#27413-a-JMK
2016 S.D. 47
IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
****
BLACK HILLS TRUCK &
TRAILER, INC.
License No. 1020-0886-ST,
DAKOTA VOLVO TRUCKS, INC.
License No. 1015-3946-ST,
NORTH CLIFF USED & REBUILT
TRUCK PARTS, INC.
License No. 1016-4988-ST,
SFK LEASING, INC.
License No. 1015-0596-ST,
SIOUX FALLS KENWORTH, INC.
License No. 1015-4684-ST,
SIOUX FALLS TRAILER SALES,
INC. (SIOUX FALLS, SD)
License No. 1016-0511-ST,
and
SIOUX FALLS TRAILER SALES,
INC. (WATERTOWN, SD)
License No. 1016-0513-ST, Appellants,
v.
SOUTH DAKOTA
DEPARTMENT OF REVENUE, Appellee.
****
APPEAL FROM THE CIRCUIT COURT OF
THE SECOND JUDICIAL CIRCUIT
MINNEHAHA COUNTY, SOUTH DAKOTA
****
THE HONORABLE DOUGLAS E. HOFFMAN
Judge
****
CONSIDERED ON BRIEFS
ON JANUARY 11, 2016
OPINION FILED 06/22/16
DAVID L. EDWARDS
Breit Law Office, PC
Sioux Falls, South Dakota Attorneys for appellants.
ROSA YAEGER of
South Dakota
Department of Revenue
Pierre, South Dakota Attorneys for appellee.
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KERN, Justice
[¶1.] The South Dakota Department of Revenue subjected Black Hills Truck
& Trailer and other corporations owned by North American Truck & Trailer, Inc.,
(collectively Taxpayers) to a sales-and-use-tax audit. The audit uncovered errors
regarding Taxpayers’ reporting of use tax. The Department assessed Taxpayers for
unpaid use taxes. Taxpayers paid the assessment under protest and demanded an
administrative hearing. At the hearing, Taxpayers argued that the shop supplies
assessed were exempt from use tax because they were purchased for resale to
customers. Taxpayers offered an invoice demonstrating a typical transaction in
support of their position. The hearing examiner declined to consider the invoice
because Taxpayers submitted it more than 60 days after the audit began, in
violation of SDCL 10-59-7. Upon appeal, both the Department and the circuit court
affirmed the exclusion of the exhibit and the assessment. Taxpayers appeal. We
affirm.
Facts
[¶2.] North American Truck & Trailer, Inc., owns Black Hills Truck &
Trailer, Inc., and several other truck and trailer dealerships in various cities in
South Dakota. 1 These dealerships perform multiple services related to the lease,
sale, and repair of trucks, trailers, and similar equipment.
1. Taxpayers include Black Hills Truck & Trailer, Inc., Dakota Volvo Trucks, -
Inc., North Cliff Used & Rebuilt Truck Parts, SFK Leasing, Inc., Sioux Falls
Kenworth, Inc., Sioux Falls Trailer Sales, Inc. (Sioux Falls, S.D.), and Sioux
Falls Trailer Sales, Inc. (Watertown, S.D.).
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[¶3.] The Department began its audit of each corporation in September
2012. It requested Taxpayers’ tax returns, worksheets, sales reports, expense
invoices, sales invoices, and other documents for the reporting periods of May 2009
through April 2012. During the audit, the Department narrowed its focus to a one-
year time frame within the audit period. The audit uncovered what the
Department believed to be use-tax errors regarding shop supplies used by
Taxpayers in their repair service. Taxpayers did not pay sales tax on the supplies
at the time of purchase or use tax at the time the supplies were used and consumed.
The Department attributed the mistakes to human error rather than intent to
evade taxation. The Department assessed Taxpayers $27,691.91 in unpaid use tax.
[¶4.] Taxpayers paid the tax under protest and requested an administrative
hearing. At the hearing on May 30, 2013, Taxpayers challenged the use tax
assessment and offered exhibits in support of their position. The Department
objected to ten of Taxpayers’ exhibits because Taxpayers did not present them to
the auditor within 60 days from the beginning of the audit as required by SDCL 10-
59-7. The Department also objected because several of the exhibits were dated
outside of the audit period. The hearing examiner excluded the exhibits because
they were not timely presented.
