CINCINNATI FEDERAL SAVINGS & LOAN CO., APPELLANT, v. MCCLAIN, TAX COMMR., APPELLEE.
No. 2021-0064
Supreme Court of Ohio
Decided March 15, 2022
Slip Opinion No. 2022-Ohio-725
Submitted September 21, 2021
[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Cincinnati Fed. S. & L. Co. v. McClain, Slip Opinion No. 2022-Ohio-725.]
NOTICE
This slip opinion is subject to formal revision before it is published in an advance sheet of the Ohio Official Reports. Readers are requested to promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65 South Front Street, Columbus, Ohio 43215, of any typographical or other formal errors in the opinion, in order that corrections may be made before the opinion is published.
SLIP OPINION NO. 2022-OHIO-725
[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Cincinnati Fed. S. & L. Co. v. McClain, Slip Opinion No. 2022-Ohio-725.]
Taxation—A transaction is taxable only when the consumer‘s true object is to obtain the work performed by computer systems rather than to obtain personal and professional services that are coupled with the work that is performed by computer systems—Decision affirmed in part and vacated in part, and cause remanded.
APPEAL from the Board of Tax Appeals, No. 2018-2247.
{¶ 1} Appellant, Cincinnati Federal Savings & Loan Co. (“Cincinnati Federal” or “the bank“), challenges a decision of the Board of Tax Appeals (“BTA“) that upheld appellee Tax Commissioner Jeffrey McClain‘s denial of its claim for a sales-tax refund. Cincinnati Federal paid sales tax to Fiserv Solutions, Inc. (“Fiserv“), in connection with compensating Fiserv for services that Fiserv provided to the bank during 2013, 2014, and 2015. Cincinnati Federal argues that the services do not qualify as taxable “automatic data processing” or “electronic information services” but instead constitute nontaxable “personal or professional services.” For the reasons stated below, we affirm in part, vacate in part, and remand for further proceedings.
I. BACKGROUND
A. Facts
{¶ 2} During the period at issue, Cincinnati Federal received and paid for computerized services provided by Fiserv pursuant to a master agreement. The agreement refers to “account-processing services” of various kinds; according to hearing testimony at the BTA, “the Fiserv system” allows Cincinnati Federal to run transactions on a daily basis and maintains all of the bank‘s accounting and financial records. Under the agreement, according to Cincinnati Federal‘s president, Fiserv “maintain[s] the [accounting] system and maintain[s] accounting services * * * on an ongoing basis, real-time basis.” Indeed, Fiserv maintains the bank‘s general ledger
{¶ 3} If a customer presents herself at a branch office of the bank and makes a deposit, a withdrawal, or a loan payment, the teller accesses the customer‘s account and the account is updated immediately by the Fiserv system—and the updating encompasses not only the customer‘s accounts but also the bank‘s own accounts and books, all the way to the general ledger. The Fiserv system does the same for nonteller transactions.
{¶ 4} During the period at issue, Cincinnati Federal regularly received two invoices every month from Fiserv. At the BTA, Cincinnati Federal submitted spreadsheets listing each charge from Fiserv‘s invoices for the years at issue. For each charge, there was a description of the services, which was taken from the invoices themselves, plus a categorization of the charges according to service functions, which the bank developed for purposes of its tax appeal. Some examples of the categories that were developed by the bank include the Prologue Accounting Platform (the general ledger and ancillary accounting information), Mobility (the mobile-application service offered by the bank), Branch Capture Services (the teller transactions at the bank‘s branches), and FCN Direct Services (the interbank transactions between banks served by Fiserv). During the BTA hearing, Cincinnati Federal‘s vice president and chief deposit officer identified isolated charges that specifically related to Fiserv‘s customization of the software to meet Cincinnati Federal‘s needs.
