WESTERN WIRELESS v. Dept. of Rev.

• Citation: 665 N.W.2d 73,2003 SD 68
• Decision Date: 04 June 2003
• Docket Number: No. 22373.,22373.
• Parties: WESTERN WIRELESS CORPORATION, License No. 73-001-911638901E-ST-001, and Sioux Falls Cellular Communications Corporation, License No. 51-001-133413748E-ST-001, Plaintiffs and Appellants, v. DEPARTMENT OF REVENUE, Defendant and Appellee.
• Court: South Dakota Supreme Court

665 N.W.2d 73

2003 SD 68

WESTERN WIRELESS CORPORATION, License No. 73-001-911638901E-ST-001, and Sioux Falls Cellular Communications Corporation, License No. 51-001-133413748E-ST-001, Plaintiffs and Appellants, v. DEPARTMENT OF REVENUE, Defendant and Appellee.

No. 22373.

Supreme Court of South Dakota.

Argued on November 19, 2002.

Reassigned March 4, 2003.

Decided June 4, 2003.

Rehearing Denied July 11, 2003.

Steven W. Sanford of Cadwell, Sanford, Deibert & Garry, LLP, Sioux Falls, South Dakota, Attorneys for plaintiffs and appellants.

Lawrence E. Long, Attorney General, Jack C. Magee, Assistant Attorney General, Department of Revenue, Pierre, South Dakota, Attorneys for defendant and appellee.

KONENKAMP, Justice (on reassignment).

[¶ 1.] South Dakota imposes a use tax on tangible personal property and services purchased out of state for in-state use. The question here is whether the Department of Revenue properly levied use tax on out-of-state billing services purchased by a South Dakota cellular phone company to bill and collect fees from its South Dakota subscribers. Both the hearing examiner and the circuit court concluded that the use tax was properly collectible. Because this billing service applies to activities of the purchaser in this state and the amount of tax is apportioned to the billing service applicable to South Dakota customers, our statutes authorize use tax on this service and they are constitutional. We affirm.

A. Background

[¶ 2.] Western Wireless operates a cellular telephone business in South Dakota. Although its principal office is in the State of Washington, it has physical facilities in both Sioux Falls and Rapid City. To provide its South Dakota customers a monthly billing statement for cellular services, Western contracts with Computer Sciences Corporation (CSC) in Champaign, Illinois, to obtain "subscriber billing services." For these services, Western pays an undisclosed fee.¹ Western records the cellular activity of its South Dakota customers on its equipment in South Dakota. Western then sends the recorded information to CSC in Illinois. Using its proprietary software, CSC runs the raw data on these tapes through a "call rating process" to generate electronic bills.

[¶ 3.] The electronic bills are then sent to a Western office in Washington for approval. Once approved, CSC sends them to a subcontractor in California, where invoices are printed. The invoices are placed in the United States mail in California, eventually reaching Western's South Dakota customers. All payments made on bills are remitted to Phoenix, Arizona. Customer questions about the bills are handled in Washington or New Mexico. In short, the essential information necessary to complete the bills originates from Western Wireless in South Dakota, and, after processing by the billing service contractor, the bills are mailed to South Dakota subscribers.

[¶ 4.] Upon a tax audit of Western's operations, the Department sought to collect $232,408.12 for use tax on the billing services applicable to Western's billings in South Dakota from 1994 to 1997. Western challenged the assessment. The hearing examiner ruled that the tax was proper. On appeal to the circuit court, it initially reversed the decision. Later, following a remand for further evidentiary findings, the court ruled that the billing services were subject to use tax and that the imposition of the tax was constitutional. On appeal before us, Western asserts that South Dakota's legislative framework does not impose use tax on the billing services and that if it did, such tax would be unconstitutional.²

B. Standard of Review

[¶ 5.] This is an administrative appeal. We reconfirmed the proper standard of review for administrative appeals in Sopko v. C & R Transfer Co., Inc., 1998 SD 8, ¶¶ 6-7, 575 N.W.2d 225, 228-29. SDCL 1-26-36 requires us to give great weight to administrative findings and inferences on factual questions. Id. ¶ 6. Agency findings are examined "in the same manner as the circuit court to decide whether they were clearly erroneous in light of all the evidence. If after careful review of the entire record we are definitely and firmly convinced a mistake has been committed, only then will we reverse." Id. An agency's conclusions of law, however, are fully reviewable. Id. Tax statutes are construed liberally in favor of the taxpayer, as are ambiguities in those statutes. Nash Finch Co. v. South Dakota Dep't of Revenue, 312 N.W.2d 470, 472 (S.D.1981). Because the questions here are primarily legal ones, our review in this case is de novo.

