Stephen R. Brooks,
Darrell
V. McGraw, Jr.
Flaherty, Sensabaugh & Bonasso, P.L.L.C.
Attorney
General
Morgantown, West Virginia
Stephen
B. Stockton
Attorney for the Appellant
Senior
Assistant Attorney General
Charleston,
West Virginia
Attorneys
for the Appellee
JUSTICE McGRAW delivered the Opinion of the Court.
2. “Once
a full record is developed, both the circuit court and this Court will review
the findings and conclusions of the Tax Commissioner under a clearly erroneous
and abuse of discretion standard unless the incorrect legal standard was applied.”
Syl. pt. 5, Frymier-Halloran v. Paige, 193 W. Va. 687, 458
S.E.2d 780 (1995).
3. “When
the Legislature enacts laws, it is presumed to be aware of all pertinent judgments
rendered by the judicial branch. By borrowing terms of art in which are accumulated
the legal tradition and meaning of centuries of practice, the Legislature
presumably knows and adopts the cluster of ideas attached to each borrowed
word in the body of learning from which it was taken and the meaning its use
will convey to the judicial mind unless otherwise instructed.” Syl. pt.
2, in part, Stephen L.H. v. Sherry L.H., 195 W. Va. 384, 465 S.E.2d
841 (1995).
4. “Having
taken advantage of the benefits of incorporation, a corporation cannot decline
to accept the liabilities of the corporate form in order to reduce the incidence of taxation.” Syl. pt. 2, Southern States Coop., Inc. v. Dailey,
167 W. Va. 920, 280 S.E.2d 821 (1981).
5. “'”Where
a person claims an exemption from a law imposing a license or tax, such law
is strictly construed against the person claiming the exemption.” Syl.
pt. 2, State ex rel. Lambert v. Carman, State Tax Comm'r, 145
W. Va. 635, 116 S.E.2d 265 (1960).' Syl. pt. 5, Pennsylvania &
West Virginia Supply Corp. v. Rose, 179 W. Va. 317, 368 S.E.2d 101
(1988).” Syl. pt. 2, Tony P. Sellitti Constr. Co. v. Caryl,
185 W. Va. 584, 408 S.E.2d 336 (1991).
6. It
is the substance, not just the form, of a commercial transaction that determines
its tax consequences.
McGraw, Justice:
Appellants in this case,
CB&T Operations Company, Inc., (“CB&T Operations”), and
its parent company, CB&T Financial Corp. (“CB&T Financial”),
challenge the circuit court's rulings upholding assessments against them for
use tax imposed by the Tax Commissioner of the State of West Virginia (“Tax
Commissioner”) pursuant to W. Va. Code § 11-15A-2 (1989)
(Repl. Vol. 1995), in connection with appellants' ostensible lease of data-
processing equipment and related software from one of CB&T Financial's
bank subsidiaries. We reverse, finding that the transactions at issue are
exempt from use tax pursuant to W. Va. Code § 11-15A-3(a)(2) (1987)
(Repl. Vol. 1995) and W. Va. Code § 11-15-9(a)(24) (2001) (Supp.
2001), which exempt services provided among commonly-controlled business enterprises.
In order to carry out its
assigned task, CB&T Operations leased property already owned by CB&T
Bank, which included data-processing equipment and related software, office
furniture, leasehold improvements to a building located in Fairmont, West
Virginia, and several automobiles.
(See footnote 2) This arrangement was documented
through a series of written lease agreements whereby CB&T Operations,
as lessee, agreed to make monthly lease payments to CB&T Bank, as lessor,
of $70,000 during 1991, and $80,000 throughout 1992.
(See footnote 3) The monthly lease payments
were calculated by adding the annual depreciation and amortization costs of
the leased property together with a fair-market rate of interest on the net book value of the property,
(See footnote 4) and then dividing the aggregate
figure by twelve months and rounding up. This formula resulted in estimated
monthly costs of $53,220.61 for 1991, and $78,494.68 in 1992. In addition
to these lease payments, CB&T Operations was also required under the leases
to bear the full cost of all expenses incurred in connection with the leased
property, including taxes, insurance, repairs, and maintenance.