B. Course of proceedings
{¶ 5} In 2016, Cincinnati Federal filed the refund claim at issue, which sought recovery of $57,412.58. The tax commissioner denied the claim in a final determination, rejecting the bank‘s claims that it purchased nontaxable accounting services or, alternatively, nontaxable customized software.
{¶ 6} Cincinnati Federal appealed the tax commissioner‘s denial of its refund claims to the BTA. At the BTA hearing, Cincinnati Federal offered the testimony of four witnesses, including the expert testimony of a certified public accountant regarding accounting services. The bank also presented 22 exhibits, including invoices and summaries of the invoices that identify the services relating to the charges.
{¶ 7} In its decision affirming the tax commissioner‘s denial of Cincinnati Federal‘s refund claim, the BTA first addressed the bank‘s argument that it had purchased customized software from Fiserv, stating that “software customization is a spectrum” that ranges from a vendor selling “prewritten software with no modifications specific to the purchaser” to a vendor who “creates an entirely new software system from scratch.” BTA No. 2018-2247, 2020 WL 7711533, *4 (Dec. 22, 2020). According to the BTA, “[t]he services Fiserv provides are in the middle” of the spectrum. Id. The BTA applied the principle that “[e]xclusions are ‘strictly construed,‘” id. at *3, quoting Satullo v. Wilkins, 111 Ohio St.3d 399, 2006-Ohio-5856, 856 N.E.2d 954, ¶ 15, and concluded that Cincinnati Federal‘s claim must be denied under the principle
{¶ 8} Next, the BTA addressed Cincinnati Federal‘s claim that the services Fiserv provides the bank constitute “accounting services,” which are tax exempt under
{¶ 9} Cincinnati Federal appealed to this court as of right.
II. ANALYSIS
A. The statutes at issue
{¶ 10} In 1983, Ohio extended its sales and use tax to purchases of “automatic data processing and computer services.” Am.Sub.H.B. No. 291, 140 Ohio Laws, Part II, 2872, 3214-3215, 3220 (“H.B. 291“); see also Sub.H.B. No. 794, 140 Ohio Laws, Part II, 4746, 4778, 4785, effective July 6, 1984;
{¶ 11}
{¶ 12}
{¶ 13} In this appeal, Cincinnati Federal argues that Fiserv‘s services fall into two of those categories. According to Cincinnati Federal, Fiserv provided nontaxable accounting services under
{¶ 14} Cincinnati Federal argues that all the service charges it paid to Fiserv are not taxable under both
C. With respect to the customization of software, the BTA erred by failing to apply the true-object test
{¶ 15} Cincinnati Federal‘s first proposition of law claims that the services it purchased were nontaxable under
Designing policies, procedures, and custom software for collecting business information, and determining how data should be summarized, sequenced, formatted, processed, controlled, and reported so that it will be meaningful to management.
{¶ 16} In its merit brief, Cincinnati Federal emphasizes that Fiserv customized its software for the bank‘s use and that the “customization work created financial statements and a general ledger specific to Cincinnati Federal and not usable by any other business.”
