Farm v. S.D. Dep't of Revenue

• Citation: 847 N.W.2d 550,2014 S.D. 31
• Decision Date: 21 May 2014
• Docket Number: Nos. 26795,26805.,s. 26795
• Court: Supreme Court of South Dakota
• Parties: PAUL NELSON FARM, Appellee, v. SOUTH DAKOTA DEPARTMENT OF REVENUE, Appellant.

847 N.W.2d 550

2014 S.D. 31

PAUL NELSON FARM, Appellee,

v.SOUTH DAKOTA DEPARTMENT OF REVENUE, Appellant.

Nos. 26795, 26805.

Supreme Court of South Dakota.

Argued on March 25, 2014.

Decided May 21, 2014.

Justin Lee Bell, May, Adam, Gerdes & Thompson, LLP, Pierre, South Dakota, Attorneys for appellee.

John T. Richter, South Dakota Department of Revenue, Pierre, South Dakota, Attorneys for appellant.

GILBERTSON, Chief Justice.

[¶ 1.] The Department of Revenue and Regulation conducted an audit on Paul Nelson Farm and assessed use tax and interest against Paul Nelson Farm for its purchases of food, beverages, and ammunition. Paul Nelson Farm contested the assessment of use tax and appealed to the circuit court. The circuit court held Paul Nelson Farm was not liable for use tax on food, but was liable for use tax on beverages and ammunition. The Department appeals the decision of the circuit court, arguing Paul Nelson Farm owes tax on all three categories of goods. Paul Nelson Farm responds that its possession of these goods does not constitute “use” under the taxing statute, because they are purchased for sale in the regular course of business. We affirm in part and reverse in part, holding that use tax is not properly imposed on any of these goods.

FACTS

[¶ 2.] Paul Nelson Farm, a South Dakota corporation, operates an all-inclusive hunting lodge near Agar, South Dakota. A typical hunting package at Paul Nelson Farm includes three days of pheasant hunting with the lodge's guides and dogs, overnight lodging, all meals and beverages, unlimited use of a private sporting clays range, ammunition, use of a shotgun, and five pheasants per day with accompanying bird-cleaning and packaging services. Customers are charged a single “package price” for all of these items, with the option to shoot additional birds for an extra fee.¹ Customers are not given the option to purchase any of the items separately; they must be purchased as an all-inclusive hunting package. Upon request, Paul Nelson Farm would provide customers with an itemized receipt allocating costs to various portions of the hunting package.²

[¶ 3.] Paul Nelson Farm collected and timely remitted sales tax on each hunting package sold to its customers. When Paul Nelson Farm purchased food, non-alcoholic beverages, and ammunition, it did not pay sales or use tax on these items. The Department conducted an audit on Paul Nelson Farm covering November 2006 to October 2009 and determined that Paul Nelson Farm owed use tax and interest totaling $29,428.06. The assessment included $17,405.14 in tax and interest for unpaid use tax on food, beverages, and ammunition.

[¶ 4.] Paul Nelson Farm requested an administrative hearing to contest this portion of the assessment. At the administrative hearing, Paul Nelson Farm asserted that the food, beverages, and ammunition were not purchased for end use by Paul Nelson Farm, but were instead purchased for resale to hunting lodge customers in its ordinary course of business. Accordingly, Paul Nelson Farm argued it was not required to pay use tax on those items. The Hearing Examiner rejected this reasoning and entered a proposed decision affirming the Department's assessment of the use tax. The Examiner's proposed order was adopted in full by the Department Secretary. Paul Nelson Farm appealed the order to the circuit court. The circuit court affirmed in part and reversed in part, holding that Paul Nelson Farm was not required to remit use tax on the food, but was required to remit use tax on the beverages and ammunition.

[¶ 5.] The circuit court held that Paul Nelson Farm's final product consisted of three essential parts: 1) lodging, 2) hunting, and 3) three full buffet meals per day. The court determined that the food provided to customers had value independent from the hunting and lodging services provided and that customers took this value into consideration when deciding whether to purchase the package. Therefore, the circuit court held that a sale of the food occurred between Paul Nelson Farm and its customers and use tax should not be assessed against Paul Nelson Farm. Conversely, the court held that the ammunition and beverages were consumed in providing the service and customers would likely pay the same package price had these items not been included. Thus, it held that use tax was appropriate on the beverages and ammunition.

[¶ 6.] On appeal to this Court, the Department requests that we reverse the circuit court's decision and uphold the Department's assessment of use tax on the food purchased by Paul Nelson Farm. Paul Nelson Farm filed a Notice of Review asserting that use tax should not be imposed on the beverages and ammunition in question.

