SC Administrative Law Court Decisions

This matter is before the Administrative Law Court (“ALC” or “Court”) pursuant to a request for a contested case hearing filed by ESA Services, LLC (formerly ESA Services, Inc.) c/o Extended Stay, Inc. (“ESA” or “Taxpayer”). ESA challenges the South Carolina Department of Revenue’s (“Department”) January 9, 2008 final agency determination (“Determination”). The Department found that ESA did not create the minimum number of jobs required by the Revitalization Agreement (the “RVA”) between ESA and the Advisory Coordinating Council for Economic Development for the State of South Carolina (“Council”)[1] and, as a result, ESA was not entitled to claim Job Development Credits (“JDCs”)[2] pursuant to the South Carolina Enterprise Zone Act of 1995 (the “EZA”).

After timely notice to the parties, a contested case hearing was held on October 6 and 7, 2008 at the offices of the Court in Columbia, South Carolina. Both parties appeared at the hearing, introduced evidence, and provided testimony.

After careful consideration of the evidence, the Court finds and concludes that the Determination is not supported by the evidence or the law, that ESA has complied with all of the requirements of the RVA, and that ESA is entitled to claim JDCs for the quarters in question.

All motions or issues raised in the proceedings, but not addressed in this Order, are deemed denied pursuant to ALC Rule 29(C).

FINDINGS OF FACT

1. ESA Services, LLC is a limited liability company authorized to do business in the State of South Carolina. At the beginning of the time period relevant in this case, it did business in the name of ESA Services, Inc. and was a member of a group of publicly traded companies that owned and/or operated extended stay lodging facilities. Its parent company was Extended Stay America, Inc. [3]

2. In May 2004, the Blackstone Group purchased Extended Stay America, Inc. and took it private. On May 11, 2004, Extended Stay America, Inc., the publicly traded parent company of ESA, sold all its outstanding stock to an affiliate of the Blackstone Group and became a privately held company.

3. ESA did not dissolve or cease to exist as a result of the sale of the stock by its parent. However, on May 11, 2004, ESA underwent a conversion, under Delaware law, whereby it changed its income tax status from a corporation to a partnership and changed its name from ESA Services, Inc. to “ESA Services, LLC.”

The change in income tax status had no effect on the operations of ESA. After May 11, 2004, ESA continued as the employer of its employees at its Spartanburg location, continued to make payroll to its employees there, continued to file withholding returns with the Department through the end of December 2004, and continued using the same federal employer identification number it had used prior to May 11, 2004.

The Department did not reject any filings ESA made after May 11, 2004, and the Department’s records indicate that ESA was a valid taxpayer through December 31, 2004.

4. On December 30, 2004, ESA Services, LLC merged into HVM, LLC, a sister company. HVM, LLC was a management holding company that was owned by the Blackstone Group. The name of the company after the merger was HVM, LLC. This merger between ESA and HVM, LLC was finalized outside the claims period and approximately six months after ESA’s last refund claim was made. After the merger, HVM, LLC chose to withdraw from the RVA rather than assume ESA’s obligations thereunder. Thus, apart from the three pending claims for refunds, no further claims for JDCs can be made by ESA. Further, after the merger, the surviving entity, HVM, LLC, continued to operate its offices in the same facility at Spartanburg, South Carolina. At the time of the trial, HVM, LLC employed 150 persons at the same location in Spartanburg.

5. ESA did not notify Council of the sale by its parent company of its stock to the Blackstone Group, its conversion in its income tax status, or the change of its name because it continued its operations in South Carolina in the same manner as before.

In addition, ESA never received any notice or indication from Council that it considered ESA to be in default of the RVA as a result of these transactions.

Revitalization Agreement

6. Sometime prior to 2001, ESA and the State of South Carolina began negotiations for the relocation of ESA’s business from Ft. Lauderdale, Florida to Spartanburg, South Carolina, as well as expansion of the operation in South Carolina after the move. In addition, ESA’s parent, Extended Stay America, Inc., agreed to relocate its national corporate headquarters from Ft. Lauderdale, Florida to Spartanburg, South Carolina.

In furtherance of these negotiations, on July 19, 2001 ESA submitted an application to Council seeking approval to participate in the South Carolina Enterprise Zone Program (“EZA Program”) and qualification for enterprise zone incentives, including JDCs. The application was filed in the name of “Extended Stay America, Inc. and subsidiaries” and stated the intent of both ESA and its parent, Extended Stay America, Inc., to relocate to Spartanburg, South Carolina, for the construction of a new $13 million corporate headquarters facility there, and for ESA to create an estimated 200 new jobs there.[4]

7. On July 26, 2001, Council prepared a letter addressed to “Mr. Bill Kastler, partner-Pricewaterhouse Coopers, Extended Stay America, Inc., 450 East Las Olas Blvd, Suite 1100, Fort Lauderdale, FL 33301.”[5] The letter was copied to “Mr. Gregg Robinson.” The letter stated that Council approved the application “with the contingency that only positions paying above $11.58 an hour (the Spartanburg per capita) would qualify for Job Development Credits” (“Contingency”). Further, it stated that Council intended to enter into a final RVA with ESA within eighteen months of the date of the original application, and that ESA could accept the terms, as outlined therein, by signing it and returning a copy to Council.

