Opinion ID: 1767500
Heading Depth: 1
Heading Rank: 3

Heading: equitable pleas

Text: Associated concedes that, as a general rule, transactions between related persons are taxable under the sales tax statute. But the hospital service corporation makes a variety of arguments based on a common theme, viz., that under the circumstances of this case the corporate veil should be pierced, the identity of the service corporation as an entity separate from its owners, the hospital corporations, should be disregarded, and the transactions should be held to be non-taxable intramural transfers of services and payments. The clear legislative intent of the sales tax statute seems to preclude our disregarding the corporate entity, and, even if we were to assume arguendo that the corporation might be allowed to pierce its own corporate veil in exceptional cases, the present litigation is plainly distinguishable from such an extraordinary case. Associated's argument for disregarding its own corporate entity relies primarily on a line of cases that it contends allows for piercing when the furnisher or seller, a subsidiary, is an entity formed to serve a specific, subordinate purpose of its parent and not an independent business purpose, so that the subsidiary acts as an alter ego of the parent with respect to that function, i.e., Cajun Contractors, Inc. v. Department of Revenue and Taxation, 515 So.2d 625 (La.App. 1st Cir.1987); United Companies Printing Co. v. City of Baton Rouge, 569 So.2d 186 (La.App. 1st Cir.1990), writ den. 572 So.2d 73 (1991); compare Hilton Hotels Corporation v. Traigle, 360 So.2d 245 (La.App. 1st Cir.1978); see also Valier Coal v. Illinois Department of Revenue, 11 Ill.2d 402, 143 N.E.2d 35 (1957); Mapo, Inc. v. State Board of Equalization of California, 53 Cal.App.3d 245, 125 Cal. Rptr. 727 (1975). The holding in each of those cases was dependent upon a factual situation clearly distinguishable from the circumstances of the present case. In each, the court decided that the subsidiary which sold materials or services to its parent, was exempt from the sales tax because the facts preponderated to the conclusion that the subsidiaries were not separate and distinct legal entities from their parents. In Cajun Contractors, supra, the subsidiary and the parent were treated by the corporations themselves as a single entity for insurance, bonding and federal taxation purposes; all of the subsidiary's clerical work was performed by employees of the parent; and the two entities never entered a formal, written agreement regarding the transaction alleged to be taxable. Id. at 628. In United Companies Printing, supra, the parent kept all the accounting records for the subsidiary, supplied the employees that carried out the subordinate functions that the subsidiary was created to perform, made purchases for the subsidiary, and allowed the subsidiary to occupy the parent's building rent-free. In addition, the subsidiary had no bank account of its own and, according to company records, owned no assets. The two entities filed consolidated federal tax returns. In Mapo, supra, the subsidiary owned no materials, kept no books, bore no liability for its operation, recorded no profits, and made no decisions without the approval of the board of directors of its parent. Its parent retained title to its assets and performed all its bookkeeping functions. Its existence was a temporary, paperwork one for the purpose of overcoming jurisdictional problems in the carrying out of labor union agreements. Mapo, 53 Cal.App.3d at 249, 125 Cal.Rptr. at 730. In each case the court considered, as only one factor in determining if the subsidiary and parent should be considered one entity, the fact that the transactions resulted in no profit for the subsidiary. In contrast, it is clear that Associated has acted consistently with an intention to hold itself out and to operate as a separate corporation for every purpose. The record reflects that Associated has adhered to the formalities required of corporations. For example, it has drafted and amended its articles of incorporation in the manner provided by law. The contracts with members, whereby each member committed to pay a pro rata share of expenses and have all its laundry done by Associated, were drafted in the form of a sales contract between Associated and the member. While the form of this contract is not itself determinative of the taxability of the transaction, it is evidence that Associated maintained an identity separate and distinct from that of each member. In addition, Associated in its corporate capacity owned the land and the laundry plant, had its own employees, made purchases, borrowed money, and