is deemed prima facie correct.
Upon administrative review of the Final Decision, the Board determines that the Assistant Secretary properly concluded the Taxpayers were "doing business" in this State and were therefore subject to this State's corporate income tax and corporate franchise tax. Applying the applicable statutes and administrative rule, the Assistant Secretary concluded that the Taxpayers were doing business in this State because they operate a business activity or enterprise in North Carolina for economic gain. In determining that the Taxpayers were doing business in North Carolina, the Assistant Secretary found that the Taxpayers own valuable intangible property in the form of trademarks, tradenames, and service marks and the goodwill associated with the marks. This property is business or income-producing property. The property is intangible property and, under applicable principles of law, has acquired a business situs where it is used. See Wheeling Steel Corp. v. Fox, 298 U.S. 193 (1936). The Taxpayers' property is used in North Carolina. Consequently, Taxpayers own business or income-producing property in North Carolina.
Applying the principles of trademark law, the Assistant Secretary ruled that Taxpayers' property cannot exist apart from an established business in which it is used; if the property is not used, the property is considered abandoned and ceases to exist. The Taxpayers' property therefore exists only where it is used. The Taxpayers' property is used extensively in North Carolina in connection with established businesses. These established businesses are the 130 plus North Carolina retail locations of Taxpayers' related retail companies.
The record in this matter reflects that the Taxpayers' marks are permanently affixed to the retail locations and appear on the labels of merchandise sold at the locations. As a result, Taxpayers' marks are used at the retail locations each time employees at the locations sell merchandise. This use, which occurs in North Carolina, preserves the existence of Taxpayers' property.
The record also reflects that the Taxpayers rent their intangible property in North Carolina by licensing the use of the property to their related retail companies, which operate over 130 retail locations in North Carolina. The licensing agreements require the related companies to make royalty payments to Taxpayers for the use of Taxpayers' property. The Taxpayers purposefully license their property for use in this State. The Taxpayers in fact earn significant royalty income from the licensing agreements. The Taxpayers therefore license business or income-producing property in North Carolina.
Based upon the facts, the Assistant Secretary concluded that the Taxpayers were doing business in North Carolina because they are operating a business enterprise or activity in North Carolina for economic gain. Thus, Taxpayers' activities fall within all three of the possible methods set out in Administrative Rule 17 NCAC 5C .0102(a)(5) by which an entity could be doing business in this State. The Taxpayers own business or income-producing property in North Carolina, the Taxpayers license business or income-IN ADDITION
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producing property in North Carolina, and the Taxpayers operate business or income-producing property in North Carolina. Thus, the Board determines that the record supports the Assistant Secretary's determination that the Taxpayers were "doing business" under the applicable North Carolina statutes and administrative rules and finds no merit in Taxpayers' argument that until the enactment of recent legislation, the statute did not authorize taxation of the Taxpayers.
The Board also determines that the Assistant Secretary properly concluded that the Taxpayers were "excluded corporations" within the meaning of G.S. 105-130.4(a)(4). G.S. 105-130.4(a)(4) defines an "excluded corporation" in pertinent part as "a corporation which receives more than fifty percent (50%) of its ordinary gross income from investments in and/or dealing in intangible property." The Assistant Secretary properly determined that the Taxpayers both "invest" and "deal" in the trademarks, which are intangible property. The Taxpayers received more than 50% of their ordinary gross income from their investments in or dealing in the trademarks. They therefore meet the statutory definition of "excluded corporation" set forth in G.S. 105-130.4(a)(4). Since the Taxpayers are "excluded corporations," G.S. 105-130.4(r) requires the Taxpayers to apportion their business income using the sales factor as determined under G.S. 105-130.4 (l).
