Michael E. Caryl, Esq.
Darrell V. McGraw, Esq.
Bowles, Rice, McDavid, Graff & Love Attorney General
Charleston, West Virginia Stephen B. Stockton, Esq.
Attorney for Appellee Assistant Attorney General
Charleston, West Virginia
Attorneys for Appellant
JUSTICE STARCHER delivered the Opinion of the Court.
The appellant, RGIS Inventory Specialists, Inc. (RGIS), challenges a ruling
by appellee, 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.
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 hand-held 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) See footnote 1 1 , states:
[The following sales and services are exempt from sales tax:]
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.
[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.
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  (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 .
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) ), 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.
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 prices ranging from 34 cents to 58 cents a can. Any retailer with a continuous inventory system will already have that information. For inventory purposes, that information is essentially meaningless unless there are quantities associated with it. That quantity number is the essential piece of data that any retail store needs to know, and it is that piece of data that Taxpayer's inventory counters generate.
(Emphasis in original.)
The series of ones and zeroes that represent a dozen cans of
beans in a computer's memory are data. The numbers and
words 12 cans of beans written on a piece of paper are data.
But a dozen cans of beans sitting on a shelf are not data,
much less previously documented data; they are a dozen
cans of beans. The act of recording the existence of those
twelve cans of beans is an act of generating data where none
existed before, and is by its very nature not processing of
Taxpayer's testimony and briefs have assiduously characterized
the taking of the physical inventory as data entry, but the data in
this case does not exist until it is entered, and only then does it
become [n]umerical or other information presented in a form
suitable for processing by computer. See American Heritage
College Dictionary 353 (3d ed. 1997) (in the context of
computer science, data is defined as [n]umerical or other
information represented in a form suitable for processing by
computer.) The keystroking involved in generating the data
that Taxpayer later processes is neither keypunching nor data
The position and reasoning that RGIS urges upon this Court is set forth in the
following (slightly edited) excerpt from RGIS's brief:
[The] Tax Commissioner argues that the product unit quantity element of its customers' data does not exist prior to its observation and entry by the Taxpayer's personnel. He then leaps to the conclusion that such data cannot be said to be previously documented as the statute requires. Such a conclusion is erroneous for several compelling reasons.
First, the express language of the statute does not require that, to render tax-exempt electronic data processing services, one must be processing data documented by another prior to the onset of those services. Specifically, the law provides that tax- exempt electronic data processing services means:
. . . (1) The processing of another's data, including all processes incident to the 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 . . .
By the use of the term of enlargement including and of the
term such as to introduce them, the processes specifically
identified in the above-quoted language must be seen as a non-
exclusive list of examples of tax-exempt processes which are
incident to data processing. State Human Rights Commission v.
Pauley, 158 W.Va. 495, 212 S.E.2d 77 (1975). Thus, because
it is not a mandatory element of the exemption scheme, the
purported absence of documentation of its customers' data prior
to the onset of the Taxpayer's service cannot serve as the basis
for denying their entitlement to the exemption.
Second, simple logic dictates that, as used in the quoted statutory language, the previous documentation of the subject data must itself also be seen as a process incident to the processing of such data. Further, the statute's language which immediately follows that reference expressly provides that it does not matter whether any such processes are done by the same person or several persons. Thus, the application of the exemption does not turn on whether the previous documentation of the subject data is done by the same person who later processes it, or by others.
Third, as the foregoing dictionary definition of the term data processing states, recording . . . information by mechanical means . . . is data processing. Webster's New World College Dictionary, supra, at p. 352.
Fourth, in asserting that, until observed and entered, the customers' product unit quantity data does not exist, the Tax Commissioner overlooks the fact that the above-quoted common meaning of the term data includes evidence. See Webster's Unabridged Dictionary of the English Language 369. When the term evidence is used in a legal context, it is defined to include testimony, writings, material objects, or other things presented to the senses that are offered to prove the existence or nonexistence of a fact. See Black's Law Dictionary 555 (6th Ed. 1990). (Emphasis added).
Thus, each unit of product on a customer's shelves is data in the form of evidence of its existence, of the quantity of the same, and of the many other elements of data apparent from it, which data the Taxpayer's personnel enter into their microcomputers incident to the processing of the same.
The Tax Commissioner, in his brief, asserts that the Circuit
Court's holding _ which applies rather than interprets the
governing statute _ flips the necessary analysis on its head.
Rather, in the face of the statute's plain words, exempting from
tax . . . all processes incident to [electronic data] processing
. . ., it is the Tax Commissioner who is flipping the analysis by
arguing that the Circuit Court should have found that all the
Taxpayer's processing was incident to providing a taxable
inventory counting service.
In so arguing, the Tax Commissioner is, in effect, attributing to the Legislature an intent to only exempt electronic data processing services where they are performed for their own sake and not to achieve some other ultimate purpose, such as maintaining a bank's customers' accounts, billing patients for health care providers, or independently measuring and confirming a retailer's inventory.
Nevertheless, in words too plain to permit interpretation, the Legislature exempted the electronic data processing of another's data, and all processes incident thereto, regardless of the particular context or ultimate object or use of that processed data by the person engaging the electronic data processing service. Clearly, the ultimate result the Taxpayer's customers are seeking is a reliable report of their inventory data organized in a manner which meets their management needs. To obtain that result, they hire the Taxpayer to perform its electronic data processing service.