(See footnote 5)
In April 1992, it was decided
that CB&T Financial would nominally assume some of the data-processing
work that had previously been transferred to CB&T Operations. Although
the lease in effect between CB&T Operations and CB&T Bank was not
formally modified, CB&T Financial began to make monthly payments of $16,000
in connection with its use of the leased property. Payments made by CB&T
Operations under its lease agreements with CB&T Bank were reduced accordingly.
Effective February 28, 1993,
the lease arrangement in question was terminated, and Mellon Bank was contracted
to perform the data-processing work for CB&T Financial's affiliates. CB&T
Operations was later formally dissolved in June 1994.
Following an audit by the
Auditing Division of the State Tax Department of West Virginia, the Tax Commissioner
on August 27, 1993 issued use tax assessments against both CB&T Operations
and CB&T Financial in connection with the lease payments detailed above.
The amount of the use tax assessed against CB&T Operations, for the period
from January 1, 1991 through February 28, 1993, was $129,167. Interest computed
for the same period, amounting to $12,583, was added for a total tax liability
of $141,750. The amount of the use tax assessed against CB&T Financial,
for the period from January 1, 1991 through March 31, 1993, was $16,014. Interest
computed for the same period, amounting to $930, was added for a total liability
of $16,944.
After receiving written
notification of these tax assessments, CB&T Operations and CB&T Financial
each filed timely petitions for reassessment. The petitions were consolidated
and a hearing was subsequently held on April 18, 1994. By a decision issued
on June 25, 1997, the Administrative Law Judge (“ALJ”) found, in
part, that the subject transactions generated a profit for CB&T Bank,
and thus qualified as “business” activity subject to use tax under
Chapter 11, Article 15A of the West Virginia Code. The ALJ also rejected appellants' argument that the transactions were subject to the
exemption for services provided by commonly-controlled business enterprises
as set forth in W. Va. Code §§ 11-15A-3(a)(4) & 11-15-9(a)(24),
finding that the transactions did not involve the “dispensing of a service,
but rather a sale.”
Appellants later sought
judicial review in the Circuit Court of Marion County, and by an order entered
on September 8, 2000, the lower court upheld the decision of the Tax Commissioner.
It is from this order that appellants now appeal.
The Court's consideration of issues of law is much less deferential, however, as we have consistently adhered to the rule that “[i]nterpreting a statute or an administrative rule or regulation presents a purely legal question subject to de novo review.” Syl. pt. 1, Appalachian Power Co. v. State Tax Dep't of West Virginia, 195 W. Va. 573, 466 S.E.2d 424 (1995); accord syl. pt. 1, In re Tax Assessment Against American Bituminous Power Partners, L.P., 208 W. Va. 250, 539 S.E.2d 757 (2000). Yet even in this sphere we are not entirely free to substitute our own judgment for that of an administrative agency, as “[i]nterpretations of statutes by bodies charged with their administration are given great weight unless clearly erroneous.” Syl. pt. 4, Security Nat'l Bank & Trust Co. v. First W. Va. Bancorp., Inc., 166 W. Va. 775, 277 S.E.2d 613 (1981).
Appellants
first argue that the transactions in question, to the extent they may be deemed
to involve the use of tangible personal property, are not subject to tax because
CB&T Bank was not engaged in the “business” of leasing data
processing equipment, as required in order for the transactions to be taxable
under Chapter 11, Article 15A of the West Virginia Code. Specifically, they
contend that the transactions were aimed merely
to facilitate more accurate accounting of the
aggregate cost of data-processing within the larger organization,
and were never intended to realize a profit for any of the firms involved.
Appellants'
argument requires careful parsing of the relevant statutory text defining
the use tax. West Virginia Code
§ 11-15A-2(a) & (b) (1989) (Repl. Vol. 1995)
(See footnote 6) impose
a tax on the “use”
(See footnote 7) of, among other things,
“tangible
personal property,”
the latter phrase being defined
to encompass “tangible goods, wares and merchandise when sold by a retailer
for use in this state.” W. Va. Code § 11-15A-1(12) (1986)
(Repl. Vol. 1995). The term “retailer,” in turn, is defined as “every
person engaging in the business of selling, leasing, or renting tangible personal
property for use within the meaning of this article.” W. Va. Code
§ 11-15A-1(7). Finally, the term “business” refers to “any
activity engaged in by any person . . . with the object
of direct or indirect economic gain, benefit or advantage, and includes any purposeful revenue generating activity in this state.”