STANDARD OF REVIEW

[¶ 7.] “Whether a statute imposes a tax under a given factual situation is a question of law and thus no deference is given to any conclusion reached by the Department of Revenue or the circuit court.” Butler Machinery Co. v. S.D. Dep't of Revenue, 2002 S.D. 134, ¶ 6, 653 N.W.2d 757, 759–60 (quoting Robinson & Muenster Assocs., Inc. v. S.D. Dep't of Revenue, 1999 S.D. 132, ¶ 7, 601 N.W.2d 610, 612). “[O]n questions of law, we may ‘interpret statutes without any assistance from the administrative agency.’ ” In re State Sales & Use Tax Liab. of Pam Oil, Inc., 459 N.W.2d 251, 255 (S.D.1990) (citation omitted).

ANALYSIS AND DECISION

[¶ 8.] The question before this Court is whether the food, beverages and ammunition purchased by Paul Nelson Farm and included as part of an all-inclusive hunting package are subject to South Dakota use tax. SDCL 10–46–2 provides:

An excise tax is hereby imposed on the privilege of the use, storage, and consumption in this state of tangible personal property purchased for use in this state at the same rate of percent of the purchase price of said property as is imposed pursuant to chapter 10–45.³

Furthermore, SDCL 10–46–4 states:

In addition, said tax is hereby imposed upon every person using, storing, or otherwise consuming such property within this state until such tax has been paid directly to a retailer or the secretary of revenue as hereinafter provided.

[¶ 9.] The Department contends that Paul Nelson Farm owes use tax on the food, beverages, and ammunition under SDCL 10–46–2 and SDCL 10–46–4 because Paul Nelson Farm purchased these items without paying the sales tax imposed by SDCL 10–45–2. The Department argues that Paul Nelson Farm is the end consumer of these goods as a service provider and that there are no applicable use tax exemptions for goods incorporated into a service. Paul Nelson Farm, however, contends that it does not owe use tax because its control over the goods did not constitute “use” as defined by SDCL 10–46–1(17).

[¶ 10.] Accordingly, this Court is called upon to interpret the meaning of “use” under the applicable South Dakota statutes. “When engaging in statutory interpretation, we give words their plain meaning and effect, and read statutes as a whole, as well as enactments relating to the same subject. When the language in a statute is clear, certain and unambiguous, there is no reason for construction, and this Court's only function is to declare the meaning of the statute as clearly expressed.” State v. Hatchett, 2014 S.D. 13, ¶ 11, 844 N.W.2d 610, 614 (citations and internal quotation marks omitted).

[¶ 11.] The parties argue at length over whether this case involves the imposition of a tax or an exemption from a tax. “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 statute.” Butler Machinery, 2002 S.D. 134, ¶ 6, 653 N.W.2d at 759–60 (citations omitted). However, because the language of the statute is clear, certain, and unambiguous we need not resort to statutory construction in this case. We instead declare the meaning of the statute as clearly expressed, without application of the rules of construction advanced by either party.

[¶ 12.] SDCL 10–46–1(17) defines “use” as including “the exercise of right or power over tangible personal property” but not “the sale of that property in the regular course of business.” ⁴ “We understand this to mean that use tax, consistent with its complementary relationship to sales tax, generally applies to retail transactions and not to transactions where items are purchased for resale.” Robinson & Muenster, 1999 S.D. 132, ¶ 11, 601 N.W.2d at 613 (quoting Sioux Falls Newspapers, Inc. v. Sec'y of Revenue, 423 N.W.2d 806, 810 (S.D.1988)).

[¶ 13.] To determine under SDCL 10–46–1(17) whether the food, beverages, and ammunition were purchased for “the sale of that property in the regular course of business,” we must examine whether there was a “sale” of the goods in question. A “sale” is defined in the sales tax statute as “any transfer, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, for a consideration[.]” SDCL 10–45–1(12). In this case, the transaction between Paul Nelson Farm and its customers constitutes a sale within this definition.

[¶ 14.] Initially, we note that the goods in question were subjected to a “transfer, exchange, or barter.” Transfer means “the conveyance of right, title, or interest in real or personal property from one person to another by sale, gift, or other process[.]” Webster's Third New International Dictionary 2427 (1976). When Paul Nelson Farm's customers pay the package price, it includes the use and consumption of an unlimited amount of food, beverages, and ammunition during their stay. While staying at Paul Nelson Farm, the food and beverages are transferred to the customers' actual possession. The customers have the right to eat and drink as much as they would like. Similarly, when the customers go into...