[¶5.] During the hearing, the Department contended that Taxpayers had
purchased shop supplies without payment of sales tax. To determine if use tax was
due, the Department divided the shop supplies into various categories. These
included shop supplies consumed during the repair of customer vehicles, shop
supplies used to repair customer vehicles that become part of the vehicle, and
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maintenance items used to repair Taxpayer-owned vehicles. Examples of shop
supplies consumed during a repair service included: sand paper, glass cleaner, dust
masks, nitrile gloves, razor blades, thinner or reducer, rubbing compound, VIS
polish, bars and buffing wheels, sandblasting sand, packing tape, masking tape,
solvent, shop towels, brake cleaner, carb cleaner, and drill bits. Shop supplies that
became part of the customer’s vehicle include products such as filters and
windshield sealant. Maintenance items are things such as oils, antifreeze, and
other fluids used on Taxpayer-owned vehicles.
[¶6.] The Department argued that use tax was due and owing on supplies
used and consumed in the repair of customer vehicles. The Department did not
assess use tax on shop supplies that were put into customers’ vehicles and left the
shop with the vehicles. But the Department assessed use tax on maintenance items
put into Taxpayer-owned vehicles either being prepared for resale or for items used
to repair leased vehicles. In response, Taxpayers alleged that none of the items
were subject to use tax because they were all purchased for resale and therefore
exempt.
[¶7.] When analyzing whether use tax was due, the hearing examiner
considered in part whether the supplies became part of the customer’s vehicle as
defined in ARSD 64:06:02:58. 2 The hearing examiner affirmed the assessment,
2. ARSD 64:06:02:58 provides:
All charges for repair services, including maintenance
agreements, are subject to sales tax. Repair of personal
property or any product transferred electronically is a service in
which property is restored to or near its former condition or
(continued . . .)
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finding that the Department properly distinguished between the categories of
supplies and assessed the tax due on each.
[¶8.] Taxpayers appealed the hearing examiner’s decision to the circuit
court. Taxpayers first alleged that because the Department had unrestricted access
to all of their records during the audit, prior submission of the exhibits was
unnecessary. The circuit court agreed regarding most of the exhibits holding that
all but four were admissible pursuant to SDCL 10-59-7. It held that Exhibit 18—a
sales invoice that described the agreement for repair services including the cost of
supplies used during the repair—was not from the designated audit period and was
not material evidence. Therefore, the circuit court affirmed the Department’s
decision to exclude Exhibit 18 under the statute.
[¶9.] Taxpayers next argued that the supplies used were exempt from use
tax because they were actually resold to customers in the regular course of business.
The circuit court disagreed. It reasoned that Taxpayers were selling the repair
_________________________________
(. . . continued)
usefulness. A person engaged in the repair business must have
a sales tax license and report tax on the gross receipts.
Items purchased by a repair person which become part of the
repaired property may be purchased exempt from sales tax by
the repair person. The charges to the customer for the parts and
service are taxable. Tools, equipment, and supplies consumed
by a repair person are subject to sales tax when purchased. A
business is liable for use tax on all items of tangible personal
property and any product transferred electronically used by the
business even though an item may have been especially
fabricated to produce a product for a particular customer, is
completely consumed in completing the customer’s order, and
the cost of the item is included in the charge to the customer.
A person who occasionally does some repair work but does not
hold out to the public that the person does repair work is not
considered to be in a repair business subject to sales tax.
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service itself, not the supplies used during the service. The circuit court affirmed
the Department’s assessment of use tax.
[¶10.] On appeal, Taxpayers raise two issues: 3
1. Whether the Hearing Examiner erred by refusing to consider
Exhibit 18.
2. Whether the Hearing Examiner erred by affirming the
Department’s assessment of use tax on shop supplies used
during the repair process.
Standard of Review
[¶11.] The standard of review governing an agency’s decision is set forth in
SDCL 1-26-36. We “give great weight to the findings of the agency and reverse only
when those findings are clearly erroneous in light of the entire record.” Williams v.
