Taxpayers Lack Standing to Challenge Incentives

In Munger v. State of North Carolina, the Court of Appeals held that tax payers lacked standing to challenge economic incentives provided to Google under various provisions of the North Carolina Constitution.

(Disclosure: Womble Carlyle represented Google, Inc. and Madras Integration, LLC in this matter.)

In 2006, as part of an effort to convince Google to open an internet data center in Caldwell County, lawmakers "exempted internet data centers from certain sales and use taxes." Plaintiffs Michael Munger, Barbara Howe, and Mark Whitley Cares sued the state and various other parties seeking a declaration that the economic incentives provided to internet data centers violated the North Carolina Constitution. The Plaintiffs also sought an injunction prohibiting the State from "providing any incentives to the Google Defendants and recoup any incentive amounts that had already been provided to the Google Defendants."

In November 2008, Judge Paul C. Ridgeway of Wake County Superior Court entered an Order and Memorandum of Decision that dismissed all of plaintiffs' claims. Plaintiffs' claims under the "just and equitable" taxation, uniformity of taxation, and "law of the land" provisions of the North Carolina Constitution were dismissed due to lack of standing. Plaintiffs appealed the portion of the trial court's Order that determined they did not have standing to pursue the constitutional claims.

The Court's analysis opened with a review of the law governing taxpayer standing cases. Opinions from the Court of Appeals and the Supreme Court establish taxpayer standing for two types of actions:

(1) actions challenging the constitutional validity of a statute on the grounds that it allows public funds to be dispersed for reasons other than a “public purpose,” in which a taxpayer generally has standing, and (2) actions challenging the constitutional validity of a statute on the grounds that the statute discriminates among classes of persons, in which a taxpayer must show that he belongs to a class that receives prejudicial treatment.

Plaintiffs' arguments regarding standing were all related to the discrimination-based taxpayer standing. First, plaintiffs claims that because they were challenging tax exemptions, instead of a tax levy, they did not need to be among those eligible for the tax exemption in order to have standing. Second, they claim that they did not raise a "true discrimination claim" and therefore the case law regarding discrimination-based claims was inapplicable to this case. Finally, they argued that if the discrimination-based standing test was applied to them they satisfied the standing requirement "by virtue of their status as persons who pay the relevant taxes."

The plaintiffs first argument was based upon the North Carolina Supreme Court's decision in Goldston v. State where the Supreme Court held that taxpayers have standing to bring suit against government officials for alleged misuse or misappropriation of public funds. The plaintiffs argued that because a failure to collect taxes diminished the amount of money in the public coffers in the same manner as a misuse or misappropriation of funds, they should have standing to challenge the tax exemptions.

The Court of Appeals held that Goldston did not modify the doctrine of taxpayer standing in the manner plaintiffs suggested. In order to demonstrate standing, the plaintiffs would have to show that they were among the class of individuals prejudiced by the allegedly discriminatory statute. Therefore "the mere fact that Plaintiffs pay North Carolina income and sales and use taxes, without more, does not give them standing to challenge the sales and use tax exemptions afforded to eligible internet data centers."

Plaintiffs, relying on the Court of Appeals decision in In re Appeal of Barbour, next attempted to avoid the label of a discrimination-based claim by claiming that "[i]nstead of alleging 'that the qualifying criteria operate in a discriminatory manner,' Plaintiffs claim to 'have alleged that the creation of a special tax exemption - without regard to qualifying criteria - is unconstitutional.'" According to plaintiffs, the Barbour decision held "that the plaintiff in that case had standing for uniformity claims which were challenges to the existence of a tax exemption rather than those claims which challenged the discriminatory features of an exemption."

The Court of Appeals rejected this argument, saying that "we are unable to find any support for the distinction upon which Plaintiffs rely in this case." According to the Court, Barbour supported the traditional standing requirement that a plaintiff seeking to bring a challenge under the Uniformity of Taxation clause must be part of the class that is prejudiced by the challenged statute. The Court found that

At bottom, the crux of each of Plaintiffs’ claims is that eligible internet data centers have received more favorable tax treatment than Plaintiffs and other similarly-situated persons, which makes their claims quintessentially discrimination-based. As a result, we conclude that the trial court correctly concluded that Plaintiffs had to demonstrate that they “‘belong[ed] to the class which is prejudiced by the statute,’” Barbour, 112 N.C. App. at 373, 436 S.E.2d at 173, as a prerequisite for maintaining a constitutional challenge to the sales and use tax exemption for eligible internet data centers.

After holding that the plaintiffs would have to show that they were members of the class prejudiced by the challenged statutes, the Court went on to explain why plaintiffs could not meet this burden. The plaintiffs, again relying on Barbour, asserted that " 'a plaintiff must be in the class of taxpayers who pay the tax exempted by the challenged tax exemption' and 'need not be discriminated against by the criteria for exemption itself' in order to challenge an exemption from the sales and use tax.

The Court once again held that Barbour could not support the weight placed upon it by the plaintiffs. Barbour did not contain "any explicit distinction between challenges to the existence of an exemption and challenges to the 'qualifying criteria' associated with an exemption." Relying on its previous decision in Blinson v. State, the Court found that the fact that plaintiffs

pay sales and use tax, that the same sort of exemption available to eligible internet data centers is not available to them, and that the existence of the sales and use tax exemption for eligible internet data centers forces them to bear more of the burden of financing the activities of state government than would be the case in the absence of the exemption

was insufficient to establish standing.

It is unlikely that the Court of Appeals' decision will be the last word in this case.  The Supreme Court has shown a willingness to hear tax incentive cases in the past and it is likely that the plaintiffs will request that it review this case as well.