Authors
Key takeaways
- The North Carolina Supreme Court ruled that the Office of Administrative Hearings (OAH) cannot decide any constitutional challenges—facial or as-applied—to state tax statutes.
- Taxpayers challenging the constitutionality of a tax statute must bring their claim before the OAH, have it dismissed, and then file suit in state court.
- Procedurally, Philip Morris’s case involving North Carolina’s franchise tax affiliated indebtedness rules now returns to the OAH.
On August 22, 2025, the North Carolina Supreme Court issued its decision in North Carolina Department of Revenue v. Philip Morris USA, Inc.,1 addressing whether the OAH has jurisdiction to decide constitutional challenges to state tax statutes. The Court ruled that the OAH lacks jurisdiction to decide both facial and as-applied constitutional challenges to tax statutes. Instead, the power to decide these constitutional issues belongs solely to the judicial branch. This decision affirms the lower court’s 2023 opinion on this procedural question.2
The case arose after Philip Morris challenged a particular application of North Carolina’s franchise tax statute. Specifically, Philip Morris argued that the statutory franchise tax deduction for indebtedness owed to a taxpayer by an affiliate, as applied to Philip Morris, violated the dormant Commerce Clause of the U.S. Constitution. [See this prior Client Alert for a discussion of North Carolina’s rules for affiliated indebtedness and Philip Morris’s challenge.] Philip Morris was assessed additional franchise tax by the Department of Revenue as a result of adjusting this deduction, and Philip Morris sought relief before the OAH, which ruled in Philip Morris’s favor. In doing so, the OAH determined that it possessed subject matter jurisdiction to decide this constitutional challenge because Philip Morris was merely arguing that the application of the statute was unconstitutional “as-applied” to Philip Morris’s specific facts; it was not arguing that the statute was facially unconstitutional.3
The Department of Revenue appealed, and the Business Court determined that the OAH lacked subject matter jurisdiction over the constitutional claim, reasoning that the relevant statutes—N.C.G.S. § 105-241.17 and § 7A-45.4—direct such constitutional challenges to the courts, not administrative agencies.4 The Supreme Court agreed, emphasizing that the legislature had not clearly granted the OAH the power to adjudicate as-applied constitutional issues, and that doing so would raise serious separation-of-powers concerns, regardless. The Court also noted that its approach here is consistent with the U.S. Supreme Court’s major questions doctrine: “when an administrative agency in the executive branch wants to do something that is an extraordinarily big deal, it must show that [the legislature] clearly gave it permission to do so in the statutory text.”
As a result, Philip Morris’s case will be remanded back to the OAH with instructions to dismiss the case for lack of jurisdiction, and, following dismissal, Philip Morris may restart the proceedings at Business Court.
This decision provides important clarity for taxpayers and practitioners regarding the procedural requirements for challenging the constitutionality of North Carolina tax statutes. Taxpayers must first exhaust their administrative remedies, including appeal to the OAH. But, if their sole claim is that a statute is unconstitutional—whether on its face or as-applied—the OAH must dismiss the case for lack of subject matter jurisdiction, and the taxpayer may then pursue the claim in the courts.
- No. 242A23 (filed August 22, 2025).
- NC Department of Revenue v. Philip Morris USA, Inc., 22 CVS 1162 (filed May 3, 2023).
- Philip Morris USA, Inc. v. NC Department of Revenue, 20 REV 04215 (filed December 30, 2021).
- NC Department of Revenue v. Philip Morris USA, Inc., 22 CVS 1162 (filed May 3, 2023).
Client Alert 2025-225