S.D. Dep’t of Agric., 2010 S.D. 19, ¶ 5, 779 N.W.2d 397, 400. The determination of
whether a statute imposes a tax under a given factual scenario is a question of law,
and our review is de novo. We give no deference to any conclusion of law reached by
the circuit court or the Department. Paul Nelson Farm v. S.D. Dep’t of Revenue,
2014 S.D. 31, ¶ 7, 847 N.W.2d 550, 554. “Statutes exempting property from
taxation should be strictly construed in favor of the taxing power.” Butler Mach. Co.
v. S.D. Dep’t of Revenue, 2002 S.D. 134, ¶ 6, 653 N.W.2d 757,759 (quoting Robinson
& Muenster Assocs., Inc. v. S.D. Dept. of Revenue, 1999 S.D. 132, ¶ 7, 601 N.W.2d
610, 612). “[T]he taxpayer has the burden of proving entitlement to a statutory
3. Taxpayers raised five issues in their docketing statement but elected to brief
only two issues in this appeal. Other than by a brief reference, Taxpayers did
not address maintenance items or repair software in their appellate brief. As
“we will consider only those issues that the parties actually briefed[,]” these
issues are waived. Daily v. City of Sioux Falls, 2011 S.D. 48, ¶ 10 n.6,
802 N.W.2d 905, 910 n.6.
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exemption.” In re State Sales & Use Tax Liab. of Pam Oil, Inc., 459 N.W.2d 251,
255 (S.D. 1990).
Analysis and Decision
[¶12.] 1. Whether the Hearing Examiner erred by refusing to consider
Exhibit 18.
[¶13.] This issue concerns whether Exhibit 18, a sample invoice from outside
the audit period, should have been received into evidence by the hearing examiner.
Both SDCL 10-59-3 and 10-59-7 notify taxpayers that they must provide to the
Department all documents evidencing reduction, deduction, or exemption of
taxation to the auditor within 60 days from initiation of the audit. 4 It is undisputed
that Taxpayers herein were given proper notice. The Department is not required to
consider documents presented more than 60 days after the commencement of the
audit. However, additional pertinent documents “shall be considered[,]” if the
documents are material, there is a good reason for the failure to present them
within the proper timeframe, and they are submitted within a reasonable time prior
to any hearing scheduled pursuant to SDCL 10-59-9. SDCL 10-59-7.
4. SDCL 10-59-3 requires each notice of intent to audit include the following
statement:
All records, books, and documents must be prepared for
presentation to the auditor on the date of commencement of the
audit. All 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.
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[¶14.] Taxpayers argue that the invoice meets all three requirements of
SDCL 10-59-7. 5 With reference to the first factor, they assert that the exhibit was
material because it illustrated the resale of the products to the customer in support
of their claim that the products were exempt from use tax. Exhibit 18 states, “We
have included a charge equal to 8% of total cost of parts and labor, not to exceed
$350.00, in the misc. charges amount for shop supplies used in connection with this
repair.” Taxpayers argue that other invoices considered by the Department did not
explain the charges in such detail.
[¶15.] While it is true that Exhibit 18 provides more information about the
charges, it does not more clearly illustrate Taxpayers’ resale theory compared to
other exhibits that were considered during the audit. It also describes a transaction
that occurred outside the period of the audit. The admission of Exhibit 18 would
not have significantly affected the hearing examiner’s analysis. As it would not
have added anything substantial, it was not material. Because Taxpayers failed to
5. SDCL 10-59-7 provides in part:
Any 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. However, additional pertinent
papers or documents shall be considered if all the following
apply:
(1) The additional pertinent papers or documents are
material;
(2) There were good reasons for failure to present other
pertinent papers or documents as referenced in § 10-45-45
or 10-46-43, within the prescribed time period; and
(3) The additional pertinent papers or documents are
submitted within a reasonable time period prior to any
hearing scheduled pursuant to § 10-59-9.
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establish that the exhibit was material, it is unnecessary to analyze the remaining
criteria. We affirm the hearing examiner’s decision to exclude Exhibit 18 as
untimely.
[¶16.] 2. Whether the Hearing Examiner erred by affirming the
Department’s assessment of use tax on shop supplies used during
the repair process.
[¶17.] SDCL 10-45-2 imposes a broad-based sales tax of four-and-one-half
percent. 6 The sales tax applies to a business’s gross receipts from the retail sale of
tangible personal property to customers or users unless specifically exempted.
Likewise, the gross receipts from repair services are taxable pursuant to SDCL 10-
45-5. If sales tax was not included in the price of a transaction involving taxable
property, the user of such property is then required to pay use tax. See SDCL 10-
46-2; SDCL 10-46-4; Sioux Falls Newspapers, Inc. v. Sec’y of Revenue, 423 N.W.2d
806, 810 (S.D. 1988).
