#27265-aff in pt & rev in pt-LSW

2015 S.D. 92

                           IN THE SUPREME COURT
                                   OF THE
                          STATE OF SOUTH DAKOTA

                                     ****

MIDWEST RAILCAR REPAIR, INC.,                Appellee,

      v.

SOUTH DAKOTA DEPARTMENT
OF REVENUE,                                  Appellant.


                                     ****

                   APPEAL FROM THE CIRCUIT COURT OF
                      THE SECOND JUDICIAL CIRCUIT
                   MINNEHAHA COUNTY, SOUTH DAKOTA

                                     ****

                  THE HONORABLE DOUGLAS E. HOFFMAN
                                Judge

                                     ****

CATHERINE A. TANCK
SANDRA HOGLUND HANSON of
Davenport, Evans, Hurwitz
 & Smith LLP
Sioux Falls, South Dakota                    Attorneys for appellee.


JOHN T. RICHTER of
South Dakota Department of Revenue
Pierre, South Dakota                         Attorneys for appellant.

                                     ****

                                             CONSIDERED ON BRIEFS
                                             ON AUGUST 31, 2015

                                             OPINION FILED 11/24/15
#27265

WILBUR, Justice

[¶1.]        Taxpayer challenged the South Dakota Department of Revenue’s

certificate of assessment for use tax on parts and materials taxpayer used in its

service of railcars for two affiliated companies. In a separate proceeding, taxpayer

appealed the Department’s denial of its refund requests for sales tax paid on its

service of railcars received in South Dakota but delivered and used outside South

Dakota. The Department consolidated the proceedings for an administrative

hearing. The hearing examiner, and ultimately the Secretary of the Department,

affirmed the certificate of assessment and upheld the Department’s denial of

taxpayer’s refund requests. Taxpayer appealed, and the circuit court reversed the

Department’s May 2013 final decision related to both the certificate of assessment

and the Department’s denial of taxpayer’s refund requests. The Department

appeals. We affirm in part and reverse in part.

                                    Background

[¶2.]       Although procedurally this case involves an appeal from one

administrative proceeding, the case implicates two distinct tax issues. For ease of

reading, we separately describe the facts related to each.

             1. Use Tax Assessed on Parts and Materials used by Midwest for
                CarMath and M&C Leasing Railcars

[¶3.]       Midwest Railcar Repair, Inc. is owned by Greg Carmon and is in the

business of servicing railcars for various customers. Carmon also owns CarMath

and M&C Leasing. CarMath and M&C Leasing own and lease railcars to third

parties. CarMath, M&C Leasing, and Midwest are independent companies.



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Midwest services railcars for CarMath and M&C Leasing. In its service of the

railcars, Midwest incorporates parts and materials from its inventory.

[¶4.]         On September 27, 2006, the South Dakota Department of Revenue

issued Midwest a notice of intent to audit its sales and use tax licenses for the tax

periods covering October 2003 to October 2006. In November 2006, Department

employees Wayne Palmer and Willis Dreesman met with Midwest employee

Timothy Hoon and commenced the audit. During the audit, Auditor Palmer

informed Hoon that Midwest owed use tax on materials and parts incorporated into

railcars serviced for CarMath and M&C Leasing. Hoon replied that Midwest did

not pay use tax on materials and parts because the Department had issued Midwest

written advice in 1996 (1996 Advice Letter) that parts and materials used in its

modification of railcars were not subject to tax. 1 Hoon presented the letter to

Auditor Palmer. Auditor Palmer responded that the Department’s advice letter had

been overridden by this Court’s decision in Butler Machinery Co. v. South Dakota

Department of Revenue, 2002 S.D. 134, 653 N.W.2d 757.

[¶5.]         In January 2007, the Department issued a certificate of assessment in

the amount of $94,046.08, which included $15,790.84 of interest. In March 2007,

Midwest filed a written request for an administrative hearing and, in April 2007, a



1.      The letter provided in part:
              If a railcar that is leased is purchased for lease purposes and is
              later modified to meet lessee specifications, is there South
              Dakota sales or use tax due on the costs of modification? Since
              this is a modification and not a repair, and the lease agreement
              itself would obviously be structured around this modification,
              then the modification would be able to be purchased on a tax
              unpaid, sale for resale basis.

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protective refund claim for taxes previously paid in the amount of $1,052,096.10. In

its request for an administrative hearing, Midwest claimed the certificate of

assessment was improper because the imposition of use tax is “contrary to the

written advice issued by the Department on September 4, 1996[.]” Midwest

asserted that the Department improperly assessed a use tax (1) on “items

purchased for resale or for lease[,]” (2) “on replacement parts installed or to be

installed in tangible personal property that will ultimately be held for resale or for

lease[,]” and (3) “on payments of one member of a controlled group to another

member of a controlled group” in violation of SDCL 10-45-20.1. 2 And Midwest

claimed that the South Dakota Constitution, United States Constitution, and the

Railroad Revitalization and Regulatory Reform Act, 49 U.S.C. § 11501(b)(4) (4-R

Act) prohibited the Department from assessing use tax.