{¶ 17} In opposition, the tax commissioner contends that
{¶ 18} The tax commissioner also contends that “there is no evidence that shows the requisite level of customization of software to justify non-taxable status.” Beyond that, he argues that because “the transactions underlying the refund claim are for a variety of taxable [ADP] and [EIS], not for the development of custom software,”
{¶ 19} Consonant with the tax commissioner‘s findings, the BTA stated that “the Fiserv software is not custom as that term is used in R.C. 5739.01.” 2020 WL 7711533 at *3. But unlike the tax commissioner, the BTA went further and found that under
{¶ 20} We conclude that the BTA erred in two respects. First, it erred by viewing
1. R.C. 5739.01(Y)(2)(e) identifies a separate service and does not function as a tax exemption
{¶ 21} The BTA‘s principal error is that it viewed the service of software customization under
{¶ 22} We reject the BTA‘s premise that
{¶ 24} When the General Assembly decided to impose sales tax on ADP and EIS, it defined and carved out those computer-related services as taxable while leaving “personal or professional services” outside the ambit of the tax. Anticipating cases in which different services could be bundled in one transaction, the legislature conditioned the taxability of the whole transaction on determining its true object: a transaction is taxable only when the consumer‘s true object is to obtain the work performed by computer systems—ADP or EIS—rather than to obtain personal and professional services that are coupled with the work that is performed by computer systems. Accordingly, instead of setting forth a list of exemptions,
{¶ 25} Third,
2. The BTA erred by failing to apply the true-object test to the specific service charges at issue
{¶ 26} The BTA explicitly found that “Fiserv made some modifications [to the software] to account for Cincinnati Federal‘s needs.” 2020 WL 7711533 at *4. And Cincinnati Federal does not dispute that Fiserv provided services that are defined as ADP and EIS. Consequently, this case involves “mixed transactions,” because Cincinnati Federal purchased both ADP and EIS from Fiserv and needed Fiserv‘s software customized for its own use. The BTA should have applied the clear directive of
{¶ 27} Cincinnati Federal advocates an all-or-nothing approach to applying
{¶ 28} In ComTech Sys., Inc. v. Limbach, 59 Ohio St.3d 96, 98-99, 570 N.E.2d 1089 (1991), we held that when ADP or EIS is involved in a transaction, that transaction is presumed taxable, subject to rebuttal by the taxpayer. In this case, Cincinnati Federal should be permitted to argue on the basis of the record it developed in this case that it has rebutted the presumption with respect to some of the service charges that it paid. We therefore vacate the BTA‘s decision with respect to
D. ADP and EIS remain taxable even though they are associated with accounting
{¶ 29} Cincinnati Federal‘s second proposition of law claims that the services it purchased were nontaxable under
Accounting and legal services such as advice on tax matters, asset management, budgetary matters, quality control, information security, and auditing and any other situation where the service provider receives data or information and studies, alters, analyzes, interprets, or adjusts such material.
{¶ 30} For the reasons that follow, we reject Cincinnati Federal‘s argument.
{¶ 31} At oral argument, Cincinnati Federal clarified that it does not dispute that Fiserv provides services that are defined as ADP and EIS. Fiserv receives data from Cincinnati Federal and its customers and processes that data with its computers while making it available to the bank through telecommunications equipment.
{¶ 32} Cincinnati Federal‘s accounting-services argument relies on a “replacement” theory: in its merit brief, Cincinnati Federal maintains that it “replaced a portion of the internal accounting department and an external traditional accounting/bookkeeping firm by use of the accounting services of Fiserv.” At the BTA hearing, Cincinnati Federal‘s president testified that “Fiserv provides [the bank‘s] accounting system. They provide accounting services, maintain the system and maintain accounting services * * * on an ongoing basis, real-time basis.” He confirmed that Fiserv‘s services include maintaining the general ledger.
{¶ 33} Deters, Cincinnati Federal‘s accounting expert, opined that providing a general ledger is an “accounting service” because it involves “summarizing the transactions, analyz[ing] and determin[ing] transactions, determining where they should be posted, what the proper accounting is, all of that would be considered an accounting service.” According to Deters, an accounting service is an accounting service whether it is provided by computer systems or performed by “an office full of accountants poring over books.”