ESA did not receive the letter, was not aware of the Contingency, did not agree to the Contingency, and did not return an executed copy of the letter to Council. ESA first became aware of the Contingency in October 2005.[6]

8. On August 15, 2002, ESA notified Council that it would increase its capital investment to $14.49 million (rather than $13 million) and could commit to the creation of a minimum number of 215 full-time new jobs (rather than 200 as initially proposed). On August 29, 2002, Council agreed to ESA’s request to increase its commitment. The letter discussed wages and JDCs; however, it made no mention of an $11.58 minimum hour wage contingency.

9. After the initial approval of its application, ESA relocated from Florida to South Carolina, as did the national corporate headquarters of Extended Stay America, Inc., and began the expansion, made capital expenditures, and created new jobs.

10. On January 30, 2003 and July 16, 2003, ESA Services, Inc. and Council, respectively, executed the final RVA.[7] The parties agreed to an effective date of July 19, 2001. Council approved ESA to claim JDCs for new jobs in the “moderately developed” County of Spartanburg, State of South Carolina. The RVA contained all the parties’ negotiated terms and conditions.

Council prepared a cover letter on July 16, 2003[8] and mailed it with the fully executed RVA to ESA’s Chief Financial Officer, Greg Moxley. The letter provided that ESA could begin claiming JDCs after it had certified to Council, in writing, that it had created the minimum full-time jobs (215) and that it had met the Minimum Capital Investment ($14,490,000). Further, Council required ESA to provide to Council its Employee Withholding Number, its Federal Employer Identification Number, and proof that health benefits would be provided to all its employees. No other requirements or contingencies were listed in the letter.

11. The final RVA provided:

a. “Agreement” means this Revitalization Agreement effective as of the date specified on the cover between the Council and the Company.

b. “Company” means the company specified on the cover hereof which is organized and existing in the business form specified in Exhibit A under the laws of the state specified in Exhibit A, and its permitted successors and assigns as specified under Section 3.4 of this Agreement.

c. “Cut-off Date” means the fifth anniversary of the effective date of this agreement (July 19, 2006).

d. “Department” means the South Carolina Department of Revenue and its successors.

e. “Minimum Job Requirement” means the minimum number of New Jobs the Company has agreed to create, prior to the Cut-Off Date, and maintain before claiming any Job Development Credits. Once it meets the Minimum Job Requirement, the Company may fall below the Minimum Job Requirement by 15 percent or exceed the Minimum Job Requirement by 50 percent and remain eligible to claim Job Development Credits. This allowance of a range of new jobs is known as the “85%/150% Rule.”

f. “New Job” has the same meaning as set forth in Section 12-6-3360 of the Code except that it shall be deemed to include only such jobs as are created at the Project between the first day of the Company’s taxable year in which it enters into this Agreement and the Cut-off Date.

g. “Project,” as described in Exhibit A to the RVA, was the establishment of the corporate headquarters for ESA operations.

h. ESA agreed to create and maintain a minimum of 215 new jobs at its headquarters in Spartanburg, South Carolina.[9]

i. ESA agreed to invest a minimum of $14,490,000 in the Project before the Cut-off Date.

j. In accordance with provisions contained in Exhibit B, Article II of the RVA, ESA represented that it was a “Qualifying Business” and a business entity as described in Exhibit A, duly organized, validly existing and in good standing under the laws of the state specified in Exhibit A (Delaware). Further, it represented that it was qualified to conduct business in, and was in good standing in, the State of South Carolina. In addition, ESA agreed to maintain its existence, to continue to operate its business in South Carolina, to maintain the Project substantially as outlined in Exhibit A to the RVA, and to give to “Council written notice of any merger or consolidation of the Company, any sale, lease or transfer of substantially all of the assets or the Project or change in the name or the location of its books and records or of any substantial change in its business structure, or the nature of the operations conducted at the Project within thirty days following the occurrence of such event.”

k. ESA agreed that all material representations and warranties made by it on its behalf, which were contained in the RVA or in any RVA, were true, accurate and complete in all material respects.

l. ESA agreed that, before it made any claim for JDCs, it would notify Council that it had met the Minimum Job Requirement, had met the Minimum Capital Investment, and that it would provide all documentation Council required to verify compliance. Council agreed that within thirty days of its finding that all the requirements were met, it was required to certify to the Department that ESA was eligible to start claiming JDCs.

m. The RVA, together with the exhibits attached thereto, constituted the entire agreement as to the matters contained in the RVA and superseded all prior agreements and understandings, written or oral, between the parties.