Regarding Taxpayers' arguments that the Assistant Secretary's Final Decision should be reversed because physical presence in a state is a constitutional prerequisite for taxation; and since the Taxpayers are not physically present in North Carolina they cannot be taxed by North Carolina; the Tax Review Board, which is an administrative body, does not have the authority or jurisdiction to rule upon the constitutionality of a statute. Great American Insurance Company v. Gold, 254 N.C. 168 (1961). Since these contentions involve constitutional issues, the Tax Review Board lacks authority or jurisdiction to address them. Thus, Taxpayers' constitutional claims are not issues that the Tax Review Board is empowered to determine.
The Board having conducted an administrative hearing in this matter, and having considered the petition, briefs, the whole record, the Assistant Secretary's final decision, the parties' arguments and the authorities cited, concludes that the findings of fact made by the Assistant Secretary in the final decision were fully 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 Secretary of Revenue should be confirmed.
In confirming the final decision in this matter, the Board takes administrative notice that the Assistant Secretary modified the proposed corporate franchise and income tax assessments for tax year 1994 by granting the Taxpayers' motion to waive the penalties imposed against them for tax year 1994. Although there is ample evidence in the record supporting the Department of Revenue's original imposition of penalties for tax year 1994, since the decision to waive penalties imposed by the Department of Revenue falls within the discretion of the Secretary of Revenue, this Board defers to the Secretary's determination.
WHEREFORE, THE TAX REVIEW BOARD ORDERS, ADJUDGES AND DECREES that the Final Decision entered by the Assistant Secretary in this matter on September 19, 2000 be and is hereby Confirmed in its entirety.
Made and entered into the 7th day of May, 2002.
TAX REVIEW BOARD
Signature
Richard H. Moore, Chairman
State Treasurer
Signature
Jo Anne Sanford, Member
Chair, Utilities Commission
Signature
Noel L. Allen, Appointed Member
RULE-MAKING PROCEEDINGS
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A Notice of Rule-making Proceedings is a statement of subject matter of the agency's proposed rule making. The agency must publish a notice of the subject matter for public comment at least 60 days prior to publishing the proposed text of a rule. Publication of a temporary rule serves as a Notice of Rule-making Proceedings and can be found in the Register under the section heading of Temporary Rules. A Rule-making Agenda published by an agency serves as Rule-making Proceedings and can be found in the Register under the section heading of Rule-making Agendas. Statutory reference: G.S. 150B-21.2.
TITLE 02 – DEPARTMENT OF AGRICULTURE AND CONSUMER SERVICES
CHAPTER 52 – VETERINARY DIVISION
Notice of Rule-making Proceedings is hereby given by the North Carolina Board of Agriculture in accordance with G.S. 150B-21.2. The agency shall subsequently publish in the Register the text of the rule(s) it proposes to adopt as a result of this notice of rule-making proceedings and any comments received on this notice.
Citation to Existing Rule Affected by this Rule-making: 02 NCAC 52J .0101-.0103, .0201-.0210, .0301-.0304 - Other rules may be proposed in the course of the rule-making process.
Authority for the Rule-making: G.S. 19A-24
Statement of the Subject Matter: These Rules establish standards for the care of dogs and cats by animal shelters, boarding kennels, pet shops, dealers and public auctions. The rules also provide for recordkeeping by licensees.
Reason for Proposed Action: Proposed changes would clarify existing rules by making requirements more specific, add requirements for drainage of facilities, acceptable impervious surfaces for sanitation, fencing of outdoor areas, and other changes to improve quality of facilities and care provided by licensees.
Comment Procedures: Written comments may be submitted to David S. McLeod, Secretary, North Carolina Board of Agriculture, PO Box 27647, Raleigh, NC 27611.
TITLE 15A – DEPARTMENT OF ENVIRONMENT AND NATURAL RESOURCES
CHAPTER 19 - HEALTH: EPIDEMIOLOGY
Notice of Rule-making Proceedings is hereby given by Commission for Health Services in accordance with G.S. 150B-21.2. The agency shall subsequently publish in the Register the text of the rule(s) it proposes to adopt as a result of this notice of rule-making proceedings and any comments received on this notice.