[¶6.]        Prior to an administrative hearing, Midwest commenced suit in federal

court seeking a declaration that South Dakota’s assessment of use tax violated the

4-R Act. Although Midwest did not prevail, this federal suit is relevant because the

Department argues to this Court that Midwest should be judicially estopped from

asserting that it modifies railcars when it argued during the federal litigation that



2.      SDCL 10-45-20.1 provides:
              Payments made by one member of the controlled group to
              another member of a controlled group which represent an
              allocation, reimbursement, or charge for services provided by or
              rendered by the members of the controlled group are specifically
              exempted from the provisions of this chapter and the
              computation of the tax imposed by it. The exemption provided
              in this section does not apply to the lease of tangible personal
              property or any product transferred electronically unless the
              sales or use tax has been paid on the property by the lessor.

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#27265

it repairs railcars. See Midwest Railcar Repair, Inc. v. S.D. Dep’t of Revenue &

Regulation, 659 F.3d 664 (8th Cir. 2011); Midwest Railcar Repair, Inc. v. S.D. Dep’t

of Revenue & Regulation, 2010 WL 2545952 (D.S.D.).

              2. Midwest’s Service to Burlington Northern Railcars: The
                 Source of the Sale for Sales Tax Purposes

[¶7.]        In addition to servicing railcars for CarMath and M&C Leasing,

Midwest services railcars for other companies, many of whom are located outside

South Dakota. Its service of these railcars was not the subject of the Department’s

notice of intent to audit or certificate of assessment. In fact, Midwest had been

paying South Dakota tax on its service of these railcars. In 2008, Midwest

requested written advice from the Department on the taxation of its service based

on SDCL 10-45-108. That statute provides that “a retailer shall source sales of

tangible personal property . . . and services to the location where the tangible

personal property . . . or service is received.” Id. Midwest’s written request

explained that, although its service to the railcars was performed at Midwest’s

business location in South Dakota, the railcars were brought to Midwest from a

location outside South Dakota by Burlington Northern Railroad and received by the

customer outside South Dakota via the railroad. Midwest believed the sale should

be sourced outside South Dakota. Midwest specifically excluded from its written

request the service it provided to railcars owned and leased by Burlington Northern

and its affiliates.

[¶8.]        The Department issued Midwest written advice on October 23, 2008

(2008 Advice Letter), providing in part that “[t]he Department agrees with your

analysis that Midwest Railcar’s services would be sourced to the location to where

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the railcars are delivered by common carrier.” The Department advised that

“Midwest Railcar’s services of repairing and refurbishing railcars delivered by

common carrier to locations outside of South Dakota would not be subject to South

Dakota tax.” But the Department qualified that “this written advice does not apply

to railcars owned or leased by the common carrier railroad or its affiliates.”

[¶9.]       Based on the 2008 Advice Letter, Midwest discontinued paying South

Dakota tax on non-Burlington Northern railcars and submitted nine refund claims.

Midwest’s refund requests included taxes it paid on its service to Burlington

Northern railcars. The Department granted Midwest’s refund requests for taxes

paid and applicable interest related to its service to non-Burlington Northern

railcars. But it denied the claims related to sales tax paid on Midwest’s service to

Burlington Northern railcars. According to the Department, Midwest’s repair

service to Burlington Northern railcars was subject to South Dakota tax because

Burlington Northern took possession of its railcars at Midwest’s business location in

South Dakota. In March 2010, Midwest appealed the Department’s denial of its

refund requests.

             3. The Administrative Proceedings

[¶10.]      The Department consolidated Midwest’s appeal from the denial of its

refund request with Midwest’s 2007 request for an administrative hearing

challenging the certificate of assessment for use tax on parts and materials

incorporated into Midwest’s service to CarMath and M&C Leasing railcars.

                   i. Certificate of Assessment on Midwest’s Parts and
                      Materials



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[¶11.]       During the administrative hearing on October 25, 2012, Midwest

sought to admit invoices and lease explanations as evidence that parts and

materials used in its service to CarMath and M&C Leasing railcars were not subject

to use tax. The Department objected and asserted that SDCL 10-59-3 and -7

precluded Midwest from relying on the invoices and lease explanations because

Midwest did not present these documents to the auditor within sixty days of the

commencement of the audit. The hearing examiner overruled the Department’s

objection and accepted the exhibits into evidence.

[¶12.]       The Department also challenged Midwest’s attempt to rely on the 1996

Advice Letter. The Department asserted that the letter was not issued to Midwest

specifically, but to certified public accountant Jim Pfeiffer. The Department

alternatively argued that even if Midwest had a right to rely on the 1996 Advice

Letter, Butler Machinery Co. overruled the advice and Midwest’s service is subject

to tax. In response, Midwest explained that, although the Department did not issue

the 1996 Advice Letter to Midwest directly, Greg Carmon had asked Pfeiffer to

request written advice from the Department on Midwest’s behalf. Pfeiffer

forwarded a copy of the letter to Carmon, and Midwest retained a copy of this letter

in its file. The hearing examiner did not specifically overrule the Department’s

objection.

               ii. Refund for Repair Services to Burlington Northern
                   Railcars

[¶13.]       Senior Revenue Agent Darrin Gerry testified that based upon the

Department’s training on sourcing rules, Midwest’s repair services to Burlington

Northern railcars implicated South Dakota sales tax. He noted that Midwest did

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not dispute that Burlington Northern, the purchaser, received its repaired railcars

at Midwest’s business location in South Dakota. Therefore, he opined that the

Department properly denied Midwest’s refund requests.