12. The RVA contained several exhibits, which were incorporated by reference. Exhibit A, entitled “Project Details,” was referred to numerous times in the text of the RVA and contained, among other things, a description of the Project, the Project costs and other fundings, the guaranteed Minimum Capital Investment ($14,490,000), the Minimum Job Requirement (215) that ESA agreed to, and ESA’s authorized company representatives. Exhibit A did not reference any requirement that the new jobs had to pay a certain minimum wage.

13. Exhibit B to the RVA, entitled “Approved Employment Positions,” listed the job title (Officers, Management, and Staff), number of positions in each (10, 40, 165, respectively), their wage bracket (annual salaries of $220,000, $73,000 and $30,000, respectively), and the job development percentage that ESA estimated would be created (5%, 5%, and 4%, respectively).

14. Exhibit C is a blank copy of the Schedule C--Employer Quarterly Report (“Schedule C”) which ESA had to file with Council to claim JDCs. It contained a table indicating the percentage of JDCs available for certain wage ranges beginning at $7.18 per hour through $17.96 per hour, and up. It did not contain any language providing, or implying, that these were mandatory wage ranges that ESA had to utilize when it hired the new employees.

15. Exhibit D, entitled “Special Provisions and Amendments,” listed several amendments to the standard language contained in the RVA. However, it contained no reference to a minimum wage contingency.

Qualification/Certification to claim JDCs

16. Shortly after the execution of the RVA, ESA submitted documentation to Council that it had met the Minimum Job Requirement and the Minimum Capital Investment required by the RVA. ESA informed Council that it had created 230 new jobs at its Project in Spartanburg, South Carolina and that it had made a capital investment in the amount of $14,506,927. In the submission, ESA requested certification that it was qualified to start making claims for JDCs.

17. On September 30, 2003, Council wrote to ESA. In the letter Council stated that it had reviewed ESA’s documentation and that it had approved ESA for claiming JDCs. Further, Council stated that ESA could begin calculating JDCs, effective October 1, 2003, and that it would notify the Department of the certification. Again, there was no mention of any mandatory wage range ESA had to utilize in paying its new employees.

Refund Claims

18. After receipt of the certification letter, ESA filed Schedule C’s with Council[10] and Employer Quarterly Tax Returns (Form WH-1605AZ) with the Department, requesting JDCs as follows:

a. a refund claim in the amount of $136,706 for the 4^th Quarter of 2003 (quarter ending December 31, 2003), based upon ESA’s payment of $4,272,261 in wages to 226 eligible employees. The Department issued a refund to ESA in the amount of $136,706.

b. a refund claim in the amount of $80,623 for the 1^st Quarter of 2004 (quarter ending March 31, 2003), based upon ESA’s payment of $2,660,634 in wages to 231 eligible employees. The Department issued a refund of $80,623 for this claim.

c. a refund claim in the amount of $933,962 for the 2^nd Quarter 2004 (quarter ending June 30, 2004), based upon the payment of $27,110,506 in wages to 190 eligible employees. The Department did not issue a refund for this claim.

19. After ESA submitted its third and final refund claim on July 29, 2004, Council reviewed all three Schedule C’s that had been filed with it and determined that ESA had claimed JDCs for some jobs that paid less than $11.58 per hour.[11] Thereafter, Ms. Jacki Calvi, an employee of Council,[12] spoke telephonically with representatives of ESA. She requested ESA to amend the returns and delete any JDC claims for jobs which ESA had paid hourly wages less than the Spartanburg per capita average hourly wage of $11.58. However, she told ESA representatives that all the new jobs it had created (including those jobs paying $11.58 per hour or less) could be counted toward the 215 Minimum Job Requirement number.[13] Council also informed Edward R. Barwick of its interpretation of the EZA and the RVA concerning the Minimum Job Requirement.[14] This was the first time ESA had been made aware of the Contingency.[15]

After the conversation with Ms. Calvi, ESA agreed to accept the $11.58 wage contingency and amend its Schedule C’s.[16] Subsequently, it filed amended returns with Council (Schedule C’s) and the Department (WH-1605AZ’s), deleting any claim for refunds for new jobs paying less than $11.58 per hour. However, ESA included in the amended returns the number of new jobs that paid less than $11.58 per hour[17] in the calculation of the Minimum Job Requirement.

20. After it had amended the quarterly returns, ESA claimed refunds as follows: (a) $133,873 for the 4^th Quarter 2003 based on 226 new jobs created; (b) $77,226 for the 1^st Quarter 2004 based on 231 new jobs created; and, (3) $930,894 for the 2^nd Quarter 2004 based on 190 new jobs created.

21. These voluntary adjustments by ESA resulted in excess refunds by the Department to ESA in the amount of $2,832.00 for the 4^th Quarter 2003 and $3,397.00 for the 1^st Quarter 2004. ESA has not paid the overage to the Department.

Department’s Audit

22. After ESA filed its amended return with the Department for the 2^nd Quarter 2004, the Department notified ESA that it intended to conduct a field audit concerning the refund claims.

