Mauch v. Sd Dept. of Revenue and Regulation, 23966.

Decision Date22 August 2007
Docket NumberNo. 23966.,23966.
Citation2007 SD 90,738 N.W.2d 537
PartiesGary MAUCH, License No. 13-001-000141941T-ST-001, Petitioner and Appellant v. SOUTH DAKOTA DEPARTMENT OF REVENUE AND REGULATION, Respondent and Appellee.
CourtSouth Dakota Supreme Court

Jeffrey L. Bratkiewicz, William G. Taylor, Cheri S. Raymond of Woods, Fuller, Shultz & Smith, P.C., Sioux Falls, SD, for petitioner and appellant.

Jack C. Magee, Donald W. Hageman, South Dakota Department of Revenue and Regulation, Pierre, SD, for respondent and appellee.

ZINTER, Justice, (on reassignment).

[¶ 1.] Gary Mauch appeals a Department of Revenue and Regulation decision assessing sales tax on engineering services he provided. Mauch also appeals the Department's assessment of use tax for accounting and legal services that were provided to Mauch by out-of-state accountants and attorneys. We reverse the assessment of sales tax on the engineering services, affirm the assessment of use tax, and remand.

I.

[¶ 2.] Mauch obtained a one-year technical degree in drafting and design technology in 1972. Thereafter, he started working as a draftsman for Beehive Machinery Inc., in Salt Lake City, Utah. Beehive manufactured specialized machinery used in the meat processing industry to separate meat from bone. During his employment with Beehive, Mauch held the positions of Chief Draftsman, Acting Engineering Director, and Chief Products Engineer. Mauch's duties included design and modification of standard and custom food processing machinery. He also trained the new Engineering Director.

[¶ 3.] Mauch met Eldon Roth during Mauch's employment with Beehive. Roth is the founder and majority owner of Beef Products Inc. (BPI), a company that uses custom designed meat processing machinery to eliminate bacteria and pathogens from meat and sells meat to other food processing companies. In 1986, Mauch accepted an engineering position with BPI in its Nevada City, California facility. After six months, Mauch left BPI's Nevada City facility and began working as an independent contractor. He continued to provide services for BPI and was also hired by Multi-Fill1 to design and improve its equipment.

[¶ 4.] In 1994, Roth contacted Mauch in an effort to obtain his engineering services more exclusively in connection with BPI's facilities. BPI's headquarters are in Dakota Dunes, South Dakota. However, all of its processing facilities are located outside South Dakota. Roth wanted Mauch to help design new machinery for use in BPI's out-of-state facilities. Mauch accepted the offer. He and his family bought a home in Burbank, South Dakota, where he lives and works.

[¶ 5.] In the course of this employment, Mauch attended meetings with Roth in which the two "brainstormed" for ideas to improve and design BPI equipment. The meetings were either held at Mauch's home or at BPI headquarters in Dakota Dunes. Mauch drafted most of BPI's dimensional drawings with the assistance of BPI's drafters. The designs were then reviewed at BPI headquarters to ensure that they met BPI's quality standards. If BPI approved the designs, it sent them to out-of-state machine shops for construction. After construction, the machines were sent to BPI plants for installation. Mauch occasionally visited the out-of-state plants to ensure proper installation.

[¶ 6.] In 2003, the Department audited Mauch's engineering business. The audit resulted in an assessment of tax, interest, and penalties in the amount of $70,641.32. The assessment was imposed for sales tax on the engineering services Mauch provided to BPI and use tax on legal and accounting services that were provided to Mauch's business by out-of-state firms.

[¶ 7.] Mauch disputed the Department's assessment and requested a hearing under SDCL 10-59-9. Following the hearing, an independent hearing examiner proposed findings of facts and conclusions of law reversing the sales tax assessment and upholding the use tax assessment. The Department rejected the hearing examiner's findings of fact and conclusions of law and imposed its original assessment. Mauch appealed to circuit court. The circuit court affirmed the Department's assessment, and Mauch appeals raising the following issues:

1. Whether the engineering services Mauch provided BPI were exempt from sales tax under SDCL 10-45-12.2.

2. Whether the engineering services Mauch provided BPI were exempt from sales tax under SDCL 10-45-12.3 (repealed SL 2003, ch. 61, section 3).

