Puetz Corp. v. S.D. Dep't of Revenue

• Citation: 871 N.W.2d 632
• Decision Date: 04 November 2015
• Docket Number: No. 27282.,27282.
• Parties: PUETZ CORPORATION a/k/a Puetz Construction, Inc., Plaintiff and Appellee, v. SOUTH DAKOTA DEPARTMENT OF REVENUE, Defendant and Appellant.
• Court: Supreme Court of South Dakota

871 N.W.2d 632

PUETZ CORPORATION a/k/a Puetz Construction, Inc., Plaintiff and Appellee,

v.SOUTH DAKOTA DEPARTMENT OF REVENUE, Defendant and Appellant.

No. 27282.

Supreme Court of South Dakota.

Considered on Briefs Aug. 31, 2015.

Decided Nov. 4, 2015.

Timothy G. Bottum of Morgan Theeler LLP, Mitchell, South Dakota, Attorneys for plaintiff and appellee.

Rosa Yaeger of South Dakota Department of Revenue Pierre, South Dakota, Attorneys for defendant and appellant.

KERN, Justice.

[¶ 1.] After an audit of the taxpayer's construction management at-risk services, the South Dakota Department of Revenue issued a certificate of assessment against the taxpayer's gross receipts because it determined that the taxpayer's services were subject to contractor's excise tax under SDCL 10–46A–1. The taxpayer challenged the assessment and requested a hearing. The taxpayer asserted that its services were not subject to excise tax because it was not a prime contractor engaged in a realty improvement contract when it provided construction management at-risk services. Ultimately, the circuit court reversed the Department's certificate of assessment, ruling that the taxpayer's services were not subject to a contractor's excise tax under SDCL 10–46A–1. The Department appeals. We reverse the circuit court's decision and remand with direction that the circuit court reinstate the Department's final decision upholding the certificate of assessment.

BACKGROUND

[¶ 2.] In September 2012, the South Dakota Department of Revenue (Department) commenced an audit on Puetz Construction, Inc.'s (Puetz Inc.) excise tax and sales tax licenses for tax periods June 2009 through June 2012. Puetz Inc. is a South Dakota Corporation located in Mitchell, South Dakota. It engages in multiple construction-related services for both private and public entities. At issue here is whether Puetz Inc.'s construction management at-risk services provided to public and non-profit entities are subject to a contractor's excise tax under SDCL 10–46A–1. An excise tax is imposed under SDCL 10–46A–1"upon the gross receipts of all prime contractors engaged in realty improvement contracts, at the rate of two percent." It is undisputed that Puetz Inc. did not remit excise tax on the gross receipts it received from its construction management at-risk services provided to public and non-profit entities.

[¶ 3.] Puetz Inc. submits that a construction management at-risk service involves a contract with a public entity whereby the construction manager agrees to provide a completed project for the public entity at a specified cost and by a specified date. The purpose of Puetz Inc.'s construction management at-risk service is to "streamline" the construction "process and better protect government entities from the dire effects of cost overruns, construction delays and unsatisfactory work[.]" Further, with a construction management at-risk service, "the risk, uncertainty and burden of managing construction projects is removed from city or county officials and transferred to an expert in the construction field."

[¶ 4.] The audit began with a meeting between Auditor Joseph Thury and Puetz Inc.'s chief financial officer Peggy Nolz. Nolz had participated in past audits by the Department and informed Auditor Thury that the Department had not previously imposed excise tax on construction management at-risk services although the issue had been discussed. Auditor Thury examined the language of SDCL chapter 10–46A, a document prepared by the Department entitled "Contractor's Excise Tax Guide," and sample construction management at-risk contracts provided by Puetz Inc. From his review of this information, he determined that Puetz Inc.'s actions in the performance of its construction management at-risk contracts "more clearly align with that of a Prime Contractor than that of a Construction Manager." Thury therefore concluded that the gross receipts from Puetz Inc.'s construction management at-risk services were subject to excise tax.

[¶ 5.] As a result of the audit, the Department issued Puetz Inc. a certificate of assessment for $43,020.63, which included $31,879.83 in excise tax and $11,140.80 in interest. Puetz Inc. requested an administrative hearing to challenge the assessment. At the administrative hearing, Auditor Thury testified that in addition to talking to Nolz, he and his supervisor examined the sample contracts and "determined that these construction manager at risk fees will be subject to the prime contractor's excise tax[.]" Puetz Inc. received money from the public entity to pay "the contractors working underneath [Puetz Inc.], [and] had also reported excise tax on all other fees or all other amounts received from [the public entity.]"

