#27265-aff in pt & rev in pt-LSW
2015 S.D. 92
IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
****
MIDWEST RAILCAR REPAIR, INC., Appellee,
v.
SOUTH DAKOTA DEPARTMENT
OF REVENUE, Appellant.
****
APPEAL FROM THE CIRCUIT COURT OF
THE SECOND JUDICIAL CIRCUIT
MINNEHAHA COUNTY, SOUTH DAKOTA
****
THE HONORABLE DOUGLAS E. HOFFMAN
Judge
****
CATHERINE A. TANCK
SANDRA HOGLUND HANSON of
Davenport, Evans, Hurwitz
& Smith LLP
Sioux Falls, South Dakota Attorneys for appellee.
JOHN T. RICHTER of
South Dakota Department of Revenue
Pierre, South Dakota Attorneys for appellant.
****
CONSIDERED ON BRIEFS
ON AUGUST 31, 2015
OPINION FILED 11/24/15
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WILBUR, Justice
[¶1.] Taxpayer challenged the South Dakota Department of Revenue’s
certificate of assessment for use tax on parts and materials taxpayer used in its
service of railcars for two affiliated companies. In a separate proceeding, taxpayer
appealed the Department’s denial of its refund requests for sales tax paid on its
service of railcars received in South Dakota but delivered and used outside South
Dakota. The Department consolidated the proceedings for an administrative
hearing. The hearing examiner, and ultimately the Secretary of the Department,
affirmed the certificate of assessment and upheld the Department’s denial of
taxpayer’s refund requests. Taxpayer appealed, and the circuit court reversed the
Department’s May 2013 final decision related to both the certificate of assessment
and the Department’s denial of taxpayer’s refund requests. The Department
appeals. We affirm in part and reverse in part.
Background
[¶2.] Although procedurally this case involves an appeal from one
administrative proceeding, the case implicates two distinct tax issues. For ease of
reading, we separately describe the facts related to each.
1. Use Tax Assessed on Parts and Materials used by Midwest for
CarMath and M&C Leasing Railcars
[¶3.] Midwest Railcar Repair, Inc. is owned by Greg Carmon and is in the
business of servicing railcars for various customers. Carmon also owns CarMath
and M&C Leasing. CarMath and M&C Leasing own and lease railcars to third
parties. CarMath, M&C Leasing, and Midwest are independent companies.
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Midwest services railcars for CarMath and M&C Leasing. In its service of the
railcars, Midwest incorporates parts and materials from its inventory.
[¶4.] On September 27, 2006, the South Dakota Department of Revenue
issued Midwest a notice of intent to audit its sales and use tax licenses for the tax
periods covering October 2003 to October 2006. In November 2006, Department
employees Wayne Palmer and Willis Dreesman met with Midwest employee
Timothy Hoon and commenced the audit. During the audit, Auditor Palmer
informed Hoon that Midwest owed use tax on materials and parts incorporated into
railcars serviced for CarMath and M&C Leasing. Hoon replied that Midwest did
not pay use tax on materials and parts because the Department had issued Midwest
written advice in 1996 (1996 Advice Letter) that parts and materials used in its
modification of railcars were not subject to tax. 1 Hoon presented the letter to
Auditor Palmer. Auditor Palmer responded that the Department’s advice letter had
been overridden by this Court’s decision in Butler Machinery Co. v. South Dakota
Department of Revenue, 2002 S.D. 134, 653 N.W.2d 757.
[¶5.] In January 2007, the Department issued a certificate of assessment in
the amount of $94,046.08, which included $15,790.84 of interest. In March 2007,
Midwest filed a written request for an administrative hearing and, in April 2007, a
1. The letter provided in part:
If a railcar that is leased is purchased for lease purposes and is
later modified to meet lessee specifications, is there South
Dakota sales or use tax due on the costs of modification? Since
this is a modification and not a repair, and the lease agreement
itself would obviously be structured around this modification,
then the modification would be able to be purchased on a tax
unpaid, sale for resale basis.
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protective refund claim for taxes previously paid in the amount of $1,052,096.10. In
its request for an administrative hearing, Midwest claimed the certificate of
assessment was improper because the imposition of use tax is “contrary to the
written advice issued by the Department on September 4, 1996[.]” Midwest
asserted that the Department improperly assessed a use tax (1) on “items
purchased for resale or for lease[,]” (2) “on replacement parts installed or to be
installed in tangible personal property that will ultimately be held for resale or for
lease[,]” and (3) “on payments of one member of a controlled group to another
member of a controlled group” in violation of SDCL 10-45-20.1. 2 And Midwest
claimed that the South Dakota Constitution, United States Constitution, and the
Railroad Revitalization and Regulatory Reform Act, 49 U.S.C. § 11501(b)(4) (4-R
Act) prohibited the Department from assessing use tax.
