Out-of-State Lenders

Out-of-State Lenders

March 01, 2006

Out-of-state lenders financing equipment in North Carolina must pay an annual tax on the face value of the loan, an appeals court said.

North Carolina taxes anyone engaged in the “business of dealing in, buying, or discounting installment paper, notes, bonds, contracts, or evidences of debt” that are secured by liens on equipment located in North Carolina. The tax is .277% of the face value of the debt. It is collected annually.

Navistar, a truck manufacturer, has a finance subsidiary that lends dealers and customers the money they need to purchase Navistar trucks. The finance subsidiary is based outside North Carolina. It has no office in the state. It brought suit in an effort to get back $700,000 in taxes paid on installment paper over roughly a two-year period, arguing that it has too little “nexus” — or connection — with the state for the state to be able to tax it.

A state appeals court disagreed in a decision released in late February. The US constitution bars states from taxing persons who have little connection to the state or in a manner that discriminates against out-of- state residents or specially burdens interstate commerce. The court said the fact that the company holds liens over equipment in North Carolina gives it a substantial enough connection to the state.

The court also said there is no risk of Navistar having to pay the same taxes to multiple states, since the trigger for the North Carolina tax is holding a note secured by a lien over equipment in North Carolina. The case is Navistar Financial Corporation v. Tolson.

Keith Martin