Modern Merchandising, Inc. v. Department of Revenue

FOSHEIM, Justice.

This is an appeal from a circuit court judgment affirming a Department of Revenue (Department) order assessing use tax *471and interest against LaBelle’s. We reverse.

LaBelle’s is a Minnesota corporation and a subsidiary of Modern Merchandising. It retails consumer goods by mail order and through stores located in Minnesota, North Dakota, and South Dakota. Department assessed use taxes and interest against La-Belle’s from April 1, 1982 through February 29, 1984, on catalogs and flyers mailed to South Dakota residents. Following a hearing, Department issued an order approving the assessment and denying La-Belle’s request for a refund.

From the stipulated facts it appears companies related to LaBelle’s contracted with printers located in Minnesota to print the catalogs and flyers. These printers either mailed the literature from Minnesota directly to the South Dakota residents or turned the materials over to common carriers who delivered them to post offices located in South Dakota for mailing to the South Dakota residents. LaBelle’s furnished the printers with the names of those to whom the literature was to be delivered. The catalogs were delivered free of charge to the residents who were free to use or discard them as they wished. Catalogs not delivered in South Dakota were returned directly to the Minnesota printers.

The tax was levied pursuant to SDCL 10-46-2 which, in pertinent part, provides:

An excise tax is hereby imposed on the privilege of the use, storage, and consumption in this state of tangible personal property purchased on or after July 1, 1939, for use in this state at the same rate [as the state sales tax].

It is Department’s position that since La-Belle’s paid the printers for the catalogs and flyers and those items were mailed to the South Dakota residents as determined by LaBelle’s customer list, LaBelle’s exercised “right or power” over the catalogs and, therefore, “use[d] the flyers and catalogs to generate sales in South Dakota and to operate its catalog business in South Dakota within the definition of ‘use’ in SDCL 10-46-1(2)”, which in pertinent part reads:

‘Use’ means and includes the exercise of right or power over tangible personal property incidental to the ownership of that property....

In reviewing a circuit court judgment entered under SDCL ch. 1-26 (Administrative Procedure and Rules), “the Supreme Court shall give the same deference to findings of fact, conclusions of law and final judgment of the circuit court as it does in other appeals from the circuit court.” SDCL 1-26-37. The facts in this case are undisputed. It is only the legal significance of these facts which is questioned. LaBelle’s claims the circuit court erroneously applied the use tax statutes. Whether a taxation statute imposes a tax under a given set of facts is a question of law. Petition of Famous Brands, Inc., 347 N.W.2d 882 (S.D.1984); Nash Finch Co. v. South Dakota Dept. of Rev., 312 N.W.2d 470 (S.D.1981); Matter of Sales Tax or Use Tax, Etc., 290 N.W.2d 865 (S.D.1980); Wisconsin Dept. of Revenue v. J.C. Penney Co., 108 Wis.2d 662, 323 N.W.2d 168 (1982). See also Sales Tax Liability of Valley Queen Cheese, 387 N.W.2d 39 (S.D.1986); Matter of Change of Bed Category of Tieszen, 343 N.W.2d 97 (S.D.1984). This court gives no deference to a lower court’s legal conclusion. It is true some cases accord “great weight” to an agency’s statutory interpretation. See Matter of Sales Tax or Use Tax, 290 N.W.2d at 868; Valley Queen Cheese, 387 N.W.2d at 40. However, this rule applies only when the agency is expressly authorized by statute to make such an interpretation. Famous Brands, 347 N.W.2d at 884; Tieszen, 343 N.W.2d at 98. The Secretary of Revenue has been given no such power under the statutes applicable in this case. Compare Matter of Sales or Use Tax (involving SDCL 10-46-1(6) which expressly gives the Secretary of Revenue power to interpret the meaning of the word “agents” for use tax purposes).