[¶14.]       Greg Carmon testified that Midwest’s service to Burlington Northern

railcars was no different than that provided to non-Burlington Northern railcars.

Although Burlington Northern obtained possession of its railcars in South Dakota,

it could not use or place its railcars into service until the repairs were accepted or

rejected at Burlington Northern’s place of business outside South Dakota. Midwest

argued that the sale of repair services to Burlington Northern railcars should be

sourced in the same manner as Midwest’s sale to non-Burlington Northern railcars.

               iii. Hearing Examiner’s Decision

[¶15.]       On April 23, 2013, the hearing examiner issued a written proposed

decision. It found that “Midwest repairs and refurbishes railcars” and that the

railcars “are brought to Midwest on railroad tracks that are owned by Burlington

[Northern].” According to the hearing examiner, Burlington Northern “owns the

tracks, the railcars, and the computer that decides which cars go where. It is safe to

assume that Burlington has direction and control over where Burlington wants to

use its own railcars.” The hearing examiner concluded that Midwest’s repair

service to Burlington Northern railcars was subject to South Dakota tax. “When

Burlington picks up its own railcars, on its own tracks, routed through its own

computer, the taxes should be sourced to the location where Burlington takes

possession of the railcars, Midwest.”




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[¶16.]       The hearing examiner further found that “Midwest is not exempt from

taxes on services provided to [CarMath] and M&C Railcar [sic] during the audit

period.” The hearing examiner considered the 1996 Advice Letter because, in the

examiner’s view, it was sent to “Jim Pfeiffer, an accountant for Midwest.” The

hearing examiner noted that the letter applied to “a railcar modified for lease

purposes” and advised that such service “is not subject to taxes.” But the hearing

examiner interpreted Butler Machinery Co. to override the 1996 Advice Letter. The

hearing examiner also held that parts and materials incorporated into the serviced

railcars were subject to tax, although Midwest, CarMath, and M&C Leasing are

part of the same controlled group under SDCL 10-45-20.1. The examiner said,

“When a part is removed from inventory and used, it is subject to a use tax.”

[¶17.]       On May 9, 2013, the Secretary of the Department adopted the hearing

examiner’s proposed decision “in full” and declared “that the South Dakota

Department of Revenue shall be affirmed in all respects.” In June 2013, Midwest

appealed the Department’s final decision to the circuit court. It asserted among

other things that (1) it was entitled to a refund for sales tax paid on repair services

to Burlington Northern railcars shipped outside South Dakota, (2) parts and

materials incorporated into its service to CarMath and M&C Leasing railcars were

exempt from use tax based on the 1996 Advice Letter, and, in the alternative, (3)

incorporated parts and materials were exempt under ARSD 64:06:02:58.

               iv. Circuit Court Proceedings and Decision

[¶18.]       During the hearing before the circuit court on November 25, 2013, the

Department again objected to Midwest’s attempt to admit claims or evidence that it


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failed to submit or assert within sixty days of the commencement of the audit. See

SDCL 10-59-3, -7. The court overruled the Department’s objections and considered

the evidence and claims. On February 24, 2014, the circuit court issued an

incorporated memorandum decision, and, on August 27, 2014, findings of fact and

conclusions of law. The circuit court rejected the Department’s argument that

Midwest was precluded from raising any claim not asserted within sixty days of the

commencement of the audit because SDCL 10-59-3 and -7 “do not require the

taxpayer to ‘raise issues’ with the auditor in order to be able to challenge the final

assessment after the audit is completed.” The court found that “[t]here is no claim

that Midwest failed to provide any documents or records to the auditor in this case.”

[¶19.]       The court reviewed the evidence admitted by Midwest during the

administrative hearing and found that “Midwest performs modifications and repairs

on railcars” owned by CarMath and M&C Leasing and “leased to others.” Relying

on the lease agreement descriptions, the court determined that “Midwest modifies

the railcars to meet those lease specifications.” The court rejected the Department’s

claim that Midwest could not rely on the 1996 Advice Letter because “[t]he record

seems pretty clear that the Department was aware that the advice was sought on

behalf of Midwest by its CPA as Midwest’s agent.” Next, the court held that the

hearing examiner and Department incorrectly interpreted Butler Machinery Co. to

override the 1996 Advice Letter. According to the circuit court, “[t]here is a

difference between using parts to maintain a rental fleet that is already under

lease, as opposed to using parts to build a product that conforms to the lease

description, as is the case for Midwest.” The court ruled that Midwest was entitled


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to continue to rely on the 1996 Advice Letter. The court held that “the parts

incorporated by Midwest into the refurbished railcars as part of the overall

restoration process” were “excluded from sales or use tax consequences” because the

Department had ruled that Midwest’s railcar services for CarMath and M&C

Leasing were exempt from tax under the controlled group exemption.

