Nash Finch Co. v. South Dakota Dept. of Revenue, 13435

• Decision Date: 18 November 1981
• Docket Number: No. 13435,13435
• Citation: 312 N.W.2d 470
• Parties: NASH FINCH COMPANY, d/b/a Prairie Market Stores, Appellee, v. SOUTH DAKOTA DEPARTMENT OF REVENUE, Appellant.
• Court: South Dakota Supreme Court

Page 470

312 N.W.2d 470

NASH FINCH COMPANY, d/b/a Prairie Market Stores, Appellee, v. SOUTH DAKOTA DEPARTMENT OF REVENUE, Appellant.

No. 13435.

Supreme Court of South Dakota.

Argued Oct. 1, 1981.

Decided Nov. 18, 1981.

Thomas J. Welk of Boyce, Murphy, McDowell & Greenfield, Sioux Falls, for appellee.

Gene R. Woodle, Asst. Atty. Gen., Pierre, for appellant; Mark V. Meierhenry, Atty. Gen., Pierre, on the brief.

DUNN, Justice.

The South Dakota Department of Revenue appeals from an order and judgment of the circuit court which found that the membership fee paid to Prairie Market Stores (appellee) was not subject to sales tax as the sale of a service and the free merchandise given to customers was also not subject to use tax. We affirm the order and judgment of the circuit court.

Appellee is a foreign corporation doing business in South Dakota as the Prairie Market Stores. Appellee operates wholesale grocery stores in which customers mark and carry out their own merchandise. Before customers may shop at appellee's store, they must pay a fee and become members. There are two types of memberships: a regular membership and a golden age membership. A regular member pays a monthly two dollar fee and receives a membership card that will expire on the last day of the month after the fee has been paid. After the card has expired, the regular member is entitled to redeem the expired card for merchandise worth approximately one dollar. The golden age membership is available to those customers who have health insurance claim numbers. A golden age member pays an annual two dollar fee and is not entitled to receive the bonus merchandise. All members are allowed to make purchases of merchandise at lower prices than found in retail stores. Nonmembers may not. Members are also entitled to some other minor privileges.

Appellee admits that one dollar of the regular membership fee which is applied towards the bonus merchandise provided to the regular member is subject to sales tax liability. Appellee has previously paid sales tax on this portion. Appellee has not paid sales tax on the remaining one dollar of the regular membership fee or on the two dollar golden age membership fee.

Appellee requested a declaratory ruling from the Secretary of Revenue regarding whether the membership fees were subject to sales tax. After an administrative hearing, the Deputy Secretary of Revenue determined that the membership fees resulted from the sale of a service and thus were subject to sales tax and that the free merchandise given to customers was subject to use tax. Appellee appealed to circuit court which reversed and vacated, and ordered the South Dakota Department of Revenue to return the tax previously paid upon membership fees with interest.

The construction of a statute is a question of law. Therefore, the decisions of the administrative agency and the circuit court are fully reviewable. Matter of Sales Tax or Use Tax, Etc., 290 N.W.2d 865 (S.D.1980). As a general rule, statutes which impose taxes are to be construed liberally in favor of the taxpayer and strictly against the taxing body. Iowa Auto Dealers v. Iowa Dept. of Revenue, 301 N.W.2d 760 (Iowa 1981). Ambiguities in a statute imposing a tax are interpreted in favor of the taxpayer. KTVO, Inc. v. Bair, 255 N.W.2d 111 (Iowa 1977); I.B.M. Corp. v. State, Dept. of Treasury, 75 Mich.App. 604, 255 N.W.2d 702 (1977); Geo Resources, Inc. v. Tax Com'r, 288 N.W.2d 54 (N.D.1980).

The Department of Revenue contends that the membership fees charged by appellee are receipts from sales of services and subject to sales tax. We disagree. SDCL 10-45-4 imposes sales tax upon "the gross receipts of any person from the engaging or continuing in the practice of any business in which a service is rendered." Service is defined in SDCL 10-45-4.1 as "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."

We agree with appellee's contention that the membership fee paid by its customers does not fall within this definition of service. Appellee's activities predominantly involve the sale of tangible personal property rather than the performance of a service. The fee paid by the member is for the privilege of buying merchandise and is fully refundable at any time. The member may decide not to avail himself of the privilege of buying anything. A service is not provided by appellee to the member when the membership fee is paid.

The legislature has also delineated specific categories of services that are subject to taxation by incorporating by reference within SDCL 10-45-5.2 the Standard Industrial Classification Manual. Services enumerated in the list include memberships to athletic clubs, country clubs, and gun clubs. Memberships to discount grocery stores are not included in the list; however, the statute specifically states that the list is not comprehensive but rather is a representative list of services.

We do not agree with the Department of...