On August 22, 2025, the North Carolina Supreme Court held that the North Carolina Office of Administrative Hearings (“OAH”), an administrative body within North Carolina’s executive branch, does not have the authority to decide that a tax statute is unconstitutional either on its face or on an as-applied basis. North Carolina Dep’t of Revenue v. Phillip Morris USA, Inc., No. 242A23 (N.C. Aug. 22, 2025). The case makes clear to taxpayers wishing to challenge the constitutionality of a North Carolina statute, either facially or as-applied, that their exclusive remedy is challenging the statute in court. It is also a reminder to taxpayers wishing to challenge the constitutionality of tax statutes in any state, that the first step in any such challenge is ensuring that their case is before an appeals body that has the authority to determine that the tax statute in question is unconstitutional.
The taxpayer here challenged a provision of the North Carolina franchise tax law that permitted a creditor corporation to deduct from its franchise tax base the debts owed to it by a related party debtor corporation so long as the debtor corporation also filed a North Carolina franchise tax return. N.C.G.S. § 105-122(b) (2013). The taxpayer argued on appeal at the OAH that the provision was unconstitutional as applied to the taxpayer because it amounted to prohibited economic protectionism whereby the benefit of the deduction was permitted based solely on whether the debtor corporation did business in North Carolina. The OAH agreed, holding that the provision violated the Commerce Clause of the U.S. Constitution as applied to the taxpayer. The Department of Revenue appealed, and the Special Superior Court Judge for Complex Business Cases held that the OAH lacked subject matter jurisdiction over the taxpayer’s as-applied constitutional challenge to the franchise tax provision in question.
On appeal by the taxpayer, the North Carolina Supreme Court first held that a party can assert that a court lacks subject matter jurisdiction at any time in a case, even for the first time on appeal, and therefore, the fact that the Department did not raise the OAH’s lack of subject matter jurisdiction during the proceeding before the OAH did not preclude the Department from making the argument on appeal. The Court next explained that an administrative body, such as the OAH, “is a creature of the statute creating it” and “to be lawful, each agency action must ultimately be grounded in some piece of legislation.” Consequently, the Court was unpersuaded by the taxpayer’s argument that the OAH was authorized to decide as-applied constitutional challenges because it was not expressly barred from doing so by statute.
The Court instead reasoned that “if the legislature had wished to bestow the judicial power to decide as-applied constitutional challenges upon the OAH, it would have done so in clear-cut terms.” Finding (1) no such “clear-cut terms” in the applicable statutes; (2) that inferring the grant of authority to the OAH to decide as-applied constitutional challenges would raise “serious separation-of-powers issues;” and (3) that “a plausible interpretation of the statute would avoid the problem,” the Court adopted the “plausible interpretation” that the applicable statute did not grant the OAH the authority to decide as-applied constitutional challenges. The Court affirmed the lower court’s decision, remanding the case to the OAH and ordering that the OAH dismiss the taxpayer’s constitutional claims for lack of subject matter jurisdiction.
This update is one in a series of updates written for the September 2025 edition of The BR State + Local Tax Spotlight.
© 2025 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.
