North Carolina Court Finds Intercompany Product Transfers Exempt From Sales Tax

The North Carolina Superior Court recently affirmed an administrative law judge’s (ALJ’s) decision that a taxpayer’s transfer of materials to its affiliated entities did not constitute sales within the meaning of the state’s tax act (N.C. Dep’t of Rev. v Asphalt Emulsion Indus. LLC, No. 24-CV-040734-910 (N.C. Sup. Ct. 2026).

Taxpayer Asphalt Emulsion Industries (AEI) was a single-member limited liability company in North Carolina. Its sole member and parent was based in Virginia and constructed roads mainly in that state and North Carolina. The parent had other wholly owned subsidiaries that were treated as disregarded entities for federal and state tax purposes. 

AEI produced emulsion product, which it mostly passed on to the parent and subsidiaries. The parent directed those transfers, which were made at no cost, with no purchase orders or bills of sale created. The parent maintained accounting records for itself and its subsidiaries, but AEI did not create invoices for its product transfers. Instead, the transfers were listed as due to/from amounts as if the parent had purchased the product on the open market. The product was reported as transferred at cost rather than at the amount paid in the market, and the amount recorded for sales and use tax purposes was based on the price of raw materials.

The Department of Revenue contended that the transfers were subject to sales tax because there was consideration for the transfers as evidenced by: 1) the due to/from accounting entries; 2) cash infusions to and services for AEI; and 3) the presumption that the transfers were sales and consideration. It asked the court to infer that consideration existed “because ‘businesses do not generally give away their assets.’”

The court noted that neither the taxpayer nor any of its affiliates ever agreed to create any reciprocal transfer obligation (whether by payment, transfer of other goods, or otherwise) in return for the intercompany product transfers. The taxpayer was not owed anything and there was no revenue to be received. 

Ultimately, the court was unable to find that the intercompany transfers were made for consideration, so it affirmed the ALJ’s summary judgment that the transfers were not sales subject to North Carolina sales tax.