{¶ 34} Thus, under its replacement theory, the bank argues that even though the services fit the definitions of ADP and EIS, they are specially excluded from taxation by virtue of
{¶ 35} As already discussed, however, we do not read
2. Because Fiserv did not provide any accounting services that were performed by individuals, the ADP and EIS it did provide are taxable services
{¶ 36} In evaluating Cincinnati Federal‘s claim under
{¶ 37} Unlike
{¶ 38} The record provides even less of a basis for construing Fiserv‘s services as “professional services” under
{¶ 39} Because Fiserv did not furnish accounting services in the sense of services performed by individuals, and because Fiserv lacked the legal authority to provide professional accounting services that require licensure, this case does not present a “bundled transaction” when analyzed under
3. The Genuine Parts case is not controlling
{¶ 40} In its merit brief, Cincinnati Federal relies heavily on our decision in Genuine Parts Co. v. Limbach, 62 Ohio St.3d 93, 579 N.E.2d 486 (1991), to support its argument that Fiserv provides accounting services under
{¶ 41} Cincinnati Federal analogizes Fiserv‘s services to those provided in Genuine Parts, but the suggested parallel fails because the range of services that were at issue in Genuine Parts went well beyond the processing of accounting data. Indeed, in that case, the BTA noted that the service provider acted “as a full service bookkeeping, accounting, and tax department” for its customers. Genuine Parts Co. v. Limbach, BTA No. 88-A-321, 1990 WL 211922, *1 (Nov. 2, 1990), rev‘d, 62 Ohio St.3d 93, 579 N.E.2d 486. Although we reversed the BTA‘s legal conclusion, we agreed with its factual findings, noting that the service provider in Genuine Parts “reconciles bank statements and writes checks to pay [its customers‘] invoices and employees” while also “inform[ing] [its customers] regarding tax law changes and answer[ing] individual questions regarding management, bookkeeping, and accounting functions.” 62 Ohio St.3d at 93. By stark contrast, the record in the present case shows that Fiserv provided computerized data processing along with support for the computerized services, but it did not furnish the range of services at issue in Genuine Parts.
E. The evidentiary record contains support for the denial of Cincinnati Federal‘s claim that it purchased nontaxable accounting services
{¶ 43} Cincinnati Federal‘s third proposition of law argues that the BTA‘s decision is unreasonable and unlawful, because it is not supported “by any probative evidence” in the record. This court “will reverse BTA findings only when there is a total absence of evidence to support a particular finding.” HealthSouth Corp. v. Testa, 132 Ohio St.3d 55, 2012-Ohio-1871, 969 N.E.2d 232, ¶ 14.
{¶ 44} Cincinnati Federal first challenges the BTA‘s statement that Fiserv customized data, not software, for the bank. 2020 WL 7711533 at *3. But this passage of the BTA‘s decision is inconsequential because the BTA found that Fiserv did make modifications to its preexisting software in connection with serving Cincinnati Federal; and as this opinion has already discussed, this finding should have led the BTA to apply the true-object test.
{¶ 45} Second, Cincinnati Federal contends that the BTA ignored expert and fact testimony indicating that Fiserv was providing accounting services. But the witnesses’ characterization of the services as accounting services, though factually helpful, is not legally determinative. An expert‘s interpretation of the law is not admissible as such because the interpretation of the law is the province of the tribunal. See State ex rel. Parisi v. Dayton Bar Assn. Certified Grievance Commt., 2017-Ohio-9394, 103 N.E.3d 179, ¶ 29 (2d Dist.), aff‘d, 159 Ohio St.3d 211, 2019-Ohio-5157, 150 N.E.3d 43. We reject Cincinnati Federal‘s third proposition of law.
III. CONCLUSION
{¶ 46} For the foregoing reasons, we affirm the BTA‘s rejection of Cincinnati Federal‘s refund claim under
Decision affirmed in part and vacated in part, and cause remanded.
O‘CONNOR, C.J., and FISCHER, DONNELLY, STEWART, and BRUNNER, JJ., concur.
DEWINE, J., concurs in judgment only, with an opinion joined by KENNEDY, J.
DEWINE, J., concurring in judgment only.
{¶ 47} I concur in the judgment of the majority. But I write separately to express my disagreement with the majority‘s apparent assumptions that the ordinary rules of statutory construction do not apply when it comes to tax exemptions and that taxpayers who argue for exemptions must meet an especially high burden. In my view, the same rules of construction that apply to any other statute also apply to a statute that provides a tax exemption. There is no justification for a judge-made rule that puts a thumb on the scale in favor of the government and against the taxpayer when a tax exemption is at issue.
