Preston Memorial Hosp. v. Palmer

578 S.E.2d 383

213 W.Va. 189

PRESTON MEMORIAL HOSPITAL, Petitioner Below, Appellee, v. Joseph M. PALMER, State Tax Commissioner, Respondent Below, Appellant.

No. 30682.

Supreme Court of Appeals of West Virginia.

Submitted January 21, 2003.

Decided February 27, 2003.

John A. Mairs, Jackson & Kelly, P.L.L.C., Charleston, for the Appellee.

Darrell V. McGraw, Jr., Attorney General, Stephen B. Stockton, Senior Assistant Attorney General, Charleston, for the Appellant.

PER CURIAM.

This case presents the appeal of the West Virginia Tax Commissioner¹ (hereinafter "the tax commissioner") to the November 1, 2001, final order of the Circuit Court of Preston County ruling that, contrary to the decision of the tax commissioner, amounts paid by Preston Memorial Hospital (hereinafter "the hospital") to Quorum Health Services (hereinafter "Quorum") as reimbursement of compensation of a chief executive officer and a chief financial officer² were exempt from use tax. This case was filed in the circuit court by the hospital as an administrative appeal of the relevant portion of use tax assessed against the hospital. Based upon our review of the petition, briefs, record, arguments of counsel and applicable law, we affirm the ruling of the lower court.

I. Factual and Procedural Background

The hospital, incorporated as a non-profit community hospital,³ is located in Preston County, West Virginia, at Kingwood. The hospital is an acute care medical facility whose stated mission is "to provide a modern community healthcare facility, convenient to and at a cost affordable to county residents."

As explained during oral argument, the hospital's board of directors (hereinafter "the Board") sought to improve the management expertise at the hospital but had some difficulty in locating qualified individuals for the key personnel positions. In 1996, the Board addressed this problem by entering into an agreement with Quorum whereby the hospital purchased from Quorum the services of key personnel to manage the affairs of the hospital under the supervision of the Board as well as other management and consulting services. According to the provisions of the portion of the agreement involving the key personnel, the hospital was obligated to reimburse the wages and employee benefits paid by Quorum to the key personnel. The record reflects that the billing, payment and accounting of these payroll expenses were handled separately from the other management and consulting obligations the hospital incurred with Quorum.

Following its audit of the hospital, the State Tax Division of the Department of Tax and Revenue issued a Notice of Assessment on October 23, 1997, against the hospital for tax deficiencies which resulted from the agency finding that all services provided under the agreement between the hospital and Quorum were purchases subject to use tax. The hospital objected to that portion of the assessment which involved reimbursed compensation for the key personnel and filed a petition for reassessment with the tax commissioner pursuant to West Virginia Code § 11-10-8 (2002) (Supp.2002).⁴ The hospital challenged the assessment on the basis that it qualified as a joint employer with Quorum of the key personnel and therefore was exempt from use tax under the provisions of Technical Assistance Advisory⁵ (hereinafter "TAA") 95-008 issued by the tax commissioner. A hearing on the petition was held on July 29, 1998, from which an Administrative Decision was issued on May 19, 1999, upholding the assessment. See W.Va.Code § 11-10-9 (2002) (Supp.2002) (defining agency's hearing procedures). The Administrative Decision concluded that the joint employer exemption from use tax of reimbursed compensation for leased employees pursuant to TAA 95-008 did not apply to the type of employment relationship the hospital had with the key personnel. The hospital challenged the administrative agency decision by filing an appeal, as provided by West Virginia Code § 11-10-10 (2002) (Supp.2002), in the Circuit Court of Preston County on July 19, 1999.

Based upon the briefs and oral argument of the parties, the lower court reversed that portion of the Administrative Decision which found the hospital ineligible for an employer-employee use tax exemption. Instead, the order of the court below found that, according to the provisions of TAA 95-008, an employer-employee relationship did exist between the hospital and key personnel which caused the amount the hospital paid Quorum as reimbursement of compensation of the key personnel to be exempt from use tax. It is from this ruling in the November 1, 2001, final order of the lower court that the tax commissioner bases this appeal.