[¶6.] Prior to an administrative hearing, Midwest commenced suit in federal
court seeking a declaration that South Dakota’s assessment of use tax violated the
4-R Act. Although Midwest did not prevail, this federal suit is relevant because the
Department argues to this Court that Midwest should be judicially estopped from
asserting that it modifies railcars when it argued during the federal litigation that
2. SDCL 10-45-20.1 provides:
Payments made by one member of the controlled group to
another member of a controlled group which represent an
allocation, reimbursement, or charge for services provided by or
rendered by the members of the controlled group are specifically
exempted from the provisions of this chapter and the
computation of the tax imposed by it. The exemption provided
in this section does not apply to the lease of tangible personal
property or any product transferred electronically unless the
sales or use tax has been paid on the property by the lessor.
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it repairs railcars. See Midwest Railcar Repair, Inc. v. S.D. Dep’t of Revenue &
Regulation, 659 F.3d 664 (8th Cir. 2011); Midwest Railcar Repair, Inc. v. S.D. Dep’t
of Revenue & Regulation, 2010 WL 2545952 (D.S.D.).
2. Midwest’s Service to Burlington Northern Railcars: The
Source of the Sale for Sales Tax Purposes
[¶7.] In addition to servicing railcars for CarMath and M&C Leasing,
Midwest services railcars for other companies, many of whom are located outside
South Dakota. Its service of these railcars was not the subject of the Department’s
notice of intent to audit or certificate of assessment. In fact, Midwest had been
paying South Dakota tax on its service of these railcars. In 2008, Midwest
requested written advice from the Department on the taxation of its service based
on SDCL 10-45-108. That statute provides that “a retailer shall source sales of
tangible personal property . . . and services to the location where the tangible
personal property . . . or service is received.” Id. Midwest’s written request
explained that, although its service to the railcars was performed at Midwest’s
business location in South Dakota, the railcars were brought to Midwest from a
location outside South Dakota by Burlington Northern Railroad and received by the
customer outside South Dakota via the railroad. Midwest believed the sale should
be sourced outside South Dakota. Midwest specifically excluded from its written
request the service it provided to railcars owned and leased by Burlington Northern
and its affiliates.
[¶8.] The Department issued Midwest written advice on October 23, 2008
(2008 Advice Letter), providing in part that “[t]he Department agrees with your
analysis that Midwest Railcar’s services would be sourced to the location to where
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the railcars are delivered by common carrier.” The Department advised that
“Midwest Railcar’s services of repairing and refurbishing railcars delivered by
common carrier to locations outside of South Dakota would not be subject to South
Dakota tax.” But the Department qualified that “this written advice does not apply
to railcars owned or leased by the common carrier railroad or its affiliates.”
[¶9.] Based on the 2008 Advice Letter, Midwest discontinued paying South
Dakota tax on non-Burlington Northern railcars and submitted nine refund claims.
Midwest’s refund requests included taxes it paid on its service to Burlington
Northern railcars. The Department granted Midwest’s refund requests for taxes
paid and applicable interest related to its service to non-Burlington Northern
railcars. But it denied the claims related to sales tax paid on Midwest’s service to
Burlington Northern railcars. According to the Department, Midwest’s repair
service to Burlington Northern railcars was subject to South Dakota tax because
Burlington Northern took possession of its railcars at Midwest’s business location in
South Dakota. In March 2010, Midwest appealed the Department’s denial of its
refund requests.
3. The Administrative Proceedings
[¶10.] The Department consolidated Midwest’s appeal from the denial of its
refund request with Midwest’s 2007 request for an administrative hearing
challenging the certificate of assessment for use tax on parts and materials
incorporated into Midwest’s service to CarMath and M&C Leasing railcars.
i. Certificate of Assessment on Midwest’s Parts and
Materials
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[¶11.] During the administrative hearing on October 25, 2012, Midwest
sought to admit invoices and lease explanations as evidence that parts and
materials used in its service to CarMath and M&C Leasing railcars were not subject
to use tax. The Department objected and asserted that SDCL 10-59-3 and -7
precluded Midwest from relying on the invoices and lease explanations because
Midwest did not present these documents to the auditor within sixty days of the
commencement of the audit. The hearing examiner overruled the Department’s
objection and accepted the exhibits into evidence.
[¶12.] The Department also challenged Midwest’s attempt to rely on the 1996
Advice Letter. The Department asserted that the letter was not issued to Midwest
specifically, but to certified public accountant Jim Pfeiffer. The Department
alternatively argued that even if Midwest had a right to rely on the 1996 Advice
Letter, Butler Machinery Co. overruled the advice and Midwest’s service is subject
to tax. In response, Midwest explained that, although the Department did not issue
the 1996 Advice Letter to Midwest directly, Greg Carmon had asked Pfeiffer to
request written advice from the Department on Midwest’s behalf. Pfeiffer
forwarded a copy of the letter to Carmon, and Midwest retained a copy of this letter
in its file. The hearing examiner did not specifically overrule the Department’s
objection.
ii. Refund for Repair Services to Burlington Northern
Railcars
[¶13.] Senior Revenue Agent Darrin Gerry testified that based upon the
Department’s training on sourcing rules, Midwest’s repair services to Burlington
Northern railcars implicated South Dakota sales tax. He noted that Midwest did
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not dispute that Burlington Northern, the purchaser, received its repaired railcars
at Midwest’s business location in South Dakota. Therefore, he opined that the
Department properly denied Midwest’s refund requests.
