              IN THE COURT OF APPEALS OF NORTH CAROLINA

                                   No. COA18-607

                               Filed: 19 February 2019

North Carolina Property Tax Commission, No. 16 PTC 0124

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].


      Appeal by Taxpayer from Final Decision entered 1 March 2018 by Chairman

Robert C. Hunter in the North Carolina Property Tax Commission sitting as the State

Board of Equalization and Review. Heard in the Court of Appeals 17 January 2019.


      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.
                                 IN RE: AARON’S, INC.

                                  Opinion of the Court



                                    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



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                                  Opinion of the Court



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.




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                                  IN RE: AARON’S, INC.

                                    Opinion of the Court



        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 possession of the [Taxpayer] and available for sale.”

Taxpayer timely filed written notice of appeal to this Court from the Final Decision

of the Commission.

        On appeal, Taxpayer argues that the Commission erred in concluding that it

is required to list and pay ad valorem taxes on the property subject to its Lease

Purchase Agreements.

                             Scope of Appellate Review

        The scope of this Court’s appellate review of final decisions of the Property Tax

Commission is defined by N.C. Gen. Stat. § 105-345.2, which provides, in pertinent

part:

              (b) So far as necessary to the decision and where presented,
              the court shall decide all relevant questions of law,
              interpret constitutional and statutory provisions, and
              determine the meaning and applicability of the terms of
              any Commission action. The court may affirm or reverse
              the decision of the Commission, declare the same null and


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                                     Opinion of the Court



               void, or remand the case for further proceedings; or it may
               reverse or modify the decision if the substantial rights of
               the appellants have been prejudiced because the
               Commission’s findings, inferences, conclusions or decisions
               are:

                      (1) In violation of constitutional provisions; or

                      (2) In excess of statutory authority or jurisdiction of
                      the Commission; or

                      (3) Made upon unlawful proceedings; or

                      (4) Affected by other errors of law; or

                      (5) Unsupported by competent, material and
                      substantial evidence in view of the entire record as
                      submitted; or

                      (6) Arbitrary or capricious.

N.C. Gen. Stat. § 105-345.2(b) (2017).

                                       Discussion

       All real and personal property located in North Carolina is subject to taxation

unless otherwise excluded or exempted by statute. Id. § 105-274(a)(1). The burden

is on the taxpayer to establish that the property in question falls within one of the

numerated tax exemptions. In re Southeastern Baptist Theol. Seminary, Inc., 135

N.C. App. 247, 249, 520 S.E.2d 302, 304 (1999). “This burden is substantial and often

difficult to meet . . . .” Id.

       The General Assembly has enacted legislation exempting some categories of

property from taxation. One such statute provides for the exemption from taxation of


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                                   Opinion of the Court



“[i]nventories owned by retail and wholesale merchants.” N.C. Gen. Stat. § 105-

275(34). “Inventories” are defined, in pertinent part, as “[g]oods held for sale in the

regular course of business by . . . retail and wholesale merchants[.]” Id. § 105-

273(8a)(a).   Whether particular property constitutes exempt “inventories” will

ultimately depend upon the wording of Section 105-273(8a) and “the use to which the

property is dedicated[.]” In re R.W. Moore Equip. Co., 115 N.C. App. 129, 132, 443

S.E.2d 734, 736, disc. review denied, 337 N.C. 693, 448 S.E.2d 533 (1994).

      In the instant case, Taxpayer maintains that the transfer of its property to the

possession of a lessee pursuant to a Lease Purchase Agreement effects a form of

“sale,” such as a conditional sale, and that such property thus constitutes exempt

inventory under N.C. Gen. Stat. § 105-275(34). We agree with the Commission,

however, that the transfer of possession of property following the execution of

Taxpayer’s Lease Purchase Agreement is not properly categorized as a “sale,” and

therefore the property held thereunder does not fall within the class of exempt

“inventories” described in N.C. Gen. Stat. § 105-275(34).

      We reach this conclusion primarily due to the fact that Taxpayer’s lessees are,

in fact, under no obligation to either purchase the subject property or to pay the “Total

Cost to Own” the property pursuant to the terms of Taxpayer’s Lease Purchase

Agreements. See Szabo Food Serv., Inc. v. Balentine’s, Inc., 285 N.C. 452, 461-62, 206

S.E.2d 242, 249 (1974). As our Supreme Court explained in Szabo, “[o]ne of the



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                                    Opinion of the Court



principle tests for determining whether a contract is one of conditional sale or lease

is whether the party is obligated at all events to pay the total purchase price of the

property . . . ,” it being clear that “[i]f the return of the property is either required or

permitted, the instrument will be held to be a lease; if the so-called lessee is obligated

to pay the purchase price, even though it be denominated rental, the contract will be

held to be one of sale.” Id.