Citation to Existing Rule Affected by this Rule-making: 15A NCAC 19A .0401. Other rules may be proposed in the course of the rule-making process.
Authority for the Rule-making: G.S. 130A-134; 130A-135; 130A-139; 130A-141
Statement of the Subject Matter: The permanent rule change will amend the rubella, hepatitis B, Hib requirements, add varicella vaccine to the requirements, and give the State Health Director authority to suspend temporarily any portion of the requirements due to emergency conditions such as the unavailability of vaccine.
Reason for Proposed Action: The CDC recommends the changes to the vaccine requirements. This action will add varicella vaccine to the requirements for immunization. Senate Bill 736 has appropriated funds for a childhood varicella vaccine program. The United State has experienced an intermittent supply shortage for many vaccines. Vaccine shortages impact immunization requirements. This action will give the State Health Director the authority to delay any portion of the requirements of the immunization rules due to emergency conditions, such as the unavailability of vaccines.
Comment Procedures: Written comments concerning these rule-making actions may be submitted to Chris Hoke, Rule-making Coordinator, Division of Public Health, 2001 Mail Service Center, Raleigh, NC 27699-2001.
PROPOSED RULES
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This Section contains the text of proposed rules. At least 60 days prior to the publication of text, the agency published a Notice of Rule-making Proceedings. The agency must accept comments on the proposed rule for at least 30 days from the publication date, or until the public hearing, or a later date if specified in the notice by the agency. The required comment period is 60 days for a rule that has a substantial economic impact of at least five million dollars ($5,000,000). Statutory reference: G.S. 150B-21.2.
TITLE 10 – DEPARTMENT OF HEALTH AND HUMAN SERVICES
Notice is hereby given in accordance with G.S. 150B-21.2 that the NC Medical Care Commission intends to amend the rules cited as 10 NCAC 03C .3102, .4305. Notice of Rule-making Proceedings was published in the Register on October 15, 2001 and April 15, 2002.
Proposed Effective Date: April 1, 2003
Public Hearing:
Date: July 31, 2002
Time: 10:00 a.m.
Location: Room 201, Council Building, NC Division of Facility Services, Dorothea Dix Campus, 701 Barbour Dr., Raleigh, NC
Reason for Proposed Action: The NC General Assembly recently ratified House Bill 1147 (Session Law 2001-410). This legislation amends G.S. 132E-83 and directs the NC Medical Care Commission to adopt temporary rules "setting forth conditions for licensing neonatal care beds." The Commission adopted temporary amendments to these Rules to meet this legislative mandate. 10 NCAC 03R .1413-.1417 are Certificate of Need (CON) rules that were also temporarily amended to conform to – and ensure consistency with – the changes to these Rules. The Division is now moving forward with the permanent adoption of the amendments. This notice identifies a time for a public hearing and a deadline for receiving comments on this rule-making action.
Comment Procedures: Written comments concerning this rule-making action must be submitted by July 31, 2002, to Mark Benton, Chief of Budget & Planning/Rule-making Coordinator, NC Division of Facility Services, 2701 Mail Service Center, Raleigh, NC 27699-2701.
Fiscal Impact
State
Local
Substantive (>$5,000,000)
None
CHAPTER 03 – FACILITY SERVICES
SUBCHAPTER 03C - LICENSING OF HOSPITALS
SECTION .3100 – PROCEDURE
10 NCAC 03C .3102 PLAN APPROVAL
(a) The facility design and construction shall be in accordance with the construction standards of the Division, the North Carolina Building Code, and local municipal codes.
(b) Submission of Plans:
(1) Before construction is begun, color marked plans, and specifications covering construction of the new buildings, alterations or additions to existing buildings, or any change in facilities shall be submitted to the Division for approval.
(2) The Division will review the plans and notify the licensee that said buildings, alterations, additions, or changes are approved or disapproved. If plans are disapproved the Division shall give the applicant notice of deficiencies identified by the Division.
