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Dept of Revenue v. The Parsons Corporation (12/31/92), 843 P 2d 1238
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NOTICE: This opinion is subject to formal correction
before publication in the Pacific Reporter. Readers are
requested to bring typographical or other formal errors to
the attention of the Clerk of the Appellate Courts, 303 K
Street, Anchorage, Alaska 99501, in order that corrections
may be made prior to permanent publication.
THE SUPREME COURT OF THE STATE OF ALASKA
STATE OF ALASKA, DEPARTMENT )
OF REVENUE, )
)
Appellant, ) File No. S-4137
)
v. ) 3AN-88-7899 CI
)
THE PARSONS CORPORATION and ) O P I N I O N
THE RALPH M. PARSONS COMPANY, )
)
Appellees. ) [No. 3910 - December 31, 1992]
________________________________)
Appeal from the Superior Court of the State
of Alaska, Third Judicial District,
Anchorage, Roy H. Madsen, Judge.
Appearances: Marilyn May, Teresa Williams,
David T. Leblond, Assistant Attorneys
General, Anchorage, Charles E. Cole, Attorney
General, Juneau, for Appellant. Lance B.
Gordon, Patrick G. Woosley, Pasadena,
California, David G. Shaftel, Anchorage, for
Appellees.
Before: Rabinowitz, Chief Justice, Burke,
Matthews, Compton and Moore, Justices.
BURKE, Justice.
The Alaska Department of Revenue ("DOR") appeals the
superior court's reversal of DOR's July 5, 1988, administrative
decision affirming the audit division's assessment of corporate
income taxes against the Parsons Corporation and the Ralph M.
Parsons Company ("Parsons") for tax years 1977 through 1981. At
issue is the proper allocation of revenue derived from contracts
to construct oil and gas facilities at Prudhoe Bay under the
three-factor formula of the Multistate Tax Compact, AS 43.19.010-
43.19.050.
In computing the "sales"factor, Parsons excluded from
the numerator revenues which it attributed to services performed
outside the State of Alaska. DOR determined that the revenues
were derived not from services alone but from transactions
involving the sale of tangible personal property delivered inside
the State of Alaska, and therefore included the revenues in the
Alaska numerator of the sales factor. After a formal hearing,
DOR affirmed the audit division's assessment, finding that
Parsons' contractual activities on the North Slope constituted a
sale of tangible personal property. The trial court reversed
DOR's decision. We reverse the trial court and affirm DOR's
administrative decision.
I. FACTS
Parsons is a multinational corporation providing
design, engineering, procurement, and construction services to
private and governmental clients throughout the world. In the
1970's and early 1980's, Parsons was engaged in extensive,
multiyear projects involving the oil and gas production
facilities at Prudhoe Bay.
Beginning in 1971, Parsons contracted with Atlantic
Richfield Company and ARCO Oil and Gas Company (collectively
"ARCO") to design and construct oil and gas field facilities for
Prudhoe Bay. Parsons and ARCO renegotiated their contractual
relationship a number of times, but they stipulated that only
three of these contracts were at issue for the tax years in
question: contract 4834, dated January 28, 1971; contract 5600,
dated October 11, 1978; and contract 6000, dated March 24, 1979.
The contracts are cost-plus-fixed-fee contracts utilizing a zero
balance bank account mechanism.
Contract 4834 states that Parsons agrees to
manufacture, fabricate, deliver, and sell at Prudhoe Bay modules
and other equipment described in the contract documents. Parsons
is to perform all work under the contract as an independent
contractor and not as an agent. Parsons is to be paid for the
sale of modules under the contract. Title to property, including
modules, materials, and equipment for the project acquired or
manufactured by Parsons vests in Parsons. Title only passes to
ARCO when the modules and other equipment are completed,
delivered, and accepted at Prudhoe Bay. Parsons warrants that
the modules and equipment will be free of defects in material and
workmanship.
Contract 5600, in revised form, incorporates the same
job instructions as contract 4834. Parsons is to construct North
Slope oil field facilities in a series of units called modules.
Title to property acquired or manufactured by Parsons will
initially vest in Parsons until title passes upon delivery.
Contract 6000 is in a form similar to contract 5600.
It is for the construction and delivery of oil field modules.
Key elements of the design concepts under the contract include
constructing the facilities in modules in the Lower 48 to
minimize Prudhoe Bay construction; limiting the size of the
modules to stay within the limits of current crawler/transporter
technology; fabricating the modules on the west coast for direct
access to ocean-going barges; scheduling the construction in
annual increments to meet sealift dates; offloading the modules
onto gravel causeways at Prudhoe Bay; supporting them on pilings
anchored in the permafrost; and interconnecting the modules to
minimize personnel exposure to the Arctic environment.