[¶20.]       The circuit court next ruled that Midwest’s service to Burlington

Northern railcars should be sourced outside South Dakota. The court rejected the

Department’s claim that Burlington Northern could not act as both the shipping

company and purchaser. In reaching this interpretation, the court noted that

“[o]ther courts that have considered similar situations have ruled that a railroad

can be both a shipper and a buyer.” See Wyo. v. Dep’t of Revenue v. Union Pac. R.R.

Co., 67 P.3d 1176 (Wyo. 2003); Standard Oil Co. v. Johnson, 147 P.2d 577 (Cal.

1944); H-R Truck & Equip. Co. v. State Bd. of Equalization, 333 P.2d 151 (Cal. Ct.

App. 1958). According to the court, “[t]he testimony at the hearing was undisputed

that Burlington did not take possession of its railcars, other than in its capacity as a

shipping company, until they reached their destination as set forth in the waybill or

bill of lading” outside South Dakota. Thus, the court concluded that “both

Burlington and non-Burlington customers ‘received’ the repaired railcars at the out-

of-state destination specified by the customer[.]”

[¶21.]       In October 2014, the circuit court issued an order reversing the

Department’s May 2013 final decision. The court ordered that Midwest “is entitled

to recover refunds of all of its overpayments of sales tax on out-of-state repair

services for the Burlington Northern” during and after the audit period. It also


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ordered that Midwest is entitled to recover the amount overpaid under SDCL 10-59-

9 prior to the appeal from the final decision of the Secretary of the Department on

use tax for its service to CarMath and M&C Leasing railcars, which amount

included $63,724.43 of use tax. And the court ordered that Midwest is entitled to

interest on the refund amounts under SDCL 10-59-24. The Department appeals

asserting the following issues for our review:

             1.     Whether the circuit court erred when it held that the
                    Department erred in assessing use tax on repair parts
                    that Midwest used to perform repair services when no
                    sales tax had ever been paid on those parts.

             2.     Whether the circuit court erred when it held that
                    Midwest’s repair services provided in South Dakota
                    should be sourced elsewhere for the audit period and
                    refund periods following the audit.

                                Standard of Review

[¶22.]       Our standard of review of an administrative appeal is well settled.

Knapp v. Hamm & Phillips Serv. Co., Inc., 2012 S.D. 82, ¶ 11, 824 N.W.2d 785, 788

(citing SDCL 1-26-37). We will not overturn an agency’s findings of fact unless they

are clearly erroneous. Id. Conclusions of law are given no deference. Id. Questions

of statutory interpretation are reviewed de novo. Id.

                                      Analysis

             1. Use Tax Assessed on Parts and Materials used by Midwest
                for CarMath and M&C Leasing Railcars

[¶23.]       The Department challenges the circuit court’s decision to invalidate

the certificate of assessment for multiple reasons. First, it asserts that Midwest

failed to establish under SDCL 10-59-9 that the certificate of assessment was based

upon a mistake of fact or error of law. The Department also claims that the circuit

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court erred when it entered independent factual findings that Midwest modified and

refurbished the railcars. In the Department’s view, the record supported the

hearing examiner’s factual finding that Midwest performed “repairs[.]” Third, the

Department contends that Midwest should be judicially estopped from asserting

that it modifies railcars because, for four years during the federal litigation,

Midwest took the position that it repairs railcars. Lastly, the Department claims

that Midwest failed to timely submit its documentary evidence under SDCL 10-59-3

and -7 to support its claim that it performs modifications instead of repairs, and,

therefore, the evidence should not have been considered.

                 i. Failure to Timely Submit Evidence

[¶24.]       The Department claims that Midwest failed to timely submit

documentary evidence. Midwest responds that the Department failed to preserve

the issue because the Department did not file a notice of review from the hearing

examiner’s decision to admit Midwest’s evidence. Midwest claims that, even if the

issue were preserved, Midwest’s documentary evidence was not required to be

submitted within sixty days of the commencement of the audit because the invoices

and written lease descriptions were not “required by law” to be submitted to the

auditor.

[¶25.]       At the administrative hearing, Midwest offered (and the hearing

examiner admitted over the Department’s objection) documentary evidence related

to Midwest’s service to CarMath and M&C Leasing railcars. Midwest relied on this

evidence to establish that it did not repair CarMath and M&C Leasing railcars, but

instead modified the railcars in preparation for specific lease agreements.


