CB&T OPERATIONS v. TAX COM'R OF STATE

• Citation: 564 S.E.2d 408,211 W.Va. 198
• Decision Date: 25 February 2002
• Docket Number: No. 29560.,29560.
• Court: Supreme Court of West Virginia
• Parties: CB&T OPERATIONS COMPANY, INC. and CB&T Financial Corp., Petitioners Below, Appellants, v. TAX COMMISSIONER OF THE STATE OF WEST VIRGINIA, Respondent Below, Appellee.

564 S.E.2d 408

211 W.Va. 198

CB&T OPERATIONS COMPANY, INC. and CB&T Financial Corp., Petitioners Below, Appellants, v. TAX COMMISSIONER OF THE STATE OF WEST VIRGINIA, Respondent Below, Appellee.

No. 29560.

Supreme Court of Appeals of West Virginia.

Submitted September 19, 2001.

Decided February 25, 2002.

Stephen R. Brooks, Flaherty, Sensabaugh & Bonasso, P.L.L.C., Morgantown, West Virginia, Attorney for the Appellant.

Darrell V. McGraw, Jr., Attorney General, Stephen B. Stockton, Senior Assistant Attorney General, Charleston, West Virginia, Attorneys for the Appellee. 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) (1995 Repl.Vol.), 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) (1995 Repl.Vol.) and W. Va.Code § 11-15-9(a)(24) (2001) (Supp.2001), which exempt services provided among commonly-controlled business enterprises.

I. BACKGROUND

CB&T Financial was a bank holding company that provided administrative and other services to its numerous subsidiary banks.¹ Prior to 1991, the data processing for CB&T Financial's affiliates was done by one of these subsidiaries, Community Bank & Trust, National Association ("CB&T Bank"). In an effort to permit the management of CB&T Financial to more accurately track the cost of data-processing services with respect to each of its bank affiliates—and thus make more efficient decisions regarding the continued provision, or possible out-sourcing, of those services—CB&T Operations was incorporated in early 1991 as a wholly-owned subsidiary of CB&T Financial. The exclusive function of CB&T Operations was to assume, at least on paper, the data-processing work formerly shouldered by CB&T Bank.

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.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 1992.³ 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,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.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.

II. STANDARD OF REVIEW

The present appeal arises under W. Va.Code § 11-10-10 (1986) (1999 Repl.Vol.). As this Court stated in syllabus point three of Frymier-Halloran v. Paige, 193 W.Va. 687, 458 S.E.2d 780 (1995),

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). Thus, the focal point for judicial review should be the administrative record already in existence, not some new record made initially in the reviewing court.

"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, id. As we further explained in syllabus point three of In re Queen, 196 W.Va. 442, 473 S.E.2d 483 (1996), "[t]he `clearly wrong' and the `arbitrary and capricious' standards of review are deferential ones which presume an agency's actions are valid as long as the decision is supported by substantial evidence or by a rational basis."

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).

III. DISCUSSION

A. Transactions as Taxable Events Based Upon Accrual of Economic Gain

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) (1995 Repl.Vol.)⁶ impose a tax on the "use"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) (1995 Repl.Vol.). 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...