Parsons performed under these contracts in several
states outside of Alaska. Parsons provided engineering, design,
and agency procurement services from its home office in
California. Parsons designed the facilities in modular sections
which were partially assembled in Washington and Oregon, where
Parsons provided construction management services. The modules
were then barged to Prudhoe Bay where they were hauled into place
by huge tractors. Some of the modules fabricated in Tacoma,
Washington, were up to eight stories high.
II. PROCEEDINGS
In filing Alaska corporation income tax returns,
Parsons used the three-factor apportionment method to determine
its Alaska taxable income. In general, Parsons attributed
revenues from the ARCO contracts to work performed outside of
Alaska and therefore excluded them from its Alaska sales
numerator. DOR's audit division, however, attributed these
revenues to the Alaska numerator, and accordingly adjusted
Parsons' Alaska sales numerator and total tax liability.
Parsons appealed the audit division's assessment to a
formal hearing after the audit division issued an informal
conference decision affirming the audit assessment for the tax
years 1977, 1978, and 1979. The formal hearing affirmed the
assessment, and Parsons paid the additional tax and interest due
of $73,405.90 on October 28, 1983. Parsons appealed this
decision to the superior court but later stipulated with DOR to
remand the appeal, and the case was dismissed without prejudice.
On June 11, 1984, the audit division issued another
notice of assessment to Parsons for the tax years 1980 and 1981.
The audit adjustments resulted in additional tax liability for
Parsons of $309,682 for 1980, and $203,812 for 1981. Parsons
appealed these assessments. The 1980 and 1981 issues were
consolidated by agreement with the tax years 1977, 1978, and
1979. The audit division's assessments were affirmed at both an
informal conference and subsequent formal hearing. DOR issued
Decision No. 88-67 on July 5, 1988.
Parsons appealed to the superior court on August 4,
1988. On July 3, 1990, the superior court issued a memorandum
opinion and decision reversing DOR's Decision No. 88-67. Judge
Madsen held that Parsons sold services to ARCO in contracts 5600
and 6000 and rendered services through a separate income
producing activity under contract 4834.
The superior court awarded Parsons attorney's fees of
$25,000 on September 20, 1990. DOR appealed the superior
court's memorandum opinion and decision on July 30, 1990, and
later amended its appeal to include an appeal of the superior
court's order awarding attorney's fees.
III. DISCUSSION
A. Standard of Review
We summarized our approach toward reviewing adminis
trative decisions in Handley v. State, 838 P.2d 1231, 1233
(Alaska 1992):
We will independently review the
merits of an administrative determination.
No deference is given to the superior court's
decision when that court acts as an
intermediate court of appeal.
We have recognized four principal
standards of review of administrative
decisions. The `substantial evidence' test
is used for questions of fact. The
`reasonable basis' test is used for questions
of law involving agency expertise. The
`substitution of judgment' test is used for
questions of law where no expertise is
involved. The `reasonable and not arbitrary'
test is used for review of administrative
regulations. (citation omitted).
In the present case, the reasonable basis test applies.
The facts are complex. Interpreting the Multistate Tax Compact
("Compact") depends upon the "`particularized experience and
knowledge of the administrative personnel'."Gulf Oil Corp. v.
State, Dep't of Revenue, 755 P.2d 372, 378 n.19 (Alaska 1988)
(quoting Kelly v. Zamarello, 486 P.2d 906, 916 (Alaska 1971)).
We are satisfied that the reasonable basis test is appropriate
because this case "requires resolution of policy questions which
lie within the agency's area of expertise and are inseparable
from the facts underlying the agency's decision." Earth
Resources v. State, Dep't of Revenue, 665 P.2d 960, 964 (Alaska
1983). Therefore, we will not reverse DOR's decision if there is
a reasonable basis to support it.
B. The contracts between Parsons and ARCO were
for the sale of tangible personal property
delivered to a purchaser in Alaska for purposes of
the Compact, AS 43.19.010, Art. IV.
One of the purposes of the Compact is to avoid
duplicative taxation of business entities which do business in
more than one state or nation. AS 43.19.010, Art. I. The
Compact sets out a three factor formula to measure the business
income attributable to each state. AS 43.19.010, Art. IV(9).