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[¶26.]       The Department’s notice of intent to audit informed Midwest that “[a]ll

documents evidencing reduction, deduction or exemption of tax not prepared for

presentation within sixty days of the date of commencement of the audit need not

be considered by the auditor.” See SDCL 10-59-3. Further, SDCL 10-59-7 provides

that “[a]ny documents or records required to be kept by law to evidence reduction,

deduction, or exemption from tax not prepared for presentation to the auditor

within sixty days from the commencement date of the audit do not have to be

considered by the auditor or the secretary.” It is undisputed that Midwest sought to

rely on this evidence to establish exemption from taxation and that Midwest did not

present this evidence within sixty days from the commencement date of the audit.

[¶27.]       This Court has said that a taxpayer has no right to rely on evidence

offered after the sixty days required by SDCL 10-59-3, -7. Doctor’s Assocs., Inc. v.

Dep’t of Revenue & Regulation, 2006 S.D. 18, ¶ 22, 711 N.W.2d 237, 243; In re Pam

Oil, Inc., 459 N.W.2d 251, 257 (S.D. 1990). This is because “[t]o allow late submittal

of these materials long after the audit has ended would make the audit process

interminable and unworkable.” Doctor’s Assocs., Inc., 2006 S.D. 18, ¶ 22, 711

N.W.2d at 243. To preserve an administrative ruling for this Court’s review, an

appellee must file a notice of review at the circuit court level. Brown v. Douglas

Sch. Dist., 2002 S.D. 92, ¶¶ 31-32, 650 N.W.2d 264, 272-73; SDCL 1-26-36.1.

Because the Department did not file a notice of review, the issue is waived.

                ii. Judicial Estoppel

[¶28.]       We disagree that Midwest is judicially estopped from asserting that it

modifies CarMath and M&C Leasing railcars. Judicial estoppel “requires that a


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party’s prior inconsistent assertion be judicially adopted[.]” Bailey v. Duling, 2013

S.D. 15, ¶ 33, 827 N.W.2d 351, 362. The Department does not contend that the

federal court accepted Midwest’s position, nor did Midwest prevail in its federal

suit.

               iii. Certificate of Assessment: Error of Law or Mistake of Fact

[¶29.]       Department claims that Midwest cannot meet its burden to

demonstrate that the certificate of assessment contains a mistake of fact or error of

law under SDCL 10-59-9. According to the Department, because the record before

the hearing examiner supported the hearing examiner’s fact finding that Midwest

performs repairs, the circuit court clearly erred when it entered an independent fact

finding that Midwest modifies railcars. We note that the circuit court did not hold

an evidentiary hearing or consider witness testimony. The circuit court based its

findings of fact on its view of the administrative record and on the oral and written

arguments by counsel. Because we give no deference to the circuit court’s review of

the administrative record, we disregard the court’s finding that Midwest performs

modifications instead of repairs.

[¶30.]       From our independent review of the hearing examiner’s proposed

decision, we cannot determine whether the hearing examiner made a specific

finding that Midwest performs repairs and not modifications. A reading of the

decision suggests the hearing examiner made no distinction. In the examiner’s

view, this Court’s holding in Butler Machinery Co. applied to any service involving a

lease agreement and the use of parts or materials for lease purposes. Indeed, in

ruling that Midwest could no longer rely on the 1996 Advice Letter, the hearing


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examiner noted that the letter “indicated that a railcar modified for leased purposes

is not subject to taxes[.]” (Emphasis added.)

[¶31.]        We need not decide whether Midwest in fact performs modifications or

repairs to CarMath and M&C Leasing railcars. The issue is whether the hearing

examiner correctly held Midwest could no longer rely on the 1996 Advice Letter

because of this Court’s decision in Butler Machinery Co. This is because, in order to

rule that Midwest could no longer rely on the 1996 Advice Letter, the hearing

examiner had to first conclude that Midwest’s service to CarMath and M&C

Leasing railcars fell within the scope of the 1996 Advice Letter. 3 If Butler

Machinery Co. did not overrule the 1996 Advice Letter, then Midwest would be

entitled to continue to rely on that advice and its service to CarMath and M&C

Leasing railcars would continue to be exempt from taxation.

[¶32.]        In Butler Machinery Co., we were asked to determine whether the

parts and materials used by Butler to maintain and repair its rental fleet were

subject to use tax. 2002 S.D. 134, ¶ 2, 653 N.W.2d at 759. Butler owned a rental

fleet of heavy construction equipment and leased the equipment to its customers.



3.       Under SDCL 10-59-27:
              Any taxpayer who has received written advice from the
              Department of Revenue concerning the taxability of transactions
              shall be allowed to rely on such advice when filing tax returns.
              . . . The department may not maintain a position against a
              taxpayer which is inconsistent with a prior written opinion
              issued to the same taxpayer unless rescinded by the
              department, by a change in statutory law or reported case law,
              by a change in federal interpretation in cases if the department’s
              written advice was predicated upon a federal interpretation or
              by a change in material facts or circumstances relating to the
              taxpayer.

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As part of the lease agreements, Butler maintained and repaired the equipment

with parts and materials out of its inventory. In deciding a rental price, Butler

included the expenses it anticipated it would incur to repair the equipment. Id. ¶ 3.