W. Va. Code § 11-15A-1(1).
With
an eye to this statutory language, appellants assert that none of the lease
transactions in question were entered into “with the object of direct
or indirect economic gain,
benefit or advantage,”
and therefore do not qualify as taxable events under W.
Va. Code § 11-15A-2(a) & (b). We disagree.
This
Court had occasion to construe nearly identical statutory language in Southern
States Coop., Inc. v. Dailey, 167 W. Va. 920, 280 S.E.2d 821 (1981).
In Dailey, the Tax Commissioner had assessed business and occupation
tax against an agricultural cooperative association, Southern States Cooperative,
Inc., based upon the transfer of goods from Southern States to its local affiliated
cooperatives in West Virginia. Southern States acted as a central purchaser
of goods for both its own chain of branch stores, as well as the local affiliated
cooperatives, the latter of which were formed as separate legal entities under
Virginia law. Southern States
charged its local affiliates only
the actual cost of the goods transferred, including overhead and other related
expenses. Southern States responded
to the tax assessment by arguing, inter alia, that it was not subject
to tax because it was not engaged in a “business” within the meaning
of W. Va. Code § 11-13-1
(1972) (Repl. Vol. 1987),
(See footnote 8) which term was defined to
include “all activities engaged in or caused to be engaged in with the
object of gain or economic benefit, either direct or indirect.”
Significantly, a definition
for “business” was not included in In this case, evidence in
the administrative record clearly supports the determination that CB&T
Bank received economic gain or benefit from the transactions in question. Not only were appellants
charged the actual costs associated with the leased property, but the leases
further imposed an interest charge on the book value of such equipment. Appellant's
representative at the administrative hearing on this matter described the
rationale for this practice during the administrative hearing, stating that
It
cannot seriously be contended that Southern States derives no gain or economic
benefit from its wholesale transactions with its affiliated cooperatives.
It is true that the transfers of property from Southern States to its local
cooperatives are made on an actual cost basis, and therefore Southern States
derives no direct profit from the transaction. However, the statute
here involved, W. Va. Code § 11-13-1, does not refer to “profit”,
but to “gain or economic benefit.” Gain or economic benefit is a
much broader term than profit, see, e. g., Bonnar-Vawter, Inc. v.
Johnson, [157 Me. 380, 173 A.2d 141 (1961)]; State v. Zellner,
133 Ohio St. 263, 13 N.E.2d 235 (1938), and includes the benefits Southern
States receives from dealings with its cooperatives.
167 W. Va. at 931-32, 280 S.E.2d at 828 (emphasis in original).
When
the Legislature enacts laws, it is presumed to be aware of all pertinent judgments
rendered by the judicial branch. By borrowing terms of art in which are accumulated
the legal tradition and meaning of centuries of practice, the Legislature presumably
knows and adopts the cluster of ideas attached to each borrowed word in the
body of learning from which it was taken and the meaning its use will convey
to the judicial mind unless otherwise instructed.
Thus, in the absence of more
reliable indicia of legislative intent, we must presume that the Legislature
intended that the broad judicial interpretation given by the Dailey Court
to the terms “gain” and “benefit” would apply with equal
force in defining a “business” under § 11-15A-1(1).
(See footnote 10)
the use of . . .
money has value to us in the banking industry. If we sold this equipment to
CB&T Operations Company, if they owned it, then they would have to pay
[CB&T Bank] the book value, which is somewhere around a million dollars,
more or less, and [the bank] would be able to invest that money at a current
marketable rate of interest, which is what we, as a bank, do.
So,
not only would we save the depreciation cost, but we would earn more money.
So, the real cost to us of owning that equipment is the use of the money plus
the depreciation . . . . And it's pretty clear, if we pushed
it out of there, [or] if we had not bought it in the first place, that [the
bank] would make more profit by the amount of the interest we could
earn on the money that we spent . . . .