[¶14.] Greg Carmon testified that Midwest’s service to Burlington Northern
railcars was no different than that provided to non-Burlington Northern railcars.
Although Burlington Northern obtained possession of its railcars in South Dakota,
it could not use or place its railcars into service until the repairs were accepted or
rejected at Burlington Northern’s place of business outside South Dakota. Midwest
argued that the sale of repair services to Burlington Northern railcars should be
sourced in the same manner as Midwest’s sale to non-Burlington Northern railcars.
iii. Hearing Examiner’s Decision
[¶15.] On April 23, 2013, the hearing examiner issued a written proposed
decision. It found that “Midwest repairs and refurbishes railcars” and that the
railcars “are brought to Midwest on railroad tracks that are owned by Burlington
[Northern].” According to the hearing examiner, Burlington Northern “owns the
tracks, the railcars, and the computer that decides which cars go where. It is safe to
assume that Burlington has direction and control over where Burlington wants to
use its own railcars.” The hearing examiner concluded that Midwest’s repair
service to Burlington Northern railcars was subject to South Dakota tax. “When
Burlington picks up its own railcars, on its own tracks, routed through its own
computer, the taxes should be sourced to the location where Burlington takes
possession of the railcars, Midwest.”
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[¶16.] The hearing examiner further found that “Midwest is not exempt from
taxes on services provided to [CarMath] and M&C Railcar [sic] during the audit
period.” The hearing examiner considered the 1996 Advice Letter because, in the
examiner’s view, it was sent to “Jim Pfeiffer, an accountant for Midwest.” The
hearing examiner noted that the letter applied to “a railcar modified for lease
purposes” and advised that such service “is not subject to taxes.” But the hearing
examiner interpreted Butler Machinery Co. to override the 1996 Advice Letter. The
hearing examiner also held that parts and materials incorporated into the serviced
railcars were subject to tax, although Midwest, CarMath, and M&C Leasing are
part of the same controlled group under SDCL 10-45-20.1. The examiner said,
“When a part is removed from inventory and used, it is subject to a use tax.”
[¶17.] On May 9, 2013, the Secretary of the Department adopted the hearing
examiner’s proposed decision “in full” and declared “that the South Dakota
Department of Revenue shall be affirmed in all respects.” In June 2013, Midwest
appealed the Department’s final decision to the circuit court. It asserted among
other things that (1) it was entitled to a refund for sales tax paid on repair services
to Burlington Northern railcars shipped outside South Dakota, (2) parts and
materials incorporated into its service to CarMath and M&C Leasing railcars were
exempt from use tax based on the 1996 Advice Letter, and, in the alternative, (3)
incorporated parts and materials were exempt under ARSD 64:06:02:58.
iv. Circuit Court Proceedings and Decision
[¶18.] During the hearing before the circuit court on November 25, 2013, the
Department again objected to Midwest’s attempt to admit claims or evidence that it
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failed to submit or assert within sixty days of the commencement of the audit. See
SDCL 10-59-3, -7. The court overruled the Department’s objections and considered
the evidence and claims. On February 24, 2014, the circuit court issued an
incorporated memorandum decision, and, on August 27, 2014, findings of fact and
conclusions of law. The circuit court rejected the Department’s argument that
Midwest was precluded from raising any claim not asserted within sixty days of the
commencement of the audit because SDCL 10-59-3 and -7 “do not require the
taxpayer to ‘raise issues’ with the auditor in order to be able to challenge the final
assessment after the audit is completed.” The court found that “[t]here is no claim
that Midwest failed to provide any documents or records to the auditor in this case.”
[¶19.] The court reviewed the evidence admitted by Midwest during the
administrative hearing and found that “Midwest performs modifications and repairs
on railcars” owned by CarMath and M&C Leasing and “leased to others.” Relying
on the lease agreement descriptions, the court determined that “Midwest modifies
the railcars to meet those lease specifications.” The court rejected the Department’s
claim that Midwest could not rely on the 1996 Advice Letter because “[t]he record
seems pretty clear that the Department was aware that the advice was sought on
behalf of Midwest by its CPA as Midwest’s agent.” Next, the court held that the
hearing examiner and Department incorrectly interpreted Butler Machinery Co. to
override the 1996 Advice Letter. According to the circuit court, “[t]here is a
difference between using parts to maintain a rental fleet that is already under
lease, as opposed to using parts to build a product that conforms to the lease
description, as is the case for Midwest.” The court ruled that Midwest was entitled
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to continue to rely on the 1996 Advice Letter. The court held that “the parts
incorporated by Midwest into the refurbished railcars as part of the overall
restoration process” were “excluded from sales or use tax consequences” because the
Department had ruled that Midwest’s railcar services for CarMath and M&C
Leasing were exempt from tax under the controlled group exemption.
