#25546-a-SLZ
2010 S.D. 90

                          IN THE SUPREME COURT
                                  OF THE
                         STATE OF SOUTH DAKOTA

                                       * * * *

TRM ATM CORPORATION
LICENSE NOS. -
73-001-931263309E-ET001
73-001-931263309e-ST-001,                             Plaintiff and Appellant,

      v.

SOUTH DAKOTA DEPARTMENT
OF REVENUE AND REGULATION,                            Defendant and Appellee.

                                * * * *
                    APPEAL FROM THE CIRCUIT COURT
                     OF THE SIXTH JUDICIAL CIRCUIT
                    HUGHES COUNTY, SOUTH DAKOTA
                                * * * *

                        HONORABLE MARK BARNETT
                                Judge

                                       * * * *

HAVEN L. STUCK of
Lynn, Jackson, Shultz & Lebrun, P.C.
Rapid City, South Dakota

J. SCOTT MORRIS of
J. Scott Morris, P.C.                                Attorneys for plaintiff
Austin, Texas                                        and appellant.

JOHN T. RICHTER of
South Dakota Department of Revenue
and Regulation                                        Attorney for defendant
Pierre, South Dakota                                  and appellee.

                                       * * * *
                                                 CONSIDERED ON BRIEFS
                                                 ON OCTOBER 4, 2010

                                                 OPINION FILED 12/08/10
#25546

ZINTER, Justice

[¶1.]         TRM ATM Corporation (TRM) appeals a sales tax assessment on

services it rendered to intermediaries involved in providing automatic teller

machine (ATM) banking. The case requires us to consider whether concededly

taxable services are subject to sales tax that must be paid by TRM, the provider of

the services; or, whether the services are subject to use tax that must be paid by the

intermediaries that use TRM’s services. If the services are subject to sales tax, we

must also determine whether TRM is obligated to pay the tax on receipts that it

claims were received only “temporarily” until they were “passed-through” to third

parties. We conclude that the services are subject to sales tax. We also conclude

that TRM must pay the tax on all of its gross receipts.

                             Facts and Procedural History

[¶2.]         This case was submitted on stipulated facts. TRM is an Oregon

corporation that owns, operates, sells, leases, and services ATMs in South Dakota.

The South Dakota Department of Revenue and Regulation assessed sales tax on

transaction processing and surcharge fees that TRM received from sponsor banks

and core-data companies. 1 Sponsor banks and core-data companies are

intermediaries in an ATM transaction. They contract with an ATM cardholder’s

depository bank to make remote ATM services available for the cardholder. In

order to provide the ATMs at remote locations, the sponsor banks and core-data




1.      It appears that the processing and surcharge fees represent a small portion of
        the fees a cardholder pays a depository bank in an ATM transaction.

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#25546

companies contract with TRM to provide and service the ATMs. The sponsor banks

then pay TRM for its services. 2 The parties stipulated that:

                    Pueblo Bank and Trust and First Financial Bank
                     (“sponsor banks”), and core-data companies Star
                     Processing, Inc., . . . and Money Access Service . . . (“core-
                     data companies”), contract with TRM to provide and
                     service ATMs.
                    The transactions from which TRM is paid its fees are
                     between TRM, the sponsor bank, and the core-data
                     companies.
                    TRM receives its contractual share of the surcharge and
                     transactional fees through either Pueblo Bank and Trust
                     or First Financial Bank for every transaction. The
                     transaction processing fees and surcharge fees paid here
                     are taxable services to someone; they are not exempt
                     services.

(Emphasis added.)

[¶3.]         The Department adopted a hearing examiner’s decision concluding

that the sales tax assessment was correct because: “TRM clearly provides a service



2.      TRM’s contract for services requires that sponsor banks pay transaction
        processing fees as follows:

              [Sponsor bank] agrees to pay [TRM] for each transaction made
              on the ATM. A “transaction” shall mean any cash withdrawal
              made from a cardholder’s account. [Sponsor bank] shall pay
              [TRM] ten cents ($.10) [this amount may vary] per transaction.
              Payments for transactions will be disbursed monthly by
              [sponsor bank] to [TRM.]