(3) In order to avoid unnecessary expense in changing final plans, a preliminary step, proposed plans in schematic form shall be reviewed by the Division.
(4) The plans shall include a plot plan showing the size and shape of the entire site and the location of all existing and proposed facilities.
(5) Plans shall be submitted in triplicate in order that the Division may distribute a copy to the Department of Insurance for review of State Building Code requirements and to the Department of Environment, Health, and Natural Resources for review under state sanitation requirements.
(c) Location:
(1) The site for new construction or expansion shall be approved by the Division.
(2) Hospitals shall be so located that they are free from undue noise from railroads, freight yards, main traffic arteries, schools and children's playgrounds.
(3) The site shall not be exposed to smoke, foul odors, or dust from nearby industrial plants.
(4) The area of the site shall be sufficient to permit future expansion and to provide adequate parking facilities.
(5) Available paved roads, adequate water, sewage and power lines shall be taken into consideration in selecting the site.
(d) The bed capacity and services provided in a facility shall be in compliance with G.S. 131E, Article 9 regarding Certificate of Need. A facility shall be licensed for no more beds than the number for which required physical space and other required facilities are available. Neonatal Level 1, Level II and III beds are considered part of the licensed bed capacity. Newborn nursery bassinets are not considered part of the licensed bed capacity however, no more bassinets shall be placed in service than the number for which required physical space and other required facilities are available.
Authority G.S. 131E-79.
SECTION .4300 - MATERNAL - NEONATAL SERVICES PROPOSED RULES
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10 NCAC 03C .4305 ORGANIZATION OF
NEONATAL SERVICES
(a) The governing body shall approve the scope of all neonatal services and the facility shall classify its capability in providing a range of neonatal services using the following criteria:
(1) Newborn Nursery: Full-term and pre-term neonates that are stable without complications; may include small for gestational age or large for gestational age neonates;
(2) LEVEL I: Neonates or infants that are stable without complications but require special care and frequent feedings; infants of any weight who no longer require Level II or Level III neonatal services, but who still require more nursing hours than normal infants; and infants who require close observation in a licensed acute care bed;
(3) LEVEL II: Neonates or infants that are high-risk, small (or approximately 32 and less than 36 completed weeks of gestational age) but otherwise healthy, or sick with a moderate degree of illness that are admitted from within the hospital or transferred from another facility requiring intermediate care services for sick infants, but not requiring intensive care; may serve as a "step-down" unit from Level III. Level II neonates or infants require less constant nursing care, but care does not exclude respiratory support.
(4) LEVEL III (Neonatal Intensive Care Services): High-risk, medically unstable or critically ill neonates approximately under 32 weeks of gestational age, or infants, requiring constant nursing care or supervision not limited to continuous cardiopulmonary or respiratory support, complicated surgical procedures, or other intensive supportive interventions.
(b) The facility shall provide for the availability of equipment, supplies, and clinical support services.
(c) The medical and nursing staff shall develop and approve policies and procedures for the provision of all neonatal services.
Authority G.S. 131E-79.
* * * * * * * * * * * * * * * * * * * *
Notice is hereby given in accordance with G.S. 150B-21.2 that the NC Division of Facility Services intends to amend the rules cited as 10 NCAC 03R .1413-.1417. Notice of Rule-making Proceedings was published in the Register on October 15, 2001 and April 15, 2002.
Proposed Effective Date: April 1, 2003
Public Hearing:
Date: July 31, 2002
Time: 10:00 a.m.
Location: Room 201, Council Building, NC Division of Facility Services, Dorothea Dix Campus, 701 Barbour Dr., Raleigh, NC
Reason for Proposed Action: The NC General Assembly recently ratified House Bill 1147 (Session Law 2001-410). This legislation amends G.S. 132E-83 and directs the NC Medical Care Commission to adopt temporary rules "setting forth conditions for licensing neonatal care beds." The Commission adopted temporary amendments to these Rules to meet this legislative mandate. These Rules are Certificate of Need (CON) rules that were also temporarily amended to conform to – and ensure consistency with – the changes to 10 NCAC 03C .3102 and .4305. The Division is now moving forward with the permanent adoption of the amendments. This notice identifies a time for a public hearing and a deadline for receiving comments on this rule-making action.