       The Lease Purchase Agreements in the instant case provide for a month-to-

month “Initial Lease Term,” and either monthly or semi-monthly “Renewal Terms.”

The agreements merely grant to the lessee a “Purchase Option,” and the lessee is

permitted to “return or surrender the Leased Property” to Taxpayer at any time,

without penalty. The fact that the Lease Purchase Agreements contain an option to

purchase does not render those agreements sales contracts. Cf. id. at 462, 206 S.E.2d

at 249 (“[I]n order to make a conditional sale, . . . the buyer should be bound to take

title to the goods, or at least to pay the price for them. Therefore, a lease which

provides for a certain rent in installments is not a conditional sale if the lessee can

terminate the transaction at any time by returning the property, even though the

lease also provides that if rent is paid for a certain period, the lessee shall thereupon

become the owner of the property.” (emphasis added)). Because Taxpayer’s self-

denominated “lessees” are not required to ultimately purchase the property under the

terms of the Lease Purchase Agreements, we necessarily conclude that such property



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                                  Opinion of the Court



is not held for the purpose of “sale” within the meaning of N.C. Gen. Stat. § 105-

273(8a). See id. at 461-62, 206 S.E.2d at 249.

      Another indication that the “rent-to-own” transactions do not constitute

contracts of sale is the discrepancy between the ultimate “Total Cost to Own” the

property pursuant thereto and the price at which the same merchandise could be

purchased via a direct sale. The Supreme Court has held:

             A lease of personal property is substantially equivalent to
             a conditional sale when the buyer is bound to pay rent
             substantially equal to the value of the property . . . .
             [T]hough the rent is to be applied at the buyer’s option
             toward the payment of the price, the transaction is not a
             conditional sale if the price largely exceeds the rent that
             the lessee is bound to pay.

Id. at 462, 206 S.E.2d at 249. Here, the record reveals that an item that would

ordinarily cost one of Taxpayer’s customers $1,639.12 if purchased through a direct

sale would cost a lessee $2,917.63—or an additional $1,278.51—if the customer were

to purchase that same item by exercising the purchase option under a Lease Purchase

Agreement. This substantial increase in cost is consistent with the denomination of

Taxpayer’s “rent-to-own” transactions as a lease rather than a sale of the property.

      In addition, we note that N.C. Gen. Stat. § 105-273(8a) defines “inventories” as

“[g]oods held for sale in the regular course of business by . . . retail and wholesale

merchants.” N.C. Gen. Stat. § 105-273(8a)(a) (emphases added). As this Court

concluded in R.W. Moore Equipment, property cannot be found to be “ ‘held’ by [a]



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                                  Opinion of the Court



[t]axpayer” for sale for purposes of Section 273 when that property is “in the lessee’s

possession.” R.W. Moore Equip. Co., 115 N.C. App. at 132, 443 S.E.2d at 736. In this

respect, the property which was subject to Taxpayer’s Lease Purchase Agreements

could not be said to be tax-exempt inventory, in that it was “held” in the possession

of the lessee, rather than Taxpayer, at all pertinent points.

      Accordingly, we conclude that once Taxpayer’s property was in the possession

of a lessee pursuant to the terms of a Lease Purchase Agreement, that property no

longer constituted tax-exempt “inventories” pursuant to N.C. Gen. Stat. § 105-

275(34). We affirm the Commission’s Final Decision in that respect.

      Taxpayer lodges additional arguments under N.C. Gen. Stat. § 105-306(c)(2)

and N.C. Const. art. V, § 2 (1) and (2). However, those arguments are each dependent

upon the classification of the execution of its Lease Purchase Agreements as a form

of “sale.” Because we conclude that Taxpayer’s Lease Purchase Agreements are rental

agreements rather than sales, Taxpayer’s arguments under N.C. Gen. Stat. § 105-

306(c)(2) and N.C. Const. art. V, § 2 are inapposite.

      Lastly, we observe that the Commission’s Final Decision appears to contain

clerical errors. The Final Decision recites that this matter was heard upon appeal

“[f]rom the decision of the Sampson County Board of Equalization and Review

concerning the valuation of certain personal property for tax year 2016.” However, as

Taxpayer notes in its Notice of Appeal to this Court, and as both parties note in their



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                                   Opinion of the Court



briefs, the record reveals that the instant case “concerns the exemption of business

and personal property for the tax years 2010 through 2015.” Accordingly, we remand

with instructions to correct each of the captions in this matter so that the records

appropriately reflect the dates and property involved herein.

                                     Conclusion

      We affirm the Final Decision of the Property Tax Commission, but remand for

correction of the clerical errors discussed herein.

      AFFIRMED; REMANDED FOR CORRECTION OF CLERICAL ERRORS.

      Judges TYSON and COLLINS concur.




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