paid its own bills. Associated has filed federal income tax returns since 1984 and has filed Louisiana sales tax returns in connection with its linen inventory. It is true that no profit was made on the transactions to be taxed, but the sales tax statute is not drawn to tax only profitable sales, see La.R.S. 47:302 C, so the fact that no profit was made cannot be determinative of whether a sales tax is due. In the fourth case cited by Associated, Valier Coal Company v. Department of Revenue, 11 Ill.2d 402, 143 N.E.2d 35 (1957), the parent railroad company had established its subsidiary to hold coal lands so that the parent could have an assured source of coal. The court decided that the subsidiary could not be held liable for sales taxes on the coal transfers to the parent because to do so would be at odds with a prior order of the state public utilities commission whereby the subsidiary was permitted to hold coal lands and make the transfers. To determine that the transfers were taxable, the court would have had to conclude that the subsidiary was engaged in business when the public utilities regulatory body had permitted the transactions only because they did not constitute engaging in business. In the present case, there is no risk of an apparent conflict between the pronouncements of two governmental agencies as regards the activities of two heavily regulated industries. Thus Valier, a truly unique case, is distinguishable. In addition, the fact that the subsidiary makes no profit was rejected by the Valier court, as it has been by this court, as a determinative factor. In summary, except for the arguments Associated makes here to avoid a sales tax obligation, there is no instance of record in which Associated or its members have denied the separate identity of Associated. Its business has been conducted precisely in conformity with its corporate status. When a taxpayer has chosen to do business as a corporation, it must accept the tax disadvantages of that form and will not be heard to deny the separate existence of that corporation. Higgins v. Smith, 308 U.S. 473, 60 S.Ct. 355, 84 L.Ed. 406 (1940); H. Henn & J. Alexander, supra, at § 153. Courts in other states have dealt with this or analogous issues and have decided that sales between two corporations with common owners constitute sales within the meaning of a sales tax law or similar statute. Ex parte Capital City Asphalt, Inc., 437 So.2d 1291 (Ala.1983); Rexall Drug Co. v. Peterson, 113 Cal.App.2d 528, 248 P.2d 433 (1952); Montgomery Ward v. State Department of Revenue, 628 P.2d 85 (Colo. 1981) (en banc); Superior Coal Co. v. Department of Finance, 377 Ill. 282, 36 N.E.2d 354 (1941); Bonnar-Vawter, Inc. v. Johnson, 157 Me. 380, 173 A.2d 141 (1961); Commissioner of Revenue v. Globe Auto Vending Co., 383 Mass. 886, 421 N.E.2d 1213 (1981); Central Cooling v. Director of Revenue, 648 S.W.2d 546 (Mo.1982); White Motor Corp. v. Kosydar, 50 Ohio St.2d 290, 364 N.E.2d 252 (1977); Shelburne Sportswear v. City of Philadelphia, 422 Pa. 199, 220 A.2d 798 (1966); Auto Club of Washington v. State, 27 Wash. App. 781, 621 P.2d 760 (1980); Southern States Co-op, Inc. v. Dailey, 167 W.Va. 920, 280 S.E.2d 821 (1981); H. Henn & J. Alexander, supra, §§ 149, 153. Associated urges several additional variations of its piercing argument: that it is merely a conduit or a cooperative of its owners; that the transactions which appear to be sales of services by it to its owners were not sales but were contracts whereby the owners were cooperating, each to provide itself with its own laundry services, by pooling their resources and sharing the operating costs; and that we should determine the question whether sales tax is due based on the substance of the entire dealings between the owners and Associated rather than the form. These contentions are, in essence, restatements of the principal argument that Associated's legal personality should be disregarded, and we reject them for the same reasons that we found Associated's main argument for piercing to be without merit. For the foregoing reasons, we conclude that Associated owes the Department sales taxes in the gross amount of $94,942.77. Although the record is not complete as to the calculation of the taxes due, the parties evidently have agreed that Associated is owed a credit by the Department, for sales taxes paid in connection with resales of linens to Associated's tax exempt members, in the amount of $46,850.38. Rather than undertaking to formulate a proper decree on an incomplete record, however, we will remand the case to the Board of Tax Appeals for the rendition of a judgment consistent with the stipulation as to the credit and this opinion.