C. Use Tax on Out-of-State Billing Services

[¶ 6.] Sales tax is a transaction tax on certain sales and services occurring in South Dakota. Use tax serves as a sales tax substitute imposed on those who buy out of state and do not pay sales tax. The levy of the use tax attaches after the use of a tangible item or service occurs in South Dakota. See generally Billings v. United States, 232 U.S. 261, 34 S.Ct. 421, 58 L.Ed. 596 (1914)

. The two taxes are mutually compensating, one supplementing the other, but both cannot be equally applicable to the same transaction. The rate of tax is the same. See generally SDCL ch 10-45, 10-46.

[¶ 7.] Use taxes accommodate two vital concerns: (1) the state may lose tax revenue if taxpayers purchase out-of-state goods or services for in-state use, and (2) local providers will lose business if taxpayers purchase out-of-state goods or services to avoid sales tax liability. Northwestern Nat'l Bank of Sioux Falls v. Gillis, 82 S.D. 457, 467, 148 N.W.2d 293, 298 (1967); see generally Jerome R. Hellerstein & Walter Hellerstein, 2 State Taxation § 16.01[2] (3d ed 2000). Thus, the Legislature imposes a sales tax on purchases of goods and services within the state and a complementary use tax on goods and services purchased outside the state for use within the state. By itself, a use tax may appear to be discriminatory because it applies only to goods and services acquired out of state. Halliburton Oil Well Cementing Co. v. Reily, 373 U.S. 64, 69, 83 S.Ct. 1201, 1203, 10 L.Ed.2d 202 (1963). Nonetheless, because use taxes are paired with complementary sales taxes, the United States Supreme Court has upheld them: in the context of the overall tax structure, such statutes may properly impose on the out-of-state purchase of goods an equivalent burden to that imposed on an in-state purchase. Henneford v. Silas Mason Co., 300 U.S. 577, 57 S.Ct. 524, 81 L.Ed. 814 (1937).

[¶ 8.] To support imposing use tax on the billing services Western purchases, the Department relies on SDCL 10-46-1(13) and 10-46-2.1 (use tax on services).³ Under SDCL 10-46-1(13), the term "use" "also includes the use of the types of services, the gross receipts from the sale of which are to be included in the measure of the tax imposed by chapter 10-45...." Turning to chapter 10-45, we see that the term "service" means "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." SDCL 10-45-4.1.

[¶ 9.] Western contends that no use tax is payable because of our decision in Modern Merchandising, Inc. v. Department of Revenue, 397 N.W.2d 470, 471 (S.D.1986). In that case, this Court reversed the imposition of use tax on the cost of LaBelle's catalogs and flyers mailed to South Dakota residents. LaBelle's sold goods by mail order and through its local stores. The materials were delivered to South Dakota by mail or by common carrier. They were sent by out-of-state printers who contract with LaBelle's to produce these flyers and catalogs. LaBelle's provided South Dakota addresses where the materials were to be delivered.

[¶ 10.] In Modern Merchandising, the Department argued that LaBelle's used "the flyers and catalogs to generate sales in South Dakota and to operate its catalog business." In rejecting this argument as a basis for levying use tax, we found that LaBelle's had no in-state contract for the services and all control over the flyers and catalogs in South Dakota vested in either the post office or the recipients. We held that the Department's focus on whether the materials generated sales to support a use tax was erroneous; instead, the inquiry should turn on whether the language of the taxing statutes applied.⁴ [¶ 11.] Western asserts that, as in Modern Merchandising, no use tax applies here because it "has contracted for the printing of [its] bills by a third party, and as a result Western does not generate, print, or mail the bills to in-state residents; the bill preparer/printer controls all of these functions and the bills themselves." Western equates these "tangible itemized written bills" with the advertising materials sent to South Dakota residents. Moreover, Western points out that even the amended language in SDCL 10-46-1(13), added in response to the Modern Merchandising decision, will not encompass these transactions because the invoices do not "advertise products or services or promote or facilitate sales to South Dakota residents." Western believes that there is an insufficient nexus between the cost of producing the billing statements and South Dakota to justify use tax and, therefore, the billing service is outside the statutory reach of the tax.

[¶ 12.] Modern Merchandising dealt with whether a merchandiser had sufficient right or power incidental to ownership of advertising materials sent from out of state to qualify as a use in this state of tangible personal property. 397 N.W.2d at 472-73; see SDCL 10-46-1(2) and 2. On the other hand, our decision in Thermoset Plastics, Inc. v. Department of Revenue, 473 N.W.2d 136 (S.D.1991) addressed the in-state use of out-of-state services. The service in that case was provided by an out-of-state accounting firm to a South Dakota business. Before commencing operations in South Dakota, Thermoset...