[¶33.]       On appeal to this Court, Butler argued that its repair parts were not

subject to tax because (1) sales tax had been paid on the gross receipts from the

lease rental income (retail sale), (2) the repair parts were actually leased to

customers and therefore exempt, and (3) the use of the repair parts should only be

taxed once, which here was sales tax paid on the gross receipts on the income from

the lease agreements. Id. ¶¶ 9-11. We held that use tax was due in light of “the

true nature of the transaction between Butler and its customers.” Id. ¶ 12. Under

the terms of the lease agreements, the customer received from Butler both “a

working piece of equipment” and “the right to use that equipment for its intended

purpose for a given period of time.” Id. With this right to use the equipment,

“Butler has an obligation to keep the leased equipment in working order[.]” Id.

¶ 13.

[¶34.]       Here, on the other hand, the leased railcars are not Midwest’s rental

fleet. CarMath and M&C Leasing own and lease the railcars. In fact, Auditor

Palmer agreed that Midwest does not own the railcars: “Are you aware that

Midwest Railcar doesn’t own any railcars, it only services them? Yes.” There is no

evidence that Midwest entered into any agreement related to the railcars to provide

a third party the right to use the railcar for its intended purpose for a given period

of time or that Midwest had a continuing obligation to keep the railcars in specific

working order as part of its service.


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[¶35.]         Butler Machinery Co. did not create a bright-line rule that all parts

and materials used for any lease purposes are subject to taxation. It was decided on

the nature of the transaction between Butler and its customers. Because Butler’s

lease-agreement relationship with its customers is not akin to the relationship

between Midwest and CarMath and M&C Leasing, the hearing examiner erred

when it interpreted Butler Machinery Co. to overrule the Department’s 1996 Advice

Letter to Midwest. Midwest is entitled to continue to rely on the 1996 Advice

Letter. And Midwest’s service to CarMath and M&C Leasing railcars is not subject

to taxation. The circuit court correctly ruled that Midwest is entitled to a refund of

the amount of use tax overpaid on its service to CarMath and M&C Leasing

railcars. 4

                 iv. Refund Calculation

[¶36.]         The Department claims that Midwest is not entitled to a refund

because the circuit court’s refund calculation is not supported by the record. The

circuit court did not reverse the Department’s certificate of assessment in full. It

ordered the Department to refund Midwest the use tax Midwest overpaid related to

its service to CarMath and M&C Leasing railcars. The court then directed Midwest

to prepare a proposed order consistent with the court’s decision, including an award

of interest under SDCL 10-59-24. The certificate of assessment had




4.       We need not address the circuit court’s alternative ruling on the controlled
         group exception because of our holding that Midwest is entitled to rely on the
         1996 Advice Letter.

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imposed $78,255.24 in use tax and $15,790.84 in interest. Midwest’s proposed order

requested a refund of $63,724.43 in tax and $15,790.84 in interest.

[¶37.]       It is undisputed that Midwest erroneously requested the interest

imposed based on the original assessment. To address this error, the circuit court

held a telephonic hearing. During the hearing, Midwest offered to waive an award

of interest. The Department argued that Midwest’s actual refund request—

$63,724.43—lacked evidentiary support. Midwest responded that its calculation

was based on Midwest employee Kristi Saxlund’s testimony before the hearing

examiner. Midwest emphasized that the Department did not cross-examine

Saxlund on her calculations. The Department replied that the circuit court could

not rely on Saxlund’s testimony because Midwest did not offer Saxlund’s opinion

within sixty days of the commencement of the audit. See SDCL 10-59-3, -7. The

Department asked the circuit court to affirm the certificate of assessment in full

because Midwest failed to meet its burden to prove that the certificate of

assessment was incorrect under SDCL 10-59-9. Ultimately, the circuit court

ordered that Midwest was entitled to recover $63,724.43 in use tax representing the

amount overpaid prior to the appeal of the final decision of the Secretary.

[¶38.]       On appeal, the Department asks this Court to affirm the certificate of

assessment in full because, in the Department’s view, Saxlund’s testimony is not

substantial credible evidence sufficient to overcome the prima facie correctness of

the certificate of assessment. See SDCL 10-59-9. The Department avers Midwest is

not entitled to a refund in any respect because it failed to exhaust its administrative




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remedies when it did not present evidence during the audit process specifically

related to the use tax assessed on its repair to CarMath and M&C Leasing railcars.

[¶39.]       We previously ruled that the Department waived its right to assert

that Midwest could not rely on the evidence submitted during the administrative

hearing related to its service to CarMath and M&C Leasing railcars. The

Department did not file a notice of review after the Secretary affirmed the hearing

examiner’s decision in full. Further, based on the fact Midwest is entitled to

continue to rely on the 1996 Advice Letter, the certificate of assessment is incorrect

and Midwest is entitled to a refund of the use tax it overpaid related to its service to

CarMath and M&C Leasing railcars. The question remains whether to remand the

matter to the hearing examiner to determine the amount of use tax overpaid by

Midwest for its service to CarMath and M&C Leasing railcars or to affirm the

circuit court’s order directing the Department to refund Midwest $63,724.43 in

overpaid use tax.

