#24758-a-JKK
2008 SD 127
IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
* * * *
IN THE MATTER OF THE
SALES TAX LIABILITY OF
JAMES PIRMANTGEN &
PATRICIA CARLSON
LICENSE NO.
57-001-000161740T-ST-001
* * * *
APPEAL FROM THE CIRCUIT COURT OF
THE FIFTH JUDICIAL CIRCUIT
ROBERTS COUNTY, SOUTH DAKOTA
* * * *
HONORABLE JON S. FLEMMER
Judge
* * * *
JOHN T. RICHTER
SD Dept. of Revenue & Regulation Attorney for appellant SD
Pierre, South Dakota Dept. of Revenue & Regulation.
GORDON P. NIELSEN of
Delaney, Vander Linden, Delaney, Attorneys for appellees
Nielsen & Sannes, P.C. Patricia Carlson and James
Sisseton, South Dakota Pirmantgen
* * * *
CONSIDERED ON BRIEFS
ON AUGUST 26, 2008
OPINION FILED 12/23/08
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KONENKAMP, Justice
[¶1.] In this sales tax case, the South Dakota Department of Revenue and
Regulation appeals a circuit court ruling that a self-storage facility is not subject to
sales tax. Because the rental of storage space is not a “service” within the
parameters of SDCL 10-45-5.2, we affirm the decision of the circuit court.
Background
[¶2.] James Pirmantgen and Patricia Carlson own a self-service storage
facility in Sisseton, South Dakota. The Department required them to file a tax
return and remit sales tax on a bi-monthly basis. They filed a return and remitted
sales tax for the period of January 1, 2005 to December 31, 2005. They failed to file
returns or remit sales tax for the periods of January-February 2006, May-June
2006, July-August 2006, and September-October 2006. For the March-April 2006
period, they filed a return claiming zero gross receipts with no sales tax due.
[¶3.] The Department sent Pirmantgen and Carlson billing notices
requesting that they file their sales tax returns and remit their taxes. After the
notices went unanswered, the Department sent them an amended notice of jeopardy
assessment for $823.12. They contested the liability and filed a written request for
a hearing. An administrative hearing was held where they argued that they were
not performing any service, and therefore, should not be obligated to pay sales tax.
They claimed that they were acting solely as landlords because they rented the
spaces to tenants who used their own padlocks to secure the storage rooms.
[¶4.] The Department argued that under SDCL 10-45-5.2 Pirmantgen and
Carlson were providing a service subject to tax. According to the Department, the
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Standard Industrial Classification (SIC) Manual, adopted in SDCL 10-45-5.2, lists
the businesses of miniwarehousing and self-storage warehousing as providers of a
service subject to sales tax. Because Pirmantgen and Carlson provided storage
space, the Department asserted that they were engaged in the service of
miniwarehousing or self-storage warehousing. The hearing examiner agreed with
the Department. The Secretary of the Department issued a final decision affirming
the amended notice of jeopardy assessment.
[¶5.] In reversing the Department’s decision, the circuit court ruled that
Pirmantgen and Carlson provided no service. Rather, they rented space—real
estate—to their tenants. The court opined that the reference in the SIC to
“Miniwarehouse warehousing” and “Warehousing, self-storage” meant something
different than the business of self-service storage. According to the court, SIC 4225
pertained to establishments engaged in “warehousing and storage,” in which the
businesses must warehouse and store, not warehouse or store. On appeal, the
Department asserts that the gross receipts from the rental of mini-storage units are
subject to sales tax under SDCL 10-45-5.2.
Analysis and Decision
[¶6.] Our statutorily mandated standard of review for administrative
appeals requires us to “give great weight to the findings made and inferences drawn
by an agency on questions of fact[,]” by applying the clearly erroneous standard of
review. SDCL 1-26-36; Watertown Coop. Elevator Ass’n v. SD Dept. of Rev., 2001
SD 56, ¶10, 627 NW2d 167, 171 (citation omitted). Questions of law, such as
whether a statute imposes a tax in various circumstances, are reviewed de novo.
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Choice Hotels Int’l, Inc. v. SD Dept. of Rev. and Reg., 2006 SD 25, ¶9, 711 NW2d
926, 928 (citations omitted).
