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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IN RE: AARON’S, INC.
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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IN RE: AARON’S, INC.
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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IN RE: AARON’S, INC.
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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IN RE: AARON’S, INC.
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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IN RE: AARON’S, INC.
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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IN RE: AARON’S, INC.
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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IN RE: AARON’S, INC.
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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