Southern States Co-op., Inc. v. Dailey

• Decision Date: 29 July 1981
• Docket Number: No. 14481,14481
• Citation: 167 W.Va. 920,280 S.E.2d 821
• Parties: SOUTHERN STATES COOPERATIVE, INC. v. Richard L. DAILEY, State Tax Commissioner.
• Court: West Virginia Supreme Court

Page 821

280 S.E.2d 821

167 W.Va. 920

SOUTHERN STATES COOPERATIVE, INC. v. Richard L. DAILEY, State Tax Commissioner.

No. 14481.

Supreme Court of Appeals of West Virginia.

July 29, 1981.

Syllabus by the Court

1. 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.

2. 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.

3. In a cooperative system, the ability of a corporation to reach a larger market through affiliated cooperative retailing outlets is in itself a gain, the economic consequences of which are realized in larger sales of the corporation's products and reduced costs through bulk purchasing. Therefore, the transfer of goods from an incorporated cooperative to a separately incorporated affiliate is an activity engaged in with the object of gain or economic benefit and is subject to the West Virginia business and occupation tax.

Chauncey H. Browning, Atty. Gen., C. Page Hamrick, III, Sp. Asst. Atty. Gen., Charleston, for appellant.

Spilman, Thomas, Battle & Klostermeyer, G. Thomas Battle, Charleston, for appellee.

McGRAW, Justice:

This case comes on appeal from a decision of the Circuit Court of Kanawha County, which reversed in part an administrative decision of the State Tax Commissioner, in which an assessment of business and occupation tax against the appellee, Southern States Cooperative, Inc., a Virginia corporation, was affirmed in part. The circuit court held that the transfer of property by the appellee to its local affiliated cooperatives in West Virginia is not subject to the West Virginia business and occupation tax because the appellee is not engaged in that activity with the object of gain or economic benefit, and therefore its activity does not constitute the business of wholesaling, taxable under W.Va.Code § 11-13-2c (1974 Replacement Vol.). The appellant, the Tax Commissioner of West Virginia, contends that the circuit court erred in reducing the business and occupation tax assessed against the appellee by the amount payable on the gross receipts from the transfer of property between Southern States and its affiliated cooperatives. He argues that Southern States is engaged in this activity for gain or economic benefit and that the transfers constitute wholesale sales because the local affiliated cooperatives are separate and distinct corporate entities. We find merit in these contentions and consequently hold that gross receipts from the transfer of property between Southern States and its local affiliated cooperatives are subject to the West Virginia business and occupation tax.

Southern States Cooperative, Inc., is an agricultural cooperative association organized under the Virginia Agricultural Cooperative Associations Act, Va.Code § 13.1-312 et seq. (1978 Replacement Vol.), with offices located at Richmond, Virginia. It operates both as a marketing and a purchasing cooperative although approximately 97 percent of its business volume is purchasing. By its marketing activities, Southern States assists its members in merchandising goods produced by them, and benefits its members by reducing merchandising and transportation costs, avoiding congested markets, creating increased demand by advertising, and avoiding middlemen. As a purchasing cooperative, Southern States serves as a purchasing agent in the acquisition of agricultural goods and services for its members and patrons. By bulk purchasing and by maintaining a well organized system of distribution, the cooperative keeps its costs to a minimum and passes the savings of the system on to the farmer shareholders and patrons.

Southern States Cooperative, Inc., has a fifteen-member board of directors, ten of whom are elected by the farmer members and five of whom are appointed by the Deans of Agriculture of the five land-grant colleges of the states in which it operates; namely, Kentucky, West Virginia, Delaware, Maryland and Virginia. The board of directors employs the officers and employees of Southern States. By statute members of a cooperative must be producing farmers. Va.Code § 13.1-321 (1978 Replacement Vol.). Members receive common voting stock as a part of their patronage refunds, which are actually returns of the overcharges on purchases. The remainder of the refunds to which members are entitled, are made in cash. Ownership of stock makes the farmers members of the cooperative.

