Today at the Court of Appeals (6/6/12)

Today, a panel of the North Carolina Court of Appeals (Judges Hunter, Geer, and Beasley) will hear oral argument in In the Matter of the Appeal of Novartis Vaccines and Diagnostics, Inc., COA11-1592. Wake County appeals from a decision of the North Carolina Property Tax Commission holding that Novartis Vaccines and Diagnostics, Inc. is entitled to a tax exemption of 40% of the improvements to real property on which a vaccine production plant is being constructed.

According to the Record on Appeal and the parties’ briefs, which you can find here, in 2006, the Town of Holly Springs gave Novartis two tracts of land in Wake County on which Novartis is currently constructing a vaccine manufacturing facility. In 2009, Novartis entered into a contract with the United States Department of Health and Human Services (“HHS”), in which HHS agreed to fund $316 million (or 40%) of the facility’s projected construction costs and to purchase up to 96 million flu vaccines a year from Novartis once it started production. This contract, which was part of the Federal Government’s effort to prepare for future flu pandemics, allows HHS the right to use the facility to produce flu vaccines should a flu pandemic occur. The contract provides that during construction, HHS and Novartis jointly own the facility in accordance with their respective shares of investment, but once Novartis completes and validates the facility, all of the rights and title in the facility shall pass to Novartis and the Government shall retain no right of ownership in the facility.

The issue on appeal is whether Novartis should receive a 40% exemption for the 2010 tax year on the grounds that HHS owns 40% of the improvements to the real property and under N.C. Gen. Stat. § 105-278.1, this portion is not subject to taxation because it is owned by the Federal Government. The County contends that Novartis is not entitled to the 40% exemption because HHS does not own an interest in the facility and that even if HHS did own an interest, that interest does not reduce the taxable value of the property. The County’s position is that under the contract, HHS does not have a fee simple absolute interest in the property, but rather a short-lived determinable interest in the property while construction is underway that reverts to Novartis once construction is complete. Because the reversion of HHS’ interest in the property is probable in the near future (when the project is completed in 2014), the County argues it should be considered as belonging to Novartis and not subject to an exemption. In response, Novartis argues that under Federal Acquisition regulations, HHS owns a fee simple interest in all property for which it is obligated to reimburse Novartis under the contract, and thus that interest is subject to an exemption.

Stay tuned for a report once the Court publishes its ruling in this matter.