[¶20.] The circuit court next ruled that Midwest’s service to Burlington
Northern railcars should be sourced outside South Dakota. The court rejected the
Department’s claim that Burlington Northern could not act as both the shipping
company and purchaser. In reaching this interpretation, the court noted that
“[o]ther courts that have considered similar situations have ruled that a railroad
can be both a shipper and a buyer.” See Wyo. v. Dep’t of Revenue v. Union Pac. R.R.
Co., 67 P.3d 1176 (Wyo. 2003); Standard Oil Co. v. Johnson, 147 P.2d 577 (Cal.
1944); H-R Truck & Equip. Co. v. State Bd. of Equalization, 333 P.2d 151 (Cal. Ct.
App. 1958). According to the court, “[t]he testimony at the hearing was undisputed
that Burlington did not take possession of its railcars, other than in its capacity as a
shipping company, until they reached their destination as set forth in the waybill or
bill of lading” outside South Dakota. Thus, the court concluded that “both
Burlington and non-Burlington customers ‘received’ the repaired railcars at the out-
of-state destination specified by the customer[.]”
[¶21.] In October 2014, the circuit court issued an order reversing the
Department’s May 2013 final decision. The court ordered that Midwest “is entitled
to recover refunds of all of its overpayments of sales tax on out-of-state repair
services for the Burlington Northern” during and after the audit period. It also
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ordered that Midwest is entitled to recover the amount overpaid under SDCL 10-59-
9 prior to the appeal from the final decision of the Secretary of the Department on
use tax for its service to CarMath and M&C Leasing railcars, which amount
included $63,724.43 of use tax. And the court ordered that Midwest is entitled to
interest on the refund amounts under SDCL 10-59-24. The Department appeals
asserting the following issues for our review:
1. Whether the circuit court erred when it held that the
Department erred in assessing use tax on repair parts
that Midwest used to perform repair services when no
sales tax had ever been paid on those parts.
2. Whether the circuit court erred when it held that
Midwest’s repair services provided in South Dakota
should be sourced elsewhere for the audit period and
refund periods following the audit.
Standard of Review
[¶22.] Our standard of review of an administrative appeal is well settled.
Knapp v. Hamm & Phillips Serv. Co., Inc., 2012 S.D. 82, ¶ 11, 824 N.W.2d 785, 788
(citing SDCL 1-26-37). We will not overturn an agency’s findings of fact unless they
are clearly erroneous. Id. Conclusions of law are given no deference. Id. Questions
of statutory interpretation are reviewed de novo. Id.
Analysis
1. Use Tax Assessed on Parts and Materials used by Midwest
for CarMath and M&C Leasing Railcars
[¶23.] The Department challenges the circuit court’s decision to invalidate
the certificate of assessment for multiple reasons. First, it asserts that Midwest
failed to establish under SDCL 10-59-9 that the certificate of assessment was based
upon a mistake of fact or error of law. The Department also claims that the circuit
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court erred when it entered independent factual findings that Midwest modified and
refurbished the railcars. In the Department’s view, the record supported the
hearing examiner’s factual finding that Midwest performed “repairs[.]” Third, the
Department contends that Midwest should be judicially estopped from asserting
that it modifies railcars because, for four years during the federal litigation,
Midwest took the position that it repairs railcars. Lastly, the Department claims
that Midwest failed to timely submit its documentary evidence under SDCL 10-59-3
and -7 to support its claim that it performs modifications instead of repairs, and,
therefore, the evidence should not have been considered.
i. Failure to Timely Submit Evidence
[¶24.] The Department claims that Midwest failed to timely submit
documentary evidence. Midwest responds that the Department failed to preserve
the issue because the Department did not file a notice of review from the hearing
examiner’s decision to admit Midwest’s evidence. Midwest claims that, even if the
issue were preserved, Midwest’s documentary evidence was not required to be
submitted within sixty days of the commencement of the audit because the invoices
and written lease descriptions were not “required by law” to be submitted to the
auditor.
[¶25.] At the administrative hearing, Midwest offered (and the hearing
examiner admitted over the Department’s objection) documentary evidence related
to Midwest’s service to CarMath and M&C Leasing railcars. Midwest relied on this
evidence to establish that it did not repair CarMath and M&C Leasing railcars, but
instead modified the railcars in preparation for specific lease agreements.
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[¶26.] The Department’s notice of intent to audit informed Midwest that “[a]ll
documents evidencing reduction, deduction or exemption of tax not prepared for
presentation within sixty days of the date of commencement of the audit need not
be considered by the auditor.” See SDCL 10-59-3. Further, SDCL 10-59-7 provides
that “[a]ny documents or records required to be kept by law to evidence reduction,
deduction, or exemption from tax not prepared for presentation to the auditor
within sixty days from the commencement date of the audit do not have to be
considered by the auditor or the secretary.” It is undisputed that Midwest sought to
rely on this evidence to establish exemption from taxation and that Midwest did not
present this evidence within sixty days from the commencement date of the audit.
