Opinion ID: 1304942
Heading Depth: 2
Heading Rank: 3

Heading: Proper Taxing Situs

Text: Returning to the issue at hand, we now examine whether the lower court correctly determined that the funds at issue were properly subject to the City's B & O tax. The circuit court, in deciding that Beckley properly assessed the Bank for B & O taxes, considered whether the tax assessment was inconsistent with the provisions of West Virginia Code § 8-13-5(e) and section 110.26-2k.6 of the Code of State Rules. 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. [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 [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. [9] Based on the foregoing, the decision of the Circuit Court of Raleigh is hereby affirmed. Affirmed.