TECHNICAL ASSISTANCE ADVISORY 96-005SUBJECT: CONSUMERS SALES TAX -- Exemptions -- W. Va. Code § 11-15-9(24), exempting services performed by one corporation for another corporation which is part of same controlled group of corporations is available to a controlled group consisting of nonstock, nonprofit corporations when at least 50 percent of the directors of such corporation are either representatives of, or are directly or indirectly controlled by, another nonstock, nonprofit corporation. A director is a representative of a nonstock, nonprofit corporation if he or she is a director, agent, or employee of such nonstock, nonprofit corporation. A director is controlled by a nonstock, nonprofit corporation if such corporation has the power to remove such director and designate a new director. This is in response to your letter requesting on behalf of your clients, Corporation A and Corporation B (hereinafter sometimes collectively referred to as the "Applicants"), issuance of a technical assistance advisory under W.Va. Code § 11-10-5q, regarding whether or not management services provided by Corporation A to Corporation B are exempt from West Virginia Consumer Sales and Service Tax ("Sales Tax") under W.Va. Code § 11-15-9(a)(24). In support of this ruling request, the following facts and representations were submitted. Hospital C is a municipal hospital operating in X County, West Virginia. The hospital is operated by an independent board of trustees created by special municipal charter provision pursuant to W.Va. Code § 8-12-3. City council must confirm or reject all persons nominated to the board. Hospital C is a governmental entity as defined in the Employee Retirement Income Security Act of 1975 ("ERISA") and I.R.C. § 414(d). Corporation A is a nonstock membership corporation which is managed by a board of directors that is elected by its members. Hospital C is responsible for appointing all of the members to Corporation A. Current members of the board of directors include the chairman and the vice chairman of the board of trustees of Hospital C, the chief executive officer of Hospital C who is also a director of Corporation B, the chief financial officer of Hospital C who is also a director of Corporation B, and a physician who is an employee and member of Corporation B. Under Corporation A's bylaws, vacancies in the board of directors are filled by a majority vote of the members. Any director may be removed by majority vote of the members. Corporation A was formed to provide certain administrative, bookkeeping, and management services to groups of practicing physicians, as well as to acquire, own and lease assets used in the practice of medicine. Under its articles of incorporation, no dividends may be paid and no part of the income or profit of the corporation may be distributed to its members, directors or officers, except to pay them reasonable compensation for services rendered. If Corporation A were to dissolve, its assets would be liquidated to pay its liabilities. All remaining assets would be distributed to Hospital C. Corporation B is a West Virginia nonstock, nonprofit medical corporation whose members are limited to licensed physicians employed by Corporation B, during their period of employment. It is managed by its own board of directors. Corporation B's by-laws provide that 60 percent of Corporation B's board of directors is appointed directly or indirectly by Hospital C and Corporation A, with the remaining 40 percent elected by the physician-employees of Corporation B. Current members of its board of directors include the secretary of the board of trustees of Hospital C, the chief executive officer of Hospital C who is also a director of Corporation A, the chief financial officer of Hospital C who is also a director of Corporation A, and two physicians. Under Corporation B's bylaws, vacancies in the board of directors are filled by those authorized to appoint the director whose position is vacant. Any director may be removed by those authorized to appoint the director in question. Corporation B is engaged in the general practice of medicine and does not perform any services or receive any fees directly from Hospital C. If Corporation B were to dissolve, its assets would be liquidated to pay its liabilities. All remaining assets would be distributed to Hospital C. Applicants entered into a management services agreement under which Corporation A provides management and administrative services to Corporation B. The issue presented for ruling is whether or not services Corporation A furnishes to Corporation B pursuant to this management services agreement are exempt from Sales Tax under W. Va. Code § 11-15-9(a)(24), which exempts services furnished by one corporation to another corporation when both corporations are members of the same controlled group. The threshold question is whether or not Corporation A and Corporation B are members of the same controlled group of corporations.DISCUSSION The West Virginia Consumers Sales and Service Tax, W. Va. Code §§ 11-15-1 to 11-15-33, is a general, broad-based tax which vendors of tangible personal property or taxable services must collect from the purchaser of the property or service, W. Va. Code § 11-15-3. "Service" is defined, in W. Va. Code § 11-15-2(s), as follows: "Service" or "selected service" includes all nonprofessional activities engaged in for other persons for a consideration, which involve the rendering of a service as distinguished from the sale of tangible personal property, but shall not include contracting, personal services or the services rendered by an employee to his employer or any service rendered for resale."To prevent evasion, it shall be presumed that all sales and services are subject to tax until the contrary is clearly established." W. Va. Code § 11-15-6. W.Va. Code § 11-15-9 provides exemptions from Sales Tax. Subsection (a)(24) of that section specifically exempts service furnished by one member of a controlled group for another member of that same controlled group. Subsection 11-15-9(a)(24) reads in relevant part: The following sales of tangible personal property and/or services are exempt as provided in this subsection: * * * (24) Dispensing of services performed by one corporation, partnership or limited liability company for another corporation, partnership or limited liability company when the entities are members of the same controlled group or are related taxpayers as defined in Section 267 of the Internal Revenue Code. "Control" means ownership, directly or indirectly, of stock, equity interests or membership interests possessing fifty percent or more of the total combined voting power of all classes of the stock of a corporation, equity interests of a partnership or membership interests of a limited liability company entitled to vote or ownership, directly or indirectly, of stock, equity interests or membership interests possessing fifty percent or more of the value of the corporation, partnership or limited liability company[.] Applicants believe that services provided by Corporation A to Corporation B under the management services agreement are exempt from the Sales Tax under W.Va. Code § 11-15-9(a)(24) because Corporation A and Corporation B are members of the same controlled group for federal income tax purposes even