[¶7.] SDCL 10-45-4 imposes a sales tax on all “services” as defined in SDCL
10-45-4.1:
“Service” means all activities engaged in for other persons for a
fee, retainer, commission, or other monetary charge, which
activities involve predominantly the performance of a service as
distinguished from selling property. In determining what is a
service, the intended use, principal objective or ultimate
objective of the contracting parties shall not be controlling.
Any service that fits the statutory definition is subject to tax, unless a specific
exemption is provided in a different statute. SDCL 10-45-4. We use the
predominant activity test to determine if a business provides a service subject to
tax. SDCL 10-45-4.1; Watertown Co-op Elevator Ass’n, 2001 SD 56, ¶12, 627 NW2d
at 172; Nash Finch Co. v. SD Dept. of Rev., 312 NW2d 470, 472 (SD 1981).
[¶8.] Here, the circuit court considered the predominant activity test and
concluded that Pirmantgen and Carlson provide no service as defined by SDCL 10-
45-4.1. The Department does not challenge that ruling. In fact, the Department
argues that SDCL 10-45-4 and SDCL 10-45-4.1 are irrelevant. According to the
Department, a tax is imposed here through SDCL 10-45-5.2. Relying on that
statute, the Department maintains that any mini-storage or self-service storage
business is specifically subject to sales tax.
[¶9.] SDCL 10-45-5.2 provides a list of industries from the SIC that the
Legislature has determined to be subject to sales tax. Applicable here is Division E,
entitled “Transportation, Communications, Electric, Gas, and Sanitary Services.”
Within Division E is Major Group 42, entitled “Motor Freight Transportation and
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Warehousing.” Major Group 42 contains the services of “General Warehousing and
Storage,” (SIC 4225) and “Special Warehousing and Storage” (SIC 4226). Under
General Warehousing and Storage (SIC 4225), the SIC lists: “Miniwarehouse
warehousing” and “Warehousing, self-storage.”
[¶10.] Relying on SIC 4225, the Department argues that all storage and
warehousing businesses are subject to sales tax, unless specifically exempt.
Pirmantgen and Carlson, on the other hand, contend that SIC 4225 includes only
the service of warehousing and storage and not simply the business of renting
storage units.
[¶11.] Generally, statutes imposing taxes should be construed liberally in
favor of the taxpayer and strictly against the taxing entity. Nash Finch Co., 312
NW2d at 472; see also In the Matter of the Sales Tax Liability of Valley Queen
Cheese, 387 NW2d 39, 40 (SD 1986). We construe the language of the SIC adopted
in SDCL 10-45-5.2 without any deference to the agency or circuit court’s
interpretation. See Nash Finch Co., 312 NW2d at 472; see also Choice Hotels Int’l,
Inc., 2006 SD 25, ¶9, 711 NW2d at 928 (“Questions of law, such as the question
whether a statute imposes a tax under a given factual situation, are reviewed de
novo.”) (citation omitted).
[¶12.] The SIC Major Group 42, entitled “Motor Freight Transportation and
Warehousing,” provides the following description:
This major group includes establishments furnishing local or
long-distance trucking or transfer services, or those engaged in
the storage of farm products, furniture and other household
goods, or commercial goods of any nature. The operation of
terminal facilities for handling freight, with or without
maintenance facilities, is also included. . . .
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Within Major Group 42, is the subgroup, “Public Warehousing and Storage.” Listed
under this subgroup are the following industries: Farm Product Warehousing and
Storage (SIC 4221); Refrigerated Warehousing and Storage (SIC 4222); General
Warehousing and Storage (SIC 4225); and Special Warehousing and Storage, Not
Elsewhere Classified (SIC 4226). “General Warehousing and Storage” (SIC 4225)
includes “[e]stablishments primarily engaged in the warehousing and storage of a
general line of goods.” Listed under SIC 4225 are the “General warehousing and
storage,” “Miniwarehouse warehousing,” and “Warehousing, self-storage”
industries.
