August 5, 2013

Tax reform bill will add taxes to CHEC bills

A comprehensive tax reform bill passed a final vote in the North Carolina House and Senate and was signed into law by Gov, Pat McCrory in late July.  The bill takes away Cape Hatteras Electric Cooperative’s tax-exempt status, effective next July 1.

The result will be a 7 percent tax on electricity for its members. 

CHEC was originally incorporated in 1945 for the purpose of providing low cost electric service on a non-profit basis.  North Carolina declared all electric membership corporations (EMCs) to be public agencies, exempting the co-ops from paying state sales taxes. 

In 1960, a territory dispute arose between EMCs and investor owned utilities (IOUs) regarding the provision of electric service to previously unserved territories.  In 1964, a compromise was reached that resulted in the assignment of service territories to EMCs and IOUs and the loss of public agency status for EMCs. 

Since CHEC was in a unique position because it had no competitors and IOUs were not interested in serving Hatteras Island, its public agency status remained.

The provision that would remove CHEC’s tax-exempt status and subject the residents of Hatteras Island to a 7 percent  tax on electricity was added to a conference committee report of the tax reform bill just three days before the bill passed the legislature. And, by rule, the conference committee report could not be amended by the House or Senate.

This comes on the heels of a decade-long legal battle by CHEC to retain its tax-exempt status.

In 2011, The North Carolina Court of Appeals issued a unanimous decision about ongoing litigation between Cape Hatteras Electric Cooperative and the North Carolina Department of Revenue (NCDOR).

The Court of Appeals affirmed the earlier position of the trial court, which ruled in favor of CHEC.  The Appeals Court decision upheld the judgment issued in November, 2009 ordering the NCDOR to refund the sales and franchise taxes paid by the cooperative since 2000, including interest. 

NCDOR began collecting the sales and franchise taxes in 2000 and 2001.  The cooperative paid the taxes under protest from 2000 until the Dare County Superior Court ruled in its favor in 2009.

The Superior Court found that the cooperative and its members did not owe the taxes and ordered the NCDOR to refund more than $3.6 million in sales taxes and nearly $3.7 million in franchise taxes, along with accrued interest.

Rep. Paul Tine is working with cooperative staff and various other legislators to have the cooperative’s tax-exempt status restored.  

According to a media release from the electric cooperative, the hope is that a legislative revenue laws study committee will review the issue and recommend restoring CHEC’s tax-exempt status before the legislature reconvenes on May 14, 2014.

If the legislature is willing to restore CHEC’s tax-exempt status, it could occur before the 7 percent tax goes into effect on July 1, 2014.

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