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In re Appeal of Aaron's, Inc.

Court of Appeals of North Carolina

February 19, 2019

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].

          Heard in the Court of Appeals 17 January 2019.

          Appeal 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.

          Nexsen Pruet, PLLC, by Alexander P. Sands III and George T. Smith III, for Taxpayer-Appellant.

          W. Joel Starling, Jr. for Sampson County-Appellee.

          ZACHARY, Judge.

         Aaron's, 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.

         Background

         Taxpayer 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.

         The 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."

         After 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.

         Before 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 ...


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