[¶27.] This Court has said that a taxpayer has no right to rely on evidence
offered after the sixty days required by SDCL 10-59-3, -7. Doctor’s Assocs., Inc. v.
Dep’t of Revenue & Regulation, 2006 S.D. 18, ¶ 22, 711 N.W.2d 237, 243; In re Pam
Oil, Inc., 459 N.W.2d 251, 257 (S.D. 1990). This is because “[t]o allow late submittal
of these materials long after the audit has ended would make the audit process
interminable and unworkable.” Doctor’s Assocs., Inc., 2006 S.D. 18, ¶ 22, 711
N.W.2d at 243. To preserve an administrative ruling for this Court’s review, an
appellee must file a notice of review at the circuit court level. Brown v. Douglas
Sch. Dist., 2002 S.D. 92, ¶¶ 31-32, 650 N.W.2d 264, 272-73; SDCL 1-26-36.1.
Because the Department did not file a notice of review, the issue is waived.
ii. Judicial Estoppel
[¶28.] We disagree that Midwest is judicially estopped from asserting that it
modifies CarMath and M&C Leasing railcars. Judicial estoppel “requires that a
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party’s prior inconsistent assertion be judicially adopted[.]” Bailey v. Duling, 2013
S.D. 15, ¶ 33, 827 N.W.2d 351, 362. The Department does not contend that the
federal court accepted Midwest’s position, nor did Midwest prevail in its federal
suit.
iii. Certificate of Assessment: Error of Law or Mistake of Fact
[¶29.] Department claims that Midwest cannot meet its burden to
demonstrate that the certificate of assessment contains a mistake of fact or error of
law under SDCL 10-59-9. According to the Department, because the record before
the hearing examiner supported the hearing examiner’s fact finding that Midwest
performs repairs, the circuit court clearly erred when it entered an independent fact
finding that Midwest modifies railcars. We note that the circuit court did not hold
an evidentiary hearing or consider witness testimony. The circuit court based its
findings of fact on its view of the administrative record and on the oral and written
arguments by counsel. Because we give no deference to the circuit court’s review of
the administrative record, we disregard the court’s finding that Midwest performs
modifications instead of repairs.
[¶30.] From our independent review of the hearing examiner’s proposed
decision, we cannot determine whether the hearing examiner made a specific
finding that Midwest performs repairs and not modifications. A reading of the
decision suggests the hearing examiner made no distinction. In the examiner’s
view, this Court’s holding in Butler Machinery Co. applied to any service involving a
lease agreement and the use of parts or materials for lease purposes. Indeed, in
ruling that Midwest could no longer rely on the 1996 Advice Letter, the hearing
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examiner noted that the letter “indicated that a railcar modified for leased purposes
is not subject to taxes[.]” (Emphasis added.)
[¶31.] We need not decide whether Midwest in fact performs modifications or
repairs to CarMath and M&C Leasing railcars. The issue is whether the hearing
examiner correctly held Midwest could no longer rely on the 1996 Advice Letter
because of this Court’s decision in Butler Machinery Co. This is because, in order to
rule that Midwest could no longer rely on the 1996 Advice Letter, the hearing
examiner had to first conclude that Midwest’s service to CarMath and M&C
Leasing railcars fell within the scope of the 1996 Advice Letter. 3 If Butler
Machinery Co. did not overrule the 1996 Advice Letter, then Midwest would be
entitled to continue to rely on that advice and its service to CarMath and M&C
Leasing railcars would continue to be exempt from taxation.
[¶32.] In Butler Machinery Co., we were asked to determine whether the
parts and materials used by Butler to maintain and repair its rental fleet were
subject to use tax. 2002 S.D. 134, ¶ 2, 653 N.W.2d at 759. Butler owned a rental
fleet of heavy construction equipment and leased the equipment to its customers.
3. Under SDCL 10-59-27:
Any taxpayer who has received written advice from the
Department of Revenue concerning the taxability of transactions
shall be allowed to rely on such advice when filing tax returns.
. . . The department may not maintain a position against a
taxpayer which is inconsistent with a prior written opinion
issued to the same taxpayer unless rescinded by the
department, by a change in statutory law or reported case law,
by a change in federal interpretation in cases if the department’s
written advice was predicated upon a federal interpretation or
by a change in material facts or circumstances relating to the
taxpayer.
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As part of the lease agreements, Butler maintained and repaired the equipment
with parts and materials out of its inventory. In deciding a rental price, Butler
included the expenses it anticipated it would incur to repair the equipment. Id. ¶ 3.
