N.C. Supreme Court upholds dismissal of lawsuit over Google tax incentives

Feb 7th, 2011
by Andrew Ballard
from BNA


Tax Incentives

N.C. Supreme Court Upholds Dismissal

 Of Lawsuit Over Google Tax Incentives 


RALEIGH, N.C.—The North Carolina Supreme Court Feb. 3 let stand lower court rulings that dismissed a lawsuit filed by individual taxpayers challenging incentives provided to Google Inc. (Munger v. North Carolina, N.C., No. 130PA10,order filed 2/3/11).


After agreeing to consider a North Carolina Court of Appeals' decision in the matter and hearing arguments, the high court decided it improperly granted review. The court did not explain its determination that “discretionary review was improvidently allowed.”


The case stems from sales and use tax exemptions and other financial incentives offered by state and local governments in an alleged effort to encourage Google Inc. to construct a data center in western North Carolina. Google opened such a facility in May 2008.


Beginning in December 2005, state and local officials met with Google over the proposed project. Although Google was not specifically mentioned in the legislation, certain sales and use tax exemptions for “eligible internet data centers”were included in a budget bill signed into law by then-Gov. Mike Easley(D) in July 2006 (Session Law 06-66) (130 DTR H-2, 7/7/06).


In July 2007, three individual taxpayers filed a lawsuit against state officials, Google, and the company's subsidiary, Madras Integration LLC, in the North Carolina Superior Court for Wake County. The plaintiffs sought to recover incentives already paid and prevent further incentive payments, alleging they were unconstitutional.


Individual Taxpayers Found to Lack Standing 


The state trial court dismissed the lawsuit, which included a number of claims for relief. The plaintiffs appealed the finding that they lacked standing to pursue claims that the incentives violated constitutional provisions related to uniformity in taxation and equal protection.


Upon its consideration, the North Carolina Court of Appeals in February 2010 ruled that the taxpayers lacked standing to constitutionally challenge the incentives and the lawsuit was properly dismissed. Among other things, the appeals court said the fact that the plaintiffs paid a tax from which eligible internet data centers were exempt was not, in and of itself, sufficient to give them standing to advance a discrimination-based challenge to the constitutionality of such tax incentives (Munger v. North Carolina, N.C. Ct. App., No. 09-375, 2/16/10 (30 DTR K-1, 2/17/10).


Pressly M. Millen, an attorney with the Raleigh law offices of Womble, Carlyle, Sandridge &  Rice who represented Google in the case, told BNA Feb. 4 that the state supreme court essentially determined “that a significant constitutional question was not presented.”


According to Millen, Google agreed with and was pleased with the outcome. Had the high court reversed the lower court rulings on standing, “we would have a situation where virtually any taxpayer who paid any sales tax or any income tax would have standing to challenge any one of hundreds of statutory exemptions”or other provisions in state tax law, he said.


Commenting on behalf of the administration, Tim Crowley, a spokesman for the state Department of Commerce, told BNA Feb. 4 that, “[a]s consistent with past decisions, we believe this is the right result.”


Lawyer Wonders Who May Challenge 


Robert F. Orr, an attorney with the Raleigh-based not-for-profit North Carolina Institute for Constitutional Law who represented the taxpayers in the matter, called the ruling “a punt” that the justices may have made for a number of different reasons. “I am disappointed because I think it's a very important issue that the highest court in the state needs to decide,”he said.


“For all the businesses out there, I would start asking for more money,” according to Orr. By allowing the case to be dismissed, the high court has decided “there is no constitutional limitation on cities and counties and state governments for giving out money to private businesses,” he said.


“North Carolinians are left to wonder who has standing to challenge the outrageous corporate welfare and economic development give-aways specially crafted for cherry picked corporate giants like Google,” Jeanette K. Doran, another attorney with the North Carolina Institute for Constitutional Law, told BNA in a Feb. 4 e-mail. “It is unfortunate for the people that the Court, having reviewed the briefs and heard oral argument, has now decided it shouldn't have granted review,” she said.


The lawsuit against Google was one of a series of challenges to economic incentive legislation enacted in North Carolina. In April 2008, the North Carolina Supreme Court upheld the dismissal of a challenge to tax breaks and other financial incentives provided to Dell Inc. (Blinson v. North Carolina, N.C., No. 546P06-2 (71 DTR K-1, 4/14/08).


According to Orr, his group also has challenged, on behalf of taxpayers, incentives provided to Goodyear Tire & Rubber and Bridgestone/Firestone, Nitronex, and Johnson &  Wales University. Those lawsuits are in various stages of litigation, he said.