Administrative Agencies Barred from Deciding As-Applied Constitutional Tax Challenges:
A Full Commentary on N.C. Department of Revenue v. Philip Morris USA, Inc., Supreme Court of North Carolina (2025)

1. Introduction

In N.C. Dep’t of Revenue v. Philip Morris USA, Inc., the Supreme Court of North Carolina addressed whether the Office of Administrative Hearings (OAH) possesses jurisdiction to adjudicate as-applied constitutional challenges to North Carolina tax statutes. While all parties conceded that the OAH must dismiss facial constitutional attacks under N.C.G.S. § 105-241.17, the taxpayer argued that the statute still permits the agency to consider narrower, as-applied claims. The Department countered that such power rests exclusively with the judiciary. The Court, affirming the Business Court, held that the OAH lacks authority to decide even as-applied constitutional questions, thereby channeling all constitutional challenges to tax statutes—facial or as-applied—into the courts.

Key Facts

• Parties: North Carolina Department of Revenue (petitioner-appellee) vs. Philip Morris USA, Inc. (respondent-appellant).
• Tax at issue: Franchise tax under N.C.G.S. § 105-122 for tax years 2012-2014.
• Dispute: Philip Morris deducted intercompany debt; the Department disallowed the deductions, producing an assessment of ≈ $345,000.
• Procedural path: Audit ➔ OAH contested case ➔ ALJ grants summary judgment to Philip Morris on dormant Commerce Clause grounds ➔ Department seeks judicial review ➔ Business Court reverses, holds OAH lacked jurisdiction ➔ Philip Morris appeals directly to the Supreme Court.

2. Summary of the Judgment

The Supreme Court (Justice Allen) affirmed the Business Court’s dismissal, holding:

1. Jurisdictional rule: N.C.G.S. § 105-241.17 prohibits the OAH from hearing both facial and as-applied constitutional challenges to tax statutes. Its role is confined to statutory application/misapplication issues.
2. Separation of Powers: Allowing an executive-branch agency to declare a statute unconstitutional, even as applied, would place quintessential judicial power outside the judiciary, raising serious constitutional concerns.
3. Statutory interpretation: Any ambiguity in § 105-241.17 must be resolved to avoid separation-of-powers conflicts; therefore, the statute is construed to require OAH dismissal whenever constitutionality is the “sole issue.”
4. Result: The OAH’s prior merits decision for Philip Morris is void; the contested case must be dismissed, and any constitutional attack must be re-filed in the Wake County Superior Court/Business Court following the statute’s procedural prerequisites.

3. Detailed Analysis

3.1 Precedents Cited and Their Influence

• Gulf Oil Corp. v. Clayton, 267 N.C. 15 (1966) – Long-standing principle that administrative boards cannot decide constitutional questions; heavily relied upon.
• In re Redmond, 369 N.C. 490 (2017); Meads v. N.C. Dep’t of Agric., 349 N.C. 656 (1998) – Reiterated that constitutionality is for courts, not agencies.
• In re N.P., 376 N.C. 729 (2021) – Subject-matter jurisdiction can be raised at any time; enabled the Business Court to consider the Department’s belated argument.
• Wilkie v. City of Boiling Spring Lakes, 370 N.C. 540 (2018); Lenox, Inc. v. Tolson, 353 N.C. 659 (2001) – Canonical rules of statutory construction applied by the Court.
• Responsible Citizens v. City of Asheville, 308 N.C. 255 (1983) – Explained difference between facial and as-applied challenges, supporting the Court’s definitional framework.
• Federal analog: West Virginia v. EPA, 142 S. Ct. 2587 (2022) – Invoked by analogy to the “major-questions doctrine,” underscoring the need for clear legislative authorization before agencies exercise extraordinary power.

3.2 The Court’s Legal Reasoning

1. Textual starting point. The Court parsed § 105-241.17, observing that:

   “The OAH must dismiss the contested case petition for lack of jurisdiction because the sole issue is the constitutionality of a statute and not the application of a statute.”