though they are nonstock, nonprofit corporations. Applicants contend that the Legislature did not intend for the exemption in W.Va. Code § 11-15-9(a)(24) to apply only to stock corporations and that nonstock corporations be excluded. Applicants believe that subsection (a)(24) should be interpreted as having an operative section (the first sentence) which specifically provides a Sales Tax exemption to all corporations which are members of the same controlled group, regardless of whether they are stock corporations or membership corporations, and a definitional section (the second sentence) which sets forth the percentage of ownership required to be considered a controlled group. Where the corporations seeking this exemption are nonstock corporations, subsection (a)(24) should be interpreted so that the exemption still applies. In such a case, however, the Tax Commissioner needs to look at a different test to determine whether the requisite 50 percent common control exists. Applicants suggest that where control cannot be determined by looking at voting power or stock values, the appropriate test should be to look at control over management, as evidenced by the election or appointment of the members of the board of directors of each corporation. Applicants assert that this interpretation is consistent with federal income tax law. The Internal Revenue Service ("IRS") has made similar rulings. For example, in Private Letter Ruling 9442031, relating to pension plans, the IRS was asked to rule on whether two nonstock, nonprofit healthcare organizations were members of the same controlled group of corporations as defined in I.R.C. § 414 (b) and (c). The IRS found that they were members of same controlled group, reasoning that in the case of nonstock, nonprofit healthcare organizations, ownership is not an appropriate criterion for determining control and that the definition of "controlling interest" in Treas. Reg. § 1.414(c)-2 (which defines control in terms of stock ownership) may not be used to determine whether nonstock, nonprofit corporations are under common control. The IRS concluded that the appropriate test for determining whether two nonstock, nonprofit corporations form part of the same controlled group of corporations is to look to whether there is common control over the management of the corporations. In the case of organizations exempt from federal income tax under I.R.C. § 501(c), a tax is imposed by I.R.C. § 511 on their unrelated business taxable income as defined in I.R.C. § 512. Subsection 512(a) requires items of gross income and deductions directly connected with the carrying on of an unrelated trade or business be modified as provided in subsection 512(b). Paragraph 512(b)(13) provides that, notwithstanding paragraphs 512(b)(1)-(3), certain amounts of interest, annuities, royalties, and rents derived from any organization of which the organization deriving such amounts has control, as defined in I.R.C. § 368(c), shall be included as an item of gross income, whether or not the activity from which such amounts is derived represents a trade or business or is regularly carried on. I.R.C. § 368(c) defines "control" as the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation. Treas. Reg. § 1.512(b)-1(l)(4)(i)(b), applying the principles of I.R.C. § 368(c), defines "control" of nonstock corporations for purposes of I.R.C. § 512(b)(13) as follows: (b) Nonstock organization. In the case of a nonstock organization, the term "control" means that at least 80 percent of the directors or trustees of such organization are either representatives of or directly or indirectly controlled by an exempt organization. A trustee or director is a representative of an exempt organization if he is a trustee, director, agent, or employee of such exempt organization. A trustee or director is controlled by an exempt organization if such organization has the power to remove such trustee or director and designate a new trustee or director. Applicants contend that if the reasoning set forth in Private Letter Ruling 9442031 is applied to their facts, using the 50 percent control test set forth in W.Va. Code § 11-15-9(a)(24), Corporation A and Corporation B are part of the same controlled group of corporations because (1) Hospital C directly appoints 100 percent of the members of Corporation A who in turn appoint all of Corporation A's board of directors, and (2) Hospital C and Corporation A, collectively, appoint 60 percent of Corporation B's board of directors, resulting in Corporation A and Corporation B each being indirectly controlled by more than 50 percent by Hospital C.RULINGS After due consideration of the facts and representations submitted for purposes of this advisory and application of current law, we make the following rulings: 1. In the case of a nonstock, nonprofit corporation, the term "control" for purposes of applying W. Va. Code § 11-15-9(a)(24) means that at least 50 percent of the directors of such corporation are either representatives of, or are directly or indirectly controlled by, another nonstock, nonprofit corporation. A director is a representative of a nonstock, nonprofit corporation if he or she is a director, agent, or employee of such nonstock, nonprofit corporation. A director is controlled by a nonstock, nonprofit corporation if such corporation has the power to remove such director and designate a new director. 2. Corporation A and Corporation B are members of the same controlled group. Therefore, services provided by Corporation A to Corporation B are exempt from Sales Tax under W. Va. Code § 11-15-9(a)(24). 3. If control of a nonstock, nonprofit corporation (as defined in this advisory) is acquired or relinquished during the taxable year, only the gross proceeds paid or accrued to a vendor, in accordance with its method of accounting, for that portion of the taxable year it is a member of the same controlled group as the corporation for whom the services were furnished, is subject to the exemption allowed under W. Va. Code § 11-15-9(a)(24). The conclusions reached in this technical assistance advisory are based upon the facts and representations submitted by Applicants and application of current law. In the event there is a material change in the facts, or if it is determined that material facts were omitted or are materially different from those furnished to us for purposes of this ruling, or there is a material change in the applicable law, the conclusions reached in this advisory may no longer apply. Precedential Value -- Under W. Va. Code § 11-10-5r(b), a technical assistance advisory has no precedential value except to the taxpayer who requests the advisory, unless the Tax Commissioner specifically states that it has precedential value. This technical assistance advisory may not be used or cited as precedent. Publication. -- Under W. Va. Code § 11-10-5r(e), the Tax Commissioner is required to release technical assistance advisories to the public after they are modified to delete identifying characteristics, unless the taxpayer waives its right to confidentiality. This technical assistance advisory will be released as Technical Assistance Advisory 96-005. If you have any question about this advisory, please contact this office. Issued: September 27, 1996 James H. Paige III Secretary/Tax Commissioner