[¶13.] We must determine whether Pirmantgen and Carlson’s business
constitutes an “establishment primarily engaged in the warehousing and storage of
a general line of goods.” See SIC 4225. It is undisputed that Pirmantgen and
Carlson’s business primarily engages in the renting of storage space, not
warehousing and storage of any particular line of goods. In fact, the tenants must
pay rent regardless of whether they store any goods. The Department makes no
claim that Pirmantgen and Carlson provide their tenants anything other than the
rental of a storage space. Nor does the Department assert that Pirmantgen and
Carlson rent that storage space for a general line of goods. Rather, the Department
argues that, as a matter of law, the business is a service industry under SIC 4225
because it involves storage. *
* To reach its result, the dissent conducts a backwards analysis. The
Department argues in this appeal that the gross receipts of the business are
subject to tax under SDCL 10-45-5.2. Thus, we first examine whether there
(continued . . .)
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[¶14.] Renting storage space, and nothing more, can be distinguished from
the service of warehousing and storage. In fact, the SIC recognizes this difference.
In its definition of what qualifies for “Refrigerated Warehousing and Storage,” the
SIC includes “[e]stablishments primarily engaged in the warehousing and storage of
perishable goods under refrigeration.” SIC 4222. It then states that “[t]he
establishments may also rent locker space for the storage of food products for
individual households and provides incidental services for processing, preparing, or
packaging such food for storage.” Id. (emphasis added). From this we can conclude
that warehousing and storage as a service means something different in the SIC
than renting space for storage.
[¶15.] Nonetheless, the Department contends that the case of Sales Tax
Liability of Valley Queen Cheese expressly disclaimed the idea that a storage facility
can escape tax liability by claiming that it is merely renting real estate. See 387
NW2d at 42. In that case, Valley Queen argued, among other things, that it was
renting real estate, and therefore, it was not subject to sales tax under SDCL
chapter 10-45. Valley Queen established a storage company, Milbank Storage,
which warehoused cheese for Kraft Cheese, Valley Queen, and for a brief period, the
__________________
(. . . continued)
was taxable activity under that statute. Only if the activity is taxable would
we proceed to decide if there is an exemption available. Indeed, to prove an
exemption the activity first has to be taxable. Here, however, no exemption
applies because the circuit court and this Court have now held that the
activity is not taxable. A liberal rule applies to taxability analysis, and a
restrictive rule applies to exemption analysis. But the dissent begins by
applying the restrictive rule, applicable only to exemptions. From that rule,
the dissent then concludes that the business is taxable.
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United States Government. There was no dispute that Valley Queen’s storage
company warehoused cheese. Therefore, under SIC 4221, “Refrigerated
Warehousing and Storage,” the refrigerated warehousing and storage of cheese
could not be interpreted to be merely the rental of real estate. Valley Queen
engaged in the service of warehousing.
[¶16.] The same is not true here. Pirmantgen and Carlson’s business
provides no warehousing. They neither secure their tenants’ belongings nor
warehouse nor store any particular line of goods. Their tenants can store what they
wish or nothing at all, as long as the use of the space is lawful. Pirmantgen and
Carlson merely provide a space. This business, therefore, does not fit the SIC
industry that is “primarily engaged in the warehousing and storage” of any
particular goods. Simply because a business has a storage component does not
mean as a matter of law that the business is providing a taxable service. Each
business must be examined individually to determine if the service of warehousing
and storage is provided. Here, however, Pirmantgen and Carlson’s business is not
subject to sales tax under SDCL chapter 10-45.
[¶17.] Affirmed.
[¶18.] ZINTER and MEIERHENRY, Justices, concur.
[¶19.] GILBERTSON, Chief Justice and SABERS, Justice, dissent.
GILBERTSON, Chief Justice (dissenting).
[¶20.] I respectfully dissent. The Court’s opinion neglects to consider that
“‘statutes allowing tax exemptions are exactingly and narrowly construed in favor of
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the taxing entity.’” Mauch v. South Dakota Dept. of Revenue and Regulation, 2007
SD 90, ¶8, 738 NW2d 537, 540 (quoting Watertown Coop. Elevator Ass’n v. SD
Dept. of Rev, 2001 SD 56, ¶10, 627 NW2d 167, 171). The Court initially errs in
giving the benefit of the doubt to the taxpayers under the view that this is a
question of application of the tax. However, the circuit court in essence found that
the taxpayers were exempt from the tax on services as they operated a “self-service
storage facility” rather than the general category of “General Warehousing and
Storage” or more specifically, “mini-storage” that are subject to tax.
