RGIS Inventory Specialists v. Palmer, 28212.

• Decision Date: 22 February 2001
• Docket Number: No. 28212.,28212.
• Citation: 544 S.E.2d 79,209 W.Va. 152
• Court: West Virginia Supreme Court
• Parties: RGIS INVENTORY SPECIALISTS, a Michigan co-partnership, Plaintiff below, Appellee, v. Joseph M. PALMER, III, State Tax Commissioner, Defendant below, Appellant.

544 S.E.2d 79

209 W.Va. 152

RGIS INVENTORY SPECIALISTS, a Michigan co-partnership, Plaintiff below, Appellee, v. Joseph M. PALMER, III, State Tax Commissioner, Defendant below, Appellant.

No. 28212.

Supreme Court of Appeals of West Virginia.

Submitted January 10, 2001.

Decided February 22, 2001.

Michael E. Caryl, Esq., Bowles, Rice, McDavid, Graff & Love, Martinsburg, West Virginia, Attorney for Appellee.

Darrell V. McGraw, Esq., Attorney General, Stephen B. Stockton, Esq., Assistant Attorney General, Charleston, West Virginia, Attorneys for Appellant.

STARCHER, Justice:

The appellee, RGIS Inventory Specialists, Inc. ("RGIS"), challenges a ruling by appellant, Joseph M. Palmer, State Tax Commissioner of the State of West Virginia ("the Commissioner"), holding that inventory services provided by the appellant are subject to the state sales tax. We hold that certain inventory services do not fall under an "electronic data processing" exemption to the state sales tax.

I. Facts & Background

RGIS is based in Rochester, Michigan, with field offices located throughout the United States, including in Charleston and Huntington, West Virginia. "RGIS" stands for "Retail Grocery Inventory Services." RGIS is a national, multi-million dollar company that provides independent inventory services for thousands of businesses—not just grocery stores.

RGIS describes its services as either "audit inventories" or "financial inventories"—audit inventories identify more inventory characteristics. Financial inventories can be completed at RGIS field offices; audit inventories, because of their greater complexity, generally require transmittal of inventory data to RGIS's Michigan headquarters for final processing.

To conduct an inventory, RGIS employees go to a customer's site and visually observe the customer's inventory of goods. The customer has initially provided RGIS with information about the customer's inventory, from which RGIS creates an electronic template or format for the inventory. RGIS employees enter information about the observed goods (number, type, color, size, etc.) into a handheld or belt-mounted minicomputer, into which the customer's general inventory information has already been pre-loaded. Once the physical taking of the inventory is complete, RGIS arranges the collected inventory data in a format desired by the customer, and submits the information in that form to the customer.

The instant case began as an administrative appeal by RGIS from an assessment by the Commissioner for sales tax on RGIS's business activity in West Virginia—in the amount of $320,394.00 in tax and $63,824.00 in interest—for a total assessment of $384,218.00. In an Administrative Decision issued on March 31, 1999, the Commissioner affirmed the assessment, and held that RGIS's services were not "data processing services" that are exempt from West Virginia sales tax.

W.Va.Code, 11-15-9(a)(22) [1997]¹, states:

[The following sales and services are exempt from sales tax:]

* * *

Sales of electronic data processing services and related software: Provided, That for the purposes of this subsection "electronic data processing services" means: (1) The processing of another's data, including all processes incident to processing of data such as keypunching, keystroke verification, rearranging or sorting of previously documented data for the purpose of data entry or automatic processing and changing the medium on which data is sorted, whether these processes are done by the same person or several persons; and (2) providing access to computer equipment for the purpose of processing data or examining or acquiring data stored in or accessible to such computer equipment[.]

This statutory language is repeated and explained at 110 C.S.R. 15, Sec. 76, which states:

§ 110-15-76. Electronic Data Processing Services and Related Software.

76.1 Sales of electronic data processing services and related software to others are exempt from consumers sales and service tax and/or use tax. For the purposes of this exemption, electronic data processing services means (1) the processing of another's data, including all processing such as key punching, keystroke verification, rearranging, or sorting of previously documented data for the purpose of data entry or automatic processing, and changing the medium on which data is sorted; and (2) providing access to computer equipment for the purpose of processing data or examining or acquiring data stored in or accessible to such computer equipment.

