Blood Systems, Inc. v. South Dakota Dept. of Revenue, 20041
| Decision Date | 29 July 1998 |
| Docket Number | No. 20041,20041 |
| Parties | BLOOD SYSTEMS, INC., Appellee, v. SOUTH DAKOTA DEPARTMENT OF REVENUE, Appellant. |
| Court | South Dakota Supreme Court |
Gene R. Bushnell of Costello, Porter, Hill, Heisterkamp and Bushnell, Rapid City, for appellee.
Mark Barnett, Attorney General, Jack C. Magee, Chief Legal Counsel, Pierre, for appellant.
¶1 Blood Systems, Inc. (BSI) challenged an assessment made by the Department of Revenue (Department). Eventually, the case reached the circuit court which found that BSI met the requirements of SDCL 10-45-10 as a charitable organization and was exempt from the payment of sales tax for its purchases. Department appeals. We affirm.
¶2 Blood Systems, Inc. is a nonprofit corporation based in Scottsdale, Arizona, but has a division operating as United Blood Services of South Dakota that serves this state. 1 BSI has offices in Rapid City and Mitchell. BSI's main functions are to secure blood products, test them to see that they are fit for human use, and then distribute those products back to hospitals virtually all across South Dakota. Included in the hospitals served by BSI are governmentally operated Public Health Service hospitals.
¶3 The actual procurement of the blood is accomplished via a community relations department which secures volunteers throughout the state to sign up blood donors. The blood donors are also volunteers, so BSI does not have to pay for any of its blood with the exception of some rare types. Blood from the donors is then sent to Rapid City where it is processed. As federal regulations change, there is an ever increasing amount of testing done to determine if HIV, hepatitis, irregular antibodies or syphilis is present, along with tests to determine blood type. The blood is then distributed to hospitals and administered to patients according to prescriptions by the treating physicians.
¶4 BSI has received an exemption from federal income taxes under section 501(c)(3) of the Internal Revenue Code and its articles of incorporation require, in the event of its dissolution, that the corporation's assets be turned over to other exempt charitable organizations with similar humanitarian purposes. Further, no employee has any ownership interest in the company and employees are compensated through payment of a salary.
¶5 This case began following a sales and use tax audit by Department, which issued a certificate of assessment, dated July 28, 1994, against BSI in the amount of $90,806.88. On September 8, 1994, BSI requested an administrative hearing to determine if Department's tax assessment was correct. One of the issues raised by BSI was whether it was a relief agency as described in SDCL 10-45-10 and, therefore, exempt from tax. 2
¶6 On April 12, 1995, the hearing examiner concluded that he did not have jurisdiction to consider whether BSI was a relief agency, because BSI did not request such a determination from Department. Eventually the Secretary of Revenue authorized the hearing examiner to decide whether BSI constituted a relief agency. Pursuant to agreement by the parties, the hearing examiner conducted separate hearings and issued separate decisions on BSI's petition for declaratory ruling and on the appeal of the tax assessment.
¶7 On April 24, 1996, the hearing examiner issued his proposed declaratory ruling, holding that BSI constituted a relief agency and was exempt from tax. 3 The Secretary of Revenue, on October 31, 1996, issued his rejection of proposed declaratory ruling and findings of fact, conclusions of law, and declaratory ruling, holding that BSI did not constitute a relief agency and was not exempt from tax. 4
¶8 BSI appealed to the circuit court on November 22, 1996. The court, although noting that BSI played an indirect role in the relief of the poor, distressed, or underprivileged, concluded that it satisfied the requirements for a relief agency under SDCL 10-45-10. Consequently, the court adopted the hearing examiner's proposed declaratory ruling, which held that BSI was exempt from tax under the above statute.
¶9 Department appeals, contesting the finding that BSI is a relief agency. 5
¶10 Great weight is given to the findings and inferences made by the Department on factual questions. Sopko v. C & R Transfer Co., Inc., 1998 SD 8, p 6, 575 N.W.2d 225, 228 (citing Helms v. Lynn's, Inc., 1996 SD 8, pp 9-10, 542 N.W.2d 764, 766; Finck v. Northwest Sch. Dist. No. 52-3, 417 N.W.2d 875, 878 (S.D.1988)). "We examine agency findings in the same manner as the circuit court to decide whether they were clearly erroneous in light of all the evidence." Id.(citing In re Northwestern Bell Tel. Co., 382 N.W.2d 413, 415 (S.D.1986)). "We will reverse only if we are definitely and firmly convinced that a mistake has been made." Spitzack v. Berg Corp., 532 N.W.2d 72, 75 (S.D.1995) (citing Day v. John Morrell & Co., 490 N.W.2d 720, 723 (S.D.1992)). Questions of law remain fully reviewable. Caldwell v. John Morrell & Co., 489 N.W.2d 353, 357 (S.D.1992).