In the latter part of June 2005, Edward R. Barwick [18] conducted a field audit of ESA at its offices in Spartanburg, South Carolina. During the audit, ESA provided to Mr. Barwick copies of the final RVA, all pertinent information related to the final RVA, all quarterly reports filed with Council and the Department, all its backup information, and all its spreadsheets which it used to support its refund claims.

23. On September 14, 2005, Mr. Barwick issued a field audit report (“Report”). The Department sent the Report to ESA as an attachment to a letter dated September 22, 2005. The report contained three findings:

a. Because ESA had amended its Schedule C’s for the 4^th Quarter 2003 and the 1^st Quarter 2004 to remove jobs paying $11.58 per hour or less and had not repaid the overage caused by the amendments, it owed taxes (reimbursement for the credit previously refunded to it by the Department) in the amount of $2,833.00 for the 4^th Quarter 2003 and $3,397.00 for the 1^st Quarter 2004;

b. All JDC claims made by ESA should be disallowed because ESA did not create the total number of jobs required by the Minimum Job Requirement provision contained in the RVA;[19]

c. ESA was not entitled to claim JDC credits under the RVA because it ceased to exist as a taxpayer. He concluded that the name change and the reorganization constituted a “liquidation” and a “merger.”

24. The Report concluded that ESA had to pay to the State of South Carolina an additional tax of $217,329.00, plus interest of $19,111.00 computed through November 1, 2005, based on the Department’s disallowance of all the JDCs claimed by ESA and the refunds for the 4^th Quarter 2003 and the 1^st Quarter 2004. The Report also denied ESA’s 2^nd Quarter 2004 claim for a refund of $930,894.00.[20]

25. On March 20, 2006, ESA timely filed a protest of the findings and proposed assessment contained in the Report. On October 30, 2006, ESA appealed the findings in the Department’s Appeals Report (the Appeals section of the Department had reviewed the Report and affirmed its findings and conclusions).

26. On January 9, 2008, the Department issued a Determination in which it denied all of ESA’s claims. It found that ESA failed to comply with the Minimum Job Requirement contained in the RVA and that ESA had ceased to exist in the State of South Carolina which constituted a violation of RVA. That Determination is now before the Court.

CONCLUSIONS OF LAW

Based on the foregoing Findings of Fact, I conclude as a matter of law:

1. The ALC has jurisdiction of this matter pursuant to S.C. Code Ann. §§ 1-23-600 (Supp. 2008) and 12-60-460 (2000).

2. The taxpayer bears the burden of proof in this administrative proceeding. TNS Mills, Inc. v. S.C. Dep’t of Revenue, 331 S.C. 611, 618, 503 S.E.2d 471, 475 (1998). The standard of proof in a contested case hearing before the ALC is a preponderance of the evidence. S.C. Code Ann. § 1-23-600(A)(6) (Supp. 2008); Anonymous v. State Bd. of Med. Exam’rs, 329 S.C. 371, 496 S.E.2d 17 (1998).

3. The credibility and weight of the testimony is for the trier of fact. Parsons v. Georgetown Steel, 318 S.C. 63, 456 S.E.2d 366 (1995); Collins v. Frasier, 378 S.C. 249, 662 S.E.2d 464 (Ct. App. 2008). Further, the trial judge who observes a witness is in the best position to judge the witness’s demeanor and veracity and evaluate his testimony. Messer v. Messer, 359 S.C. 614, 598 S.E.2d 310 (Ct. App. 2004).

4. “Where an expert’s testimony is based upon facts sufficient to form the basis for an opinion, the trier of fact determines its probative value.”  Berkeley Elec. Co-op, Inc. v. S.C. Pub. Serv. Comm’n,  304 S.C. 15, 20, 402 S.E.2d 674, 677 (1991); Smoak v. Liebherr-America, Inc., 281 S.C. 420, 315 S.E.2d 116 (1984).  “A trier of fact is not compelled to accept an expert’s testimony, but may give it the weight and credibility he determines it deserves.”  Florence County Dep’t. of Social Servs. v. Ward, 310 S.C. 69, 72-73, 425 S.E.2d 61, 63 (Ct. App. 1992).  Generally, expert testimony consisting merely of legal conclusions on the ultimate issue is inadmissible and must be disregarded.  Dawkins v. Fields, 354 S.C. 58, 65-66, 580 S.E.2d 433, 437 (2003).

In this case, ESA presented the testimony of Mr. John von Lehe, who was qualified as an expert in South Carolina taxation law, including the goals and purposes and processes relating to South Carolina’s economic development incentives program. The Department presented the testimony of Professor Glenn W. Harrison, who was qualified as an expert in economics. Mr. von Lehe testified concerning the goals of the EZA and the procedures generally used by Council and the Department to implement the program. Mr. von Lehe also testified concerning the terms and conditions of the RVA between the parties in the context of the custom and practices of Council with regard to RVAs. Professor Harrison testified concerning the importance of increasing per capita income as a goal of economic development incentive programs.

