Sioux Falls Newspapers, Inc. v. Secretary of Revenue

• Decision Date: 06 June 1988
• Docket Number: No. 51-12054-OS,No. 15855,51-12054-OS,15855
• Citation: 423 N.W.2d 806
• Parties: In the Matter of the State Sales and Use Tax Liability for SIOUX FALLS NEWSPAPERS, INC., LicenseSioux Falls Newspapers, Inc., Licensee and Appellee, and Lewis Drugs, Inc., Intervenor, v. SECRETARY OF REVENUE, and The South Dakota Department of Revenue, Licensor and Appellant.
• Court: South Dakota Supreme Court

Page 806

423 N.W.2d 806

In the Matter of the State Sales and Use Tax Liability for SIOUX FALLS NEWSPAPERS, INC., License No 51-12054-OS Sioux Falls Newspapers Inc., Licensee and Appellee and Lewis Drugs, Inc., Intervenor, v. SECRETARY OF REVENUE, and The South Dakota Department of Revenue, Licensor and Appellant.

No. 15855.

Supreme Court of South Dakota.

Argued Jan. 14, 1988.

Decided April 27, 1988.

Rehearing Denied June 6, 1988.

Jon E. Arneson, Sioux Falls, for licensee and appellee.

Rita D. Haverly of Hagen & Wilka, P.C., Sioux Falls, for intervenor.

Gene R. Woodle, Asst. Atty. Gen., Pierre, for licensor and appellant; Roger A. Tellinghuisen, Atty. Gen., Pierre, on the brief.

SABERS, Justice.

The Department of Revenue (Department) appeals a circuit court decision which reversed an administrative determination of sales tax on retail printing charges and use tax on syndicated materials. We agree with Department's assessment of sales tax on printing charges but disagree on use tax on syndicated materials.

Facts

Department conducted a sales and use tax audit of the Sioux Falls Argus Leader (Argus) for the years 1982, 1983, and 1984. Argus was assessed additional tax and interest for sales and use during this period. The taxes were paid under protest and Argus sued to recover the assessed taxes. An administrative hearing was held on April 15th, 1986. Secretary (who did not attend the hearing) entered an order upholding the assessment. Argus appealed two issues to the circuit court: (1) the assessment for the four-page printed advertising insert sold to Lewis, and (2) the assessment for use tax on syndicated material utilized by Argus. The circuit court reversed the decision of Secretary. The circuit court held that the transactions between Argus and Lewis were tax exempt as a sale of advertising services under SDCL 10-45-12.1 and ARSD 64:06:02:03, and as newspaper sales under SDCL 10-45-12.1. The circuit court held that Argus' use of syndicated material was a nontaxable resale use under SDCL 10-45-1(5) and SDCL 10-46-1(2) and a tax exempt use under SDCL 10-46-9. Department appeals.

Findings of Fact and Scope of Review

Department appears to be claiming, not that some of the circuit court's findings are per se erroneous, but that the findings are not based upon the record developed at the administrative agency level. A review of the transcript of the administrative hearing and the exhibits show that the circuit court's findings are based upon direct evidence presented at the hearing (or reasonable inferences therefrom) and stipulations between the parties.

Whether a statute imposes a tax under a given set of facts is a question of law. Modern Merchandising, Inc. v. Department of Revenue, 397 N.W.2d 470, 471 (S.D.1986).

"Resolution of this dispute depends upon the interpretation and application of statutes. Because this is a question of law, we accord no deference to the conclusions reached by the Department or the circuit court. (citing Permann v. Dept. of Labor, 411 N.W.2d 113, 117 (S.D.1987))"

In the Matter of the State Sales and Use Tax Liability of Townley, 417 N.W.2d 398, 399 (S.D.1987).

1. SALES TAX LIABILITY FOR PRINTING CHARGES

SDCL 10-45-2 imposes "upon the privilege of engaging in business as a retailer, a tax of four percent upon the gross receipts of all sales of tangible personal property consisting of goods, wares, or merchandise, ... sold at retail in the state of South Dakota to consumers or users." Department contends that the four-page printed advertising supplement produced by Argus at the direction of Lewis is tangible personal property and as such is subject to the imposition of tax under SDCL 10-45-2. Argus argues that there must be a sale of tangible personal property in order to have a taxable event under SDCL 10-45-2. Department argues that there was a sale of tangible personal property. Department's position is that the advertising inserts are tangible property and that Department assessed tax only on that portion of Argus' charges to Lewis which were determined to be printing costs. No assessment was made on that portion of the charge determined to be for advertising services.

