Thermoset Plastics, Inc., Matter of, Nos. 17273

• Court: Supreme Court of South Dakota
• Writing for the Court: HENDERSON; MILLER
• Citation: 473 N.W.2d 136
• Parties: In the Matter of the State use Tax Liability of THERMOSET PLASTICS, INC. THERMOSET PLASTICS, INC., Plaintiff and Appellee, v. The STATE of South Dakota, DEPARTMENT OF REVENUE, Defendant and Appellant.
• Decision Date: 03 July 1991
• Docket Number: Nos. 17273,17286

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473 N.W.2d 136 In the Matter of the State use Tax Liability of THERMOSET
PLASTICS, INC.
THERMOSET PLASTICS, INC., Plaintiff and Appellee,
v.
The STATE of South Dakota, DEPARTMENT OF REVENUE, Defendant
and Appellant. Nos. 17273, 17286. Supreme Court of South Dakota. Argued March 20, 1991.
Decided July 3, 1991.

Rita D. Haverly, Hagen & Wilka, P.C., Sioux Falls, for plaintiff and appellee.

Timothy T. Weber, Dept. of Revenue, Pierre, for defendant and appellant; Roger A. Tellinghuisen, Atty. Gen., Pierre, on brief.

PROCEDURAL HISTORY/ISSUES

HENDERSON, Justice.

The Department of Revenue conducted a sales and use tax audit of Thermoset Plastics, Inc. (Thermoset) for the period of September,

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1986 through June, 1988. It was determined that Thermoset under-reported tangible personal property and services purchased for use in South Dakota. It was assessed $9,713 plus interest.

Thermoset challenged the additional assessment whereupon an administrative hearing was held. The Secretary of Revenue basically affirmed the audit assessment on October 11, 1989, and Thermoset appealed to the circuit court. The circuit court affirmed the Secretary's Order in part and reversed it in part on June 23, 1990.

The State of South Dakota, Department of Revenue raises five issues on appeal:

1. Was Thermoset's purchase in Minnesota of a used forklift, which was more than seven years old, exempt from use tax? We hold that it is not exempt.

2. Is Thermoset subject to use tax for services provided by an out-of-state accounting firm used in South Dakota? We hold that it is subject to use tax.

3. Is Thermoset liable for use tax on the cost of prototype molds designed for use in South Dakota? We hold that it is liable for use tax.

4. Are poly pails intended ingredients of Thermoset's finished product? We hold they are not.

5. Is Thermoset liable for use tax on the rental of equipment used in its manufacturing process? We hold that it is liable for use tax.

Thermoset raises two issues by Notice of Review: Is Thermoset entitled to the exemption of SDCL 10-46-9 on all materials which it consumes in the manufacturing process and does the charge from Bulk Molding Company represent a tax exempt transaction?

We affirm the Secretary, thereby reversing the circuit court in part and affirming the circuit court in part.

FACTS

Thermoset, a corporation located in Mitchell, South Dakota, is a manufacturer of compression molded plates. It commenced operations in this state in January, 1987.

On September 3, 1986, Thermoset's organizers ordered three prototype molds from a plant in St. Charles, Illinois, that were needed to qualify the product that Thermoset intended to produce. However, at that point, Thermoset had not yet determined that it would locate in South Dakota. It was considering locations in Minnesota, Arizona, Arkansas or Ohio. According to Thermoset, the prototype molds ordered by Thermoset's organizers have never been used, stored or consumed in South Dakota for production or otherwise and have never entered South Dakota. At the time Thermoset's organizers located in South Dakota, two of the prototype molds were obsolete and their value was limited to that of scrap.

Before Thermoset decided to commence operations in South Dakota in 1986, Thermoset's organizers incurred $8,000 in fees for preparation of a cash flow statement by Arthur Anderson in Phoenix, Arizona. However, the circuit court, reversing the Secretary, determined that Thermoset did not use the Arthur Anderson accounting services in South Dakota. It reasoned that the 1986 cash flow statement was based on a different product line, different manufacturing equipment, and a different labor structure than what later materialized in South Dakota in 1987.

There was testimony at the administrative hearing as to how several items listed as taxable items were consumed in the manufacturing process and, at some times, even becoming part of the finished product. The circuit court determined that suction cups, brushes, blades, chips for deflasher, molds, belts, gloves and magnetic tape only accidentally or incidentally become incorporated in the finished product. However, it determined poly pails are intended by Thermoset to be incorporated into the finished product, thus exempted.

A 1971 model forklift was also listed by the auditor as being subject to use tax. The forklift was bought used in Minnesota. The auditor also listed extruder rent to Bulk Molding Company as taxable. At the

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time Thermoset was ready to begin production, it did not have mixing equipment. It therefore agreed to a three month extrusion equipment rental agreement with Bulk Molding Company. ¹ Thermoset argues that this rent was actually payment for raw materials. DECISION

Our standard of review in this case is governed by SDCL 1-26-36. This requires us to "give great weight to the findings made and inferences drawn [by the administrative agency] on questions of fact." Deuschle v. Bak Const. Co., 443 N.W.2d 5 (S.D.1989). Further, we review the record in the same light as does the trial court and determine if the administrative agency's decision was clearly erroneous in light of all of the evidence. In re Northwestern Bell Tel. Co., 382 N.W.2d 413 (S.D.1986). However, on questions of law, we may "interpret statutes without any assistance from the administrative agency." Permann v. South Dakota Department of Labor, 411 N.W.2d 113 (S.D.1987).

I. Under SDCL 10-46-2, ² Thermoset is liable for use tax for the forklift purchased out-of-state for use in South Dakota.

The construction of a statute is a question of law. Because the question of whether a statute imposes a tax under a given factual situation is a question of law, no deference is given to any conclusion reached by the Department. Midcontinent Broadcasting v. Revenue Dep't, 424 N.W.2d 153 (S.D.1988). Further, statutes which impose taxes are to be construed liberally in favor of the taxpayer and strictly against the taxing body. Ambiguities in a statute imposing a tax are interpreted in favor of the taxpayer. Nash Finch Co. v. South Dakota Dep't of Revenue, 312 N.W.2d 470 (S.D.1981).

Thermoset contended at the administrative and circuit court levels that SDCL 10-46-3 ³ exempts the purchase of the forklift from use tax liability because the forklift is more than seven years old and Thermoset purchased it used from a Minnesota dealer who did not originally purchase it for use in South Dakota. ⁴ SDCL 10-46-3 deals with two situations: (1) Where property is less than seven years old and not originally purchased for use in this state and (2) Where property is more than seven years old and not originally purchased for use in...