Gordon C. Lane
Charles A. Lorensen
Kelly M. Young George & Lorensen P.L.L.C.
Lane Law Firm Charleston, West Virginia
Charleston, West Virginia and
and Mark Matkovich
Herschel H. Rose City Attorney, City of Beckley
Rose & Atkinson Beckley, West Virginia
Charleston, West Virginia Attorneys for the Appellee
Attorneys for the Appellant
JUSTICE ALBRIGHT delivered the Opinion of the Court.
1. In the construction of tax laws, we still must apply our general rules of
statutory construction with a view toward upholding the legislative intent. Strict
construction should not be used to defeat tax legislation that is reasonably clear in its
meaning. Syl. Pt. 5, Town of Burnsville v. Kwik-Pik, Inc., 185 W.Va. 696, 408 S.E.2d 646
2. It is the substance, not just the form, of a commercial transaction that
determines its tax consequences. Syl. Pt. 6, CB&T Operations Co., Inc. v. Tax Comm'r,
211 W.Va. 198, 564 S.E.2d 408 (2002).
3. The decision of a bank to process and handle paperwork and payments
resulting from the needs of its customers in a centralized manner does not alter the essence
of the banking business which is subject to a municipal business and occupation tax for the
privilege of conducting business within a particular city.
4. For purposes of assessing a municipal business and occupation tax, the
taxability of loan interest realized by a bank or other financial institution is to be determined
in reference to where the loan was obtained by the customer because that is where the
banking activity was conducted which resulted in the generation of the income at issue.
5. For purposes of assessing a municipal business and occupation tax, the taxability of investment income realized by a bank or other financial institution is to be determined based upon the banking location to which those income earning investments are attributed or assigned by the bank.
Appellant City National Bank (hereinafter City National or the Bank)
appeals from the November 5, 2001, order of the Circuit Court of Raleigh County affirming
the administrative decision of Appellee City of Beckley (hereinafter the City) in
connection with its assessment against the Bank of $281,550.82 for municipal business and
occupation (B & O) taxes. In challenging the assessment, City National argues that the
circuit court wrongly interpreted a legislative rule promulgated to address the proper taxing
situs where a banking business has more than one location. Based on City National's
processing of the subject funds at a location formerly in Scary Creek and now in
unincorporated Cross Lanes, the Bank argues that Beckley is not the proper taxing situs.
Upon our review of the record in this matter in connection with the applicable statutes and
regulations, we find no error, and accordingly, affirm.
In further explanation of how its banking business
has changed, City National states that when a loan is closed at a branch location,
such as in Beckley, all loan files are forwarded to and retained by personnel
at the Central Office. Based on the manner in which loans, as well as numerous
other banking matters are now handled at its Central Office, the Bank argues
that both loan interest income and investment income are not received
at Beckley and are [therefore] not subject to Beckley B&O Tax.
(See footnote 3) City
National concedes, however, that all trust department fees and safety deposit
fees; service charges for checking
accounts; NSF charges; money orders; and bank checks that are charged by its five Beckley
branch locations are received at Beckley and, thus, fully subject to the Beckley B & O tax.