The distribution of supplies from Southern States to farmers from its local warehouses is accomplished through three retailing methods: (1) branch stores; (2) franchise agencies; and (3) local affiliated cooperatives. Only local affiliated cooperatives are involved in this appeal. ¹

Local affiliated cooperatives are formed by farmers under the Virginia Agricultural Cooperatives Act as separate legal entities, with their own articles of incorporation and by-laws. The principal office of each local cooperative is in Richmond, Virginia. The president and vice-president of the local cooperatives are elected by the farmers in the area the cooperative serves, while the secretary and treasurer are employees of Southern States' Richmond headquarters. Each local cooperative in West Virginia has a contract of management with Southern States under which Southern States agrees to serve as agent and attorney-in-fact for the local cooperative.

With the exception of petty cash, all daily receipts coming into a local cooperative are deposited in a local bank account. Immediately thereafter a deposit or transfer check is written for the amount, transferring the funds to Southern States' account in Richmond. The local cooperative is given credit for these deposits. Other accounts payable owned by the local cooperative are submitted to the Richmond office and paid by Southern States check. They are charged back to the local cooperative.

At the beginning of each fiscal year, in light of the total purchasing volume of the local cooperative for the preceding year and anticipated expenses for the ensuing year, Southern States advises the local cooperative of the estimated fee for the year's purchasing operations. At the end of the fiscal year, after the actual cost of rendering the service has been determined by Southern States, adjustments are made to the fee charged the local cooperative. In the event the actual cost is less than the fee paid, the difference is credited to the local cooperative by Southern States. In the event the actual cost is greater, the difference is paid to Southern States by the local cooperative.

Southern States performs its services of purchasing and general assistance, including accounting, auditing, merchandising, personnel training, and publicity, pursuant to the contract of management between the local cooperative and Southern States. Also under the contract Southern States agrees to make available to the local cooperative all commodities or supplies manufactured, processed, assembled, handled, or distributed by it, and the local cooperative agrees to use the wholesale facilities and services of Southern States as its principal source of supply for those commodities. Local cooperatives may, however, handle goods distributed or handled by suppliers other than Southern States.

To administer its marketing and purchasing operations Southern States maintains a system of retail supervision with ten regional officers. The officers work with local cooperatives, branches and private agencies as consultants to the franchises and in direct control of the operation of the branches and of the local cooperatives under the contract of management. They select management employees and oversee the operations of the branches and local cooperatives.

During the audit period involved in this appeal, Southern States maintained regional offices in West Virginia at Huntington and Clarksburg. These regional offices are set up to advise and work with branch store and local cooperative managers with respect to the supplies and products available through the Southern States distribution system and to help them with retail level marketing. The Huntington and Clarksburg locations also serve as distribution warehouses for the various retail outlets in the State.

Common stock dividends paid to cooperative members are limited by Southern States' corporate charter to a percentage set by Virginia law, regardless of the earnings of the retail operation. ² Any earnings over and above the limited percentage dividend belong to the patrons who dealt with the cooperative. As a cooperative, Southern States has a contractual obligation to return any earnings above the limited dividend. After the dividends have been paid at the end of the year, the patronage refund rate is established, which determines the percentage to which each patron is entitled. Besides the common stock which members receive as part of their patronage refunds, a limited amount of preferred stock with a six percent dividend also exists. Preferred stock may be owned by individuals who do not transact business with the cooperative. Stock sales are the only way of acquiring the requisite capital for the formation of a new cooperative.

This case arises from an assessment of business and occupation tax issued by Richard L. Dailey, then tax commissioner, against Southern States Cooperative, Inc. pursuant to an audit of the corporation's business for the period of July 1, 1969 through June 30, 1974. The assessment was for a tax in the amount of $48,273.79, with a penalty of $13,908.66, based...