IN THE MATTER OF THE APPEAL OF: AARON'S, INC., Appellant. From the decision of the Sampson County Board of Equalization and Review concerning the valuation of certain personal property for tax year 2016 [sic] [tax years 2010 through 2015].
in the Court of Appeals 17 January 2019.
by Taxpayer from Final Decision entered 1 March 2018 by
Chairman Robert C. Hunter in the North Carolina Property Tax
Commission No. 16 PTC 0124 sitting as the State Board of
Equalization and Review.
Pruet, PLLC, by Alexander P. Sands III and George T. Smith
III, for Taxpayer-Appellant.
Joel Starling, Jr. for Sampson County-Appellee.
Inc. ("Taxpayer") appeals from the Final Decision
of the North Carolina Property Tax Commission determining
that property in the physical possession of Taxpayer's
customers pursuant to "Lease Purchase Agreements"
is subject to ad valorem taxation. Taxpayer argues
that such property constitutes "inventories owned by
retail and wholesale merchants," and is thus exempt from
taxation pursuant to N.C. Gen. Stat. § 105-275(34). We
disagree, and affirm the Final Decision of the Commission.
is a multi-state business with a location in Sampson County
at which it offers for sale or lease "property such as
furniture, appliances, personal computers and other household
electronics." However, Taxpayer derives the vast
majority of its revenue from a "rent-to-own"
business model rather than from pure "retail
sales"; Taxpayer's "Lease Revenues and
Fees" ranged between $1.68 billion and $2.68 billion for
the years 2012 through 2015, whereas its "Retail
Sales" during the same period ranged between only $32.87
million and $40.88 million.
rent-to-own transactions are effectuated through the
execution of Taxpayer's "Lease Purchase
Agreement," which provides for monthly or semi-monthly
renewal terms, and designates the subject property and the
customer as the "leased property" and the
"lessee," respectively. Pursuant to the terms of
the Lease Purchase Agreement, Taxpayer retains title to, and
the lessee obtains possession of, the subject property. While
the lessee has a "Purchase Option," the lessee may
also "terminate th[e] Agreement without penalty at any
time by surrendering or returning the Leased Property in good
repair and paying all Renewal Payments and Other Charges
through the date of surrender or return."
conducting an audit, on 6 November 2015, the Sampson County
Office of Tax Assessor sent Taxpayer a notice and appraisal
assessing a tax deficiency of $2, 636, 576.00 for the tax
years 2010 through 2015. This deficiency was largely the
result of Taxpayer's failure to list property that was in
the possession of its lessees pursuant to its Lease Purchase
Agreements. Taxpayer filed written exception to the
deficiency, arguing that the property subject to its Lease
Purchase Agreements, as property that was "in the
process of being sold," qualified as
"inventories" and was therefore exempt from
taxation. The Tax Administrator declined to amend the
assessment as requested by Taxpayer, and rendered a final
decision providing, in pertinent part, that:
I have reviewed your letter and your opinion that inventory
held by [Taxpayer] is excluded from taxation. General
Statutes 105-273(8a) defines inventories as goods held for
sale in the regular course of business by manufacturers,
retail and wholesale merchants and construction contractors.
The nature of your business tends to be in rental and leasing
rather than sales. It is important to note that inventories
cannot be held for sale and rent/lease simultaneously. In the
audit, there was an adjustment of 10% on inventories allowed
for the relatively small portion that was actually sold.
It is my opinion that the inventories for [Taxpayer] are not
exempt under the provisions of the Machinery Act of North
Carolina and the discovery of the inventories not reported
during the listing period will remain in effect.
Taxpayer appealed the Tax Administrator's decision to the
Sampson County Board of Equalization and Review, which
affirmed the Tax Administrator's decision. Taxpayer
thereafter appealed the County Board's decision to the
North Carolina Property Tax Commission.
the Commission, Taxpayer reiterated its assertion that the
property subject to its Lease Purchase Agreements constituted
"Inventories owned by retail and wholesale
merchants," and was therefore exempt from taxation
pursuant to N.C. Gen. Stat. § 105-275(34). By Final
Decision entered 1 March 2018, the Commission affirmed the
County Board's decision and concluded that
"Taxpayer, by renting the equipment to third parties, is
not entitled to the inventory tax exclusion for the rented
equipment[, ] . . . but that said property tax exclusion does
apply as to such personal property that is in the actual