Beginning with the second quarter of 1999, City National
changed the manner in which it reported taxable gross income in the banking
classification for its Beckley B & O tax return. At such time, the Bank
ceased reporting certain income generated from its loans and investments based
on its position that such funds were not being received at Beckley, but instead
at its Central Office locations where such amounts were being processed. Through
this self-imposed reporting change,
(See footnote 4) the City realized a 90% decrease in the taxes
reported by the Bank for its five Beckley branch offices in comparison to prior
(See footnote 5)
From its onset, the state B & O tax was recognized as a tax on the privilege of doing business in this state. See Syl. Pt. 1, Hydraulics, Inc. v. Dailey, 171 W.Va. 648, 301 S.E.2d 605 (1983) (observing that state B & O tax is levied on privilege of selling or serving withing this State and not on sales themselves or on income); Virginia Foods v. Dailey, 161 W.Va. 94, 102, 239 S.E.2d 770, 775 (1977). In City of Morgantown v. West Virginia University Medical Corp., 193 W.Va. 614, 457 S.E.2d 637 (1995), we identified the various businesses once subject to this tax:
In its most comprehensive form the statute [W.Va. Code § 11-
13-1 et seq.] listed the following categories of businesses upon
which the State could impose its B & O tax: production of coal
and other natural resources, W.Va.Code, 11-13-2a;
manufactured or compounded products, W.Va.Code, 11-13-2b;
business of selling tangible property, W.Va.Code, 11-13-2c;
public service or utility business, W.Va.Code, 11-13-2d;
business of contracting, W.Va.Code, 11-13-2e; business of
operating amusements, W.Va.Code, 11-13-2g; service business
or calling not otherwise specifically taxed, W.Va.Code,
11-13-2h; business of furnishing property for hire, W.Va.Code,
11-13-2i; small loan business, W.Va.Code, 11-13-2j; banking
and other financial businesses, W.Va.Code, 11-13-2k; an
additional surtax on coal production, W.Va.Code, 11-13-2l ;
generation or production of electric power, W.Va.Code,
193 W.Va. at 616-17, n.1, 457 S.E.2d at 639-40 n.1 (citing statutes from 1983 Replacement Volume and 1986 Cumulative Supplement of W.Va. Code). Currently, the state levies B & O taxes on a limited number of business activities, including public service or utility businesses; gas storage; manufacturing or producing synthetic fuel from coal; and the generation or production of electric power. See W.Va. Code §11-13-2d (1995) (Repl. Vol. 1999); W.Va. Code § 11-13-2e (1995) (Repl. Vol. 1999); W.Va. Code § 11-13-2f (2001) (Supp. 2002); W.Va. Code § 11-13-2m (1995) (Repl. Vol. 1999).
Because banking was a business activity or occupation for which the state
previously imposed its B & O tax, municipalities are authorized under the provisions of
West Virginia Code § 8-13-5 to continue to impose this type of tax. See W.Va. Code §§ 8-
13-5; 11-13-2k (1983) (repealed W.Va. Acts 1989, 1st Ex. Sess., ch. 2). The essential nature
of the banking business, as we discussed in Morris v. Marshall, 172 W.Va. 405, 305 S.E.2d
581 (1983), is:
the receipt of deposits. Having a place of business where deposits are received and paid out on checks, and where money is loaned upon security, is the substance of the business of a banker. Warren v. Shook, 91 U.S. 704, 710, 23 L.Ed. 421 (1875). Strictly speaking, the term 'bank' implies a place for the deposit of money, and that is the most obvious purpose and a primary function of such an institution. 10 Am.Jur.2d Banks § 1 (1963). The chief functions of a 'bank' involve the receipt of deposits from the general public, repayable to the depositors on demand or at a fixed time, the use of deposit funds for secured loans, and the relationship of debtor and creditor between the bank and the depositor. 1 Banks and Banking 6 (1973). See also Oulton v. German Savings and Loan Society, 84 U.S. (17 Wall.) 109, 21 L.Ed. 618 (1872); Congress Industries, Inc. v. Federal Life Ins. Co., 114 Ariz. 361, 560 P.2d 1268 (1977); State v. Jefferson Finance Co., 163 La. 1005, 113 So. 355 (1927); State ex rel. Compton v. Buder, 308 Mo. 253, 271 S.W. 770 (1925); Williams v. Fidelity Loan & Savings Co., 142 Va. 43, 128 S.E. 615 (1925).
172 W.Va. at 410, 305 S.E.2d at 586. (See footnote 6) While no one can dispute that the nature of the banking business has changed considerably in recent years due both to interstate banking and various technological advancements, the banking industry still revolves around the depositing and procurement of funds by its customers through either withdrawals or loans.
West Virginia Code § 8-13-5(e) addresses how a municipal B & O tax is to
be apportioned between two or more municipalities:
Whenever the business activity or occupation of the taxpayer is engaged in or carried on in two or more municipalities of this state, the amount of gross income, or gross proceeds of sales, taxable by each municipality shall be determined in accordance with such legislative regulations as the tax commissioner may prescribe. It being the intent of the Legislature that multiple taxation of the same gross income, or gross proceeds of sale, under the same classification by two or more municipalities shall not be allowed. . . Nothing in this subsection (e) shall be construed as permitting any municipality to tax . . . any activity that has a definite situs outside its taxing jurisdiction.