Although this Court has reviewed in detail the testimony and exhibits of the expert witnesses, each of whom provided helpful information in this case, the Court is mindful of the rule that matters of law, and more specifically South Carolina tax law, are within the province of the Court.  This Court must decide matters of South Carolina tax law, and it has not allowed any statement by an expert witness to influence that decision.  Any and all statements, written or oral, that constitute opinions on the law of this state are only opinions and are not admissible as evidence.  Notwithstanding, the Court has taken into consideration certain statements by the expert witnesses which are factual in nature and which may help this Court in determining the processes involved in applying for and qualifying for EZA credits and the intention of the South Carolina General Assembly regarding the law.

5. In South Carolina, the right to recover taxes paid to the State is statutory in nature. C.W. Matthews Contracting Co., Inc. v. S.C. Tax Comm’n, 267 S.C. 548, 230 S.E.2d 223 (1976). It is well-settled that a deduction is not a matter of right but is one of legislative grace. “To obtain a deduction, the taxpayer must bring himself squarely within the terms of the statute expressly authorizing the deduction.” Allied Corp. v. S.C. Tax Comm’n, 288 S.C. 197, 199, 341 S.E.2d 139, 141 (1986).

JDCs are tax credits. The taxpayer bears the burden of showing entitlement to the credit claimed. Norfolk S. Corp. v. Comm’n of Internal Revenue, 140 F.3d 240 (4^th Cir. 1998). Tax credit provisions must be strictly and narrowly construed against the taxpayer. As to ambiguities, the South Carolina Supreme Court recently stated that “the allowance of a tax credit is analogous to a tax deduction since both are a matter of legislative grace.” SCANA Corp. v. S.C. Dep’t of Revenue, 2008 WL 2572595, *2 (S.C. 2008), reh’g granted.

6. The General Assembly granted to the Department the authority to administer the revenue laws. S.C. Code Ann. § 12-4-10 (2000). The Department is also charged with inspection and auditing of a taxpayer’s returns.[21] The Department enforces and administers its responsibilities under the EZA through the withholding provision of Title 12. The EZA defines “withholding” in Section 12-10-30(12): “‘[w]ithholding means employee withholding pursuant to Chapter 8 of this title.’” The Department, as well as Council, is charged with auditing a taxpayer’s “sources and uses” of the JDCs every three years for taxpayers receiving in excess of $10,000 in JDCs per calendar year. S.C. Code Ann. § 12-10-80(A)(9).

The EZA

7. In 1995, the General Assembly enacted the EZA. S.C. Code Ann. § 12-10-10 et. seq. The EZA authorized qualifying businesses to receive various tax benefits for creating and maintaining certain levels of expenditures, such as for training costs and facilities, acquiring and improving real estate whether constructed or acquired by purchase, or in cases approved by Council, acquired by lease or otherwise, and for creating jobs.

The Advisory Coordinating Council for Economic Development for the State of South Carolina, also known as the South Carolina Coordinating Council for Economic Development, and Council, was created pursuant to the EZA; it is a body or division within the South Carolina Department of Commerce. The General Assembly delegated authority to it to enter into revitalization agreements with businesses in South Carolina that qualified for tax incentives, tasked it with the job of determining the available incentives that were appropriate for each project, required it to certify the total benefits for each project, required it to establish criteria for the determination and selection of qualifying businesses, required it to include in its criteria requirements relating to the capital costs of and the projected employment to be produced by the project, and required it to ensure that the business fulfills the requirements of Chapter 10.[22]

8. In S.C. Code Ann. § 12-10-20, the General Assembly stated its intent in enacting the EZA in Chapter 10. It provided:

(1) that the economic well-being of the citizens of the State is enhanced by the increased development and growth of industry within the State, and that it is in the best interests of the State to induce the location or expansion of manufacturing, processing, services, distribution, warehousing, research and development, corporate offices, technology intensive, and certain tourism projects within the State to promote the public purpose of creating new jobs within the State;

(2) that the inducement provided in this chapter will encourage the creation of jobs which would not otherwise exist and will create sources of tax revenues for the State and its political subdivisions;

(3) the powers to be granted to the Advisory Coordinating Council for Economic Development by this chapter and the purposes to be accomplished are proper governmental and public purposes and that the inducement of the location or expansion of manufacturing, processing, services, distribution, warehousing, research and development, corporate offices, and certain tourism facilities within the State is of paramount importance.

(4) The state’s per capita income has not reached the United States average and certain rural, less developed counties have not experienced capital investment, per capita income, and job growth at a level equal to the state’s average. The economic well-being of these areas will not be sustained without significant incentive to induce capital investment and job creation. (emphasis added).

“It is apparent that the General Assembly intended by enacting this statute to provide tax incentives for businesses to locate or expand manufacturing, as well as other businesses in this state, especially in certain rural areas.” Blackbaud, Docket No. 07-ALJ-17-0317 (June 12, 2008).