Comment Procedures: Written comments concerning this rule-making action must be submitted by July 31, 2002, to Mark Benton, Chief of Budget & Planning/Rule-making Coordinator, NC Division of Facility Services, 2701 Mail Service Center, Raleigh, NC 27699-2701.
Fiscal Impact
State
Local
Substantive (>$5,000,000)
None
CHAPTER 03 – FACILITY SERVICES
SUBCHAPTER 03R - CERTIFICATE OF NEED REGULATIONS
SECTION .1400 - CRITERIA AND STANDARDS FOR NEONATAL SERVICES
10 NCAC 03R .1413 DEFINITIONS
The definitions in this Rule shall apply to all rules in this Section:
(1) "Approved neonatal service" means a neonatal service that was not operational prior to the beginning of the review period. (2) "Existing neonatal service" means a neonatal service in operation prior to the beginning of the review period.
(3) "High-risk obstetric patients" means those patients requiring specialized services provided by an acute care hospital to the mother and fetus during pregnancy, labor, delivery and to the mother after delivery. The services are characterized by specialized facilities and staff for the intensive care and management of high-risk maternal and fetal patients before, during, and after delivery.
(4) "Level I neonatal service" means services provided by an acute care hospital in a licensed acute care bed to neonates and infants that are stable without complications but require special care and frequent feedings; infants of any weight who no longer require Level II or Level III neonatal services, but still require more nursing hours than normal PROPOSED RULES
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infants; and infants who require close observation in a licensed acute care bed.
(5) "Level II neonatal service" means services provided by an acute care hospital in a licensed acute care bed to neonates or infants that are high-risk, small (approximately 32 and less than 36 completed weeks of gestational age) but otherwise healthy, or sick with a moderate degree of illness that are admitted from within the hospital or transferred from another facility requiring intermediate care services for sick infants, but not intensive care. Level II neonates or infants require less constant nursing care than Level III services, but care does not exclude respiratory support.
(6) "Level III neonatal service" means neonatal intensive care services provided by an acute care hospital in a licensed acute care bed to high-risk medically unstable or critically ill neonates (approximately under 32 weeks of gestational age) or infants requiring constant nursing care or supervision not limited to continuous cardiopulmonary or respiratory support, complicated surgical procedures, or other intensive supportive interventions.
(7) "Neonatal bed" means a licensed acute care bed used to provide Level I, II, or III neonatal services.
(8) "Neonatal intensive care services" shall have the same meaning as defined in G.S. 131E-176(15b).
(9) "Neonatal service area" means a geographic area defined by the applicant from which the patients to be admitted to the service will originate.
(10) "Neonatal services" means any of the Level I, Level II or Level III services defined in this Rule.
(11) "Newborn nursery services" means services provided by an acute care hospital to full term and pre-term neonates that are stable, without complications, and may include neonates that are small for gestational age or large for gestational age.
(12) "Obstetric services" means any normal or high-risk services provided by an acute care hospital to the mother and fetus during pregnancy, labor, delivery and to the mother after delivery.
(13) "Perinatal services" means services provided during the period shortly before and after birth.
.)
Authority G.S. 131E-177(1); 131E-183.
10 NCAC 03R .1414 INFORMATION REQUIRED OF
APPLICANT
(a) An applicant proposing to develop a new newborn nursery service or increase the number of Level I, II, or III neonatal beds shall use the Acute Care Facility/Medical Equipment application form.