W.Va. Code § 8-13-5(e). There is no dispute that the issue of double taxation does not present itself under the facts of this case as neither Scary Creek nor Cross Lanes imposes a municipal B & O tax. (See footnote 7)
Pursuant to the legislative grant of authority in West Virginia Code § 8-13- 5(e), the Tax Commissioner promulgated the following regulation to resolve issues of multiple taxation involving the assessment of municipal B & O taxes: Where a banking business or a financial organization has several business locations, a municipality shall impose its business and occupation tax only upon gross income received at banks and branch offices located within the municipality. W.Va.R. Tax and Revenue § 110.26-2k.6. This regulation was undisputedly aimed at the legislative objective of preventing multiple taxation of the same gross income. W.Va. Code § 8-13-5(e). Because this case fails to present the possibility of double taxation, it is arguable that the regulation applied by both the administrative law judge and the trial court is not determinative of the issue before us. However, the reasoning employed by the administrative law judge and the trial court in applying the regulatory language to decide whether Beckley received the funds at issue, while not determinative, is nonetheless helpful in resolving the issue of whether the subject funds were properly taxable by the City.
The critical issue to be determined is whether the funds which are the subject of the assessment resulted from an activity, banking in this case, that has a definite situs within Beckley. See W.Va. Code § 8-13-5(e). As the trial court aptly noted,
[m]unicipalities have broad discretion in imposing and administering business and
occupation taxes as long as the tax does not result in (1) double taxation or (2) taxation of
activities with a definite situs outside the municipality. See id.
The initial fact finder in this case, the administrative law judge, determined
that an internal report prepared by the Bank indicated that the customer transactions giving
rise to the gross income at issue occurred in Beckley based on the situs of the loan
origination and the situs where the City National customers received the banking services
which were the source of the funds. Similarly, the circuit court found the following with
regard to the banking transactions at issue:
With respect to the loans generated in the Bank's locations in Beckley, all aspects of the relationship between debtor and creditor are created in Beckley. Conversely, the bank's activities at Scary Creek [now at Cross Lanes] are not banking activities with respect to the loans generated in the bank's Beckley locations. No Beckley loan customers were interviewed by a loan officer in Scary Creek, and no component of the relationship of debtor and creditor, as it pertains to borrowers who dealt with the Beckley locations, was created at Scary Creek. The only relationship between such a borrower and the Scary Creek location is that the borrower was told to send his loan payments to the Scary Creek location for processing.
The trial court, in addressing the Bank's argument that the received at regulatory language of section 110.26-2k.6 prevents the City from taxing the subject funds, observed:
With respect to the loans generated at the banks['] locations in Beckley, the Scary Creek location is not a bank or a branch office; it is merely a processing location. . . . During the period in question, the Scary Creek location was not a bank or a branch office for customers of the Bank's Beckley locations. Customers from Beckley did not travel to Scary Creek for any banking activity. Loan payments made by mail were sent to the Scary Creek location, and loan payments that were delivered by customers to the Bank's Beckley locations were then forwarded by mail or courier to the Scary Creek location for further processing and data entry. Nothing that occurred at Scary Creek played any part in the creation of this income.
Addressing the Bank's assertion that the location where it received the loan
payments controlled the issue of whether the City could tax the income generated from those
payments, the trial court reasoned:
[T]he activities conducted at the Scary Creek location are an integral and inseparable part of the work made necessary by the loans generated at the Bank's Beckley locations. If those loans had not been generated in Beckley, the Bank's activity at Scary Creek, to the extent that it is associated with Beckley loans, would not occur, and this income would not have been generated at all.
Rather than focusing on the whether the funds at issue were physically received at a location within Beckley, the trial court properly determined that the underlying banking activity _ in this instance a loan issuance _ was the critical factor in resolving the issue of proper taxing situs.
In focusing almost exclusively on the argument that the funds at issue are not
subject to the Beckley B & O tax due to the fact that a Central Office location handles the
processing of those funds, the Bank has lost sight of the underlying nature of the B & O tax.
Because the tax is a tax on the privilege of doing business, the location of where the subject
funds are processed is, in our judgment, an extraneous matter that does not bear on the
fundamental issue of the banking business for which the tax is being levied. Although gross
income is the measure by which the tax is assessed, it is not what is being taxed _ the
privilege of conducting the business of banking in the locale of Beckley is the taxable event.