{¶ 48} Cincinnati Federal Savings & Loan Co. requested a tax refund on the basis that it had purchased customized software. In denying the request, the Board of Tax Appeals relied on the principles that “[e]xclusions are ‘strictly construed,‘” BTA No. 2018-2247, 2020 WL 7711533, *3 (Dec. 22, 2020), quoting Satullo v. Wilkins, 111 Ohio St.3d 399, 2006-Ohio-5856, 856 N.E.2d 954, ¶ 15, and that “in all doubtful cases the exemption is denied,” id. at *3, citing Anderson/Maltbie Partnership v. Levin, 127 Ohio St.3d 178, 2010-Ohio-4904, 937 N.E.2d 547, ¶ 16. The majority accepts the BTA‘s premise (that taxpayers who argue for an exemption face an uphill climb) but concludes that the principle does not apply here because the tax provision at issue is not an exclusion. See majority opinion at ¶ 18-19.
{¶ 49} I take issue with the premise. It is true that one can find in this court‘s caselaw various statements suggesting that the deck is stacked against the taxpayer when it comes to statutes exempting property or transactions from taxation. See, e.g., N.A.T. Transp., Inc. v. McClain, 165 Ohio St.3d 250, 2021-Ohio-1374, 178 N.E.3d 454, at ¶ 15 (the taxpayer has the burden to prove that the law “clearly expresses the exemption in relation to the facts of its claim“); Anderson/Maltbie Partnership at ¶ 16 (“laws that exempt property from tax * * * must be strictly construed“); Campus Bus Serv. v. Zaino, 98 Ohio St.3d 463, 2003-Ohio-1915, 786 N.E.2d 889, ¶ 8 (same); Satullo at ¶ 15 (same); but see Columbia Gas Transm. Corp. v. Levin, 117 Ohio St.3d 122, 2008-Ohio-511, 882 N.E.2d 400, ¶ 34 (“a statute that imposes a tax requires strict construction against the state, with any doubt resolved in favor of the taxpayer“).
{¶ 50} But our responsibility is no different in interpreting a tax statute than any other statute: to apply the plain meaning of the statute as it would have been understood by an ordinary speaker of the English language at the time of the law‘s enactment. Unless the legislature has explicitly provided otherwise, the traditional rules of statutory construction apply.
{¶ 51} The idea that special rules apply to tax exemptions seems to be a relic of 19th-century federal caselaw dealing with the Contracts Clause of the United States Constitution and limitations on intrusions into state sovereignty. See Scalia and Garner, Reading Law: The Interpretation of Legal Texts 359-363 (2012). Indeed, Scalia and Garner‘s treatise devotes an entire chapter to dispelling “[t]he false notion that tax exemptions—or any others for that matter—should be strictly construed.” Id. at 359. As the treatise explains, the United States Supreme Court has largely abandoned the notion that tax statutes should be treated different than other legislative enactments. Id. at fn. 5 and 6. We should do the same.
{¶ 52} Rather,
[l]ike any other governmental intrusion on property or personal freedom, a tax statute should be given its fair meaning, and this includes a fair interpretation of any exceptions it contains. So when one statutory provision imposes a categorical tax, any exception imported by another provision must be clear. But it can be clearly implied, no less than clearly expressed, and the terms of the exception ought to be reasonably, rather than strictly, construed.
Id. at 362.
{¶ 53} The state‘s sales-tax regime does provide some interpretative guidance.
{¶ 54} Ultimately, I agree with the majority that this case should be remanded to the BTA to apply the true-object test to Cincinnati Federal‘s claim for a refund under
KENNEDY, J., concurs in the foregoing opinion.
Mann & Mann, L.L.C., David S. Mann, and Michael T. Mann, for appellant.
Dave Yost, Attorney General, and Christine Mesirow, Assistant Attorney General, for appellee.