John A. Mairs
Darrell V. McGraw, Jr.
Jackson & Kelly, P.L.L.C. Attorney General
Charleston, West Virginia Stephen B. Stockton
Attorney for the Appellee Senior Assistant Attorney General
Charleston, West Virginia
Attorneys for the Appellant
The Opinion of the Court was delivered PER CURIAM.
JUSTICE DAVIS concurs and reserves the right to file a concurring opinion.
1. “The same standard set out in the State Administrative Procedures Act, W.Va.
Code, 29A-1-1, et seq., is the standard of review applicable to review of the Tax
Commissioner's decisions under W.Va. Code, 11-10-10(e) (1986).” Syl. Pt. 3, in part,
Frymier-Halloran v. Paige, 193 W.Va. 687, 458 S.E.2d 780 (1995).
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).
Per Curiam:
This case presents the appeal
of the West Virginia Tax Commissioner
(See footnote 1) (hereinafter “the tax commissioner”)
to the November 1, 2001, final order of the Circuit Court of Preston County
ruling that, contrary to the decision of the tax commissioner, amounts paid
by Preston Memorial Hospital (hereinafter “the hospital”) to Quorum
Health Services (hereinafter “Quorum”) as reimbursement of compensation
of a chief executive officer and a chief financial officer
(See footnote 2) were
exempt from use tax. This case was filed in the circuit court by the hospital
as an administrative appeal of the relevant portion of use tax assessed against
the hospital. Based upon our review of the petition, briefs, record, arguments
of counsel and applicable law, we affirm the ruling of the lower court.
The hospital, incorporated as
a non-profit community hospital,
(See footnote 3) is located in Preston County , West Virginia,
at Kingwood. The hospital is an acute care medical facility
whose stated mission is “to provide a modern community healthcare facility, convenient to
and at a cost affordable to county residents.”
As explained during oral argument, the hospital's board of directors
(hereinafter “the Board”) sought to improve the management expertise at the hospital but
had some difficulty in locating qualified individuals for the key personnel positions. In
1996, the Board addressed this problem by entering into an agreement with Quorum
whereby the hospital purchased from Quorum the services of key personnel to manage the
affairs of the hospital under the supervision of the Board as well as other management and
consulting services. According to the provisions of the portion of the agreement involving
the key personnel, the hospital was obligated to reimburse the wages and employee benefits
paid by Quorum to the key personnel. The record reflects that the billing, payment and
accounting of these payroll expenses were handled separately from the other management
and consulting obligations the hospital incurred with Quorum.
Following its audit of the hospital, the State Tax Division of the Department
of Tax and Revenue issued a Notice of Assessment on October 23, 1997, against the hospital
for tax deficiencies which resulted from the agency finding that all services provided under
the agreement between the hospital and Quorum were purchases subject to use tax. The
hospital objected to that portion of the assessment which involved reimbursed compensation for the key personnel and filed a petition for reassessment with the tax
commissioner pursuant to West Virginia Code § 11-10-8 (2002) (Supp. 2002).
(See footnote 4) The
hospital challenged the assessment on the basis that it qualified as a joint
employer with Quorum of the key personnel and therefore was exempt from use
tax under the provisions of Technical Assistance Advisory
(See footnote 5) (hereinafter
“TAA”) 95-008 issued by the tax commissioner. A hearing on the petition
was held on July 29, 1998, from which an Administrative Decision was issued
on May 19, 1999, upholding the assessment. See W.Va. Code § 11-10-9
(2002) (Supp. 2002) (defining agency's hearing procedures). The Administrative
Decision concluded that the joint employer exemption from use tax of reimbursed
compensation for leased employees pursuant to TAA 95-008 did not apply to
the type of employment relationship the hospital had with the key personnel.
The hospital challenged the
administrative agency decision by filing an appeal, as provided by West Virginia Code § 11-
10-10 (2002) (Supp. 2002), in the Circuit Court of Preston County on July 19, 1999.
Based upon the briefs and oral argument of the parties, the lower court
reversed that portion of the Administrative Decision which found the hospital ineligible for
an employer-employee use tax exemption. Instead, the order of the court below found that,
according to the provisions of TAA 95-008, an employer-employee relationship did exist
between the hospital and key personnel which caused the amount the hospital paid Quorum
as reimbursement of compensation of the key personnel to be exempt from use tax. It is
from this ruling in the November 1, 2001, final order of the lower court that the tax
commissioner bases this appeal.
