COOPERATIVE AGRONOMY v. Dept. of Revenue, 22264.

• Citation: 668 N.W.2d 718,2003 SD 104
• Decision Date: 20 August 2003
• Docket Number: No. 22264.,22264.
• Parties: COOPERATIVE AGRONOMY SERVICES, A cooperative association, Plaintiff and Appellee, v. SOUTH DAKOTA DEPARTMENT OF REVENUE, Defendant and Appellant.
• Court: Supreme Court of South Dakota

668 N.W.2d 718

2003 SD 104

COOPERATIVE AGRONOMY SERVICES, A cooperative association, Plaintiff and Appellee, v. SOUTH DAKOTA DEPARTMENT OF REVENUE, Defendant and Appellant.

No. 22264.

Supreme Court of South Dakota.

Considered on Briefs August 26, 2002.

Decided August 20, 2003.

Carlyle E. Richards of Richards & Oliver, Aberdeen, South Dakota, Attorneys for plaintiff and appellee.

Harvey M. Crow, Jr., Department of Revenue, Rapid City, South Dakota, Attorney for defendant and appellant.

ZINTER, Justice.

[¶ 1.] The South Dakota Department of Revenue (Department) assessed sales tax on a fertilizer storage service Cooperative Agronomy Services (CAS) provided other cooperatives. The circuit court reversed the assessment on appeal, and we reverse.

FACTS

[¶ 2.] CAS is a cooperative association located in Groton, South Dakota. CAS was incorporated by approximately twelve North and South Dakota locally owned cooperatives. According to the articles of incorporation, CAS' purpose was to reduce "the member cooperatives' costs through joint action in purchasing and distributing supplies such as fertilizer, chemicals and other merchandise and personal property." To facilitate that purpose, CAS owns and operates a warehouse, railroad siding, and related personal property. It also has its own employees and payroll.

[¶ 3.] The business activity at issue is the fertilizer storage CAS provides for its member cooperatives. CAS does not purchase, own, sell, or deliver the fertilizer, and it is not involved in billing for the fertilizer it stores. CAS merely operates a warehouse for the other cooperatives' fertilizer. Each member cooperative purchases fertilizer and has it delivered to CAS' storage facility. Upon delivery, CAS unloads and stores the fertilizer. When a member cooperative subsequently sells fertilizer to its farm customer, the member cooperative makes arrangements to have the fertilizer transported from CAS' warehouse to the farm customer. The transportation occurs either through the use of the member cooperatives' own trucks or through other commercial truckers.

[¶ 4.] To pay for this storage service, the member cooperatives pay CAS a "$6 per ton through-put fee." In December 1998, at the insistence of the Department, CAS began paying sales tax on the $6 fee. In October 2000, CAS applied for a refund of the sales taxes it had paid. The Department denied CAS' refund request.

[¶ 5.] Following the denial, CAS appealed the Department's decision to circuit court. The circuit court held that the fertilizer storage service was entitled to a sales tax exemption for "agricultural services." The court concluded that the storage was classified as "agricultural services" under SDCL 10-45-12.1 and major group 07 of the 1987 Standard Industrial Classification Manual (SICM). The trial court reasoned:

By and through their members, CAS is involved in agricultural services. Cenex/Land O'Lakes Coops are agricultural cooperatives made up of local farmers. Most of the sales by and services provided by the coops are agricultural in nature. Therefore, the end transaction by CAS can only be agricultural, as the product stored [fertilizer] at the facility is only agricultural. The Court finds that because the end "transaction" of CAS is an agricultural service, CAS is classified under Major Group 07 for taxation purposes.

(emphasis added). The trial court emphasized that "CAS is classified under Major Group 07, as an [exempt] agricultural service, not because the service they provide is necessarily agricultural, but because the companies, which own or make up CAS, are solely agricultural." Thus, the trial court looked at the end transaction and activity performed by the member cooperatives that incorporated CAS, rather than focusing on the predominate activity of, and the separate transaction in which CAS was involved. Although the circuit court acknowledged the "predominate activity and separate transaction" test of Watertown Coop. Elevator Association v. South Dakota Department of Revenue, 2001 SD 56, ¶ 12, 627 N.W.2d 167, 172, the court appears to have distinguished that case by finding that CAS was an "auxiliary establishment" of each of the member cooperatives. Under the SICM, auxiliary establishments are given the same classification as the enterprise for which they provide the service. Thus, under the trial court's reasoning, CAS' storage service could be taxed as if it were the member cooperatives' exempt sale of agricultural fertilizer to farm customers. The Department appeals.

