United Engineers & Constructors, Inc. v. Rose

Decision Date17 November 1987
Docket NumberNo. 17322,17322
Citation178 W.Va. 591,363 S.E.2d 477
CourtWest Virginia Supreme Court
PartiesUNITED ENGINEERS & CONSTRUCTORS, INC. v. Herschel H. ROSE, III, State Tax Commissioner.

Syllabus by the Court

1. Gross receipts attributable to design and engineering services performed by a taxpayer out-of-state as an integral part of a construction contract to be performed in West Virginia are properly included under the "contracting" category of West Virginia Business and Occupation Tax.

2. Including gross receipts from design and engineering services performed out-of-state in furtherance of a construction contract to be performed in West Virginia does not violate the "internal consistency" test of Armco Inc. v. Hardesty, 467 U.S. 638, 104 S.Ct. 2620, 81 L.Ed.2d 540 (1984) because West Virginia would not tax services performed in this State as part of a contract to be delivered out-of-state.

3. If a West Virginia taxpayer is engaged in the business of contracting, but West Virginia cannot collect a business and occupation tax in the "contracting" category, W.Va.Code, 11-13-2e [1971], because the taxpayer's services relate to the construction or improvement of an out-of-state facility, the taxpayer cannot then be taxed under Code, 11-13-2h [1971] in the "services" category because the taxes on "contracting" and "services" are not compensating taxes.

Louis S. Southworth, II, James R. Snyder, Jackson, Kelly, Holt & O'Farrell, Charleston, for United Engineers.

Mary Carol Holbert, Att'y Gen., Tax Div., for Rose.

NEELY, Justice:

In 1979 the State Tax Commissioner assessed United Engineers & Constructors, Inc. ("United") $665,036.45 in back taxes plus $806.05 interest and $219,667.17 in penalties. United petitioned for reassessment and, in 1982, the tax commissioner affirmed the assessment but waived the penalties. The central question before the commissioner and in the lower court on appeal from the commissioner's decision was whether the gross receipts earned by United from engineering and design services ancillary to United's activities as a contractor in West Virginia but performed in Pennsylvania and Massachusetts were properly subject to the West Virginia Business and Occupation Tax.

The tax commissioner determined that engineering and design services performed in Pennsylvania and Massachusetts were an integral part of United's contracting business in West Virginia, and in 1985, the Circuit Court of Kanawha County affirmed the tax commissioner's decision. We granted United's appeal to determine whether the decisional law of the United States Supreme Court since we wrote Pittsburgh-Des Moines Steel Co. v. Goodwin, 164 W.Va. 525, 264 S.E.2d 604 (1979), compels a different result in this case than we reached in Pittsburgh-Des Moines. We find no change in the federal law since 1979 that would disturb our holding in Pittsburgh-Des Moines; therefore, we affirm the circuit court.

United is a Delaware corporation qualified to do business in West Virginia that provides engineering, design and construction services. During the audit period--the years 1974 through 1978--United performed services for member companies of the Allegheny Power System under two contracts. Under an agreement dated 1 August 1974, United contracted with Monongahela Power Company, the Potomac Edison Company, and West Penn Power Company to provide engineering, design and construction management services and to perform such construction work as needed for two generating units at the Pleasants Power Station. By a separate agreement, United contracted with Monongahela Power Company to provide engineering and design services and to perform such construction work and construction management services as needed to modify an existing coal handling system at Monongahela's Willow Island Power Station.

United's business is divided into two categories: (1) engineering and design services and (2) construction services. United is composed of four engineering divisions and one construction division. Each division is a separate unit for financial, accounting, and personnel purposes. Furthermore, each division is a separate profit center, having a vice-president who reports directly to the president of the company. The divisions operate independently. United customarily offers its engineering services and construction services separately. In 1978, for example, United had 151 contracts for engineering services only, 16 contracts for construction services only, and 41 contracts for both engineering and construction services.

In the case before us United offered and contracted for its engineering services and construction services separately. Its proposal letter set out the various fees that would apply if the power companies required only engineering services, only construction services, or both. Nevertheless all United's responsibilities for various services were reflected in a single contract for both projects, although each service was set forth in a separate provision.

During the audit period United's gross receipts from both contracts were $121,097,314.13. Of this, $26,123,482.85, or approximately 18 percent, was for design and engineering services. The remainder was for construction and construction management activities. The amount received for construction activities was reported by United under the contracting classification of our business and occupation (B & O) tax. The amount that was received for construction management services was reported under the service classification. The tax commissioner determined that the construction management activity was so intertwined with the contracting as to be inseparable from it and reclassified this income to the contracting classification. United admitted that this was a factual question and, based on the tax commissioner's administrative decision, conceded the issue on appeal to the circuit court.

The engineering and design services, however, are still at issue in this case. Because the engineering and design services took place outside West Virginia, United did not consider gross receipts from these out-of-state services to be subject to the West Virginia B & O tax. The tax commissioner disagreed and determined not only that these receipts were subject to the B & O tax, but also that they should be taxed in the contracting category rather than in the service category.

United became involved in these two West Virginia projects in 1972 when Allegheny Power System invited United to submit a proposal to design, engineer and construct a three unit power station at a site yet to be selected in Pennsylvania or West Virginia. After extended discussion, United's Philadelphia office submitted to Allegheny Power System at its Greensburg, Pennsylvania office a proposal to provide engineering and design services, construction management services, and construction services on the project. This proposal permitted the power companies to elect to employ United's design services alone or both its design and construction services, and set forth alternative fees depending upon which alternative was selected.

Throughout the contract negotiations, all correspondence and discussion took place at Allegheny Power System's offices, either in New York or Greensburg, or at United's home office in Philadelphia. Meanwhile, in January, 1974 United submitted a proposal to perform design and engineering services, construction management services, and construction services on proposed plant modification at the Willow Island Power Station. Monongahela Power Company hired United to provide, as separate services, engineering and design services, construction management services, and construction services as needed to modify an existing coal handling system at its Willow Island Power Station, but to provide only construction management services with regard to new structures that were to be engineered and designed by others. These agreements were executed by United at its Philadelphia office and by the power companies at their Greensburg, Pennsylvania office. Both agreements specified that the engineering and design services were to be performed by United at its home office in Philadelphia and its engineering office in Boston. It was also agreed that title to all engineering and design drawings would pass to the power companies at their Greensburg office upon completion of this section of the contract.

Although there were many phases to the engineering and design services performed by United, none of those phases was performed in West Virginia. All engineering work was performed by United either in Philadelphia or Boston. Aerial photographs of the site, from which United prepared a location report in Pennsylvania, were taken and provided by the power companies. The power companies retained an independent contractor to drill test holes in the field, and United did not supervise or participate in that drilling, although it did retain an independent consultant to examine the core borings obtained. The environmental impact statement was prepared in Pennsylvania based almost entirely on information gathered by the power companies and their agents, not by United. With respect to engineering and design services relating to the Pleasants Power Station, the tax commissioner in his administrative decision states that "the engineering division was also involved in preparing thermodynamic calculations for the environmental statement. This engineering, along with all other engineering, was performed by personnel at Philadelphia, Pennsylvania and Boston, Massachusetts."

Contacts with West Virginia by United's engineering division were minimal and merely incidental to their performance of engineering services in Pennsylvania and Massachusetts. The engineering division did not maintain an office at the job site, or anywhere else in West Virginia. Contacts by United's engineering division were limited to preliminary visits by...

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