Cincinnati Fed. Sav. & Loan Co. v. McClain
| Citation | 2022 Ohio 725 |
| Decision Date | 15 March 2022 |
| Docket Number | 2021-0064 |
| Court | Ohio Supreme Court |
| Parties | Cincinnati Federal Savings & Loan Co., Appellant, v. McClain, TaxCommr., Appellee. |
Submitted September 21, 2021
Appeal from the Board of Tax Appeals, No. 2018-2247.
Mann & Mann, L.L.C., David S. Mann, and Michael T. Mann, for appellant.
Dave Yost, Attorney General, and Christine Mesirow, Assistant Attorney General, for appellee.
{¶ 1} Appellant, Cincinnati Federal Savings & Loan Co. ("Cincinnati Federal" or "the bank") challenges a decision of the Board of Tax Appeals ("BTA") that upheld appellee Tax Commissioner Jeffrey McClain's denial of its claim for a sales-tax refund. Cincinnati Federal paid sales tax to Fiserv Solutions, Inc. ("Fiserv"), in connection with compensating Fiserv for services that Fiserv provided to the bank during 2013, 2014, and 2015. Cincinnati Federal argues that the services do not qualify as taxable "automatic data processing" or "electronic information services" but instead constitute nontaxable "personal or professional services." For the reasons stated below, we affirm in part, vacate in part, and remand for further proceedings.
{¶ 2} During the period at issue, Cincinnati Federal received and paid for computerized services provided by Fiserv pursuant to a master agreement. The agreement refers to "account-processing services" of various kinds; according to hearing testimony at the BTA, "the Fiserv system" allows Cincinnati Federal to run transactions on a daily basis and maintains all of the bank's accounting and financial records. Under the agreement, according to Cincinnati Federal's president, Fiserv "maintains] the [accounting] system and maintains] accounting services * * * on an ongoing basis, real-time basis." Indeed, Fiserv maintains the bank's general ledger at the Fiserv facility in Brookfield, Wisconsin.[1]
{¶ 3} If a customer presents herself at a branch office of the bank and makes a deposit, a withdrawal, or a loan payment, the teller accesses the customer's account and the account is updated immediately by the Fiserv system-and the updating encompasses not only the customer's accounts but also the bank's own accounts and books, all the way to the general ledger. The Fiserv system does the same for nonteller transactions.
{¶ 4} During the period at issue, Cincinnati Federal regularly received two invoices every month from Fiserv. At the BTA, Cincinnati Federal submitted spreadsheets listing each charge from Fiserv's invoices for the years at issue. For each charge, there was a description of the services, which was taken from the invoices themselves, plus a categorization of the charges according to service functions, which the bank developed for purposes of its tax appeal. Some examples of the categories that were developed by the bank include the Prologue Accounting Platform (the general ledger and ancillary accounting information), Mobility (the mobile-application service offered by the bank), Branch Capture Services (the teller transactions at the bank's branches), and FCN Direct Services (the interbank transactions between banks served by Fiserv). During the BTA hearing, Cincinnati Federal's vice president and chief deposit officer identified isolated charges that specifically related to Fiserv's customization of the software to meet Cincinnati Federal's needs.
{¶ 5} In 2016, Cincinnati Federal filed the refund claim at issue, which sought recovery of $57, 412.58. The tax commissioner denied the claim in a final determination, rejecting the bank's claims that it purchased nontaxable accounting services or, alternatively, nontaxable customized software.
{¶ 6} Cincinnati Federal appealed the tax commissioner's denial of its refund claims to the BTA. At the BTA hearing, Cincinnati Federal offered the testimony of four witnesses, including the expert testimony of a certified public accountant regarding accounting services. The bank also presented 22 exhibits, including invoices and summaries of the invoices that identify the services relating to the charges.
{¶ 7} In its decision affirming the tax commissioner's denial of Cincinnati Federal's refund claim, the BTA first addressed the bank's argument that it had purchased customized software from Fiserv, stating that "software customization is a spectrum" that ranges from a vendor selling "prewritten software with no modifications specific to the purchaser" to a vendor who "creates an entirely new software system from scratch." BTA No. 2018-2247, 2020 WL 7711533, *4 (Dec. 22, 2020). According to the BTA, "[t]he services Fiserv provides are in the middle" of the spectrum. Id. The BTA applied the principle that "[exclusions are 'strictly construed, '" id. at *3, quoting Satullo v. Wilkins, 111 Ohio St.3d 399, 2006-Ohio-5856, 856 N.E.2d 954, ¶ 15, and concluded that Cincinnati Federal's claim must be denied under the principle that exemptions must be denied when "exemption is 'doubtful, '" id. at *4.