   The phrase does not distinguish facial from as-applied, but rather constitutional from mere application disputes.
2. Agency-power principle. Administrative bodies possess only powers expressly granted by statute (Broad & Gales Creek, 300 N.C. 267 (1980)). No statute clearly grants OAH power to adjudicate constitutional challenges.
3. Separation-of-Powers backdrop. Art. I, § 6 of the N.C. Constitution mandates that legislative, executive, and judicial powers remain distinct. Granting OAH decision-making over constitutional claims would collapse the boundary between executive and judicial branches.
4. Harmonizing with § 7A-45.4. That provision routes all constitutional challenges to tax laws (filed under § 105-241.17) to the Business Court, reinforcing legislative intent to keep such questions in the judiciary.
5. Avoidance canon. Where two plausible readings exist, courts adopt the interpretation that avoids constitutional infirmity. Here, reading § 105-241.17 as excluding OAH jurisdiction on constitutional matters sidesteps separation-of-powers doubts.
6. Rejection of tacit practice. Prior cases where OAH entertained as-applied challenges (Quad Graphics, Graybar) did not consider jurisdiction, so they lack precedential weight on the specific question.

3.3 Anticipated Impact

• Forum certainty: Taxpayers must bring any constitutional attack—facial or as-applied—to the Superior Court of Wake County/Business Court after paying the disputed tax and securing OAH dismissal.
• Administrative efficiency vs. access costs: The ruling avoids fragmented adjudication but may increase litigation costs for taxpayers, who must pay first and litigate later.
• Strengthened Judicial Role: Reinforces the North Carolina judiciary as the exclusive arbiter of constitutional validity, even in narrow, taxpayer-specific contexts.
• Legislative drafting signal: If the General Assembly wishes to empower agencies to decide constitutional issues, it must use unmistakably clear language.
• Spill-over to other agencies: Although about tax, the reasoning applies broadly: unless statutes unmistakably confer such power, executive agencies cannot adjudicate constitutional validity of the laws they administer.

4. Complex Concepts Simplified

4.1 Facial vs. As-Applied Challenges

• Facial: Argues the law is invalid in all circumstances; the statute cannot be constitutionally applied to anyone.
• As-Applied: Accepts the statute could be valid generally but contends it is unconstitutional in its operation on a specific party or set of facts.

4.2 Office of Administrative Hearings (OAH)

The OAH is a quasi-judicial executive agency that hears “contested cases” involving state agencies. It can interpret and apply statutes, but—after this decision—cannot decide constitutional validity of tax laws.

4.3 Separation-of-Powers Clause (N.C. Const. art. I, § 6)

Embeds the principle that legislative, executive, and judicial powers must remain distinct. Assigning core judicial tasks (like striking statutes) to executive agencies threatens this balance.

4.4 Major-Questions Analogy

Borrowed from U.S. Supreme Court doctrine: courts require clear statutory authorization before agencies can exercise powers of “vast economic and political significance.” North Carolina’s Court uses a similar cautionary principle when constitutional boundaries are implicated.

5. Conclusion

N.C. Dep’t of Revenue v. Philip Morris USA, Inc. solidifies a categorical rule: administrative agencies in North Carolina, including the OAH, cannot adjudicate constitutional challenges to tax statutes—whether facial or as-applied. The decision harmonizes statutory interpretation with the state’s robust separation-of-powers doctrine, channels constitutional tax disputes into the Business Court, and signals that extraordinary powers will not be inferred from ambiguous legislative text. Practitioners must now navigate tax constitutional litigation exclusively through the judicial track outlined in § 105-241.17, paying the assessment, securing an OAH dismissal for lack of jurisdiction, and filing in Wake County Superior Court within two years. The ruling thus preserves judicial supremacy in constitutional interpretation and provides clearer procedural contours for taxpayers and the Department alike.