North Carolina Supreme Court Upholds Tax Ruling Against Philip Morris

Raleigh, North Carolina – The North Carolina Supreme Court issued a crucial ruling on Monday, confirming that administrative courts lack the authority to overturn state tax laws. This landmark decision upheld a tax bill of approximately $340,000 against Philip Morris, following a legal dispute that stemmed from franchise tax assessments made by the N.C. Department of Revenue for the years 2012 to 2014.

The court’s decision clarifies that only state courts have the jurisdiction to address constitutional challenges to North Carolina tax laws. The Supreme Court sided with the N.C. Department of Revenue, which asserted that Philip Morris did not adequately comply with the legal provisions governing franchise tax liabilities. An audit in 2016 revealed that the company owed around $344,994, which included unpaid taxes, penalties, and interest.

The franchise tax in question is calculated based on a corporation’s assets, commonly referred to as its capital base. State legislation permits corporations to reduce their tax bills by subtracting any debts owed to them by related companies, provided those companies also remit state franchise taxes. Philip Morris, which operates in North Carolina and was previously responsible for a cigarette manufacturing facility in Concord, had argued that it had properly followed the tax law. However, the Supreme Court concluded otherwise.

A series of financial transactions between Philip Morris and its affiliated companies, part of the Altria Group, complicated the matter. Some of these affiliates were subject to North Carolina’s franchise tax, while others were not. In 2020, Philip Morris filed a petition for a contested case hearing with the state’s Office of Administrative Hearings, contesting the Department of Revenue’s interpretation of the franchise statute as unconstitutional under the Commerce Clause of the U.S. Constitution.

Initially, an administrative judge sided with Philip Morris, reversing the tax assessment. However, this decision was challenged, leading the case to the North Carolina Business Court, which ruled that the Office of Administrative Hearings could not make determinations on constitutional issues related to tax payments. The Supreme Court later reinforced this decision, asserting that the state law (N.C. General Statute 105-241.17) mandates the dismissal of cases focused solely on the constitutionality of tax matters.

Representatives for Philip Morris stated that they would not appeal this procedural ruling. Plans are underway to refile a complaint addressing specific technical issues related to the case. Philip Morris has a long-standing relationship with North Carolina, having operated a cigarette plant there for 16 years, employing nearly 3,000 workers before the plant’s closure in 2009. Today, Philip Morris, headquartered in Richmond, Virginia, represents a leading player in the U.S. cigarette market, controlling approximately 46% of it.

Founded in London in 1847, Philip Morris continues to produce major brands, including Marlboro and Virginia Slims. Its parent company, Altria, reported over $24 billion in net revenue in 2024. Once a significant employer and taxpayer in Cabarrus County, North Carolina, the company’s historical presence continues to impact the state’s economy.

Background Information

Philip Morris’s contention centers around the complexity of tax regulations and their compliance with federal law. The ongoing legal battle reflects broader implications for taxation, corporate governance, and the interpretations of state tax policies.

Key Details of the Ruling

• The North Carolina Supreme Court ruled against Philip Morris, affirming a tax of $344,994.
• Franchise tax assessments stemmed from 2012 to 2014.
• The company improperly applied rules regarding tax reductions based on debts owed by affiliates.
• The ruling emphasizes that only state courts can review constitutional challenges to tax laws.

What was the outcome of the North Carolina Supreme Court ruling against Philip Morris?

The court upheld a tax liability of approximately $340,000 against Philip Morris, clarifying state tax law authority.

Why did Philip Morris dispute the tax assessment?

Philip Morris contested an additional franchise tax assessment, claiming that the interpretation of the tax law violated the Commerce Clause of the U.S. Constitution.

What does the franchise tax depend on?

The franchise tax is based on a corporation’s assets, known as its capital base, and allows reductions for debts owed by related companies that also pay franchise taxes.

What is Philip Morris’s history in North Carolina?

Philip Morris operated a cigarette plant in Concord for 16 years and was a significant employer before closing the facility in 2009.

What are the financial implications of the court’s ruling?

The ruling enforces that Philip Morris must pay the owed taxes, penalties, and interest, totaling approximately $344,994, which could influence their financial performance in the state.