West Virginia Code § 11-10-10 sets forth the process by which administrative
decisions of the tax commissioner may undergo judicial review through the circuit court and
further provides that the resulting circuit court decision may be appealed to this Court by
either the taxpayer or the tax commissioner. As explained in syllabus point three of
Frymier-Halloran v. Paige, 193 W.Va. 687, 458 S.E.2d 780 (1995), “[t]he same standard
set out in the State Administrative Procedures Act, W.Va. Code, 29A-1-1, et seq., is the
standard of review applicable to review of the Tax Commissioner's decisions under W.Va.
Code, 11-10-10(e) (1986).” We went on to state in syllabus point five of Frymier-Halloran
that “[o]nce 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.”
Initially we recognize that
the consumer sales tax and use tax laws do not provide a definition for the
terms “employee” or “employer” or otherwise define an
employer-employee relationship. A regulation, apparently promulgated by the
agency to fill this gap, provides a basis for ascertaining, for consumer sales
tax purposes, whether an employer-employee relationship exists. See
110 W.Va.C.S.R. 15, § 60.3. This regulation sets forth twenty factors,
(See footnote 7) based
upon the common law, “to be considered when determining the nature of
[] [an employment] relationship.” Id.
It is important to note at this
juncture that the common law definition of employer was modified by the tax
commissioner with the creation of a “joint employer” concept in TAA
95-008, which itself may be questionable.
(See footnote 8) Nevertheless, TAA 95-008 allows an exemption
of reimbursed payroll costs from use tax where personnel are leased from one
company _ leasing organization _ to another business _ recipient organization
_ pursuant to a long-term agreement. In essence, TAA 95-008 acknowledges the
leasing organization as the common law employer and recognizes the recipient
organization as a joint employer if an employer-employee relationship is supported
by the circumstances. Demonstration of the requisite authority and control to
establish the recipient organization as an employer and the personnel in question as qualifying leased employees
(See footnote 9) is
accomplished by applying the twenty factors contained in 110 W.Va.C.S.R. 15, § 60.3.
Before examining how the standards of TAA 95-008 affect the present case,
it is important to reiterate that our review is governed by the West Virginia Administrative
Procedure Act (hereinafter “APA”). We summarized the circumstances under which a
reviewing court may reverse a decision of an administrative agency under the APA in
syllabus point two of Shepherdstown Volunteer Fire Department v. West Virginia Human
Rights Commission, 172 W.Va. 627, 309 S.E.2d 342 (1983), stating that under W.Va. Code
§ 29A-5-4(g),
[a] court shall reverse, vacate or modify the order or decision of
the agency if the substantial rights of the petitioner or
petitioners have been prejudiced because the administrative
findings, inferences, conclusions, decisions or order are: “(1) In
violation of constitutional or statutory provisions; or (2) In
excess of the statutory authority or jurisdiction of the agency; or
(3) Made upon unlawful procedures; or (4) Affected by other
error of law, or (5) Clearly wrong in view of the reliable,
probative and substantial evidence on the whole record; or (6)
Arbitrary or capricious or characterized by abuse of discretion
or clearly unwarranted exercise of discretion.”
Although we acknowledge that the clearly wrong and arbitrary and capricious standards of
review are deferential standards, we also have recognized that such deference “presume[s]
[that] an agency's actions are valid as long as the decision is supported by substantial
evidence or by a rational basis.” Syl. Pt. 3, in part, In re Queen, 196 W.Va. 442, 473 S.E.2d
483 (1996) (emphasis added). Furthermore, despite the limited nature of judicial review of
such contested cases, a court “cannot uphold a decision by an administrative agency . . . if,
while there is enough evidence in the record to support the decision, the reasons given by
the trier of fact do not build an accurate and logical bridge between the evidence and the
result.” Id. at 447, 473 S.E.2d at 488. We proceed with these principles in mind to
determine whether the lower court abused its discretion in reaching a decision which sets
aside the presumption of regularity generally accorded an administrative agency's decision
by a reviewing court.
An examination of the May 19, 1999, Administrative Decision (hereinafter “Decision”) reveals that the administrative law judge (hereinafter “ALJ”) who presided over the initial hearing and issued the Decision found the hospital's reliance on TAA 95-008 misplaced. Although the ALJ agreed with the hospital that similarly situated taxpayers are entitled to equal and uniform treatment under the law, he found that the fact pattern underlying the basis for TAA 95-008 and the situation of the hospital to be too dissimilar to afford the same treatment of providing a tax exemption. Specifically, the Decision relates:
The factual situation in TAA 95-008 is essentially that
Company A needs to reduce its employee overhead, so it
contracts with another Company, B, to transfer all of its (A's)
employees to B, which in turn leases those same employees
back to Company A.