The three factors are property, payroll, and sales. The sales
factor, the relevant factor in this case, is the ratio of the
taxpayer's sales made in the taxing state during the tax period
and the total sales of the taxpayer everywhere during the same
period. AS 43.19.010, Art. IV(15). The property and payroll
factors are similarly determined. The business's taxable income
that is apportioned to the taxing state is then determined by
multiplying the business income by a fraction derived from these
three factors.1
Using the Uniform Division of Income for Tax Purposes
Act approach, the Compact divides sales revenues into two
categories and applies different sourcing rules to each: (1)
revenue from sales of tangible personal property is sourced to
the place of delivery and (2) revenue from sales of services is
sourced to the place of performance.2 The income tax results in
this case depend upon the classification of Parsons' business
activity. If Parsons acted as a manufacturer and seller of oil
field modules its revenues were for the "sale of tangible
personal property." If Parsons acted as a contractor who
procured materials as a purchasing agent and was paid for skills
and services provided, its revenues were from sales "other than
sales of tangible personal property." AS 43.19.010, Art. IV.
In Decision No. 88-67, DOR determined that Parsons'
"engineering, construction management, and procurement services
were performed in order to sell tangible personal property to a
customer in Alaska." It therefore affirmed the audit division's
assessments. In so doing, DOR properly rejected Parsons'
arguments that Parsons was only acting as ARCO's agent3, and that
Parsons' California home office engineering services constituted
a separate income producing activity.
The relevant statute and regulations support DOR's
decision. The Compact considers sales of tangible personal
property to be in Alaska if "the property is delivered or shipped
to a purchaser . . . within this state regardless of the f.o.b.
point or other conditions of the sale." AS 43.19.010, Art. IV,
16(a). DOR has promulgated rules pursuant to the Compact to help
determine "sales"in various situations. Thus, for example, in
the case of "cost-plus-fixed-fee contracts," such as the
contracts in the present case, "`sales' includes the entire
reimbursed cost, plus the fee." 15 AAC 19.251(a)(2).
For the sales factor, DOR properly attributed Parsons'
revenues to sales of tangible personal property made in Alaska.
Regardless of the f.o.b. point and other conditions of the
contracts, modules were shipped to a purchaser in Alaska. AS
43.19.010, Art. IV, 16(a). Because the recipient was located
in Alaska, the modules are considered to be "delivered" here,
even though they were ordered from outside the state. See 15 AAC
19.281(b). Furthermore, the sales properly included the entire
reimbursed cost, plus the fee. 15 AAC 19.251(a)(2).
We reject Parsons' argument that its revenues were
derived from "professional services." The relevant sales factor
regulation, when referring to taxpayers engaged in providing
services, lists such activities as "the operation of an
advertising agency, or the performance of equipment service
contracts, [or] research and development contracts." 15 AAC
19.251(a)(3). Parsons' activities do not fit into either the
specific activities listed or the general class of activities the
list is meant to illuminate.
The regulation for sales other than sales of tangible
personal property lists such business activities as rendering
personal services; selling, renting, or leasing real property;
renting or leasing tangible personal property; and selling
intangible personal property. 15 AAC 19.301(b)(1-4). Parsons
did not do any of these things under the ARCO contracts.
In Decision 88-67, DOR concluded,
It is clear that the Taxpayer's
contracts here required the Taxpayer to
perform services and procure the materials
and equipment necessary to produce the
modules. In fact, in the later contracts,
the procurement of materials and equipment
for ARCO was so integrated into the contracts
that no separate phase of the contract exists
outlining the sale and transfer of the
property. The modules that incorporated the
procured property were more than just
"incidental"to the services rendered. It is
clear that the contracts required more than
just rendering service.
We agree. We are satisfied that the record contains a reasonable
basis to support DOR's Decision 88-67.4
It is a fair result to attribute Parsons' sales to
Alaska. The North Slope contracts are important to Parsons.
Parsons has described itself as the "unrivalled leader in the
modularization of production and process facilities for use" on
the North Slope. Thus, even though most of Parsons' activities
are conducted outside of Alaska, it is perfectly appropriate to
attribute all of its revenues to Alaska, for sales factor
purposes. See Sjong v. State, Dep't of Revenue, 622 P.2d 967
(Alaska 1981). Failure to attribute sales to the state in which
they are made "would greatly underrepresent the extent of the
taxpayer's activities within the state."Id. at 978.
IV. CONCLUSION
We REVERSE the superior court's memorandum opinion and
decision and AFFIRM DOR's Decision No. 88-67. We also VACATE the
superior court's attorney's fees award.