¶11 "Statutory interpretation involves questions of law for the circuit court and, as such, our review of such matters is de novo." In re Estate of Gossman, 1996 SD 124, p 6, 555 N.W.2d 102, 104 (citing Sioux Valley Hosp. Ass'n. v. State, 519 N.W.2d 334, 335 (S.D.1994); King v. John Hancock Mut. Life Ins. Co., 500 N.W.2d 619, 621 (S.D.1993)). National Food Corp. v. Aurora Cty. Bd. of Comm'rs, 537 N.W.2d 564, 566 (S.D.1995) (citations and alterations omitted).
Whether the circuit court erred in holding that BSI is a nonprofit charitable organization which devotes its resources exclusively to the relief of the poor, distressed, or underprivileged.
¶12 The sole question to be resolved is whether BSI falls within the sales tax exemption granted to purchases made by a relief agency under SDCL 10-45-10. This statute reads, in pertinent part, as follows:
There are hereby specifically exempted from the provisions of this chapter and from the computation of the amount of tax imposed by it, the gross receipts from sales of tangible personal property ... to any nonprofit charitable organization which devotes its resources exclusively to the relief of the poor, distressed or underprivileged, and has been recognized as an exempt organization under § 501(c)(3) of the Internal Revenue Code....
Department, in implementing this statute, promulgated ARSD 64:06:01:38 which specifies a number of factors that will
be considered, but will not be exclusive, in the final determination of the exemption status request:
(1) The relief agency shall be organized and conducted solely for the benefit of the general public and for relief of the public burden;
(2) A person who needs the services of the relief agency may not be turned away because the person is not able to pay for services;
(3) The relief agency may not provide for gain or profit of any private member of the agency except in the form of a salary;
(4) Upon dissolution the assets of the agency shall be used for charitable purposes;
(5) The relief agency may not present or appear to present any obstacles of any character, such as founders' fees, mandatory assignment of income or property, or minimum fees, to those who need the benefits of the agency;
(6) The average cost of services of the relief agency shall exceed the amount of fees actually collected;
(7) A major source of income of the relief agency must result from gifts, bequests or donations, not current charges;
(8) Allocation of facilities or services of the relief agency may not be related in any way to ability to pay for such facilities or services; and
(9) The relief agency must have an exemption granted pursuant to section 501(c)(3) of the Internal Revenue Code.
Although these criteria "are generally consistent with the accepted definition of a charitable organization, ..." they East River Legal Services v. State Dep't of Revenue, 303 N.W.2d 375, 378 (S.D.1981) (citation omitted). As East River Legal Services held, the nine criteria are not determinative as to whether an organization qualifies as a relief agency, "as long as it meets the requirements of SDCL 10-45-10." Id.
¶13 Department held that BSI does not qualify as a relief agency under the nine factors of ARSD 64:06:01:38 and does not devote its resources exclusively to the relief of the poor, distressed, or underprivileged as required by SDCL 10-45-10. This decision merely sets forth the Department's bare conclusion without any in-depth analysis as to how the Department arrived at its result. Such a conclusory decision does not assist this court in conducting a meaningful appellate review.
¶14 On the other hand, the uncontested evidence shows that BSI became established in South Dakota because many South Dakota hospitals were unable to produce their own blood products under the very stringent FDA regulations. Moreover, it was a burden for many hospitals to anticipate beforehand the number and type of units of blood needed. In addition, costs have continued to rise as the number of tests required expands. No fewer than twelve tests must be conducted to ensure the safety of the blood--a process that would be even more expensive for individual hospitals that lack the economies of scale that BSI enjoys. BSI supplies its products to thirty-two different hospitals in South Dakota, including hospitals run by government. It is undisputed that, if BSI did not provide these services, a governmental agency...
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