        TRM’s contract also requires that sponsor banks pay transaction surcharges
        as follows:

              In the event [TRM] is legally permitted and chooses to impose a
              surcharge upon each transaction, [TRM] will receive, from said
              transaction proceeds, one hundred percent (100%) of the gross
              surcharge income collected per month. [Sponsor bank] agrees
              that surcharge revenue shall be remitted to [TRM] at the time
              transaction fees . . . are paid.

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#25546

and it does so for the transaction fees and surcharge fees. TRM provides its services

to the sponsor banks [and the] core data companies.” The circuit court affirmed.

“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.” S.D. Dep’t. of Revenue v. Sanborn Tel. Coop., 455

N.W.2d 223, 225 (S.D. 1990).

                                       Decision

[¶4.]        A sales tax is imposed on the gross receipts of businesses engaged in

rendering services.

             There is hereby imposed a tax at the same rate as that imposed
             upon sales of tangible personal property in this state upon the
             gross receipts of any person from the engaging or continuing in
             the practice of any business in which a service is rendered. Any
             service as defined by § 10-45-4.1 shall be taxable, unless the
             service is specifically exempt from the provisions of this chapter.

SDCL 10-45-4. Taxable services include “all activities engaged in for other persons

for a fee . . . which activities involve predominantly the performance of a service[.]”

SDCL 10-45-4.1.

[¶5.]        A number of entities provide services in a chain of transactions

necessary for ATM banking. TRM concedes that its services are taxable. But TRM

argues that it is not the entity in the chain that is responsible to pay tax on those

services. TRM contends that instead of it paying sales tax, the sponsor banks and

core-data companies should be assessed use tax for their use of TRM’s services. See

SDCL 10-46-2.1 (“For the privilege of using services in South Dakota . . ., there is

imposed on the person using the service an excise tax equal to four percent of the

value of the services at the time they are rendered.”).

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#25546

[¶6.]         TRM points out that it has no contractual relationship with the

cardholder or the cardholder’s depository bank, and TRM provides no service

directly to the ATM cardholder. TRM only provides services to the core-data

companies and sponsor banks that contract with the depository banks that

ultimately provide their cardholders with access to ATMs. TRM also points out that

the core-data companies calculate and disburse the fees earned by each

intermediary in an ATM transaction. The core-data companies then charge the

cardholder’s bank account. Based on these facts, TRM argues that its transactions

are not subject to sales tax under the predominant activity test applied in

Watertown Coop. Elev. Assoc. v. S.D. Dep’t. of Revenue, 2001 S.D. 56, 627 N.W.2d

167, and Sioux Falls Shopping News, Inc. v. Dep’t. of Revenue and Regulation, 2008

S.D. 34, 749 N.W.2d 522. 3

[¶7.]         Watertown Coop. and Shopping News involved the imposition of use

tax on intermediary transactions not involving an ultimate consumer. In both cases

we applied (expressly or implicitly) the predominant activity test, and we

emphasized that the focus should be on the transaction. See Shopping News, 2008

S.D. 34, ¶ 23, 749 N.W.2d at 527; Watertown Coop., 2001 S.D. 56, ¶ 12, 627 N.W.2d

at 172. TRM argues that its services are not the predominant activity in an ATM

transaction. TRM further argues that because use tax was imposed on

intermediaries in Watertown Coop. and Shopping News, the Department must




3.      The predominant activity test was not specifically mentioned in Shopping
        News. Instead, we cited Coop. Agronomy Serv. v. S.D. Dep’t. of Revenue, 2003
        S.D. 104, ¶ 8, 668 N.W.2d 718, 721, which applies the same test.

                                         -4-
#25546

collect use tax from the sponsor banks and core-data companies for their use of

TRM’s services rather than collecting sales tax from TRM for its sale of those

services. We conclude that the Department is not so constrained.