II. Standard of Review

West Virginia Code § 11-10-10 sets forth the process by which administrative decisions of the tax commissioner may undergo judicial review through the circuit court and further provides that the resulting circuit court decision may be appealed to this Court by either the taxpayer or the tax commissioner. As explained in syllabus point three of Frymier-Halloran v. Paige, 193 W.Va. 687, 458 S.E.2d 780 (1995), "[t]he 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)." We went on to state in syllabus point five of Frymier-Halloran that "[o]nce 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."

III. Discussion

The specific tax at issue in this case is the state's use tax. The Legislature has provided that the use tax and sales tax statutes "be [considered] complementary laws and wherever possible be construed and applied to accomplish such intent as to the imposition, administration and collection of such taxes." W.Va.Code § 11-15A-1a (1969) (Repl.Vol.2002). As a result of this complementary treatment, the same exemptions are applicable to both the sales tax and the use tax. W.Va.Code § 11-15A-3(a)(2) (1987) (Repl.Vol.2002). Of particular interest to our discussion here is the exemption for services rendered by an employee to his or her employer. W.Va.Code § 11-15-2(s) (2001) (Repl.Vol.2002);⁶ see also 110 W.Va.C.S.R. 15, § 60.1. The instant case revolves around the question of whether the hospital is exempt from payment of use taxes on reimbursed compensation of the key personnel according to the provisions of TAA 95-008 or, more to the point, whether the hospital and Quorum under the TAA are joint employers of the key personnel which thereby would qualify the hospital for the employer-employee exemption defined by the TAA. The tax commissioner argues that the facts in this case and those underlying TAA 95-008 are so dissimilar that the complete opposite outcome is warranted. The commissioner's position is that the hospital does not qualify for the exemption from use tax allowed by TAA 95-008 because the facts in the instant case do not demonstrate that an employer-employee relationship existed between the hospital and the key personnel.

Initially we recognize that the consumer sales tax and use tax laws do not provide a definition for the terms "employee" or "employer" or otherwise define an employer-employee relationship. A regulation, apparently promulgated by the agency to fill this gap, provides a basis for ascertaining, for consumer sales tax purposes, whether an employer-employee relationship exists. See 110 W.Va. C.S.R. 15, § 60.3. This regulation sets forth twenty factors,⁷ based upon the common law, "to be considered when determining the nature of [ ] [an employment] relationship." Id.

It is important to note at this juncture that the common law definition of employer was modified by the tax commissioner with the creation of a "joint employer" concept in TAA 95-008, which itself may be questionable.⁸ Nevertheless, TAA 95-008 allows an exemption of reimbursed payroll costs from use tax where personnel are leased from one company—leasing organization—to another business—recipient organization—pursuant to a long-term agreement. In essence, TAA 95-008 acknowledges the leasing organization as the common law employer and recognizes the recipient organization as a joint employer if an employer-employee relationship is supported by the circumstances. Demonstration of the requisite authority and control to establish the recipient organization as an employer and the personnel in question as qualifying leased employees⁹ is accomplished by applying the twenty factors contained in 110 W.Va.C.S.R. 15, § 60.3.

Before examining how the standards of TAA 95-008 affect the present case, it is important to reiterate that our review is governed by the West Virginia Administrative Procedure Act (hereinafter "APA"). We summarized the circumstances under which a reviewing court may reverse a decision of an administrative agency under the APA in syllabus point two of Shepherdstown Volunteer Fire Department v. West Virginia Human Rights Commission, 172 W.Va. 627, 309 S.E.2d 342 (1983), stating that under W.Va. Code § 29A-5-4(g),

[a] court shall reverse, vacate or modify the order or decision of the agency if the substantial rights of the petitioner or petitioners have been prejudiced because the administrative findings, inferences, conclusions, decisions or order are: "(1) In violation of constitutional or statutory provisions; or (2) In excess of the statutory authority or jurisdiction of the agency; or (3) Made upon unlawful procedures; or (4) Affected by other error of law, or (5) Clearly wrong in view of the reliable, probative and substantial evidence on the whole record; or (6) Arbitrary or capricious or characterized by abuse of discretion or clearly unwarranted exercise of discretion."

Although we acknowledge that the...