{¶ 8} Next, the BTA addressed Cincinnati Federal's claim that the services Fiserv provides the bank constitute "accounting services," which are tax exempt under R.C. 5739.01(Y)(2)(a). Quoting the tax commissioner's final determination, the BTA held that Fiserv's" 'updating and displaying of information upon input or request of the data respectively is not accounting services; no studying, altering, analyzing, interpreting, or adjusting of the claimant's data or financial material occurs.'" BTA No. 2018-2247, 2020 WL 7711533, at *4.
{¶ 9} Cincinnati Federal appealed to this court as of right.
{¶ 10} In 1983, Ohio extended its sales and use tax to purchases of "automatic data processing and computer services." Am.Sub.H.B. No. 291, 140 Ohio Laws, Part II, 2872, 3214-3215, 3220 ("H.B. 291"); see also Sub.H.B. No. 794, 140 Ohio Laws, Part II, 4746, 4778, 4785, effective July 6, 1984; R.C. 5739.01(B)(3)(e) and (Y). In 1993, the General Assembly amended the statute to separate "automatic data processing and computer services" into the following categories: automatic data processing ("ADP"), electronic information services ("EIS"), and computer services. Am.Sub.H.B. No. 152, 145 Ohio Laws, Part II, 3341, Part III, 4287, 4294-4295. As a result of the amendments, the "sales" that are subject to tax include transactions in which ADP, EIS, or computer services are "provided for use in business when the true object of the transaction is the receipt by the consumer of [ADP], computer services, or [EIS] rather than the receipt of personal or professional services to which [ADP], computer services, and [EIS] are incidental or supplemental." (Emphasis added.) R.C. 5739.01(B)(3)(e).
{¶ 11} R.C. 5739.01(Y)(1)(a) defines ADP as the" 'processing of others' data, including keypunching or similar data entry services together with verification thereof, or providing access to computer equipment for the purpose of processing data." R.C. 5739.01(Y)(1)(c) defines EIS as "providing access to computer equipment by means of telecommunications equipment" for one of two purposes: (1) "[examining or acquiring data stored in or accessible to the computer equipment" or (2) "[p]lacing data into the computer equipment to be retrieved by designated recipients with access to the computer equipment."[2]
{¶ 12} R.C. 5739.01(Y)(2) identifies certain "personal and professional services" that are not subject to the tax on ADP, EIS, or computer services. That section states that" 'personal and professional services' means all services other than [ADP], computer services, or [EIS], including but not limited to" the specific services identified in R.C. 5739.01(Y)(2)(a) through (k).
{¶ 13} In this appeal, Cincinnati Federal argues that Fiserv's services fall into two of those categories. According to Cincinnati Federal, Fiserv provided nontaxable accounting services under R.C. 5739.01(Y)(2)(a) and nontaxable customization of software under R.C. 5739.01(Y)(2)(e).
{¶ 14} Cincinnati Federal argues that all the service charges it paid to Fiserv are not taxable under both R.C. 5739.01(Y)(2)(a) and (e). But the BTA rejected Cincinnati Federal's argument as to both provisions. In this tax appeal, we determine whether the BTA's decision is reasonable and lawful, deferring to factual determinations of the BTA but correcting legal errors. N.A.T. Transp., Inc. v. McClain, 165 Ohio St.3d 250, 2021-Ohio-1374, 178 N.E.3d 454, ¶ 11. The determination by the BTA whether a particular service constitutes taxable ADP or EIS is a question of "ultimate fact" that is subject to our review and redetermination on appeal. See Marc Glassman, Inc. v. Levin, 119 Ohio St.3d 254, 2008-Ohio-3819, 893 N.E.2d 476, ¶ 7-8. On the other hand, a determination of the "true object" of a transaction is primarily factual, and we affirm a true-object finding when it is reasonable. See Amerestate, Inc. v. Tracy, 72 Ohio St.3d 222, 223-224, 648 N.E.2d 1336 (1995).
{¶ 15} Cincinnati Federal's first proposition of law claims that the services it purchased were nontaxable under R.C. 5739.01(Y)(2)(e) because they involve customization of software under that division. R.C. 5739.01(Y)(2)(e) describes the following "personal and professional services":
Designing policies, procedures, and custom software for collecting business information, and determining how data should be summarized, sequenced, formatted, processed, controlled, and reported so that it will be meaningful to management.
{¶ 16} In its merit brief, Cincinnati Federal emphasizes that Fiserv customized its software for the bank's...
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