[¶18.] Use tax is required by SDCL 10-46-2, which provides in part that “an
excise tax is hereby imposed on the privilege of the use, storage, and consumption in
this state of tangible personal property[.]” “Use” is defined as “the exercise of right
or power over tangible personal property” but does not “include the sale of that
property in the regular course of business.” SDCL 10-46-1(17). Use tax is
complementary and supplemental to sales tax to ensure that property sold or used
in the state will be taxed once for the support of state government. Sioux Falls
6. When Taxpayers filed this appeal, the rate was four percent. The state
legislature increased the amount during the 2016 legislative session.
2016 S.D. Sess. Laws ch. 65, § 1.
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Newspapers, Inc., 423 N.W.2d at 810, n. 3. “We understand this to mean that use
tax . . . generally applies to retail transactions and not to transactions where items
are purchased for resale.” Id. at 810; see also Paul Nelson Farm, 2014 S.D. 31, ¶ 12,
847 N.W.2d at 555.
[¶19.] As the shop supplies were purchased without paying sales tax, the
Department issued use-tax assessments on certain transactions. As referenced
above, the Department when examining the transactions divided the supplies into
categories. One category included supplies used and consumed in the repair
process, such as sandpaper and rubber gloves. The Department distinguished these
supplies from those that actually become part of the customer’s vehicle such as
windshield sealant. The Department did not assess use tax on those supplies that
became part of a customer’s vehicle and left the shop with the vehicle. Maintenance
items used on Taxpayer-owned vehicles were assessed but are not appealed herein.
The only tax assessed that remains at issue is that on supplies used and consumed
in the repair process.
[¶20.] Taxpayers contend that the shop supplies are exempt from use tax
because they are resold to customers as a part of Taxpayers’ repair services.
Taxpayers claim that they have a service contract with their customers—the sales
invoice—which illustrates this charge to their customers for miscellaneous supplies.
They submit this “resale” of shop supplies occurs in the regular course of business
and is therefore exempt from use tax. Because their customers pay sales tax on the
entire bill, Taxpayers also contend that the use-tax assessment constitutes “double
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taxation.” In support of their position they rely primarily on our holdings in Paul
Nelson Farm and Robinson.
[¶21.] To determine whether use tax is due we first determine whether a sale
has occurred in the regular course of business. “Sale” is defined as “any transfer,
exchange, or barter, conditional or otherwise, in any manner or by any means
whatsoever, for a consideration[.]” SDCL 10-45-1(12). We recently discussed the
definition of “sale” in Paul Nelson Farm. In that case, customers purchased a
hunting package from an all-inclusive hunting lodge. 2014 S.D. 31, 847 N.W.2d
550. The package included unlimited food, beverages, and ammunition during the
stay. Id. ¶ 2, 847 N.W.2d at 552. The Department assessed use tax on all three
items, but the taxpayer alleged the goods were purchased for resale. Id. ¶ 4, 847
N.W.2d at 553. In analyzing the issue, we determined that the actual transfer of
goods determines whether a sale occurs, even if the consideration paid by the
customer is mostly for a service. Id. ¶ 14, 847 N.W.2d at 555. Focusing on the
“essence of the transaction,” we agreed with the taxpayer, found that the goods were
sold in the regular course of business, and reversed the assessment. We found
relevant that the sale occurred as a steady and uniform occurrence at the hunting
lodge. Id. ¶ 26, 847 N.W.2d at 558-59. We noted that while the hunting services
rendered were likely the most important component of the sale, the customers also
placed value on the tangible personal property they received. Id. ¶ 17, 847 N.W.2d
at 556.
[¶22.] Taxpayers’ reliance on Paul Nelson Farm is unpersuasive as that case
is distinguishable from the facts of this case. The customer here gains no right or
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interest in the supplies that are used and consumed during the Taxpayers’ repair
process. The customer does not drive out of the repair shop with pieces of
sandpaper, drill bits, or gloves attached to the vehicle. The supplies are consumed
in the repair process, and no change of ownership occurs. As the hearing examiner
found, these supplies do not become part of the vehicle and are properly subject to
use tax. ARSD 64:06:02:58. This applies whether the repair was to a third-party
customer’s vehicle, a leased vehicle, or a Taxpayer-owned vehicle.
[¶23.] Taxpayers ask us to compare this case to Robinson. In Robinson &
Muenster Associates, Inc., we held that to determine whether something was sold in
the regular course of business, “we must consider whether the [product] was an
inextricable part of the finished product” that was provided to the customers.