(Emphasis added.) It is clear from this statement that the interest imposed
under the leases was intended to permit CB&T Bank to capture a profit
on the transactions equivalent to what it could otherwise obtain by selling
the data processing equipment and lending the proceeds at prevailing market
rates. The realization of such profit obviously qualifies as an “economic
gain
Appellants
further contend that
in determining whether any gain or
benefit was realized from the lease transactions, the activities undertaken
by CB&T Financial and its wholly owned subsidiaries should be considered as a whole. In this regard,
appellants argue that there was no net financial impact upon the larger corporate
group, pointing to the fact that financial reporting to the public is done
only in connection with CB&T Financial. Appellants are, in effect, asking
the Court to disregard the fact that the parties to the transactions were
each established as separate legal entities. On this point, Dailey
is again instructive. In Dailey, Southern States similarly argued that
there was no meaningful distinction to be made between itself and its local
affiliates, where Southern States had contracted to manage each of the local
cooperatives. The Court rejected this argument, finding that In sum, the Court finds
no merit in appellant's argument that the subject transactions fall outside
the scope of W. Va. Code § 11-15A-2(a) & (b) based on the
contention that no “economic gain, benefit or advantage” was derived
from the transactions We therefore discern no error in the circuit court's
refusal to grant relief on this basis.
Appellants further argue
that even if the transactions at issue are otherwise taxable under W. Va.
Code § 11-15A-2(a) & (b), they should be relieved of the obligation
to pay use tax by operation of W. Va. Code § 11-15-9(a)(24)
(2001) (Supp. 2001), which provides an exemption for “services performed
by one corporation, partnership, or limited liability company for another
corporation, partnership, or limited liability company when the entities are
members of the same controlled group . . . .”
(See footnote 12)
In making this argument, appellants contend that while the subject transactions
were documented in the form of lease arrangements, their substance in fact
involved the provision of services. Appellants stress evidence in the record indicating that the transactions were merely a bookkeeping
device aimed at facilitating more accurate accounting of data-processing costs,
and that the leases were prepared simply in order to provide a corresponding
audit trail. The Tax Commissioner, while
not contesting the fact that the business entities involved are part of the
“same controlled group” for purposes of § 11-15-9(a)(24),
responds by asserting that the exemption applies only with respect to the
provision of “services,” and not to transactions involving the “sale”
of tangible personal property. Going further, the Tax Commissioner stresses
the fact that the transactions were structured in the form of written leases,
and posits that they should therefore be deemed to “involve[] the provision
of rented personal property and not services.” We think that the Tax
Commissioner in this case exalts form over substance. West Virginia Code §
11-15A-3(a)(2) (1987) (Repl. Vol. 1995) exempts from the use tax items of
tangible personal property or services that are otherwise exempt from the
consumer sales tax. In this regard, W. Va. Code § 11-15-9(a)(24)
provides an exemption for: In contrast to instances
where we are called upon to interpret statutes that affirmatively impose a
tax, here we are dealing with a statute that purports to limit an otherwise
generally applicable tax law. As to the former circumstance, this Court has
consistently signaled its willingness to construe any ambiguity in favor of
the taxpayer. See, e.g., Consolidation Coal Co. v. Krupica,
163 W. Va. 74, 80, 254 S.E.2d 813, 816 (1979) (“tax statutes are
generally to be construed in favor of the taxpayer and against the taxing
authority”). In cases involving the latter situation, however, we have
indicated that “'”[w]here a person claims an exemption from a law
imposing a license or tax, such law is strictly construed against the person
claiming the exemption.”'” Syl. pt. 2, Tony P. Sellitti
Constr. Co. v. Caryl, 185 W. Va. 584, 408 S.E.2d 336 (1991) (citations
omitted); see also Wooddell v. Dailey, 160 W. Va. 65, 68, 230
S.E.2d 466, 469 (1976) (“a tax law under which a person claims an exemption
is strictly construed against the person claiming the exemption”).
(See footnote 14)
Thus, to the extent there is any ambiguity in the exemption for services provided between commonly-controlled corporations set forth in W. Va.