9. The South Carolina General Assembly codified the meaning of various applicable terms and provisions in S.C. Code Ann. § 12-10-30.

10. The South Carolina General Assembly provided in S.C. Code Ann. § 12-10-50 various requirements an EZP participant had to meet to qualify for the tax benefits. Further, it provided that Council would determine if the available incentives were appropriate for the project, would certify that the total benefits of the project exceeded the costs to the public, and that the business otherwise fulfills the requirements of Chapter 10.

11. The General Assembly provided in S.C. Code Ann. § 12-10-60 that Council could enter into an RVA with each qualifying business with respect to the project and that the terms and provisions of each RVA must be determined by negotiations between Council and the qualifying business. Further, it provided that the RVA must set a date by which the business will have completed the project.

12. In order to qualify for tax benefits under the EZA, an entity must be primarily engaged in a qualifying business as set forth in Section 12-6-3360,[23] must provide a benefits package to full-time employees which includes health care, and must enter into a revitalization agreement which is approved by Council. S.C. Code Ann. § 12-10-50.

13. The General Assembly provided in S.C. Code Ann. § 12-10-80(A) that a business could claim JDCs against its quarterly withholding tax liability if it had met the Minimum Job Requirement and Minimum Capital Investment provided for in the final RVA. Further, it provided that the qualifying business would thereafter be authorized to claim its JDCs against its withholding on its quarterly state withholding tax return for the amount of the JDCs allowable under § 12-10-80.

14. The decision to enter into a revitalization agreement with a qualifying business is solely within the discretion of Council based on the appropriateness of the negotiated incentives to the project and the determination that approval of the project is in the best interests of the State. S.C. Code Ann. § 12-10-60. The EZA further provides that the terms and provisions of each revitalization agreement must be determined by negotiations between Council and the qualifying business. Id. The amount that may be claimed as a JDC is limited by the RVA. S.C. Code Ann. § 12-10-80(D)(2).

Council is authorized by the EZA to certify to the Department the taxpayer’s maximum JDC. S.C. Code Ann. § 12-10-80(E).

15. In this case, ESA negotiated and entered into an RVA with Council. Thus, the RVA is a contract to which ESA and Council are the contracting parties and the only parties that have knowledge of its intent and meaning when it was agreed to. The Department was not a party to the contract.

16. Section 12-10-110 of the EZA directs that the Act “must be liberally construed in conformity with the findings [of the General Assembly] provided in Section 12-10-20.” (emphasis added). From a reading of Sections 12-10-110 and 12-10-20 together, it is obvious to this Court that the General Assembly intended for Council and the Department to apply liberally the provisions of Chapter 10 to the understandings Council and a taxpayer agreed to (in a final RVA) so the taxpayer, as a qualifying business, could claim all the tax benefits it contracted with Council for.

Interpretation of a Contract

17. If a contract’s language is plain, unambiguous, and capable of only one reasonable interpretation, no construction is required and its language determines the instrument’s force and effect. Jordan v. Security Group, Inc., 311 S.C. 227, 230, 428 S.E.2d 705, 707 (1993). Further, where an agreement “is clear and capable of legal interpretation, the court’s only function is to interpret its lawful meaning, discover the intention of the parties as found within the agreement, and give effect to it.” Ellie, Inc. v. Miccichi, 358 S.C. 78, 93, 594 S.E. 2d 485, 493 (Ct. App. 2004) (quoting Blakeley v. Rabon, 266 S.C. 68, 72, 221 S.E.2d 767, 769 (1976)). However, where an agreement is ambiguous, the court should seek to determine the parties’ intent. Prestick Golf Club, Inc. v. Prestwick Ltd. P’ship, 331 S.C. 385, 390, 503 S.E.2d 184, 187 (Ct. App. 1998).

“The primary purpose of all rules of contract construction is to determine the intent of the parties.” Goldston v. State Farm Mut. Auto. Ins. Co., 358 S.C. 157, 170, 594 S.E.2d 511, 518 (Ct. App. 2004). In determining the parties’ intentions, the court must read the contract as a whole. S. Atl. Fin. Servs., Inc. v. Middleton, 356 S.C. 444, 590 S.E.2d 27 (2003). To discover the intention of a contract, the court must first look to its language – if the language is perfectly plain and capable of legal construction, it alone determines the document’s force and effect. Superior Auto. Ins. Co. v. Maners, 261 S.C. 257, 199 S.E.2d 719 (1973). “When the language of a contract is clear, explicit, and unambiguous, the language of the contract alone determines the contract’s force and effect and the court must construe it according to its plain, ordinary, and popular meaning.” Moser v. Gosnell, 334 S.C. 425, 430, 513 S.E.2d 123, 125 (Ct. App. 1999); Shuler v. Tri-County Elec. Co-op., Inc., 374 S.C. 516, 649 S.E.2d 98 (Ct. App. 2007). “Contracts should be liberally construed so as to give them effect and carry out the intention of the parties.” Mishoe v. Gen. Motors Acceptance Corp., 234 S.C. 182, 188, 107 S.E.2d 43, 47 (1958).