[¶33.] On appeal to this Court, Butler argued that its repair parts were not
subject to tax because (1) sales tax had been paid on the gross receipts from the
lease rental income (retail sale), (2) the repair parts were actually leased to
customers and therefore exempt, and (3) the use of the repair parts should only be
taxed once, which here was sales tax paid on the gross receipts on the income from
the lease agreements. Id. ¶¶ 9-11. We held that use tax was due in light of “the
true nature of the transaction between Butler and its customers.” Id. ¶ 12. Under
the terms of the lease agreements, the customer received from Butler both “a
working piece of equipment” and “the right to use that equipment for its intended
purpose for a given period of time.” Id. With this right to use the equipment,
“Butler has an obligation to keep the leased equipment in working order[.]” Id.
¶ 13.
[¶34.] Here, on the other hand, the leased railcars are not Midwest’s rental
fleet. CarMath and M&C Leasing own and lease the railcars. In fact, Auditor
Palmer agreed that Midwest does not own the railcars: “Are you aware that
Midwest Railcar doesn’t own any railcars, it only services them? Yes.” There is no
evidence that Midwest entered into any agreement related to the railcars to provide
a third party the right to use the railcar for its intended purpose for a given period
of time or that Midwest had a continuing obligation to keep the railcars in specific
working order as part of its service.
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[¶35.] Butler Machinery Co. did not create a bright-line rule that all parts
and materials used for any lease purposes are subject to taxation. It was decided on
the nature of the transaction between Butler and its customers. Because Butler’s
lease-agreement relationship with its customers is not akin to the relationship
between Midwest and CarMath and M&C Leasing, the hearing examiner erred
when it interpreted Butler Machinery Co. to overrule the Department’s 1996 Advice
Letter to Midwest. Midwest is entitled to continue to rely on the 1996 Advice
Letter. And Midwest’s service to CarMath and M&C Leasing railcars is not subject
to taxation. The circuit court correctly ruled that Midwest is entitled to a refund of
the amount of use tax overpaid on its service to CarMath and M&C Leasing
railcars. 4
iv. Refund Calculation
[¶36.] The Department claims that Midwest is not entitled to a refund
because the circuit court’s refund calculation is not supported by the record. The
circuit court did not reverse the Department’s certificate of assessment in full. It
ordered the Department to refund Midwest the use tax Midwest overpaid related to
its service to CarMath and M&C Leasing railcars. The court then directed Midwest
to prepare a proposed order consistent with the court’s decision, including an award
of interest under SDCL 10-59-24. The certificate of assessment had
4. We need not address the circuit court’s alternative ruling on the controlled
group exception because of our holding that Midwest is entitled to rely on the
1996 Advice Letter.
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imposed $78,255.24 in use tax and $15,790.84 in interest. Midwest’s proposed order
requested a refund of $63,724.43 in tax and $15,790.84 in interest.
[¶37.] It is undisputed that Midwest erroneously requested the interest
imposed based on the original assessment. To address this error, the circuit court
held a telephonic hearing. During the hearing, Midwest offered to waive an award
of interest. The Department argued that Midwest’s actual refund request—
$63,724.43—lacked evidentiary support. Midwest responded that its calculation
was based on Midwest employee Kristi Saxlund’s testimony before the hearing
examiner. Midwest emphasized that the Department did not cross-examine
Saxlund on her calculations. The Department replied that the circuit court could
not rely on Saxlund’s testimony because Midwest did not offer Saxlund’s opinion
within sixty days of the commencement of the audit. See SDCL 10-59-3, -7. The
Department asked the circuit court to affirm the certificate of assessment in full
because Midwest failed to meet its burden to prove that the certificate of
assessment was incorrect under SDCL 10-59-9. Ultimately, the circuit court
ordered that Midwest was entitled to recover $63,724.43 in use tax representing the
amount overpaid prior to the appeal of the final decision of the Secretary.
[¶38.] On appeal, the Department asks this Court to affirm the certificate of
assessment in full because, in the Department’s view, Saxlund’s testimony is not
substantial credible evidence sufficient to overcome the prima facie correctness of
the certificate of assessment. See SDCL 10-59-9. The Department avers Midwest is
not entitled to a refund in any respect because it failed to exhaust its administrative
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remedies when it did not present evidence during the audit process specifically
related to the use tax assessed on its repair to CarMath and M&C Leasing railcars.
[¶39.] We previously ruled that the Department waived its right to assert
that Midwest could not rely on the evidence submitted during the administrative
hearing related to its service to CarMath and M&C Leasing railcars. The
Department did not file a notice of review after the Secretary affirmed the hearing
examiner’s decision in full. Further, based on the fact Midwest is entitled to
continue to rely on the 1996 Advice Letter, the certificate of assessment is incorrect
and Midwest is entitled to a refund of the use tax it overpaid related to its service to
CarMath and M&C Leasing railcars. The question remains whether to remand the
matter to the hearing examiner to determine the amount of use tax overpaid by
Midwest for its service to CarMath and M&C Leasing railcars or to affirm the
circuit court’s order directing the Department to refund Midwest $63,724.43 in
overpaid use tax.