(b) An applicant proposing to develop a new newborn nursery service or increase the number of Level I, II, or III neonatal beds shall provide the following additional information:
(1) the current number of newborn nursery bassinets, Level I beds, Level II beds and Level III beds operated by the applicant;
(2) the proposed number of newborn nursery bassinets, Level I beds, Level II beds and Level III beds to be operated following completion of the proposed project;
(3) evidence of the applicant's experience in treating the following patients at the facility during the past twelve months, including:
(A) the number of obstetrical patients treated at the acute care facility;
(B) the number of neonatal patients treated in newborn nursery bassinets, Level I beds, Level II beds and Level III beds, respectively;
(C) the number of inpatient days at the facility provided to obstetrical patients;
(D) the number of inpatient days provided in Level I beds, Level II beds and Level III beds, respectively;
(E) the number of high-risk obstetrical patients treated at the applicant's facility and the number of high-risk obstetrical patients referred from the applicant's facility to other facilities or programs; and
(F) the number of neonatal patients referred to other facilities for services, identified by required level of neonatal service (i.e. Level I, Level II or Level III);
(4) the projected number of neonatal patients to be served identified by newborn nursery, Level I, Level II and Level III neonatal services for each of the first three years of operation following the completion of the project, including the methodology and assumptions used for the projections;
(5) the projected number of patient days of care to be provided in the newborn nursery bassinets, Level I beds, Level II beds and Level III beds, respectively, for each of the first three years of operation following completion of the project, including the methodology and assumptions used for the projections;
(6) if proposing to provide new newborn nursery or Level I neonatal services, documentation that at least 90 percent of the anticipated patient population is within 30 minutes driving time one-way from the facility;
(7) if proposing to provide new newborn nursery or Level I neonatal services, documentation of a written plan to transport infants to Level II or Level III neonatal services as the infant's care requires;
PROPOSED RULES
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(
(8) evidence that the applicant shall have access to a transport service with at least the following components:
(A) trained personnel;
(B) transport incubator;
(C) emergency resuscitation equipment;
(D) oxygen supply, monitoring equipment and the means of administration;
(E) portable cardiac and temperature monitors; and
(F) a mechanical ventilator;
(9) documentation that the proposed service shall be operated in an area organized as a physically and functionally distinct entity with controlled access;
(10) documentation to show that the new or additional Level I, Level II or Level III neonatal services shall be offered in a physical environment that conforms to the requirements of federal, state, and local regulatory bodies;
(11) a detailed floor plan of the proposed area drawn to scale;
(12) documentation of direct or indirect visual observation by unit staff of all patients from one or more vantage points; and
(13) documentation that the floor space allocated to each bed and bassinet shall accommodate equipment and personnel to meet anticipated contingencies.
(c) If proposing to provide new Level II or Level III neonatal services the applicant shall also provide the following information:
(1) documentation that at least 90 percent of the anticipated patient population is within 90 minutes driving time one-way from the facility, with the exception that there shall be a variance from the 90 percent standard for facilities which demonstrate that they provide very specialized levels of neonatal care to a large and geographically diverse population, or facilities which demonstrate the availability of air ambulance services for neonatal patients;
(2) evidence that existing and approved neonatal services in the applicant's defined neonatal service area are unable to accommodate the applicant's projected need for additional Level II and Level III services;
(3) an analysis of the proposal's impact on existing Level II and Level III neonatal services which currently serve patients from the applicant's primary service area;
(4) the availability of high risk OB services at the site of the applicant's planned neonatal service;
(5) copies of written policies which provide for parental participation in the care of their infant, as the infant's condition permits, in order to facilitate family adjustment and continuity of care following discharge; and
(6) copies of written policies and procedures regarding the scope and provision of care within the neonatal service, including but not limited to the following:
(A) the admission and discharge of patients;
(B) infection control;
(C) pertinent safety practices;
(D) the triaging of patients requiring consultations, including the transfer of patients to another facility; and
(E) the protocols for obtaining emergency physician care for a sick infant.
Authority G.S. 131E-177(1); 131E-183.