“Whether a contract is ambiguous is to be determined from the entire contract and not from isolated portions of the contract.” Farr v. Duke Power Co., 265 S.C. 356, 362, 218 S.E.2d 431, 433 (1975); Silver v. Abstract Pools & Spas, Inc., 376 S.C. 585, 658 S.E.2d 539 (Ct. App. 2008). Where a contract is unclear, or is ambiguous and capable of more than one construction, the parties’ intentions are matters of fact to be submitted to the trier of fact. Wheeler v. Globe & Rutgers Fire Ins. Co. of City of N.Y., 125 S.C. 320, 118 S.E. 609 (1923). “Once the court decides that the language is ambiguous, evidence may be admitted to show the intent of the parties.” Hawkins v. Greenwood Dev. Corp., 328 S.C. 585, 592, 493 S.E.2d 875, 878-79 (Ct. App. 1997).

An ambiguous contract is a contract capable of being understood in more than one way or a contract unclear in meaning because it expresses its purpose in an indefinite manner. Klutts Resort Realty, Inc. v. Down’Round Dev. Corp., 268 S.C. 80, 232 S.E.2d 20 (1977); HK New Plan Exch. Prop. Owner I, LLC v. Coker, 375 S.C. 18, 649 S.E.2d 181 (Ct. App. 2007). The construction of a clear and unambiguous contract is a question of law for the court. S.C. Dep’t of Natural Res. v. Town of McClellanville, 345 S.C. 617, 550 S.E.2d 299 (2001).

In general, a written agreement between two persons merges all discussions and negotiations about the subject of the agreement, and it is not proper to receive testimony to vary or contradict the terms of such an agreement. 30 S.C. Jur. Contracts § 38. “Under the parol evidence rule, extrinsic evidence is inadmissible to vary or contradict the terms of [a contract].” Penton v. J.F. Cleckley & Co., 326 S.C. 275, 280, 486 S.E.2d 742, 745 (1997). The courts will look within the four corners of the document to ascertain the intent of the parties. Koontz v. Thomas, 333 S.C. 702, 511 S.E.2d 407 (Ct. App. 1999). “However, if a contract is ambiguous, parol evidence is admissible to ascertain the true meaning and intent of the parties.” Id. at 709, 511 S.E.2d at 411.

Issue and Arguments

18. The primary issue before the Court is whether the final RVA between ESA and Council contained any wage contingencies. The Department disallowed ESA’s refund claims because it determined there were wage contingences in the final RVA which ESA did not comply with.

According to the Department, the first mention of a wage contingency was contained in early correspondence between the parties (which served as the preliminary RVA in this case).[24] The correspondence was a letter from Council to ESA dated July 26, 2001 wherein it approved ESA’s application for eligibility for Enterprise Zone benefits. In the letter, Council stated that ESA’s application was approved “with the contingency that only positions paying above $11.58 an hour (the Spartanburg per capita) will qualify for Job Development Credits.” The only evidence presented to the Court supports ESA’s contention that it never received the letter in question and never agreed to any contingency at the preliminary RVA stage or at any time thereafter.

The second wage contingency found by the Department in its disallowance of ESA’s claims is contained in Exhibit B to the RVA. Exhibit B, entitled “Approved Employment Positions,” consists of the following table:[25]

The Department contends that this table requires ESA to create the number of jobs listed on the table paying the wages listed.

ESA contends that Exhibit B does not mention the term Minimum Job Requirement and does not contain any requirement that ESA create new jobs as stated in the table in order to meet its Minimum Job Requirement. ESA points to provisions in the RVA as support for its interpretation. For example, the definition of “Minimum Job Requirement” in Article I of the RVA does not reference any wage contingency. However, it does include the 85%/150% Rule which allows ESA to be in compliance if it falls fifteen percent below the 215 job threshold. Further, there is a provision under paragraph 3.4 in the RVA which requires ESA to maintain the project as proposed in the initial application and as outlined in Exhibit A. Also, Exhibit A provides that the Minimum Job Requirement for ESA is “215.” None of these provisions contain any limiting language suggesting that the Court adopt an interpretation that the “Minimum Job Requirement” must not only consist of 215 new jobs, but that the newly-hired employees must be paid the wages as contained in Exhibit B.

It is undisputed that after Council certified ESA to start claiming JDCs and, after ESA had submitted its three refund claims, Council brought the $11.58 wage contingency to ESA’s attention. At that time both parties agreed that ESA would amend its refund claims to remove any requests for JDCs based upon those newly-hired employees that had been paid less than $11.58 per hour. The evidence also shows that at the same time, ESA and Council agreed that the wage contingency, as agreed to at that time, would have no effect on ESA’s Minimum Job Requirement and that ESA could count all the new jobs it had created towards its Minimum Job Requirement threshold of 215.