[¶8.]        Contrary to TRM’s argument, Watertown Coop. did not utilize the

predominant activity test to determine which tax applied. The issue was whether

crop production specialist services provided in connection with the sale of exempt

agronomy products were exempt from all taxation because the services were a part

of the exempt product sold. Watertown Coop., 2001 S.D. 56, ¶ 11, 627 N.W.2d at

171-72. Similarly, Shopping News did not utilize the predominant activity test “to

determine whether use tax or sales tax applied to the transaction.” Appellant’s Br.

7. The type of applicable tax – sales or use – was not at issue. The issue was

“[w]hether the distribution and delivery services [used by an advertiser were]

exempt from the use tax.” Shopping News, 2008 S.D. 34, ¶ 17, 749 N.W.2d at 525.

[¶9.]        Furthermore, the fact that use tax was ultimately imposed on

intermediaries in both cases was not important to this Court’s reasoning. In fact,

we expressly noted that “the focus belongs on the transaction, not the character of

the participants.” Id. ¶ 23, 749 N.W.2d at 527. Therefore, Shopping News and

Watertown Coop. do not stand for the proposition that intermediary transactions

not involving a final consumer are only subject to use tax. Both cases merely stand

for the proposition that in analyzing the taxability of a service, the dispositive

inquiry focuses on the predominant activity in the transaction between those

parties who exchange consideration for the service. In this case, TRM’s provision of




                                           -5-
#25546

ATM services is the predominant activity in its transactions with the sponsor banks

and core-data companies.

[¶10.]       TRM’s attempt to shift all tax liability to the user of its services fails to

recognize that sales tax is imposed “upon the gross receipts of any person from the

engaging or continuing in the practice of any business in which a service is

rendered.” SDCL 10-45-4 (emphasis added). Those services include “all activities

engaged in for other persons[.]” SDCL 10-45-4.1 (emphasis added). And, “gross

receipts means the total amount or consideration, . . . for which services are sold . . .

whether received in money or otherwise[.]” SDCL 10-45-1.14 (emphasis added). On

the other hand, use tax “is imposed on the person using the service[.]” SDCL 10-46-

2.1 (emphasis added). “A use tax is a tax on the enjoyment of that which was

purchased.” State v. Dorhout, 513 N.W.2d 390, 392 (S.D. 1994). Therefore, use tax

applies if an entity has paid another entity for the use of services. But sales tax

applies if an entity has received payment from another entity for services rendered.

[¶11.]       In this case, TRM “rendered” ATM services “for other persons,” and

TRM “receive[d]” consideration for those services. See SDCL §§ 10-45-4, -4.1,-1.14.

Because TRM was the party rendering services to others for money, its services fall

within the definition of “service” under the sales tax statutes, SDCL §§ 10-45-4 and

10-45-4.1.

[¶12.]       TRM’s argument also fails to recognize that a transaction may be

subject to either sales or use taxation. “In South Dakota, the use tax was passed by

our [L]egislature to complement the sales tax, not to displace it.” Dorhout, 513

N.W.2d at 397 (Henderson, J., specially concurring). Moreover, the Legislature has


                                           -6-
#25546

provided an exemption from use tax if the service is subject to the sales tax. See

SDCL 10-46-6. Therefore, we see no statutory impediment to the Department’s

decision to first focus on the entity providing a service rather than the entity using

the service. We agree with the hearing examiner, the Department, and the circuit

court that TRM’s services are subject to sales tax under SDCL 10-45-4.

[¶13.]         TRM, however, contends that it received “some” of the fees only

“temporarily” until they were “passed through” to third-party merchants. TRM

points out that it originally owned and operated over thirty ATMs in South Dakota.

Prior to the audit period, TRM sold all but three ATMs to third-party merchants on

whose premises the ATMs were located. After those sales, TRM became

contractually obligated to pay the third-party merchants some of the fees. But “[i]n

every instance where TRM sold an ATM to a third-party merchant, TRM

maintained the contract with the sponsor bank or core-data company. TRM

continued to collect its contractual transaction fees and surcharges.” Stipulated

Fact # 18. Moreover, the amount paid 4 to the third-party merchants was based on

some contractual obligation, the specifics of which TRM has not disclosed on appeal.

