- North Carolina Business Court Construes Meaning of the Term “Building or Construction Contractor” for Purposes of the North Carolina Revenue Act
- February 12, 2016 | Authors: David S. Coats; John T. Crook; David S. Wisz
- Law Firm: Bailey & Dixon, L.L.P. - Raleigh Office
- Pursuant to the North Carolina Revenue Act, a corporation which generates its income from multiple states is required to apportion using a three-factor apportionment formula. Certain “excluded corporations,” however, are entitled to use a single factor apportionment method. For purposes of the Revenue Act, an excluded corporation includes any corporation “engaged in the business as a building or construction contractor.” See N.C.G.S. § 104-130.4. In the recent case of Midrex Technologies, Inc. v. N.C. Dept. of Revenue, 2015 NCBC LEXIS 92 (Oct. 7, 2015), the North Carolina Business Court interpreted this statute to require that a corporation be responsible for performance or direction of the actual building, erection, or assembly of a structure in order to be entitled to use the single factor apportionment method.
In Midrex, the Petitioner was a North Carolina corporation which had developed a process to convert iron ore into direct reduced iron (“DRI”) which can be used as a feed for making steel, which process required the construction of a specialized processing plant. During the tax years at issue, Midrex designed and sold processing plants in several foreign countries. The sale of such a plant involved 3 different business segments: (a) engineering and design services which primary took place in Midrex’s home office, (b) a Plant Sales Contract which included the technical specifications for the construction of the plant, and (c) aftermarket sales. Midrex contended that it was an excluded corporation for tax purposes because of its role in the Plant Sales Contract, including providing on-site personnel to assist the owner’s general contractor (a separate company) in scheduling and sequencing the construction, determining manpower requirements, providing quality control, directing and supervising the installation of the specialized equipment, and supervising the initial operation of the plant. The State disagreed, however, and the matter went before the North Carolina Business Court upon a review of an administrative law judge’s decision in the State’s favor.
The primary issue before the Court was the meaning of the term “building or construction contractor” as used in N.C.G.S. § 105-130.4. As the term is not defined by the statute, the Court initially looked at whether that term had a plain meaning. In that regard, the Court looked at dictionary definitions of the terms “building,” “construction,” and “contractor,” as focusing on the actual erection or assembly of a structure. The Court further took note of another statute - the Machinery Act - which defined “construction contractor” as “a taxpayer who is regularly engaged in building, installing, repairing, or improving real property.” N.C.G.S. § 105-273(5a). In response, Midrex argued that construction contracting can include work in the nature of project management and supervision, and that its field advisory work qualified as construction management. According to the Court, however, in the absence of evidence that the legislature intended to incorporate any technical definition or terms of art into the statute, the Court’s interpretation of “building or construction contractor” would be confined to the plain language of the statute. In that regard, construction management that only involves oversight or scheduling, but does not include responsibility for performance or the direction of the actual building or assembly, did not fit within the plain meaning of the term “building or construction manager.”
As a result, where the Midrex contracts provided only for engineering services and technical advice, but the client was responsible for the providing the physical construction, installation, or erection of the plant, this did not constitute serving as a “building or construction contractor.” Similarly, providing direct supervision over the commissioning (start-up) of the plant equipment did not fall within the statute where the commissioning itself was performed by the client’s employees. For all of these reasons, the Court concluded that Midrex was not an “excluded corporation” for purposes of tax allocation of income.
Although Midrex is a case involving the interpretation of the Revenue Act, its analysis and interpretation of the term “building or construction contractor” may have application in other construction law settings. It is also noteworthy that the Court made no reference to the North Carolina General Statutes Chapter 87 governing “general contracting,” apart from a fleeting mention that the Revenue Act did not appear to require a company to be a licensed general contractor to qualify as an excluded corporation, despite the statutory definitions of “general contractor” (N.C.G.S. § 87-1) and construction management (21 N.C.A.C. 12.0208).