Code § 11-15-9(a)(24), the statute must be given a narrow construction
favoring taxation. Section 11-15-9(a)(24)
unquestionably does not exempt sales of tangible personal property among commonly-controlled
corporations. The statutory definition of “service” clearly gives
such term an exclusive meaning relative to a “sale.” Consequently,
to the extent that the transactions at issue in this case may be deemed to
involve the “sale of tangible personal property,” they would fall
outside of the exemption provided by § 11-15-9(a)(24). West Virginia Code §
11-15-6 (1987) provides that “[t]o prevent evasion, it shall be presumed
that all sales and services are subject to the tax until the contrary is clearly
established.” In making such a clear showing, however, a taxpayer is
not bound by the formal characterization given a particular transaction. No
principle is more firmly embedded in this area of the law than the concept
that it is the substance, not just the form, of a commercial transaction that
determines its tax consequences. There is good reason for this rule, since
it “promotes the public interest in tax certainty and thereby conforms
with general business expectations.” General Trading Co., Inc, v.
Director. Div. of Taxation, 83 N.J. 122, 138, 416 A.2d 37 (1980). Thus,
the characterization given to a particular transaction by the parties involved
is not necessarily determinative of its treatment under the tax law. See Footpress Corp. v. Strickland, 242 Ga. 686, 687, 251 S.E.2d 278,
279 (“The substance of a transaction controls its tax treatment rather
than the appellation chosen by the parties.”) (citations omitted). Giving effect to the substance
of the transactions at issue, the Court finds that they are more appropriately
placed under the rubric of services, rather than sales of tangible personal
property. Again, the gravamen of a “sale” under W. Va. Code
§ 11-15-2(r) is the transfer of possession or ownership of tangible
personal property for consideration. Although documented through written lease
agreements concerning the equipment used in the data-processing operation,
the record indicates that this equipment continued to be operated by the same
employees of CB&T Bank who had previously done such work, at the same
location. Appellant's representative stated at the administrative hearing
that aside from the formal lease agreements and related accounting entries, We hold that under these
circumstances, where the data-processing work continued to be performed by
employees of the purported lessor at the same location it had been done prior
to the transactions in question_in other words, where there was no transfer
of possession of the subject property_the transactions more closely approximated
the provision of services rather than the sale of tangible personal property. Accordingly, we conclude
that the ALJ's factual determination concerning the applicability of § 11-15-9(a)(24)
was clearly erroneous, and therefore find that the circuit court erred in
this case by failing to grant appropriate relief to appellants on this basis.
Reversed
and remanded.
Southern States . . .
and its local cooperatives are separate legal entities within the meaning
of W. Va. Code § 11-13-1. That section defines “persons,”
for purposes of the business and occupation tax, as including “any individual,
firm, (or) copartnership . . . .” In this case, the local affiliated
cooperatives and Southern States fall individually into the aforementioned
categories as “persons” for business and occupation tax purposes.
The designation “group or combination acting as a unit” contained
in W. Va. Code § 11-13-1 is used to include business configurations
not otherwise specifically denominated. When separate corporations fall into
specific designations of taxable “persons” enumerated in W. Va.
Code § 11-13-1, they do not constitute a “group or combination
acting as a unit,” despite the fact that they form part of a cooperative
distribution system. Consequently, Southern States and its local cooperatives
are individually taxable entities for business and occupation tax purposes.
Business and occupation taxes are designed to reach virtually all business
activities carried on within the state, see Automobile Club of Washington
v. State, Department of Revenue, 27 Wash. App.
781, 621 P.2d 760 (1980), and a business ought not be permitted to avoid taxation
merely because it is acting in concert with another.
167 W. Va. at 928-29, 280 S.E.2d at 826. The Dailey
Court went on to observe that “Southern States and its cooperatives have
made a conscious decision to do business in the corporate form with its attendant
advantages. These advantages include the limitation of personal liability,
the continuity of corporate existence, and the facilitation of business
administration. . . . Having taken advantage of the benefits
of incorporation, a corporation cannot decline to accept the liabilities of
the corporate form in order to reduce the incidence of taxation.” Id.
at 929, 280 S.E.2d at 827 (emphasis added).