3. Whether the accounting and legal services provided to Mauch were exempt from use tax under SDCL 10-46-2.1.

4. Whether Mauch was entitled to an abatement of interest and penalties under SDCL 10-59-6 or SDCL 10-59-28.

[¶ 8.] "Questions of law, such as the question whether a statute imposes a tax under a given factual situation, are reviewed de novo." In the Matter of Choice Hotels International, Inc. v. SD Dept. of Rev. and Reg., 2006 SD 25, ¶ 9, 711 N.W.2d 926, 928. Further, "[s]tatutes allowing tax exemptions are exactingly and narrowly construed in favor of the taxing entity." Watertown Coop. Elevator Ass'n v. S.D. Dept. of Rev., 2001 SD 56, ¶ 10, 627 N.W.2d 167, 171.

II. Engineering Services Exemption Under SDCL 10-45-12.2

[¶ 9.] Four statutes govern sales taxation on engineering services. SDCL 10-45-4 imposes a broad sales tax on services in general:

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.

SDCL 10-45-4.1 defines "service" 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." "Engineering services" are specifically captured by SDCL 10-45-5.2. However, SDCL 10-45-12.2 provides an exemption if the "engineering services" are classified in Group No. 871 of the Standard Industrial Classification Manual, 1987 (SIC Manual) and they are for projects located entirely out-of-state:

There are specifically exempted from the provisions of this chapter and from the computation of the amount of tax imposed by §§ 10-45-4 and 10-45-5, the gross receipts from engineering, architectural, and surveying services ([G]roup [N]o. 871, Standard Industrial Classification Manual, 1987, as prepared by the Statistical Policy Division of the Office of Management and Budget, Office of the President) rendered for a project entirely outside this state.

Id. Therefore, in order for Mauch to be entitled to the exemption provided by SDCL 10-45-12.2, he had the burden of showing that his services were classified as "engineering services" under SIC Group No. 871 and that such services were rendered for projects outside of South Dakota.

[¶ 10.] Industry Group No. 871 of the SIC Manual is titled "Engineering, Architectural and Surveying Services." Industry No. 871 describes "Engineering Services" as "[e]stablishments primarily engaged in providing professional engineering services." (Emphasis added.)

[¶ 11.] The hearing examiner acknowledged that Mauch was not licensed as a "professional" engineer in South Dakota and did not have an engineering degree. However, the hearing examiner concluded that Mauch provided professional engineering services because of his knowledge and experience. On the other hand, the circuit court agreed with the Department's position that in order to be entitled to the tax exemption, Mauch was required to be licensed as a "professional" engineer by the South Dakota Board of Technical Professions under SDCL ch. 36-18A, the chapter regulating the practice of architecture and engineering.

[¶ 12.] At the outset it must be noted that the statutes capturing and exempting these services do not refer to "professional" engineering services: those statutes only refer to "engineering services." There is also no statutory reference in the tax statutes requiring licensure. With respect to SIC Manual Group No. 871, it is equally important to note that it is only intended to classify types of economic activity rather than the status of the individuals providing the economic activity in that industry.2 Additionally, although the SIC Manual contains "professional engineering services" language, there is no definition of a "professional engineer" in the SIC Manual. Finally, one specific example for this industry included services provided by "machine tool designers," the service that Mauch appears to have provided. Nevertheless, the Department concluded that SDCL ch 36-18A, the chapter regulating the practice of architecture and engineering, should be incorporated into the tax code to determine the taxability of engineering services. We conclude that the incorporation of this regulatory engineering practice chapter into the unrelated sales tax statutes was incorrect for three independent reasons.

[¶ 13.] First, the incorporation of these unrelated statutes is at odds with the statutory rule governing when definitions in one part of the code may be used in others. SDCL 2-14-4 provides: "Whenever the meaning of a word or phrase is defined in any statute such definition is applicable to the same word or phrase wherever it occurs except where a contrary intention plainly appears." Here, the words and phrases are not the same and a contrary intention plainly appears. SDCL 36-18A-1(24) defines a "professional engineer" as a person who is licensed and legally authorized to practice engineering in the state. However, neither the tax statutes imposing the tax on services (SDCL 10-45-4 and 10-45-5.2) nor the engineering exemption (SDCL 10-45-12.2) use the words "professional" or "engineer." Rather, the...

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1 books & journal articles
  • THE LIFE AND LEGAL LEGACY OF JUSTICE STEVEN L. ZINTER.
    • United States
    • South Dakota Law Review Vol. 65 No. 2, June 2020
    • 22 Junio 2020
    ...9-10, 793 N.W.2d at 4. (193.) Id. [paragraph] 11, 793 N.W.2d at 5. (194.) Mauch v. S.D. Dcp't of Revenue & Regulation, 2007 SD 90, [paragraph] 1, 738 N.W.2d 537, 538. (195.) Id. [paragraph] 24, 738 N.W.2d at 544. (196.) Id. [paragraph][paragraph] 9-20, 24, 738 N.W.2d at 542-43. The serv......

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