The Dare County Superior Court has ruled in favor of Cape Hatteras Electric Membership Corporation, now operating as Cape Hatteras Electric Cooperative, in a complaint filed by the cooperative in November of 2000 concerning sales and franchise taxes the N.C. Department of Revenue collected beginning in 2000 and 2001. 

The cooperative has paid the taxes under protest since 2000.

Judge Jerry R. Tillett found that the cooperative and its members did not owe the taxes and has ordered the Department to make a refund of over $3.6 million in sales taxes and nearly $3.7 million in franchise taxes along with accrued interest. The total with interest is about $9.7 million.

Though it is not clear yet whether the Department of Revenue will appeal or what kind of offer it may make to CHEC, the settlement has the potential to be a significant windfall to the member-owned electric cooperative.

CHEC has about 7,450 accounts and about 5,400 members.  Some members have more than one account.

The total of revenue for the cooperative in 2008 was about $15.6 million with total operating expenses of about $15 million.

Therefore, an influx of almost $10 million would have significant positive financial ramifications for the co-op members.

Jim Kinghorn, CHEC executive vice-president and general manager, says that the co-op is discontinuing the collection of a 3 percent sales tax on electric bills, effective immediately. And a refund on sales taxes paid for almost 10 years may be coming.

‘Sales tax was levied on the consumers and was collected and remitted to the Department by CHEC,” he said in an e-mail. “The sales tax, as well as interest on the sales tax, will be returned to the consumers after a refund is received by the cooperative.”

The total sales tax to be refunded under the courts decision is $3.62 million with $1.23 million in interest – for a total refund to the cooperative of about $4.85 million.

Kinghorn says the franchise tax was levied on the cooperative as a business entity based on gross receipts.

“The handling of the franchise tax refund will be determined by the cooperative's Board of Directors,” Kinghorn said. “This decision has not been discussed by the board.”

The court decision says that the Department of Revenue owes CHEC a refund of $3.67 million for franchise taxes and $1.15 million in accrued interest for a total of about $4.82 million.

“In any event,” Kinghorn said, “the refund of the franchise tax and associated interest to the cooperative ultimately works to the benefit of the cooperative's consumers, as the cooperative is a non-profit organization owned by its consumers.”

The franchise tax is 3.22 percent of CHEC revenue, Kinghorn said.

Therefore consumers stand to see not only the immediate elimination of the 3 percent sales tax, but also will benefit from the elimination of the 3.22 percent franchise tax.

“To the consumer, this could mean a 6 percent cost reduction eventually,” Kinghorn said.

The court has also ordered the Department of Revenue to pay CHEC’s legal fees.

According to the court’s decision, “The cooperative was incorporated on March 30, 1945, as a public agency and as an electric membership corporation under former N.C. Gen. Stat. § 117-19 for the purpose of providing electricity on a non-profit basis to consumers on Hatteras Island.”

The decision last month found that the CHEC is still a public agency and is also a non-profit electric membership corporation.

The decision also states:

“In the early 1960s, disputes arose between EMCs and IOUs (investor-owned utilities) as to the provision of electric service to previously unserved territories and customers. In the early to mid-1960s the said disputes reached the public arena with EMCs and IOUs petitioning the General Assembly to pass legislation favorable to each. Following the gubernatorial election in 1964, Governor-elect Dan K. Moore, seeking to end the public feud over service territories between EMCs and IOUs, asked representatives of EMCs and IOUs to work out a compromise. The said representatives (which included Luther Pershing “Bill” Beverage, the general manager of Four County EMC), negotiated a compromise which involved the assignment of service territories to EMCs and IOUs, and the loss of the tax-favored public agency status for all EMCs except the ones which served Hatteras and Ocracoke Islands. CHEMC and Ocracoke EMC served islands, had no competitors, and did not benefit from the assignment of territories. Moreover, the IOUs had no interest in serving Hatteras and Ocracoke Islands.”

The court found that nothing since the mid-1960s had changed the public agency status of CHEC.

FOR MORE INFORMATION

To read the entire judgment document, click here

To read the annual report of the Cape Hatteras Electric Cooperative, click here