The issue on appeal is whether LaBelle’s had sufficient “right or power ... incidental to the ownership” of the catalogs and flyers once in South Dakota to qualify as a *472“use ... in this state” under SDCL 10-46-1(2) and 2.

Department relies heavily upon our K-Mart Corp. v. Dept. of Revenue, 345 N.W.2d 55 (S.D.1984), decision. The retailer in K-Mart contracted with local newspapers to have its advertisements inserted in its publications for distribution in South Dakota. The supplements were printed and sent to a publisher outside of South Dakota. The publisher received a distribution list from K-Mart setting forth the South Dakota newspapers to which it sent the supplements. Essentially, K-Mart made the same arguments we find here. We held that because K-Mart owned the supplements and retained the power to control the date of distribution and the numbers of copies to be distributed after the copies entered South Dakota, K-Mart “use[d]” the supplements within the meaning of SDCL 10-46-2.

Although the facts of K-Mart are similar to those in this case, we distinguish advertisements delivered in the K-Mart fashion from the direct mailings in this case. Unlike K-Mart, LaBelle’s had no in-state contract and no similar in-state power. All control over the present literature within our state belonged to either the post office or the advertisement recipients. Even if the literature could not be delivered, it again would be handled by the post office until outside of South Dakota. By concluding the catalogs and flyers were taxable, Department concentrated more on the material’s generation of in-state sales for La-Belle’s than on whether LaBelle’s activities fit the language of the tax statutes. In contrast, K-Mart focuses and turns upon the statutory language; not merely upon whether the newspaper supplements generated in-state sales for K-Mart.

Department cites Northwestern National Bank of Sioux Falls v. Gillis, 82 S.D. 457, 148 N.W.2d 293 (1967), as demonstrating a legislative intent behind SDCL 10-46-2 and 1(2) to tax LaBelle’s for its activities in question here. Gillis states that the purpose of the use tax is not only to raise money but also to “help the retailers in this state, who are subject to the sales tax, compete on an equal footing with out-of-state competitors.” 82 S.D. at 467, 148 N.W.2d at 298. Department also points out that the use tax is designed to prevent avoidance of our state sales tax. E.g., Woods v. M.J. Kelley Co., 592 S.W.2d 567 (Tenn.1980). Since a local printer selling flyers or catalogs (or its purchaser) would be liable for the sales tax, LaBelle's should pay a use tax on the literature, according to Department. Department also argues that if LaBelle’s does not pay tax on the catalogs local retailers are put at a competitive disadvantage contrary to legislative intent. While we agree with Department’s interpretation of our legislature’s intent, we cannot apply the statute to activity which is plainly alien to its language. See Famous Brands, supra. We must honor the rule that statutes imposing a tax are to be construed liberally in favor of the taxpayer. Nash Finch, supra.

Department argues it is illogical to subject advertisements delivered in the K-Mart fashion to the use tax, but not those delivered as in this case. However, we find support for this dichotomy in J. C. Penney, supra, relied upon in K-Mart. In J.C. Penney, the Wisconsin Supreme Court considered both the K-Mart situation and the one before us now,1 and reached the same contrasting conclusions as this court. Similarly, that Court was also confronted with the argument that reaching such contrasting results was irrational. We agree with its observation that “[t]his contention is more appropriately directed to the legislature.” J.C. Penney, 323 N.W.2d at 170.2

*473The circuit court’s judgment is reversed and taxpayer’s refund request of $42,673 shall be honored.

WUEST, C.J., and MORGAN and HENDERSON, JJ., concur. SABERS, J., dissents.

. In holding the directly mailed material untaxable, J.C. Penney employs a rationale differing from that relied upon here. See id., 323 N.W.2d at 170.

. Counsel for LaBelle’s concede that the Wisconsin Legislature amended their statute after the J.C. Penney decision to make the advertising procedures LaBelle's utilized here subject to the Wisconsin Use Tax. See Wisc.Stat. § 77.-51(15)(b).