[¶14.]         Nevertheless, TRM insists that it acted “as a mere pass through,” and

therefore, the money it was obligated to pay the third-party merchants was not

TRM’s “gross receipts.” But under the facts of this case, whether TRM had

contractual obligations to the third-party merchants is irrelevant. SDCL 10-45-4

imposes the tax “upon gross receipts.” And gross receipts include the “total amount



4.       During the audit period, TRM kept $243,813 in fees: $11,081 in 2004;
         $87,767 in 2005; $81,229 in 2006; and $54,736 in 2007.

                                          -7-
#25546

or consideration . . . received . . . without any deduction” for any “cost” of the service

or “any other expense” of the seller except for statutory deductions and exemptions

that are not claimed here. 5 See SDCL 10-45-1.14(1), (2).

[¶15.]         Because TRM makes no claim to a statutory deduction or exemption

for its costs associated with the third-party merchants, TRM argues that it

“performs no services that would entitle it to receive and keep these fees; they are

received and passed on without consideration received. These amounts are not . . .

‘[g]ross [r]eceipts.’” (Emphasis added.) But the record does not include the

contracts with the third-party merchants reflecting the extent to which TRM

performed services for consideration. This is important because, as indicated in the

stipulated facts, even when TRM sold an ATM to a third-party merchant, TRM

contracted with the core-data companies and sponsor banks “to continue[ ] to collect

its contractual transactional fees and surcharges.” And notwithstanding the

purported “pass through” of some of the fees, TRM acknowledges that it performed

a contractual service by disbursing the fees to the third-party merchants. As the

hearing examiner and circuit court observed, that service, “[a]t a minimum,

[included TRM’s provision of] some accounting or bookkeeping service and handling

service for those [third-party] merchants.” We conclude that this record does not

support TRM’s claim that it received no gross receipts in those cases where third-

party merchants purchased ATMs.




5.       For a list of the extensive statutory deductions and exemptions, see SDCL ch.
         10-45.

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#25546

[¶16.]       TRM finally argues that the money it paid third-party merchants is

not taxable because this was a pass-through arrangement that is “structurally”

similar to the arrangement approved in Choice Hotels Int’l, Inc. v. S.D. Dep’t. of

Revenue and Regulation, 2006 S.D. 25, 711 N.W.2d 926. In Choice Hotels, a

franchisor mandated that its franchisee hotels participate in a commission program.

When a reservation was booked through a travel agent, the franchisor collected the

travel agent’s commission from the franchisee. The Department claimed the

franchisor’s collection of the travel agent’s commissions was subject to sales tax.

The franchisor claimed a statutory travel agent commission exemption, arguing

that it was merely transferring the exempt commission from the franchisee to the

travel agent. The Department ruled that the tax exemption applied only if the

franchisee paid the travel agent commission directly to the travel agents. This

Court reversed, noting that “[t]o interpret the exemption [that narrowly]

contravenes the legislative intent that travel agent commissions be exempt from

sales tax.” Id. ¶ 14, 711 N.W.2d at 929. We concluded “it [was] unreasonable to

hold that solely because the commissions [were] collected by the franchisor from the

franchisees and then paid to the travel agents they [were] no longer exempt from

tax.” Id. ¶ 15, 711 N.W.2d at 930 (emphasis added). But in this case TRM claims

no statutory exemption. And, as previously noted, the tax is imposed on all gross

receipts except for statutory exemptions and deductions. Therefore, Choice Hotels is

substantively inapplicable.

[¶17.]       TRM’s services provided to sponsor banks and core-data companies are

subject to sales taxation under SDCL 10-45-4. Because TRM has identified no


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statutory deduction or exemption for the fees it collected for those services, the

assessment is affirmed.

[¶18.]       GILBERTSON, Chief Justice, and KONENKAMP, MEIERHENRY,

and SEVERSON, Justices, concur.




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