Appellants and CB&T Bank
each clearly qualify as “persons” under Article 15A. See
W. Va. Code § 11-15A-1(4).
(See footnote 11) And since the use tax is “imposed
upon every person using tangible personal property or taxable services
within this state,” W. Va. Code § 11-15A-2(b) (emphasis
added), we reject appellants' contention that they should be spared liability
for use tax merely because the subject transactions involved affiliated corporate entities. In simpler terms, appellants will not be permitted to
disregard their chosen corporate structure merely to suit the occasion.
Dispensing
of services performed by one corporation, partnership or limited liability
company for another corporation, partnership or limited liability company
when the entities are members of the same controlled group or are related
taxpayers as defined in Section 267 of the Internal Revenue Code. “Control”
means ownership, directly or indirectly, of stock, equity interests or membership
interests possessing fifty percent or more of the total combined voting power
of all classes of the stock of a corporation, equity interests of a partnership or membership
interests of a limited liability company entitled to vote or ownership, directly
or indirectly, of stock, equity interests or membership interests possessing
fifty percent or more of the value of the corporation, partnership or limited
liability company[.]
(Emphasis added.)
(See footnote 13) The term “service” is defined
to “include[] all nonprofessional activities engaged in for other persons
for a consideration, which involve the rendering of a service as distinguished
from the sale of tangible personal property, but shall not include contracting,
personal services or the services rendered by an employee to his or her employer
or any service rendered for resale.” W. Va. Code § 11-15-2(s)
(2001) (Repl. Vol. 2001) (emphasis added). Giving substance to this distinction,
a “sale” is separately defined to “include[] any transfer of
the possession or ownership of tangible personal property for a consideration,
including a lease or rental, when the transfer or delivery is made in the
ordinary course of the transferor's business and is made to the transferee or his or her agent
for consumption or use or any other purpose[.]” W. Va. Code § 11-15-2(r).
“nothing else changed.
. . . [T]he employees _ it's still the same exact employees. We
didn't _ we don't have any officers for this newly formed company. Only we
have some, but they are also _ they wear two hats. And so nothing changed,
and it was continued to be done under the same location. Just the accounting
changed, is all.
It was further explained at the hearing that the sole purpose of the lease
arrangement was to permit all of the data-processing costs to be aggregated
under one company, CB&T Operations, thus allowing management to easily
track such expenses on a daily basis by referring to computerized general ledger reports. This evidence was not
rebutted by anything presented by the Tax Commissioner in proceedings before
the ALJ.
For the reasons stated,
the judgment of the Circuit Court of Marion County is reversed and remanded
for further proceedings consistent with this opinion.
Footnote: 1
(a) An excise tax is hereby levied and imposed on the use in this state of tangible personal property or taxable services, to be collected and paid as hereinafter provided, at the rate of six percent of the purchase price of such property or taxable services, beginning on the first day of March, one thousand nine hundred eighty-nine, except that sales of gasoline and special fuel shall remain taxable at five percent. “Taxable services,” for the purposes of this article, means services of the nature that are subject to the tax imposed by article fifteen of this chapter. In
this article, wherever the words “tangible personal property”
or “property” appear, the same shall include the words “or
taxable services,” where the context so requires.
(b)
Such tax is hereby imposed upon every person using tangible personal property
or taxable services within this state. That person's liability is not extinguished
until such tax has been paid. A receipt with the tax separately stated thereon
issued by a retailer engaged in business in this state, or by a foreign retailer
who is authorized by the tax commissioner to collect the tax imposed by this
article, relieves the purchaser from further liability for the tax to which
the receipt refers.
Dispensing
of services performed by one corporation for another corporation when both
corporations are members of the same controlled group. Control means ownership,
directly or indirectly, of stock possessing fifty percent or more of the total
combined voting power of all classes of the stock of a corporation entitled
to vote or ownership, directly or indirectly, of stock possessing fifty percent
or more of the value of the corporation[.]
As the entities in question here are all corporations, the subsequent amendments
to the statute do not alter our present analysis.