Given that the only parties to the RVA are in agreement to the understandings of, operation of, and effect of the alleged $11.58 wage contingency, the Court finds no ambiguity in the final RVA as to any wage contingency. Accordingly, the Department’s interpretation of the RVA which would have required ESA to create a minimum of 215 new jobs all paying in excess of $11.58 per hour is rejected. The Court concludes that ESA complied with all the requirements contained in the RVA concerning the payment of wages to its newly-hired employees and that it did not contain any contingency concerning the payment of wages.

19. The court is mindful of decisional law which does not require it to seek an interpretation of a contract if it finds that the contract is not ambiguous. However, it is also aware of decisional law which requires it to ascertain the intent of the parties if it finds that a contract is ambiguous. In determining as a matter of law whether this contract is ambiguous, this Court must consider the contract as a whole, not from a review of isolated portions of the contract. Further, this Court must construe the contract as a whole, and different provisions dealing with the same subject matter must be read together.

When construed as a whole, the RVA clearly defines Minimum Job Requirement as 215 New Jobs.[26] Exhibit B is not referenced in any paragraph of the RVA and there is no provision in the RVA that could be read to impose a wage contingency of any sort on ESA. The $11.58 wage contingency was first agreed to by the parties after ESA began claiming JDCs. The Department’s interpretation of Exhibit B is not supported by the plain language of Exhibit B and the RVA as a whole.

Even if Exhibit B were held to create an ambiguity in the contract with regard to ESA’s Minimum Job Requirement, resort to the extrinsic evidence of intent in this case compels the same conclusion reached above. There was never any meeting of the minds as to a wage contingency. The sole understanding between the parties, as contained in the RVA and as shown to the Court in testimony and the documentary evidence, was that ESA had to create 215 new jobs, regardless of the wages it paid for such jobs, in order to meet the Minimum Job Requirement.

Except for the July 26, 2001 letter containing the wage contingency, none of the correspondence between the parties referenced a wage contingency. Indeed, Council certified ESA as meeting the Minimum Job Requirement of the RVA after it had created 230 new jobs, without consideration of the wages paid for those jobs.[27]

In addition, when Council ascertained that ESA had claimed JDCs for jobs paying less than $11.58 per hour, it instructed ESA to amend its Schedule C’s to remove those jobs from the amounts claimed as refunds. ESA agreed to do so. At the same time, Council advised ESA that it could continue to count those jobs toward the Minimum Job Requirement. This course of conduct between the parties belies any intent by them that an $11.58 per hour wage contingency applied to ESA’s Minimum Job Requirement obligations. The Department’s interpretation of the contract is contrary to the parties’ agreement when they executed the contract.

20. The Department’s final reason (third) for disallowing ESA’s refund claims was based upon its finding that ESA ceased to exist as a taxpayer (which, if it were factual, would constitute a violation of the RVA). However, this finding by the Department is not supported by the evidence.

The evidence, which was not contradicted, is that ESA’s parent company, Extended Stay America, Inc., was purchased by and merged into a Blackstone Group affiliate on May 11, 2004, and that ESA changed its name on the same date. However, ESA continued in existence as it had before. ESA continued to occupy its corporate headquarters facilities in Spartanburg, South Carolina, continued to employ the same South Carolina work force as before the sale and merger by its parent company, and continued to file withholding returns on those employees with the same federal employer identification number as before the sale and merger. ESA presented testimony from its corporate Vice-President and Controller, as well as documentation from the Delaware Secretary of State, South Carolina Secretary of State, and Department, which support its contention that it existed as a taxpayer in South Carolina during all of the relevant claims periods in this case.

Accordingly, the Court finds that neither the sale nor merger of ESA’s parent company, nor ESA’s conversion and name change to ESA Services, LLC, affected its status under the RVA. The RVA did not require ESA to give notice to Council or the Department of these actions. Therefore, the Department’s findings on these issues are not adopted by the Court.

21. The Court concludes that ESA has shown by the preponderance of the evidence that it has fully complied with its obligations under the RVA, that the RVA did not contain any wage contingency, and that it is entitled to claim the JDCs as shown on its amended Schedule C’s for the three quarters at issue in this case.

ORDER

Based upon the foregoing Findings of Fact and Conclusions of Law, it is hereby

ORDERED that ESA fully complied with its obligations under the RVA, that the RVA did not contain any wage contingency, and that ESA was entitled to claim the JDCs shown on its amended Schedule C’s for the three quarters at issue in this case; and it is further

ORDERED that the Department shall pay to ESA all sums due and owing on ESA’s 2^nd Quarter 2004 claim in the amount of $930,894.00, plus all statutory interest thereon, up to and through the date of payment; and it is further

ORDERED that ESA shall pay to the Department the amount of $2,833.00 for the 4^th Quarter 2003 and the amount of $3,397.00 for the 1^st Quarter 2004, plus all statutory interest thereon up to and through the date of payment.

AND IT IS SO ORDERED.

__________________________________

Marvin F. Kittrell

Chief Judge

February 9, 2009

Columbia, South Carolina