ISSUE

Whether CAS' fertilizer storage service is exempt from sales tax.

STANDARD OF REVIEW

[¶ 6.] Our standard of review is set forth in Graceland College Center v. South Dakota Department of Revenue, 2002 SD 145, ¶ 5, 654 N.W.2d 779, 782.

Our standard of review, delineated in SDCL 1-26-36, requires us to give great weight to the findings and inferences made by the Department on factual questions. 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. If after careful review of the entire record we are definitely and firmly convinced a mistake has been committed, only then will we reverse. Questions of law, of course, are fully reviewable.

...

[W]hether a statute imposes a tax under a given factual situation is a question of law. Statutes which impose taxes are to be construed liberally in favor of the taxpayer and strictly against the taxing body. Statutes exempting property from taxation should be strictly construed in favor of the taxing power. The words in such statutes should be given a reasonable, natural, and practical meaning to effectuate the purpose of the exemption.

Id. (citations omitted).

DECISION

[¶ 7.] We first determine whether CAS is classified as an "auxiliary" of each member cooperative and therefore entitled to the member cooperatives' end use exemption for the sale of agricultural fertilizer. If CAS is not entitled to the member cooperatives' classification, we must then determine whether CAS is entitled to any other tax exemptions for its fertilizer storage service.

I.

CAS was not entitled to an exemption as an auxiliary of each member cooperative.

[¶ 8.] A sales tax is imposed on services. SDCL 10-45-4 provides:

There is hereby imposed a tax at the same rate as that imposed upon sales of tangible personal property in this state upon the gross receipts of any person from the engaging or continuing in the practice of any business in which a service is rendered. Any service as defined by § 10-45-4.1 shall be taxable, unless the service is specifically exempt from the provisions of this chapter.

(emphasis added). CAS is a legal business entity (a cooperative) that is performing a service that is generally subject to tax. However, the exemption applied by the circuit court is found in SDCL 10-45-12.1, which provides in part:

The following services enumerated in the Standard Industrial Classification Manual, 1987, as prepared by the Statistical Policy Division of the Office of Management and Budget, Office of the President are exempt from the provisions of this chapter: ... agricultural services (major group 07)....

Under these statutes, we generally "use the predominant activity test in deciding if services [are] subject to sales tax. We have also emphasized that `determinations of taxability should focus on the transaction.'" Watertown Coop., 2001 SD 56, ¶ 12, 627 N.W.2d at 172 (further citations omitted).

[¶ 9.] The Department contends that Watertown Coop controls this case. The Department argues that like Watertown Coop, there are two separate transactions involved: 1) CAS' fertilizer storage; and 2) individual cooperatives' sales of fertilizer. The Department contends that even if the end transaction of individual cooperatives involves exempt sales of agricultural fertilizer, CAS' business activity is a separate taxable transaction involving fertilizer storage.

[¶ 10.] Like the taxpayer in Watertown Coop, CAS responds that the storage transaction is only one step in the sale of fertilizer: a sale starting with the manufacturer and ending with the farm customer. Under CAS' interpretation, there is only one relevant transaction: the sale of fertilizer, and that transaction is exempt because the fertilizer is ultimately used for agricultural purposes. See SDCL 10-45-12.1; 10-45-16.¹

[¶ 11.] The trial court appears to have adopted CAS' argument. In doing so, it distinguished Watertown Coop by concluding that CAS was an "auxiliary" of each member cooperative. That distinction is valid only if CAS qualifies as an auxiliary unit of the other cooperatives under the SICM because the SICM classification is specifically incorporated into the exemption statute, SDCL 10-45-12.1.

[¶ 12.] According to the 1987 SICM, "auxiliaries" are establishments that perform "services for other establishments of the same enterprise" and, "[a]n enterprise consists of all establishments having more than 50 percent common direct or indirect ownership." SICM 13 (1987). (emphasis added). However, CAS failed to prove that there is more than 50 percent common ownership between any member cooperative and CAS. In fact, that likelihood appears impossible because twelve or more cooperatives each claim to be members of the CAS cooperative leaving no one cooperative with more than 50 percent ownership of CAS.²

[¶ 13.] Consequently, CAS is not entitled to the "auxiliary" classification, and we conclude that this case is governed by the predominate activity and separate transaction test utilized in Watertown Coop., 2001 SD 56, 627 N.W.2d 167. In Watertown Coop, the taxpayers sold agronomy products to farmers and ranchers. In addition to the sales of agronomy products, the taxpayers' distributors, as part of a separate contract with the taxpayers, provided the farmers and ranchers with production specialists to advise them on which products to buy and how best...