[¶40.] Under SDCL 1-26-36, the circuit “court may affirm the decision of the
agency or remand the case for further proceedings.” The court also has the
discretion to “reverse or modify the decision” of the Department. Id. Here, the
court correctly determined that the Department improperly assessed use tax on
Midwest’s parts and materials used to service CarMath and M&C Leasing railcars.
The court then exercised its discretion and reversed and modified the Department’s
May 2013 final decision. The Department does not challenge the court’s discretion
under SDCL 1-26-36. Nor does the Department present counter evidence related to
the use tax on Midwest’s service to CarMath and M&C Leasing railcars. We affirm
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the circuit court’s modification of the Department’s May 2013 final decision and
ruling that “Midwest Railcar Repair, Inc. is entitled to recover a refund of the
amount overpaid pursuant to SDCL 10-59-9 prior to appeal from the Final Decision
of the Secretary, representing use tax on modification and refurbishments for
CarMath and M&C Leasing, which amount included $63,724.43 of use tax.”
2. Midwest’s Service to Burlington Northern Railcars: The
Source of the Sale for Sales Tax Purposes
[¶41.] In South Dakota, “a retailer shall source sales of tangible personal
property . . . and services to the location where the tangible personal property . . . or
service is received.” SDCL 10-45-108. Generally, “[i]f the product is received by the
purchaser at a business location of the seller, the sale is sourced to that business
location.” ARSD 64:06:01:63(1). “The sourcing rules in §§ 64:06:01:62 to
64:06:01:68, inclusive, apply regardless of the characterization of a product as
tangible personal property, a product transferred electronically, or a service.”
ARSD 64:06:01:61 (emphasis added). “Product” is defined to include “services[.]”
ARSD 64:06:01:62(2). “Receive” is defined to include “the taking possession of
tangible personal property[.]” Id. at (1)(a). “Receive” also means “making first use
of services[.]” Id. at (1)(b). However, “[t]he term, receive, does not include
possession by a shipping company on behalf of the purchaser.” Id. at (1) (emphasis
added).
[¶42.] Here, it is undisputed that Midwest provides its repair service to
Burlington Northern railcars at Midwest’s business location in South Dakota. It is
also undisputed that Burlington Northern takes physical possession of its railcars
at Midwest’s business location in South Dakota. Thus, under SDCL 10-45-108 the
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sale shall be sourced to South Dakota—the serviced tangible personal property
(railcar) is received by the purchaser (Burlington Northern) at the business location
of the seller (Midwest). See ARSD 64:06:01:62(1)(a).
[¶43.] Midwest, however, argues that it is immaterial that Burlington
Northern takes physical possession of the railcar in South Dakota because Midwest
provides a repair service, not tangible personal property. It claims that its service
implicates the alternate definition of “Receive.” Under ARSD 64:06:01:62(1)(b),
“Receive” is defined to include “making first use of services.” In Midwest’s view,
Burlington Northern could not make “first use” of Midwest’s repair service until
Burlington Northern delivered the railcar to the destination listed on the waybill or
bill of lading—a location outside South Dakota. Midwest also contends that federal
law prohibits Burlington Northern from putting the railcar to use until it is
inspected for safety, which happens at a location outside South Dakota. Midwest
relies on “The Rules and Procedures of Streamlined Sales Tax Governing Board,
Inc.,” which is a document the Department has used to provide guidance for
sourcing determinations.
[¶44.] Whether a statute or regulation imposes a tax under a given factual
situation is a question of law; we give no deference to the circuit court or agency’s
interpretation. TRM ATM Corp. v. S.D. Dep’t of Revenue & Regulation, 2010 S.D.
90, ¶ 3, 793 N.W.2d 1, 3. The same rules of construction apply to our review of
administrative regulations. First Gold, Inc. v. S.D. Dep’t of Revenue & Regulation,
2014 S.D. 91, ¶ 6, 857 N.W.2d 601, 603-04. We construe the statute or regulation
liberally in favor of the taxpayer. Id. at 604. Yet, we give the words in the statute
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or administrative rule “a reasonable, natural, and practical meaning to effectuate
the purpose of the statute.” Robinson & Muenster Assocs. v. S.D. Dep’t of Revenue,
1999 S.D. 132, ¶ 7, 601 N.W.2d 610, 612.
[¶45.] In full, ARSD 64:06:01:62 provides:
Terms used in §§ 64:06:01:61 to 64:06:01:65, inclusive, mean:
(1) “Receive,”
(a) the taking possession of tangible personal
property;
(b) making first use of services; or
(c) taking possession of or making first use of any
product transferred electronically, whichever comes
first.
The term, receive, does not include possession by a
shipping company on behalf of the purchaser;
(2) “Product,” any tangible personal property, any product
transferred electronically, including software delivered
electronically, or services, whether sold, leased, or rented.