[¶40.]       Under SDCL 1-26-36, the circuit “court may affirm the decision of the

agency or remand the case for further proceedings.” The court also has the

discretion to “reverse or modify the decision” of the Department. Id. Here, the

court correctly determined that the Department improperly assessed use tax on

Midwest’s parts and materials used to service CarMath and M&C Leasing railcars.

The court then exercised its discretion and reversed and modified the Department’s

May 2013 final decision. The Department does not challenge the court’s discretion

under SDCL 1-26-36. Nor does the Department present counter evidence related to

the use tax on Midwest’s service to CarMath and M&C Leasing railcars. We affirm


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the circuit court’s modification of the Department’s May 2013 final decision and

ruling that “Midwest Railcar Repair, Inc. is entitled to recover a refund of the

amount overpaid pursuant to SDCL 10-59-9 prior to appeal from the Final Decision

of the Secretary, representing use tax on modification and refurbishments for

CarMath and M&C Leasing, which amount included $63,724.43 of use tax.”

             2. Midwest’s Service to Burlington Northern Railcars: The
                Source of the Sale for Sales Tax Purposes

[¶41.]       In South Dakota, “a retailer shall source sales of tangible personal

property . . . and services to the location where the tangible personal property . . . or

service is received.” SDCL 10-45-108. Generally, “[i]f the product is received by the

purchaser at a business location of the seller, the sale is sourced to that business

location.” ARSD 64:06:01:63(1). “The sourcing rules in §§ 64:06:01:62 to

64:06:01:68, inclusive, apply regardless of the characterization of a product as

tangible personal property, a product transferred electronically, or a service.”

ARSD 64:06:01:61 (emphasis added). “Product” is defined to include “services[.]”

ARSD 64:06:01:62(2). “Receive” is defined to include “the taking possession of

tangible personal property[.]” Id. at (1)(a). “Receive” also means “making first use

of services[.]” Id. at (1)(b). However, “[t]he term, receive, does not include

possession by a shipping company on behalf of the purchaser.” Id. at (1) (emphasis

added).

[¶42.]       Here, it is undisputed that Midwest provides its repair service to

Burlington Northern railcars at Midwest’s business location in South Dakota. It is

also undisputed that Burlington Northern takes physical possession of its railcars

at Midwest’s business location in South Dakota. Thus, under SDCL 10-45-108 the

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sale shall be sourced to South Dakota—the serviced tangible personal property

(railcar) is received by the purchaser (Burlington Northern) at the business location

of the seller (Midwest). See ARSD 64:06:01:62(1)(a).

[¶43.]       Midwest, however, argues that it is immaterial that Burlington

Northern takes physical possession of the railcar in South Dakota because Midwest

provides a repair service, not tangible personal property. It claims that its service

implicates the alternate definition of “Receive.” Under ARSD 64:06:01:62(1)(b),

“Receive” is defined to include “making first use of services.” In Midwest’s view,

Burlington Northern could not make “first use” of Midwest’s repair service until

Burlington Northern delivered the railcar to the destination listed on the waybill or

bill of lading—a location outside South Dakota. Midwest also contends that federal

law prohibits Burlington Northern from putting the railcar to use until it is

inspected for safety, which happens at a location outside South Dakota. Midwest

relies on “The Rules and Procedures of Streamlined Sales Tax Governing Board,

Inc.,” which is a document the Department has used to provide guidance for

sourcing determinations.

[¶44.]       Whether a statute or regulation imposes a tax under a given factual

situation is a question of law; we give no deference to the circuit court or agency’s

interpretation. TRM ATM Corp. v. S.D. Dep’t of Revenue & Regulation, 2010 S.D.

90, ¶ 3, 793 N.W.2d 1, 3. The same rules of construction apply to our review of

administrative regulations. First Gold, Inc. v. S.D. Dep’t of Revenue & Regulation,

2014 S.D. 91, ¶ 6, 857 N.W.2d 601, 603-04. We construe the statute or regulation

liberally in favor of the taxpayer. Id. at 604. Yet, we give the words in the statute


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or administrative rule “a reasonable, natural, and practical meaning to effectuate

the purpose of the statute.” Robinson & Muenster Assocs. v. S.D. Dep’t of Revenue,

1999 S.D. 132, ¶ 7, 601 N.W.2d 610, 612.

[¶45.]       In full, ARSD 64:06:01:62 provides:

             Terms used in §§ 64:06:01:61 to 64:06:01:65, inclusive, mean:

                   (1) “Receive,”
                          (a) the taking possession of tangible personal
                          property;
                          (b) making first use of services; or
                          (c) taking possession of or making first use of any
                          product transferred electronically, whichever comes
                          first.
                   The term, receive, does not include possession by a
                   shipping company on behalf of the purchaser;
                   (2) “Product,” any tangible personal property, any product
                   transferred electronically, including software delivered
                   electronically, or services, whether sold, leased, or rented.