1999 S.D. 132, ¶ 12, 601 N.W.2d at 613; see also Sioux Falls Newspapers, Inc.,
423 N.W.2d at 811 (holding that syndicated materials to be published in a
newspaper were purchased for resale in the regular course of business when the
products were “the very essence of what has been traditionally perceived as a
‘newspaper’”). In Robinson, the taxpayer was a research and telecommunications
business that performed survey and polling services for customers. 1999 S.D. 132,
¶ 2, 601 N.W.2d at 611. The taxpayer contracted with customers and then obtained
samples and lists of telephone numbers (collectively, “samples”) to meet the
customers’ exact specifications. Id. ¶ 3, 601 N.W.2d at 611. The taxpayer then used
the samples to conduct the research for the customers and then transferred the
samples to the customers along with the final report. Id. The taxpayer did not pay
sales tax on the purchase of the samples, and the Department assessed use tax. Id.
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We reversed, holding that the samples were not subject to use tax as they were
purchased for incorporation into the final product and sold in the ordinary course of
business. Id. ¶ 14, 601 N.W.2d at 614.
[¶24.] Robinson is distinguishable for several reasons. First, a sale requires a
change in ownership of some sort. The shop supplies taxed by the Department
(sandpaper, razor blades, etc.) never changed ownership. They do not become part
of the vehicle and are not an “inextricable part of the finished product” but are
consumed in the repair process. Additionally, Taxpayers do not purchase these
supplies with any particular customer’s needs in mind, whereas the taxpayer in
Robinson provided a product tailored to each customer’s specific needs. With
reference to the other category of shop supplies such as “sealants, grease and
caulk,” Taxpayers argue these items are part of the finished product. This
argument is moot because these items in this context were not taxed.
[¶25.] 3. Taxpayers’ customer invoice.
[¶26.] Nonetheless, Taxpayers claim that a “sale” of the shop supplies occurs
because they entered into a contract with their customers for the sale of the
supplies. To support this argument, Taxpayers rely on the language of the invoice
with their customers, which indicates a fee for shop supplies. It is immaterial that
the Taxpayers’ invoices purport to charge the customer for supplies. This contract
is simply a business practice used by Taxpayers to recoup the costs of the supplies.
There is no “sale” as contemplated by SDCL 10-45-1(12) for any of the goods
Taxpayers argue were wrongfully assessed. Regarding supplies consumed in the
repair process, the customers never obtain any right to the supplies. Furthermore,
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Taxpayers cannot contract around the law of use tax; thus, it is immaterial that
Taxpayers invoiced customers for these supplies. See SDCL 53-9-1 (“A contract
provision contrary to an express provision of law or to the policy of express law,
though not expressly prohibited or otherwise contrary to good morals, is unlawful.”).
[¶27.] 4. Double Taxation.
[¶28.] Lastly, Taxpayers argue that the Department’s assessment of use tax
on Taxpayers’ purchase of the shop supplies results in double taxation. Taxpayers
argue that this Court has previously rejected application of use tax and sales tax to
the same transaction. See Butler Mach., 2002 S.D. 134, ¶ 15, 653 N.W.2d at 761
(“As to the issue of double taxation, we have long held that the sales tax and the use
tax are meant to be complimentary and should not both be used to tax the same
transaction.”). 7 However, in this case, there are two separate transactions involved,
and each is taxed separately. The first transaction occurs when Taxpayers
purchase the supplies without paying sales tax. Accordingly, the Department
assessed use tax under SDCL 10-45-5 when Taxpayers used and consumed the
supplies during repair services. The second transaction occurs when the customers
purchase repair services. Sales tax is assessed on the total value of the service.
Our past holdings are only implicated if use tax and sales tax are applied to the
same transaction.
7. While we acknowledge this holding, we also emphasize that there is no
constitutional prohibition against double taxation. There are several
instances where double taxation is permitted, including alcohol and tobacco,
where an excise tax is combined with a sales tax. See SDCL 35-5-2 (alcohol
excise tax), SDCL 10-50-3 (tobacco excise tax), SDCL 10-45-2 (general sales
tax).
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Conclusion
[¶29.] The hearing examiner did not err when it affirmed the Department’s
refusal to consider Exhibit 18. The hearing examiner also did not err when it
affirmed the Department’s certificate of assessment of use tax due and owing on
transactions where shop supplies, purchased without payment of sales tax, were
used and consumed.
[¶30.] Affirmed.
[¶31.] GILBERTSON, Chief Justice, and ZINTER, SEVERSON and
WILBUR, Justices, concur.
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