North Carolina Department of Justice
North Carolina Department of Justice
North Carolina Department of Justice
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June 22, 1977


Taxation; Ad Valorem; Municipal Property; Exemption; Art. V, Sec. 2(3) N. C. Constitution

Requested By:

Steve B. Settlemeyer County Attorney Burke County


Is a municipality exempt from ad valorem taxation when the municipality's property is used to provide electrical service, waterworks and sewerage to nonresidents located without the corporate limits?


A municipality does not lose its tax exempt status by extending an otherwise public purpose activity to nonresidents living without its corporate limits so long as it stays within reasonable limitations.

Municipalities offer a variety of services to their residents, among these are electrical service, waterworks and sewerage. It is commonly expected that a municipality will provide these services to its residents, but recently more and more municipalities are extending these services to individuals living outside the city limits. Under such a situation, the question arises as to whether a municipality maintains its exemption from property taxation under Article V, Section 2(3) of the North Carolina Constitution which provides: "Property belonging to the State, counties and municipal corporations shall be exempt from taxation."

In Warrenton v. Warren County, 215 NC 342, the North Carolina Supreme Court interpreted the aforementioned provision of the Constitution to mean that State property or property of municipal corporations shall be exempt from taxation if the property is used for governmental or public purposes -- this judicial interpretation has been codified in G.S. 105-278.1(b). Court decisions have held that electrical service, waterworks and sewerage are municipal activities which fit within the meaning of "public purpose." Swindell v. Belhaven, 173 NC 1; Fawcett v. Mount Airy, 134 NC 125; and the Legislature has classified these services, inter alia, as being "public enterprises" of municipal corporations. G.S. 160A-311. As long as a municipality confines these services to its inhabitants, its tax immunity is not open to challenge; only when the municipality ventures outside its corporate limits to serve nonresidents is there a chance that the municipality is jeopardizing its exempt status and engaging in a possible ultra vires activity.

The Legislature apparently deemed it a necessary extension of the public purpose concept by permitting municipalities to service nonresidents outside corporate limits; but a city's power to extend its services beyond its corporate limits is expressly restricted by "reasonable limitations."

G.S. 160A-312. Thus municipalities may distribute electricity beyond corporate limits, and extend water and sewer facilities beyond their boundaries. Holmes v. Fayetteville, 197 NC 740; Upchurch v. City of Raleigh, 252 NC 676. This legislative grant of extra-territorial jurisdiction comports with the Court's feelings about the congestion along municipal borders and that a solution to these problems is of common interest to the inhabitants of the cities as well as those individuals immediately without. Charlotte v. Heath, 226 NC 750.

Notwithstanding the judicial nod given to municipal services and the legislative grant of extra-territorial jurisdiction, municipalities must stay within the reasonable limitations standard set forth under G.S. 160A-312, or the municipality's activity will be classified as a competitive, private enterprise instead of a public enterprise. Williamson v. High Point, 213 NC 96. The question of whether a city's authorized service within its border is a public enterprise without its border depends upon the "reasonable limitations" proscription placed upon cities; this restriction is broadly interpreted by the Court: "The term "within reasonable limitations' does not refer solely to the territorial extent of the venture but embraces all facts and circumstances which affect the reasonableness of the venture." Service Co. v. Shelby, 252 NC 816.

All things considered in the foregoing discussion, does the fact that municipal services are income-producing negate an otherwise property tax immunity? The Court in Redevelopment Commission v. Guilford County, 274 NC 585, accepted the well-established rule on this question: "Where the primary and principal use to which property is put is public, the mere fact that an income is incidentally derived from it does not affect its character as property devoted to public use." The Court added the following rationale in regard thereto:

"It would seem unreasonable and to the obvious detriment of the taxpayer that property primarily used for public purpose and incidentally producing income should be reduced to nonincome-producing property in order to maintain its tax exempt status while the property is necessarily held by a municipality in order to carry out its public purpose." 274 NC at 593.

Whether municipal property is income-producing does not play a major role in the determination of its immunity from taxation. Instead, two criteria must be met by the property in question -- (1) it must be used for a public purpose, and (2) if used outside the corporate limits it must be used within the reasonable limitations proscription of G.S. 160A-312. If these two criteria are satisfied, the city is authorized to offer its services outside its limits and the property is exempt from taxation. In essence, the legislative grant of extraterritorial jurisdiction broadens the reach of a municipality's public purpose responsibility.

Recently the Court tightened its view of the "reasonable limitations" proscription: "The primary function of a municipal corporation is to provide local government within its limits and authorized services to its inhabitants, not to engage in business enterprises for profit outside its corporate limits." Electric Service v. City of Rocky Mount, 285 NC 135 at 144. Nevertheless, the Court recognized that a municipality has the authority to extend its services beyond its border, but if the municipal activity goes beyond reasonable limitations, and otherwise public purpose (enterprise) becomes a private enterprise and the activity is ultra vires. Once this happens the municipality sheds its immunity from taxation.

The Electric Service case serves to illustrate one key point about taxation of municipalities; the line of demarcation between private enterprise and public enterprise does not have fixed coordinates -- each situation must be closely examined and analyzed before a determination of tax liability can be made.

Rufus L. Edmisten Attorney General

William H. Boone Associate Attorney