The plain language of this regulation does not support Midwest’s view that its
service to Burlington Northern railcars cannot implicate either definition of
“Receive” under ARSD 64:06:01:62(1). On the contrary, the rule uses the word “or”
and provides alternate meanings of “Receive.” If Burlington Northern either “takes
possession of tangible personal property” in South Dakota or is “making first use of
services” in South Dakota, receipt occurs in South Dakota. It cannot be disputed
that Burlington Northern took possession of the railcar (tangible personal property)
in South Dakota. Moreover, the product here is not merely a service; it is a service
to a railcar—tangible personal property. Under the unambiguous language of
ARSD 64:06:01:62(1), Burlington Northern receives the serviced railcar at
Midwest’s business location in South Dakota.
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[¶46.] Nonetheless, Midwest contends that even if we conclude that
Burlington Northern receives the railcar in South Dakota, the exclusion to the
definition of “Receive” applies. That exclusion provides: “The term, receive, does not
include possession by a shipping company on behalf of the purchaser[.]” Id.
According to Midwest, when Burlington Northern picks up the railcar in South
Dakota, it possesses the railcar as a shipping company and as the purchaser. It
then directs this Court to Wyoming Department of Revenue, 67 P.3d 1176, Standard
Oil Co., 147 P.2d 577, and H-R Truck & Equipment Co., 333 P.2d 151, for the
proposition that a common carrier can act as both the shipping company and buyer
when the destination for the repaired railcar is out of state.
[¶47.] The Department responds that the plain language of ARSD
64:06:01:62(1) does not support the interpretation that Burlington Northern can be
both the shipping company and purchaser. In the Department’s view, “on behalf of”
contemplates one person doing something for someone else. The Department
argues that the cases relied on by Midwest are irrelevant in light of South Dakota’s
different tax structure.
[¶48.] From our review of the plain language of ARSD 64:06:01:62(1),
Burlington Northern cannot be both the shipping company and the purchaser. The
language unambiguously contemplates a contract between two parties—a shipping
company and a purchaser. Black’s Law Dictionary defines a “shipper” as 1.
“Someone who ships goods to another. 2. Someone who contracts with a carrier for
the transportation of cargo.” Shipper, Black’s Law Dictionary (10th ed. 2014).
When used as a “legal term of art, the shipper may not be the person who owns the
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cargo, but an agent or an independent contractor[.]” Id. Therefore, Burlington
Northern cannot be in physical possession of its railcar while simultaneously
possessing the railcar on behalf of itself. To conclude otherwise would require a
strained and unreasonable interpretation of the regulatory language. See Citibank,
N.A. v. S.D. Dep’t of Revenue, 2015 SD 67, ¶ 12, 868 N.W.2d 381, 387; Border States
Paving, Inc. v. S.D. Dep’t of Revenue, 437 N.W.2d 872, 877 (S.D. 1989) (Wuest, C.J.,
dissenting) (we do not attempt a strained or forced construction when the language
is clear on its face).
[¶49.] Also, nothing in Wyoming Department of Revenue, 67 P.3d 1176,
Standard Oil Co., 147 P.2d 577, or H-R Truck & Equipment Co., 333 P.2d 151,
compels a different conclusion. Unlike South Dakota’s sourcing law, Wyoming law
specifically considers the “intent of the vendor” to transfer title of the product to the
purchaser out of state. Wyoming Dep’t of Revenue, 67 P.3d at 1185-86. Similarly,
the intent of the common carrier that delivery not take place until the product
reaches its out-of-state destination was relevant in Standard Oil Co., 147 P.2d at
580 and H-R Truck & Equipment Co., 333 P.2d at 153. Because Burlington
Northern received the repaired railcars in South Dakota, the hearing examiner
properly sourced the sale to South Dakota and imposed tax under SDCL 10-45-108.
Conclusion
[¶50.] We affirm the circuit court’s conclusion that Butler Machinery Co. did
not override the 1996 Advice Letter. Because Midwest is entitled to continue to rely
on the advice, we need not consider whether Midwest’s service is exempt from
taxation under the controlled group exemption and exemption-related regulations.
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We affirm the court’s order that “Midwest Railcar Repair, Inc. is entitled to recover
a refund of the amount overpaid pursuant to SDCL 10-59-9 prior to appeal from the
Final Decision of the Secretary, representing use tax on modifications and
refurbishments for CarMath and M&C Leasing, which amount included $63,724.43
of use tax.” And we affirm the court’s ruling that Midwest is entitled to “interest on
these refund amounts, under SDCL 10-59-24, the amount of which interest shall be
calculated and depend upon the date it is ultimately refunded[.]” But we reverse
the circuit court’s order that Midwest “is entitled to recover refunds of all of its
overpayments of sales tax on out-of-state repair services for the Burlington
Northern” during and after the audit period.
[¶51.] Affirmed in part and reversed in part.
[¶52.] GILBERTSON, Chief Justice, and ZINTER, SEVERSON, and KERN,
Justices, concur.
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