10 NCAC 03R .1415 REQUIRED PERFORMANCE
STANDARDS
(a) An applicant shall demonstrate that the proposed project is capable of meeting the following standards:
(1) an applicant proposing a new newborn nursery, new Level I services, or additional Level I beds shall demonstrate that the occupancy of the applicant's total number of neonatal beds is projected to be at least 50% during the first year of operation and at least 65% during the third year of operation following completion of the proposed project; (2) if an applicant proposes an increase in the number of the facility's existing Level II or Level III beds, the overall average annual occupancy of the total number of existing Level II and Level III beds in the facility is at least 75%, over the 12 months immediately preceding the submittal of the proposal; and
(3) if an applicant is proposing to develop new or additional Level II or Level III beds, the projected occupancy of the total number of Level II and Level III beds proposed to be operated during the third year of operation of the proposed project shall be at least 75%.
(4) The applicant shall document the assumptions and provide data supporting the methodology used for each projection in this Rule.
(b) If an applicant proposes to develop a new Level II or Level III service, the applicant shall document that an unmet need exists in the applicant's defined neonatal service area. The need for Level II and Level III beds shall be computed for the applicant's neonatal service area by:
(1) identifying the annual number of live births occurring at all hospitals within the proposed neonatal service area, using the latest available data compiled by the State Center for Health Statistics;
(2) identifying the low birth weight rate (percent of live births below 2,500 grams) for the births identified in (1) of this Paragraph, using the PROPOSED RULES
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latest available data compiled by the State Center for Health Statistics;
(3) dividing the low birth weight rate identified in Subparagraph (2) of this Paragraph by .08 and subsequently multiplying the resulting quotient by four; and
(4) determining the need for Level II and Level III beds in the proposed neonatal service area as the product of:
(A) the product derived in Subparagraph (3) of this Paragraph, and
(B) the quotient resulting from the division of the number of live births in the initial year of the determination identified in Subparagraph (1) of this Paragraph by the number 1000.
Authority G.S. 131E-177(1); 131E-183(b).
10 NCAC 03R .1416 REQUIRED SUPPORT
SERVICES
(a) An applicant proposing to provide new Level I, Level II or Level III services shall document that the following items shall be available, unless an item shall not be available, then documentation shall be provided obviating the need for that item:
(1) competence to manage uncomplicated labor and delivery of normal term newborn;
(2) capability for continuous fetal monitoring;
(3) a continuing education program on resuscitation to enhance competence among all delivery room personnel in the immediate evaluation and resuscitation of the newborn and of the mother;
(4) obstetric services;
(5) anesthesia services;
(6) capability of cesarean section within 30 minutes at any hour of the day; and
(7) twenty-four hour on-call blood bank, radiology, and clinical laboratory services.
(b) An applicant proposing to provide new Level II or Level III services shall document that the following items shall be available, unless any item shall not be available, then documentation shall be provided obviating the need for that item:
(1) competence to manage labor and delivery of premature newborns and newborns with complications;
(2) twenty-four hour availability of microchemistry hematology and blood gases;
(3) twenty-four hour coverage by respiratory therapy;
(4) twenty-four hour radiology coverage with portable radiographic capability;
(5) oxygen and air and suction capability;
(6) electronic cardiovascular and respiration monitoring capability;
(7) vital sign monitoring equipment which has an alarm system that is operative at all times;
(8) capabilities for endotracheal intubation and mechanical ventilatory assistance;
(9) cardio-respiratory arrest management plan;
(10) isolation capabilities;
(11) social services staff;
(12) occupational or physical therapies with neonatal expertise; and
(13) a registered dietician or nutritionist with training to meet the special needs of neonates.
(c) An applicant proposing to provide new Level III services shall document that the following items shall be available, unless any item shall not be available, then documentation shall be provided obviating the need for that item:
(1) pediatric surgery services;
(2) ophthalmology services;
(3) pediatric neurology services;
(4) pediatric cardiology services;
(5) on-site laboratory facilities;
(6) computed tomography and pediatric cardiac catheterization services;
(7) emergency diagnostic studies available 24 hours per day;
(8) designated social services staff; and
(9) serve as a resource center for the statewide perinatal network.