Having set forth the positions of the parties, we begin our analysis of the
applicability of the electronic data processing exemption in the instant case by recognizing
that the controlling statutory language unequivocally states that: 'electronic data processing
services' means: (1) The processing of another's data. W.Va. Code, 11-5-9(a)(22) 
(emphasis added). Thus, the electronic data processing exemption applies only where one
person (or entity) has data -- and a separate person electronically processes the first or
other person's data.
The questions then arise: what is the nature of the data that the first person has? And how does the first person get or have such data, that can be subsequently processed?
A brief tour through several dictionaries reveals that the term data can be given such a wide range of meanings, in different contexts, that reliance on a specific dictionary definition is not much help in answering the questions before us.See footnote 2 2
However, the statute itself is some help in understanding what the Legislature
meant when it exempted the electronic processing of another's data. Specifically, the
statute says that inputting another's previously documented data (W.Va. Code, 11-15-
9(a)(22)) into an electronic system (for example, by keypunch, electronic reading, or
diskette) falls within the electronic data processing exemption.
Thus, the statute contemplates that data is something that is initially documented in one form, and then may be processed into another form.See footnote 3 3 Put another way, the use of the phrase previously documented to modify data suggests that data (as used in the statute) means symbolic or representative information -- like words, numbers, codes, or images -- that documents, stands for, or represents other, more primary items, facts, or information.
In the case of inventory services, such documentation would be accomplished by counting and recording information (number, color, size, etc.) about the physical objects in a customer's stock. The abstract or symbolic information that documents the relevant physical characteristics of a customer's stock, under this approach, would be that customer's data -- that can then be electronically processed.
In a case raising a similar issue, the Minnesota Supreme Court, in Keezer v.
Spickard, 493 N.W.2d 614 (1993), concluded that the statutory term data -- in a state Data
Practices Act -- did not apply to government-held information, until the information had
been physically recorded in some fashion other than the mental impressions of the observer.
In other words, government-held information did not become data for purposes of the Minnesota Data Practices Act, until a record of some sort that was based on the information, had been created.
The Minnesota court stated:
The threshold question we must answer is Did the statements disclose government data? Answering this question is difficult because the Act does not define the word data. . . . The failure to state whether data must be in a physical form to be government data creates an ambiguity in the Act because of the unique nature of data. The word data means information and can refer to information in any form. See Webster's Seventh New Collegiate Dictionary 210 (1972). To create data it is not necessary to write anything, enter anything into a computer, or make a record of any kind. Data exist when a person knows something. If the Act is read literally, the term government data can include knowledge that exists only in the mind of a government employee. For example, if a government employee asks a license applicant a question for the purpose of filling out a license application form, it would not be necessary for the employee to fill in the form to create government data. Data would exist as soon as the applicant responds to the question and the employee comprehends the answer. Because the employee stores the data in some physical form in the brain, the unrecorded information would be government data under a literal interpretation of the Act. We cannot believe the legislature intended the term government data, to be literally interpreted to include unrecorded data that exist only in a human brain. Interpreting government data to include mental impressions formed by public employees during the course of employment would lead to absurd results. . . . The Act regulates the collection, creation, storage, maintenance, dissemination, and access to government data. . . . By referring separately to each function, this subdivision indicates the Act is intended to do more than simply regulate physical access to government records. The Act is intended to regulate every aspect of how the government manages the information it collects and records. It is nearly impossible to regulate any function related to data until a record is created somewhere outside the human brain. To give effect to the Act, we conclude that information is not government data until the information is recorded somewhere other than the human brain. . . . A plaintiff cannot establish the Act was violated merely by showing a government employee said something about him and that the statement contained information that arguably might be stored in a government record. If the information in the employee's statement was not actually recorded, then government data have not been created or released.
493 N.W.2d at 616 - 618See footnote 4 4
RGIS says that each unit of product on a customer's shelves is data. (RGIS Brief, supra, emphasis added).
However, based on the foregoing reasoning, we do not believe that the Legislature intended the expansive definition of the term data that RGIS urges that we adopt. We do not believe that the Legislature intended that the actual cans of peas that a store possesses on its shelves -- or the mental impressions that are formed by inventory takers in observing those cans of peas -- are data, as that term is used in W.Va. Code, 11-5- 9(a)(22) .
Rather, we believe that W.Va. Code, 11-5-9(a)(22) , properly viewed through the lens of strict construction that is applicable to tax exemptions, and as applied to the facts of RGIS's operations, contemplates that data comes into existence when information about a store's inventory is recorded in some fashion other than the mind of the observer. We follow the reasoning of the Keezer court, and conclude that neither the items of a customer's inventory, nor the RGIS employees' observations of those items themselves, are data -- until information about those items or observations is recorded in some fashion other than the mental impressions of the observer.
If a store's employees (or RGIS employees) observe the characteristics of an inventory (number, size, etc.) and record information based on those observations on computers (or, for that matter, on sheets of paper), that recorded information is then another's data that RGIS can electronically process.
The Commissioner agrees (see Commissioner's Brief, supra) that such subsequent processing of once-recorded data by RGIS does fall under the statutory exemption for electronic data processing. But the Commission argues, and we agree, that RGIS's actual taking of the inventory -- by observing items in a customer's stock and recording information from those observations -- is not the processing of another's data. That service is rather the creation of another's data.
Based on this reasoning, we hold that the service of observing and
electronically recording information about a customer's inventory by an inventory services
company is the creation of data and is not exempt from sales tax under the electronic data
processing exemption established at W.Va. Code, 11-15-9(a)(22) . However,
electronic processing of such inventory data by an inventory services company, once the data
has been created, does fall within this exemption.