THE SUPREME COURT OF THE STATE OF ALASKA
STATE OF ALASKA, DEPARTMENT )
OF REVENUE, )
)
Appellant, ) File No. S-4137
)
v. ) 3AN-88-7899 CI
)
THE PARSONS CORPORATION and ) O R D E R
THE RALPH M. PARSONS COMPANY, )
)
Appellees. )
________________________________)
Before: Moore, Chief Justice, Rabinowitz,
Burke, Matthews, and Compton, Justices.
IT IS ORDERED;
1. Opinion No. 3899, published November 20, 1992, is
WITHDRAWN.
2. Opinion No. 3910 is issued on this date in its
place.
Entered by direction of the court at Anchorage, Alaska
on December 31, 1992.
CLERK OF THE SUPREME COURT
__________________________
JAN HANSEN
_______________________________
1. The numerator of the fraction is the property factor
plus the payroll factor plus the sales factor; the denominator is
three. AS 43.19.010, Art. IV(9).
2. AS 43.19.010, Art. IV. Division of Income.
. . . .
16. Sales of tangible personal property
are in this state if:
(a) the property is delivered
or shipped to a purchaser . . . within
this state. . . .
. . . .
17. Sales, other than sales of tangible
personal property, are in this state if:
(a) the income-producing
activity is performed in this state; or
(b) the income-producing
activity is performed both in and
outside this state and a greater
proportion of the income-producing
activity is performed in this state than
in any other state, based on costs of
performance.
3. In determining that Parson's was not ARCO's agent, DOR
carefully examined the facts of the present case, and compared
these to relevant authority. After reviewing the record, and
using our independent judgment, we agree with DOR's decision on
this issue. As DOR notes,
The Taxpayer retain[ed] legal title to
the procured materials and equipment until it
was delivered to Prudhoe Bay. It was
responsible for insuring its own employees
and certain other items, and was liable for
any personal injury, death or damage to
property arising out of the Taxpayer's work.
The Taxpayer warranted its work. It was
responsible for hiring employees and making
payments for purchases. It obtained workers'
compensation insurance, employers' liability
insurance, comprehensive bodily injury,
personal injury and property damage liability
insurance, and was obligated to require its
subcontractors to carry these same type[s] of
insurance coverages. It also was []
responsible for all taxes.
. . . .
[A]ll of the contracts state that
the Taxpayer was an independent contractor.
Contract 4834 additionally specifies that the
Taxpayer is not an agent or employee of ARCO.
As the Audit Division points out, at no
[time] in this appeal has any evidence been
presented by ARCO or on its behalf that it
intended the Taxpayer to serve as its agent.
Rather, the contract provisions state the
contrary. . . .
. . . .
[Finally,] [t]he purchase order
forms do not convey an agency relationship.
The form is clearly a form of the Taxpayer,
listing the Taxpayer's name, its logo and
addresses at the top of the form.
Additionally, throughout the form, reference
is made to the Taxpayer. The form states
that the item is to be shipped to the
Taxpayer, but does list the address as "c/o
Atlantic Richfield Company." The Taxpayer
has not stated, nor is it likely to occur,
that if a non-reimbursable item is purchased
using the purchase order forms that a vendor
could collect against ARCO. [sic]
(Citations omitted). Given these facts, it is easy for us to
conclude that Parsons should not be considered ARCO's agent for
Alaska income tax purposes.
4. The cases Parsons relies on to argue that there was no
"sale"here are distinguishable. In Mark IV Metal Products, CCH
Cal Rptr. 400-268 (Cal. St. Bd. Eq. 1982), the owner sent
unfinished metal to the contractor, who fabricated it into seat
parts which the contractor shipped back to the owner, who then
incorporated them into metal seats for sale to the owner's
customers. In Lone Star Steel v. Dolan, 668 P.2d 916 (Colo.
1983), the issue was whether pipe was sold in state or out of
state when it was first delivered by the manufacturer to an in
state business which applied coating and wrapping, before the
pipe was shipped to the out of state purchaser.
Parsons' "services"were not analogous to the services
of coating and wrapping the pipe in Lone Star, or the fabricating
of metal seat parts in Mark IV. Parsons manufactured the
modules, as ARCO's contractor, and delivered them to ARCO in
Alaska. Therefore, the gross receipts Parsons derived from that
delivery are taxable in Alaska. Alaska Statute 43.19.010 Art.
IV, paragraph 16(a) is designed to cover transactions, such as
the one in the present case, which are "not traditionally viewed
as sales."See Coulter Electronics v. Department of Revenue, 365
So. 2d 806, 808 (Fla. App. 1978). The relevant inquiry, which we
engage in above, is whether tangible personal property is
delivered in this state.
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