See Dailey, 171 W.Va. at 649, 301 S.E.2d at 605, syl. pt. 1.
In syllabus point five of Kwik, we held that [i]n the construction of tax laws, we still must apply our general rules of statutory construction with a view toward upholding the legislative intent. Strict construction should not be used to defeat tax legislation that is reasonably clear in its meaning. 185 W.Va. at 697, 408 S.E.2d at 647. In a recent use tax decision, we noted that [i]t is the substance, not just the form, of a commercial transaction that determines its tax consequences. Syl. Pt. 6, CB&T Operations Co., Inc. v. Tax Comm'r, 211 W.Va. 198, 564 S.E.2d 408 (2002). The Bank seeks to elevate the processing of loan and interest payments to be tantamount to banking itself. To accept the Bank's argument would require us to adopt an altered view of the nature of the banking activity that is subject to the municipal B & O tax at issue. See Hukle v. City of Huntington, 134 W.Va. 249, 255, 58 S.E.2d 780, 783 (1950) (recognizing that [i]t is a well-nigh universal principle that courts will determine and classify taxation on the basis of realities). As we discussed above, the essence of what it means to hold yourself out as a bank is still the location where depositors go to make deposits, withdrawals, obtain credit, and secure loans. Consequently, the decision of a bank to process and handle paperwork and payments resulting from the needs of its customers in a centralized manner does not alter the essence of the banking business which is subject to a municipal business and organization tax for the privilege of conducting business within a particular city. See Morris, 172 W.Va. at 410, 305 S.E.2d at 586.
Since the basis of the B & O tax is the taxable activity of banking, the Bank's
emphasis on where the funds at issue are transferred for processing purposes necessarily
skirts the legislative objective of taxing the privilege of doing business in a particular locale
and not the funds themselves. Local governments are highly dependent on the revenues
generated by the municipal B & O tax. Without question, a budgetary loss of almost three
hundred thousand dollars for a one-year period was a significant decrease in revenues for
the City. Setting aside the economic realities, however, the Bank's decision to centrally
process payments cannot be used as a mechanism to avoid the assessment of taxes by the
City. For the privilege of conducting the business of banking within its locale, the
Legislature has authorized the City to assess a municipal B & O tax. Absent that legislative
authority, Beckley would be powerless to assess such a tax. Given the grant of this
authority, however, Beckley clearly has the right to assess such a tax on banks, including
City National, that choose to operate within its boundaries and consequently realize profits
from the funds deposited and loans procured by its residents. Accordingly, we hold that for
purposes of assessing a municipal business and occupation tax, the taxability of loan interest
realized by a bank or other financial institution is to be determined in reference to where the
loan was obtained by the customer because that is where the banking activity was conducted
which resulted in the generation of the income at issue.
In addition to loan interest, the Bank also singled out investment income for purposes of challenging the assessment of the City's B & O tax. In its decision, the trial court viewed income from investment activity and interest income on loans as categorically indistinct for analytical purposes, based on the administrative trial judge's merged treatment of such income (See footnote 8) and the fact that [n]either party challenged this treatment in the briefs filed in this Administrative Appeal. As the amici observe in their brief, the Bank clearly attributes the investment income at issue to its Beckley branches in its internal operating reports. Given the fact that the Bank routinely assigns or allocates its investment income to its branch banks, it appears logical to assume that such income was realized as a consequence of the banking activity conducted by that particular branch bank. Consequently, the same reasoning discussed above in addressing why interest income on loans is properly viewed as income generated by the banking office from which the customer procured the loan is similarly applicable to identifying the proper taxing situs for interest income on investments. Given the established method used by the Bank to allocate funds used for investment purposes among various banking offices, there does not appear to be any difficulty in determining the specific location from which the investment income originated. Accordingly, we hold that for purposes of assessing a municipal business and occupation tax, the taxability of investment income realized by a bank or other financial institution is to be determined based upon the banking location to which those income earning investments are attributed or assigned by the bank, in this case, by means of internal reports generated for operational purposes. (See footnote 9)
Based on the foregoing, the decision of the Circuit Court of Raleigh is hereby affirmed.