[¶ 6.] In response, Puetz Inc. asserted that it merely acted as a pass-through for the public entities' funds when it paid the subcontractors for work completed. It further claimed that although it paid the contractor's excise tax due on the projects, it did so as part of its construction management at-risk services to the public entities. According to Puetz Inc., "all the excise tax is being paid on the actual construction by the contractors," and, therefore, an excise tax should not be imposed on Puetz Inc.'s services. Puetz Inc. also emphasized that it did not act in the capacity of a prime contractor engaged in a realty improvement contract. Rather, it provided management and inspection services "to ensure the timely and efficient delivery of public projects[.]" Puetz Inc. directed the hearing examiner to SDCL chapter 5–18B, which defines and sets forth the duties related to differing construction delivery methods. In support of its position, Puetz Inc. also submitted two official Attorney General opinions and one email from the Attorney General's Office as evidence that a construction management at-risk delivery method specifically prohibits the construction manager from acting as a prime contractor when the construction manager is also the architect on a public improvement project. Under the sample contracts, Puetz Inc. is listed as the architect.

[¶ 7.] During the hearing, Puetz Inc. also presented testimony from Wayne and Mark Puetz. Wayne and Mark explained that the construction manager purchases no materials and performs no actual construction work on the project. They asserted that the prime contractors receive the bids, provide the realty improvement, and engage in the actual construction service contracts. The construction manager, by contrast, supervises and manages the various prime contractors, schedules work, and ensures satisfactory completion of the project at a specified cost and by a specified date.

[¶ 8.] After the hearing, the examiner issued a written proposed decision holding "that Puetz clearly enters into realty improvement contracts or contracts for construction services." The hearing examiner reasoned that Puetz Inc. acted in the capacity of a prime contractor because it managed the subcontractors, ensured satisfactory completion of the construction projects, and assumed complete responsibility for the entire construction project. The hearing examiner relied on the Standard Industrial Classification Manual (SIC Manual). The SIC Manual is implicated in this case under SDCL 10–46A–2, which statute provides that "[p]rime contractors ... subject to the tax imposed by § 10–46A–1 include without limitation those enumerated in the Standard Industrial Classification Manual of 1987 ... construction (division c)."^* According to the hearing examiner, Puetz Inc.'s construction management at-risk service is properly classified in the SIC Manual (division c) Industry Group 1542, "General Contractors–Nonresidential Buildings, Other Than Industrial Buildings and Warehouses."

[¶ 9.] The hearing examiner rejected Puetz Inc.'s argument that SDCL chapter 5–18B and the Attorney General opinions prevent the imposition of excise tax on construction management at-risk services. It found that the Legislature intended that contractor's excise tax be assessed because the Legislature referred to excise tax in SDCL 5–18B–7 and SDCL 5–18B–17. Furthermore, the hearing examiner determined that a chapter regulating a business practice (chapter 5–18B) does not establish taxability of a business transaction within the tax code (chapter 10–46A) and cited Mauch v. South Dakota Department of Revenue and Regulation, 2007 S.D. 90, 738 N.W.2d 537, for this proposition.

[¶ 10.] The Department adopted the hearing examiner's proposed decision in full. Puetz Inc. appealed the decision to the circuit court. After considering the parties' written briefs and oral arguments, the circuit court issued a memorandum decision, findings of fact and conclusions of law, and an order reversing the hearing examiner's decision. The circuit court held that the hearing examiner's findings of fact were clearly erroneous and "inconsistent with current statutory construction in South Dakota and the record on this appeal[.]" The court relied on SDCL 5–18A–1(6) for the definition of a construction manager and SDCL 5–18B–15 for the fact that Puetz Inc. was prohibited from acting as both a construction manager and an architect on a public improvement.

[¶ 11.] The court also held that the hearing examiner erred when it concluded that Puetz Inc.'s construction management at-risk services fit within the SIC Manual (division c), specifically Industry Group 1542. According to the court, the plain meaning of the classifications within the SIC Manual (division c) do not include construction management at-risk services. It noted that the SIC Manual (division c) does not specifically mention the phrase "construction manager at-risk" or identify "an intermediate service provider to the prime contractors" as a building construction general contractor. The court further emphasized that "the SIC Manual was written in 1987 and does not contain any construction manager-at-risk language or provisions." Ultimately, the...