State, Dept. of Revenue v. Sanborn Telephone Co-op., 16710

• Decision Date: 14 February 1990
• Docket Number: No. 16710,16710
• Citation: 455 N.W.2d 223
• Parties: STATE of South Dakota, DEPARTMENT OF REVENUE, Plaintiff and Appellant, v. SANBORN TELEPHONE COOPERATIVE and Communication Enterprises, Inc., Defendants and Appellees. . Considered on Briefs
• Court: South Dakota Supreme Court

Page 223

455 N.W.2d 223

STATE of South Dakota, DEPARTMENT OF REVENUE, Plaintiff and Appellant, v. SANBORN TELEPHONE COOPERATIVE and Communication Enterprises, Inc., Defendants and Appellees.

No. 16710.

Supreme Court of South Dakota.

Considered on Briefs Feb. 14, 1990.

Decided April 25, 1990.

Timothy T. Weber, Asst. Atty. Gen., Pierre, for plaintiff and appellant; Roger A. Tellinghuisen, Atty. Gen., Pierre, on the brief.

Jeffrey D. Larson of Larson & Nipe, Woonsocket, for defendants and appellees.

MILLER, Justice.

In this appeal we hold that a telephone cooperative and its wholly owned subsidiary are liable for use tax on telephone directories and cable television guides purchased from out-of-state printers, but that the cooperative is not liable for service tax on reimbursements received from its subsidiary for various routine business expenses.

FACTS

The appellees are two entities, namely: Sanborn Telephone Cooperative (Sanborn), and Communication Enterprises Inc. (CEI). Sanborn provides telecommunication services to areas in south central South Dakota. CEI, a wholly owned subsidiary of Sanborn, provides cable television service to four communities and sells residential and business telephone systems, VCRs and other telecommunication equipment. CEI is operated out of the same facility as Sanborn with certain expenses and overhead being shared in a manner described later herein.

Sanborn provided its customers with telephone directories. CEI furnished its customers with cable TV guides. Both entities purchased these publications from out-of-state printers and paid no sales tax thereon.

In July, 1987, after an audit by the Department of Revenue (Department), additional sales and use taxes were assessed against both entities, with certificates of assessments being issued by the Department Secretary regarding the out-of-state purchase of the directories and guides and their subsequent use in South Dakota.

An administrative hearing was held before Department at the request of Sanborn and CEI. The Secretary ultimately affirmed the assessment. Sanborn and CEI appealed Department's decision to the circuit court which reversed the holding. Department appeals.

DECISION

ISSUE I

ARE A TELEPHONE COOPERATIVE AND A CABLE TELEVISION COMPANY LIABLE FOR USE TAX ON TELEPHONE DIRECTORIES AND CABLE TELEVISION GUIDES PURCHASED WITHOUT TAX FROM OUT-OF-STATE VENDORS FOR USE AND DISTRIBUTION IN SOUTH DAKOTA?

"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." Midcontinent Broadcasting v. Revenue Dept., 424 N.W.2d 153, 154 (S.D.1988).

Our use tax is provided in SDCL 10-46-2 and imposes a tax "on the privilege of the use, storage, and consumption in this state of tangible personal property purchased ... for use in this state[.]"

As we said in Sioux Falls Newspapers v. Secretary of Revenue, 423 N.W.2d 806, 810 n. 3 (S.D.1988), the use tax "is levied on property used within the state if that property would have been subject to sales tax if purchased within the state." Further, "[u]se tax compliments and supplements the sales tax by imposing upon those subject to it a tax burden equal to the sales tax in order that property sold or utilized in this state would be taxable once for the support of state government." Sioux Falls Newspapers, supra at 810 n. 3; National Bank of Sioux Falls v. Gillis, 82 S.D. 457, 467, 148 N.W.2d 293, 298 (1967). Use tax generally applies to retail transactions and not to transactions where items are purchased for resale. Sioux Falls Newspapers, supra.

It is undisputed that Sanborn and CEI purchased the telephone directories and cable television guides from out-of-state printers and paid no sales tax to the printers. ^* They are furnished to their customers with no specific charge. Sanborn and CEI claim that because use tax may not be imposed on the sale of property sold in the regular course of business, i.e., resale, the directories and guides are exempt from taxation. Their claimed exemption status is based on the interpretation of the term "use," which is defined under SDCL 10-46-1(12) to be "the exercise of right or power over tangible personal property incidental to the ownership of that property, except that it does not include the sale of that property in the regular course of business." (Emphasis added.)

In order for Sanborn and CEI to prevail, they must prove (1) that they actually made a sale of the directories and guides, and (2) that the sale occurred in the regular course of their businesses. When a party claims an exemption under a statute, we construe the statute strictly against the party claiming the exemption. Sioux Falls Newspapers, supra; Matter of Townley, 417 N.W.2d 398 (S.D.1987). Doubts are resolved in favor of taxation. Id.

Sanborn and CEI argue that the directories and guides are an "integral part" of their product and that their cost is calculated into the service rates, thus evidencing a resale. Department argues that the directories and guides are not purchased by Sanborn and CEI for sale to the customers because there is no subsequent resale.

In support of Department's claim, we note that inside the telephone directory under the title "General Rules and Regulations," it specifically states: "Directories, equipment, instruments, and lines furnished by the Telephone Company, on the premises of a subscriber, are the property of the Telephone Company " and "One directory for each location and/or each instrument leased through the Sanborn Telephone Co-op Inc. is furnished without charge." (Emphasis added.) This certainly negates any claim of resale of the directories. The only evidence from Sanborn contradicting this is testimony which claimed that there was a charge assessed for the directories as part of the local service rate. It is important to note, however, that Sanborn is the entity which orders and pays for the directories and would obviously control what is printed therein.

We interpret the specific language contained in the directories to mean exactly what it says, "[o]ne directory ... is furnished without charge" and that they are "the property of the Telephone Company."

Additionally, we find that there is insufficient evidence to establish CEI's resale of the guides. They are distributed free of charge to subscribers or the general public could pick them up at CEI's office.

Both companies assert that these books are an integral part of the service they provide, thereby lending support to their resale argument. First, we note they are primarily in the telecommunication business, they are not book sellers. Further, although the publications are important to their cost of doing business, so are other goods and services purchased by them. They have not, nor could they...