76.1.1 It is necessary to determine the nature of what is being purchased by the customer. For example, where a completely computerized billing service actually prints and mails the bills based on information provided by the client, receives collectibles and records the payments received, the service is taxable. The fact that a computer is utilized does not result in the service being exempt.

76.1.2 The purchase by customers of specialized computer software which allows the customers terminals to communicate directly with a central processing unit of another is exempt if that is the only use of such software.

76.1.3 The purchase of other software which merely provides information to assist the customer in making business decisions is taxable.

76.2 Purchases for use in rendering electronic data processing services for others and the purchase of related software are taxable, except for purchases for resale, for which an exemption certificate may be issued.

RGIS appealed the Commissioner's Administrative Decision to the Circuit Court of Cabell County. The circuit court reversed the Commissioner, on the grounds that RGIS performs "electronic data processing services" that are exempt from sales tax. The Commissioner then brought the instant appeal to this Court from the decision of the circuit court.

II. Standard of Review

We apply a de novo standard of review to the circuit court's decision, because that decision interpreted and applied the law to undisputed facts.

III. Discussion

A. Underlying Principles

We begin our discussion by setting forth some underlying principles that must guide our approach to the issues presented by the instant case.

This Court has repeatedly held—recently in Syllabus Point 4 of Shawnee Bank, Inc. v. Paige, 200 W.Va. 20, 488 S.E.2d 20 (1997) —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.

(Citations omitted.)

In the instant case, the foregoing principle of strict construction against exemption, as applied to the "electronic data processing" sales tax exemption, is reinforced by the fact that the Legislature has stated: "it shall be presumed that all sales and services are subject to the [sales] tax until the contrary is clearly established." W.Va.Code, 11-15-6 [1987] (emphasis added). Moreover, the statutory scheme places the burden upon the taxpayer to establish that an "assessment is incorrect and contrary to law, either in whole or in part." W.Va.Code, 11-10-9 [1978].

Additionally, in the case of the electronic data processing exemption, the applicable legislative regulations that are quoted supra state that "[i]t is necessary to determine the nature of what is being purchased by the customer," and that "[t]he [mere] fact that a computer is utilized does not result in the service being exempt." 110 C.S.R. 15, § 76.1.1.

We can take judicial notice that in a modern business environment, some aspect of electronic data processing will very likely be a part of every commercial transaction. Thus, in the context of examining and applying an exemption that exempts "all processes incident to processing of data" (W.Va.Code, 11-15-9(a)(22) [1997]), it becomes particularly necessary to determine "what is being purchased by the customer" (110 C.S.R. 15, § 76.1.1.) and what is "incident[al]" to such a purchase.

If what the customer is buying is not primarily electronic data processing, then activity that might otherwise be seen as "incidental" to such processing simply cannot qualify for the exemption. To interpret the exemption otherwise would be to exempt all parts of a transaction—if any part of the transaction, no matter how minimal, could be considered "electronic data processing." Put another way, to hold that because there is an element of electronic data processing in certain services, everything else is incidental to that element, would be contrary to the intention of the Legislature and inconsistent with the mandate that exemptions from sales tax are to be strictly construed against exemption.

B. The Commissioner's Position

The following (slightly edited) excerpt from the Commissioner's brief before this Court sets forth the Commissioner's position and reasoning:

The bulk of the taxpayer's services constitutes data generation rather than data processing.

The Tax Commissioner has always been willing to admit that some of what Taxpayer [RGIS] does is processing of another's data, and therefore exempt from sales and use tax, if it could be shown that the data processing was more than incidental. Specifically, the Tax Commissioner would admit that everything past the point of data generation is data processing. However, Taxpayer has chosen to go with an "all or nothing" strategy, insisting that everything it does is either data processing or "incidental to" data processing. Taxpayer has consistently refused to provide any kind of allocation of costs and revenues between those functions the Tax Commissioner admits are data processing, and the taking of the physical inventory, which the Tax Commissioner contends is neither data processing nor incidental to data processing.

It cannot conceivably be the customer's primary goal in having Taxpayer conduct a physical inventory to determine that they have spaces for three varieties of canned beans, with respective UPC codes of 123, 456, and 789 in aisle five of their store at...