Michelin North America, Inc. has a facility in Mecklenburg County, North Carolina, where it tests airplane tires. The tires at this facility fall into three categories: (1) "prototype tires," which are in the R&D phase; (2) "conformance production tires," which are pulled from inventory in Michelin's other factories and sent to the Mecklenburg facility for testing; and (3) "returned goods," which are used tires returned to Michelin for performance evaluation. The prototype tires and the conformance production tires are destroyed through testing at the Mecklenburg facility. The returned goods, which are owned by Michelin's customers, are denatured and hauled away after testing for disposal or recycling.
Are the prototype tires and conformance production tires subject to property tax in North Carolina? That was the question before the North Carolina Court of Appeals in Michelin North America, Inc., decided by the Court on April 5, 2016.
The default rule in North Carolina is that property is subject to tax unless excluded by statute or the North Carolina Constitution. One such exclusion from the tax base is "inventories owned by manufacturers," excluded by N.C. Gen. Stat. Section 105-275(33). In Michelin, Mecklenburg County and Michelin agreed that Michelin is a manufacturer. Moreover, the parties agreed that the prototype tires and conformance production tires were "finished goods," which is important since the term "inventories" is defined by statute in this context to include:
"raw materials, goods in process, finished goods, or other materials or supplies that are consumed in manufacturing or processing or that accompany and become a part of the sale of the property being sold."
So, what was the dispute?
As it turns out, it was one of statutory interpretation. Mecklenburg County took the position that the statutory phrase "consumed in manufacturing or processing or that accompany and become a part of the sale of the property being sold" refers not just to "other materials or supplies" but also to "raw materials, goods in process, [and] finished goods." So, under the County's reading of the statute, finished goods held by the Manufacturer would not qualify as "inventories owned by manufacturers" unless those finished goods were "consumed in manufacturing or processing" or if they "accompany and become a part of the sale of the property being sold."
If you think that's a stretch, we are on the same page. Still, the question was before it, so the Court had to answer it. To do so, the Court turned to the rules of statutory interpretation which required it to ascertain the intent of the legislature. To do that, the Court turned to the legislative history of the "inventory" definition, and specifically the inclusion of "finished goods" in that definition. The term was added in 1985. At that time, the language of the definition was exactly as the indented and quoted language above, except that the "or" preceding "other materials or supplies" was not an "or." Instead, it was an "as well as." Thus, the Court concluded, the legislature meant to include "other materials or supplies..." in addition to raw materials, goods in process, and finished goods - not in modification of those terms. The "as well as" did not become an "or" until 2008, when the legislature cleaned up the definition a bit to what it is today. The Court found that these 2008 changes showed no intent to change the meaning of the definition as it had existed since 1985.
The takeaway is this: If you are a manufacturer in North Carolina, your raw materials, goods in process, and finished goods are excluded from taxation, period. It doesn't matter if those materials, goods in process, and finished goods are consumed in the manufacturing or processing, or if they accompany and become part of the sale of the property being sold.
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