[¶21.] The language of SDCL 10-45-4.1 provides:
“Service” means all activities engaged in for other persons for a
fee, retainer, commission, or other monetary charge, which
activities involve predominantly the performance of a service as
distinguished from selling property. In determining what is a
service, the intended use, principal objective or ultimate
objective of the contracting parties shall not be controlling.
The key language in the statute is: “as distinguished from selling property.” The
Court misses the point that self storage units provide a service: the proprietor
makes available for lease space that is enclosed, securable, and suitable for storage
of any and all legal items. The proprietor then offers the space, willing customers
agree to the price, and the privilege of using the space is made available.
[¶22.] I do agree with the Court that the taxpayers are not in the business of
selling real estate. I disagree, however, that the provision of self-storage space falls
outside the definition of a service as contained in SDCL 10-45-5.2.
[¶23.] The analysis engaged in by the Court with regard to the SIC codes is
also flawed. The use of the SIC codes is applicable by virtue of SDCL 10-45-5.2.
Sales Tax Liability of Valley Queen Cheese, 387 NW2d at 40. Under those SIC codes
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at section 4225 it provides that a tax is owed for “General Warehousing and
Storage.” SIC 4225. Under illustrative examples are included “Miniwarehouse
warehousing” and “Warehousing, self-storage.” Id. While one might attempt to
split hairs over what constitutes the warehouse element of “miniwarehouse
warehousing,” all doubt is removed by the next example “Warehousing, self-
storage.” Id. Thus self-storage is considered warehousing under the SIC codes. If
not, this example includes both “warehousing and self-storage” in the disjunctive.
This is also consistent with the statutory definition of a “self-service storage
facility.” South Dakota Codified Law 44-14-1(6) provides:
“Self-service storage facility,” any real property designed and
used for the purpose of renting or leasing individual storage
space to occupants who are to have access to such for the
purpose of storing and removing personal property.
Moreover, SDCL 44-14-2 grants to the owner of the facility, as is owned here by the
taxpayers, a lien upon the renter’s personal property for services such as “labor” and
“expenses necessary for its preservation, or expenses reasonably incurred in its sale
or other disposition pursuant to this chapter.” SDCL 44-14-2.
[¶24.] The taxpayers concede that they are operating a “self-service storage
facility.” The taxpayers state:
The Circuit Court determined in Finding of Fact #7 that James
Pirmantgen and Patricia Carlson own a “self-service storage
facility.” The Department has not appealed this finding.
Therefore, for purposes of this appeal, the facility in questions
[sic] must be considered a “self-service storage facility” and not a
“mini-storage” facility as advanced by the Department.
[¶25.] A similar argument advanced by the taxpayers here was rejected by
this Court in Matter of Sales Tax Liability of Valley Queen Cheese, 387 NW2d 39.
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Therein the taxpayer tried to argue that it was merely providing rental space and
no type of services. Id. at 41. We rejected such a claim noting that “[c]heese
warehousing is expressly listed in SIC 4222, and its taxability is abundantly clear. .
. . We deem this argument of little merit given the fact that the legislature has
determined cheese warehousing is a service taxable under SDCL ch. 10-45.” Id. at
42. The same can be said for the term “warehousing, self-storage.”
[¶26.] While the Court today pays lip service to Matter of Sales Tax Liability
of Valley Queen Cheese, it in essence reverses its holding. Now, as long as the
“lessor” is able to come up with a document entitled a “lease of real estate” it can
with artful draftsmanship claim it is providing no service under SDCL 10-45-4 and
4.1. The exemption will engulf the general rule of tax liability. All such storage
facilities that dot our state’s landscape will sport a sign announcing “real estate for
rent.”
[¶27.] Taxpayers are providing a service subject to tax. Lacking a specific
exemption for self-storage units such as the ones involved in the instant case, sales
tax should be collected on all gross receipts for the service provided by the self-
storage facilities. The matter should be reversed and remanded accordingly.
[¶28.] SABERS, Justice, joins this dissent.
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