The plain language of this regulation does not support Midwest’s view that its

service to Burlington Northern railcars cannot implicate either definition of

“Receive” under ARSD 64:06:01:62(1). On the contrary, the rule uses the word “or”

and provides alternate meanings of “Receive.” If Burlington Northern either “takes

possession of tangible personal property” in South Dakota or is “making first use of

services” in South Dakota, receipt occurs in South Dakota. It cannot be disputed

that Burlington Northern took possession of the railcar (tangible personal property)

in South Dakota. Moreover, the product here is not merely a service; it is a service

to a railcar—tangible personal property. Under the unambiguous language of

ARSD 64:06:01:62(1), Burlington Northern receives the serviced railcar at

Midwest’s business location in South Dakota.

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[¶46.]       Nonetheless, Midwest contends that even if we conclude that

Burlington Northern receives the railcar in South Dakota, the exclusion to the

definition of “Receive” applies. That exclusion provides: “The term, receive, does not

include possession by a shipping company on behalf of the purchaser[.]” Id.

According to Midwest, when Burlington Northern picks up the railcar in South

Dakota, it possesses the railcar as a shipping company and as the purchaser. It

then directs this Court to Wyoming Department of Revenue, 67 P.3d 1176, Standard

Oil Co., 147 P.2d 577, and H-R Truck & Equipment Co., 333 P.2d 151, for the

proposition that a common carrier can act as both the shipping company and buyer

when the destination for the repaired railcar is out of state.

[¶47.]       The Department responds that the plain language of ARSD

64:06:01:62(1) does not support the interpretation that Burlington Northern can be

both the shipping company and purchaser. In the Department’s view, “on behalf of”

contemplates one person doing something for someone else. The Department

argues that the cases relied on by Midwest are irrelevant in light of South Dakota’s

different tax structure.

[¶48.]       From our review of the plain language of ARSD 64:06:01:62(1),

Burlington Northern cannot be both the shipping company and the purchaser. The

language unambiguously contemplates a contract between two parties—a shipping

company and a purchaser. Black’s Law Dictionary defines a “shipper” as 1.

“Someone who ships goods to another. 2. Someone who contracts with a carrier for

the transportation of cargo.” Shipper, Black’s Law Dictionary (10th ed. 2014).

When used as a “legal term of art, the shipper may not be the person who owns the


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cargo, but an agent or an independent contractor[.]” Id. Therefore, Burlington

Northern cannot be in physical possession of its railcar while simultaneously

possessing the railcar on behalf of itself. To conclude otherwise would require a

strained and unreasonable interpretation of the regulatory language. See Citibank,

N.A. v. S.D. Dep’t of Revenue, 2015 SD 67, ¶ 12, 868 N.W.2d 381, 387; Border States

Paving, Inc. v. S.D. Dep’t of Revenue, 437 N.W.2d 872, 877 (S.D. 1989) (Wuest, C.J.,

dissenting) (we do not attempt a strained or forced construction when the language

is clear on its face).

[¶49.]        Also, nothing in Wyoming Department of Revenue, 67 P.3d 1176,

Standard Oil Co., 147 P.2d 577, or H-R Truck & Equipment Co., 333 P.2d 151,

compels a different conclusion. Unlike South Dakota’s sourcing law, Wyoming law

specifically considers the “intent of the vendor” to transfer title of the product to the

purchaser out of state. Wyoming Dep’t of Revenue, 67 P.3d at 1185-86. Similarly,

the intent of the common carrier that delivery not take place until the product

reaches its out-of-state destination was relevant in Standard Oil Co., 147 P.2d at

580 and H-R Truck & Equipment Co., 333 P.2d at 153. Because Burlington

Northern received the repaired railcars in South Dakota, the hearing examiner

properly sourced the sale to South Dakota and imposed tax under SDCL 10-45-108.

                                      Conclusion

[¶50.]        We affirm the circuit court’s conclusion that Butler Machinery Co. did

not override the 1996 Advice Letter. Because Midwest is entitled to continue to rely

on the advice, we need not consider whether Midwest’s service is exempt from

taxation under the controlled group exemption and exemption-related regulations.


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We affirm the court’s order that “Midwest Railcar Repair, Inc. is entitled to recover

a refund of the amount overpaid pursuant to SDCL 10-59-9 prior to appeal from the

Final Decision of the Secretary, representing use tax on modifications and

refurbishments for CarMath and M&C Leasing, which amount included $63,724.43

of use tax.” And we affirm the court’s ruling that Midwest is entitled to “interest on

these refund amounts, under SDCL 10-59-24, the amount of which interest shall be

calculated and depend upon the date it is ultimately refunded[.]” But we reverse

the circuit court’s order that Midwest “is entitled to recover refunds of all of its

overpayments of sales tax on out-of-state repair services for the Burlington

Northern” during and after the audit period.

[¶51.]       Affirmed in part and reversed in part.

[¶52.]       GILBERTSON, Chief Justice, and ZINTER, SEVERSON, and KERN,

Justices, concur.




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