However, all employee control remains with Company
A, including the setting of wage rates, hiring, firing, training,
etc., and more importantly Company B is providing no taxable
services (management, consulting, etc.) to Company A other
than carrying its payroll for a fee.
In contrast, Quorum maintains control over its
employees, even though its employees serve subject to approval
of Petitioner's Board of Directors, and Quorum is providing a
bundle of administrative, management, and other related
services to the Petitioner under which it is paid management
fees and salary reimbursements. Quorum is also capable, at
Petitioner's choosing, to offer for a fee, specialized consulting
services, as well as a volume discount purchasing program.
These two situations, from a strictly factual standpoint
are completely different, with the bottom line being that
Quorum, unlike the leasing company scenario in TAA 95-008,
is providing, for fees, a bundle of taxable services to the
Petitioner for which the Petitioner as purchaser thereof is liable
for the payment of use tax.
Upon review of this conclusion, the lower court applied the twenty factors
adopted by the tax commissioner in TAA 95-008 as an analytical framework for determining
the existence of an employer-employee relationship. The result of the lower court's detailed
analysis was summarized in the final order as follows:
19. In the present case, the Key Personnel are providing
employee services to the Hospital even though they are common
law employees of Quorum, the leasing organization. These
services are provided pursuant to a written Agreement between
Quorum and the Hospital lasting for more than one year. At the
time the Agreement was signed, one of the two Key Personnel
had performed employee services for the Hospital on a full-time
basis in a permanent employment position of the Hospital that
had existed for many years prior to the execution of the
employee leasing Agreement. The other Key Personnel also
filled a permanent employment position with the Hospital that
had also existed for many years prior to the signing of the
Agreement. The Key Personnel, as Administrator and
Controller of the Hospital, fill positions of a type historically
performed in hospitals by their employees. Finally, the Hospital
does have a qualified pension plan as defined for federal
income tax purposes and the Key Personnel would have been
required to be included in that plan for the plan to be a qualified
plan if they were not covered by a similar qualified plan
provided by leasing organization.
The circuit court's synopsis demonstrates that some of the facts found by the
tax commissioner are of questionable merit in the determination of the existence of an
employer-employee relationship under the guidelines contained in the agency's regulations,
as adopted by the commissioner for use in situations such as that presented in TAA 95-008.
The disparity in reasoning applied in the TAA versus that applied in the current case is
readily apparent although the logical basis for the difference goes unexplained. We see no
discernable difference between that employer-employee relationship described in TAA 95-
008 and that which the hospital has with the key personnel. Nor is a defensible explanation
offered in support of the conclusion reached by the agency. Consequently, we find that the
lower court did not abuse its discretion in surmising that the tax commissioner's action in
denying the applicability of TAA 95-008 and thereby finding the hospital ineligible for the use tax exemption of a joint employer was an arbitrary conclusion which
represented an abuse of discretion. Accordingly, we affirm the decision of
the circuit court to reverse that portion of the decision of the tax commissioner
finding the hospital ineligible for a use tax exemption under TAA 95-008 for
its key personnel hired through Quorum.
(See footnote 10)
For the foregoing reasons, the November 1, 2001, final order of the Circuit
Court of Preston County is affirmed.
(a) The tax commissioner may issue an informal
technical assistance advisory to a person, upon written request,
as to the position of his office on the tax consequences of a
stated transaction or event, under existing statutes, rules or
policies. However, after the issuance of an assessment to a
taxpayer, a technical assistance advisory may not be issued to
that taxpayer with respect to the issue or issues involved in the
assessment.
[A]ny person who is the common law employee of his or her
leasing organization (General employer), who is not the
common law employee of the recipient organization (Special
employer), and who provides employee services to the recipient
if _
a. such services are provided pursuant to a written
agreement between the recipient (Special employer) and
the leasing organization (General employer) lasting for
more than one year,
b b. at least fifty percent of the leased employees performed
such services for the recipient (or for the recipient and
related persons as defined for purposes of section 414(n)
of the Internal Revenue Code of 1986, as amended), on
substantially a full-time basis in a permanent
employment position of the recipient that existed for a
period of at least one year prior to execution of the
employee leasing agreement and the rest of the
employees leased to the recipient fill permanent
employment positions with that recipient. As used here,
“permanent employment position” means a position
intended by the recipient to last for more than one year
that is neither a temporary nor seasonal position,
c c. the services of the leased employee for the Special
employer are of a type historically performed, in the
business field of the recipient (Special employer), by its
employees, and
d d. if the Special employer had a qualified pension plan as
defined for federal income tax purposes, whether or not
the Special employer has such a plan, the leased
employees must be included in the plan for the plan to be
a qualified plan.