SDCL 10-45-2 imposes a 4% tax on the gross receipts of all sales of tangible personal property sold at retail. The third paragraph in ARSD 64:06:02:03 provides that sales tax applies to the gross receipts from sales of tangible personal property to persons providing advertising services. Included in these sales are the sale of paper, ink, type composition charges and printer's production charges. Argus, acting as printer, made a sale of tangible personal property to Lewis. Department seeks to impose tax on Argus' retail sales, as a commercial printer, to Lewis. In essence, Department severed the amount charged by Argus into two components--one taxable, one exempt. The cost of the sale of tangible personal property is separate and divisible from the cost of the sale of advertising services.

A. Exemption From Sales Tax Liability For Advertising Services

Argus asserts that any tangible property produced was merely incidental to the advertising service performed by Argus for Lewis. Argus also cites to SDCL 10-45-12.1 which exempts advertising services from the operation of the sales tax.

Argus cites to Department's own regulation, ARSD 64:06:02:03 and Department's own published guidelines to substantiate its argument that charges for advertising in newspapers are not taxable. ¹ There is no question that regular newspaper advertising, such as classified, quarter page, and full page ads are within the scope of the exemption. Argus contends that these advertising supplements should be treated similarly. Argus argues that differences in size and color of advertisements are distinctions which do not change the nature of the activity or the transaction. However, Argus overlooks the third paragraph of ARSD 64:06:02:03 which states, "[s]ales tax applies to gross receipts from sales of tangible personal property[.]" (See footnote 1.)

There was a tangible product produced in this case. Argus argues that it is exempt from sales tax on the printing charges. As we have said many times, tax exemption statutes are construed strictly against the person claiming exemption. Matter of Townley, supra at 400. Argus' printing transactions with Lewis are equivalent to the commercial printing transactions held taxable in K Mart Corp., Inc. v. S.D. Dept. of Revenue, 345 N.W.2d 55 (S.D.1984). It is the similarity in the transactions and not the character of the participants upon which we must focus. Regardless of whether Argus is characterized as a printer, an advertising service or a newspaper, its transactions with Lewis in printing the inserts were those of a retailer selling tangible personal property to a consumer.

B. Exemption From Sales Tax Liability For Newspaper Sales and Subscriptions

Department contends that these advertising inserts cannot be exempt as a sale of newspapers under SDCL 10-45-12.1. It relies upon this court's decision in K Mart, supra, where this court adopted a definition of what constitutes a newspaper from Caldor, Inc. v. Heffernan, 183 Conn. 566, 440 A.2d 767 (1981). The court in Caldor found two particular factors to be characteristic of a newspaper: (1) newspapers are published in short, regular intervals of usually no more than one week, and (2) they report on many topics of interest to the general public. The court in K Mart found that although the preprinted advertising supplements might satisfy the first requirement of this definition they did not, standing alone, satisfy the second requirement. The court in K Mart was considering the taxability of supplements printed by a commercial printer and delivered to the newspaper for distribution with the newspaper.

In Daily Record Co. v. James, 629 S.W.2d 348 (Mo.banc 1982), the court distinguished supplements printed by the newspaper and billed to the advertiser, which were held to be nontaxable services, from supplements printed by a commercial printer at the direction of the advertiser and then shipped directly to the newspaper for incorporation and distribution. See also Sears, Roebuck and Co. v. State Tax Commission, 370 Mass. 127, 345 N.E.2d 893 (1976). The Daily Record court went on, however, to find that the character of the printer was an inappropriate focus. This point was echoed in Eagerton v. Dixie Color Printing Corp., 421 So.2d 1251 (Ala.1982), where the court stated that they could see no reason why "the tax consequences of identical transactions should differ, based entirely and solely on who makes the purchase" and that "[i]t is the transaction which is taxable and not the identity of the purchaser." Id. at 1253-1254. We agree. As noted above, determinations of taxability should focus on the transaction. Because we held tax was correctly imposed on an equivalent transaction in K Mart, supra, we hold that tax was correctly imposed here.

The advertising inserts, printed on yellow newsprint and appearing in Argus on Wednesdays and Sundays, are not entitled to an exemption as sales of newspapers. The inserts were merely added to and distributed with the newspaper. Only sales of newspaper to the reader/consumer are exempt under the newspaper sales exemption and Argus is not selling newspapers to Lewis. To hold otherwise would constitute unfair discrimination in favor of a newspaper and against a printer based on a purely artificial distinction, i.e., who is doing the printing?

In K Mart, supra, the taxpayer also contended that the supplements were an integral or component part of the newspaper and should qualify for the exemption. This court cited Ragland v. K Mart Corp., 274 Ark. 297, 624 S.W.2d 430 (1981), for six factors to be utilized in determining whether advertising supplements were a component part of a newspaper. The six factors identified by the Ragland court were: ownership, preparation, regular feature, privity...