Authority G.S. 131E-177(1); 131E-183(b).
10 NCAC 03R .1417 REQUIRED STAFFING AND
STAFF TRAINING
An applicant shall demonstrate that the following staffing requirements for hospital care of newborn infants shall be met:
(1) If proposing to provide new Level I services the applicant shall provide documentation to demonstrate that:
(a) the nursing care shall be supervised by a registered nurse in charge of perinatal facilities;
(b) a physician is designated to be responsible for neonatal care; and
(c) the medical staff will provide physician coverage to meet the specific needs of patients on a 24 hour basis.
(2) If proposing to provide new Level II services the applicant shall provide documentation to demonstrate that:
(a) the nursing care shall be supervised by a registered nurse;
(b) the service shall be staffed by a board certified pediatrician; and
(c) the medical staff will provide physician coverage to meet the specific needs of patients on a 24 hour basis.
(3) If proposing to provide new Level III services the applicant shall provide documentation to demonstrate that:
(a) the nursing care shall be supervised by a registered nurse with educational preparation and advanced skills for maternal-fetal and neonatal services; PROPOSED RULES
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(b) the service shall be staffed by a full-time board certified pediatrician with certification in neonatal medicine; and
(c) the medical staff will provide physician coverage to meet the specific needs of patients on a 24 hour basis.
(4) All applicants shall submit documentation which demonstrates the availability of appropriate inservice training or continuing education programs for neonatal staff.
(5) All applicants shall submit documentation which demonstrates the proficiency and ability of the nursing staff in teaching parents how to care for neonatal patients following discharge to home.
(6) All applicants shall submit documentation to show that the proposed neonatal services will be provided in conformance with the requirements of federal, state and local regulatory bodies.
Authority G.S. 131E-177(1); 131E-183(b).
* * * * * * * * * * * * * * * * * * *
Notice is hereby given in accordance with G.S. 150B-21.2 that the DHHS – Division of Medical Assistance intends to amend the rules cited as 10 NCAC 26H .0212-.0213. Notice of Rule-making Proceedings was published in the Register on July 2, 2001 and July 16, 2001.
Proposed Effective Date: April 1, 2003
Public Hearing:
Date: July 31, 2002
Time: 11:30 - 12:30 p.m.
Location: 1985 Umstead Drive, Room 132, Kirby Building, Raleigh, NC
Reason for Proposed Action: This change is necessary to ensure the continuing availability of an adequate level of services to Medicaid and uninsured persons.
Comment Procedures: Written comments concerning this rule-making action must be submitted by August 30, 2002 to Portia W. Rochelle, Rule-making Coordinator, Division of Medical Assistance, 1985 Umstead Drive, 2504 Mail Service Center, Raleigh, NC 27699-2504.
Fiscal Impact
State
Local
Substantive (>$5,000,000)
None
CHAPTER 26 – MEDICAL ASSISTANCE
SUBCHAPTER 26H – REIMBURSEMENT PLANS
SECTION .0200 - HOSPITAL INPATIENT REIMBURSEMENT PLAN
10 NCAC 26H .0212 EXCEPTIONS TO DRG
REIMBURSEMENT
(a) Covered psychiatric and rehabilitation inpatient services provided in either specialty hospitals, Medicare recognized distinct part units (DPU), or other beds in general acute care hospitals shall be reimbursed on a per diem methodology.
(1) For the purposes of this Section, psychiatric inpatient services are defined as admissions where the primary reason for admission would result in the assignment of DRGs in the range 424 through 432 and 436 through 437. For the purposes of this Section, rehabilitation inpatient services are defined as admissions where the primary reason for admissions would result in the assignment of DRG 462. All services provided by specialty rehabi