#26553-r-DG
2013 S.D. 68

                          IN THE SUPREME COURT
                                  OF THE
                         STATE OF SOUTH DAKOTA

                                    ****

MAGELLAN PIPELINE COMPANY,
LP LIC. NO. 1011-0693-ST,                  Petitioner and Appellant,

      v.

SOUTH DAKOTA DEPARTMENT
OF REVENUE AND REGULATION,                 Respondent and Appellee,



                                    ****

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

                                    ****

                 THE HONORABLE WILLIAM J. SRSTKA, JR.
                            Retired Judge

                                    ****

JAMES E. MOORE
MATTHEW P. BOCK of
Woods, Fuller, Shultz & Smith, PC
Sioux Falls, South Dakota                  Attorneys for petitioner
                                           and appellant.

ROSA YAEGER
South Dakota Department of
 Revenue and Regulation
Pierre, South Dakota                       Attorneys for respondent
                                           and appellee.

                                    ****

                                           CONSIDERED ON BRIEFS
                                           ON MAY 20, 2013
                                           OPINION FILED 09/04/13
#26553

GILBERTSON, Chief Justice

[¶1.]        Magellan Pipeline Company, LP (Magellan) appeals a sales tax

assessment by the Department of Revenue and Regulation (the Department) on

additive injection and equipment calibration pipeline services. The Hearing

Examiner, Department Secretary, and circuit court found that Magellan’s additive

injection and equipment calibration pipeline services are non-exempt from tax

under SDCL 10-45-12.1. We reverse.

                                      FACTS

[¶2.]        We rely on the parties’ stipulated facts. Magellan is a Delaware

limited partnership headquartered in Tulsa, Oklahoma. Magellan’s principal

business is the transportation of refined petroleum products. Magellan owns and

operates a refined petroleum products pipeline system, which covers a 13-state

area, including South Dakota. Magellan has refined petroleum terminals in both

Watertown and Sioux Falls.

[¶3.]        The refined petroleum products originate from direct connections to

refineries and interconnections with other interstate pipelines. For the most part,

Magellan’s customers own the refined petroleum products transported through

Magellan’s pipeline. Magellan charges its customers a tariff rate for transporting

refined petroleum products through its pipeline. When the refined petroleum

products enter the terminal in Sioux Falls or Watertown, the products are either




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#26553

stored onsite or delivered to Magellan customers through a rack. 1 Magellan also

charges its customers for services Magellan provides at its terminals. Those

services include: ethanol and biodiesel unloading and loading, additive injections,

custom blending, laboratory testing, data services, other system services, and

product storage. Additives are injected into the refined petroleum at the rack,

which is the time Magellan customers take delivery of their products from a

Magellan terminal. Some additives are mandated by law (e.g., gasoline detergent,

diesel lubricity additive, and diesel dye) whereas others are non-mandatory (e.g., jet

deicer, diesel detergent, and diesel cold flow improver).

[¶4.]         In September 2009, the Department notified Magellan that it would

begin an audit in March 2010. The audit would cover the period of September 2006

through September 2009. Later, the Department and Magellan agreed to extend

the audit period through January 2010. Department Auditor Angela Bormann

conducted the audit at Magellan headquarters in Tulsa, Oklahoma. Following the

audit, the Department issued a certificate of assessment (COA) against Magellan,

alleging a balance due of $241,274.52. Of the amount alleged to be owed,

$190,268.50 was attributed to unpaid sales and use tax, and $51,006.02 was

attributed to interest. The COA largely alleged unpaid sales tax for certain pipeline

services, including charges related to additive injections.

[¶5.]         Magellan notified the Department that it was contesting the total

assessment but, under protest, paid the full tax assessment of $190,268.50.


1.      A rack is a mechanism capable of delivering petroleum products into a means
        of transport other than the pipeline, such as a tanker truck trailer or a
        railcar.

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#26553

Initially Magellan requested a hearing. Later, however, the parties agreed to forgo

a hearing and submitted stipulated facts for the Hearing Examiner’s review. The

primary issue before the Hearing Examiner was whether the fees Magellan charged

for additive injections and equipment calibration pipeline services were subject to

South Dakota sales tax. The Hearing Examiner entered a proposed decision

affirming the Department’s tax assessment of Magellan. The Secretary of the

Department adopted the Hearing Examiner’s decision in full.

[¶6.]        Magellan appealed to the circuit court. The circuit court found that

Magellan’s additive injection and equipment calibration pipeline services were

subject to South Dakota sales tax under SDCL 10-45-4, concluding that SDCL 10-

45-12.1 exempts only pipeline transportation services. On appeal we consider

whether Magellan’s additive injection and equipment calibration pipeline services

are exempt from South Dakota’s sales tax under SDCL 10-45-12.1.

                            STANDARD OF REVIEW

[¶7.]        “Whether a statute imposes a tax under a given factual situation is a

question of law [reviewed de novo] and thus no deference is given to any conclusion

reached by the Department of Revenue or the circuit court.” TRM ATM Corp. v.

S.D. Dep’t of Revenue & Regulation, 2010 S.D. 90, ¶ 3, 793 N.W.2d 1, 3 (quoting

S.D. Dep’t of Revenue v. Sanborn Tel. Coop., 455 N.W.2d 223, 225 (S.D. 1990)); see

also Mauch v. S.D. Dep’t of Revenue & Regulation, 2007 S.D. 90, ¶ 8, 738 N.W.2d

537, 540. Further, “[s]tatutory interpretation and application are questions of law,

and are reviewed by this Court under the de novo standard of review.” Pourier v.

S.D. Dep’t of Revenue & Regulation, 2010 S.D. 10, ¶ 8, 778 N.W.2d 602, 604.


                                         -3-
#26553

                            ANALYSIS AND DECISION

[¶8.]        Magellan argues that its additive injection and equipment calibration

pipeline services are exempt from South Dakota’s sales tax under SDCL 10-45-12.1.

The critical inquiry is what the South Dakota legislature intended by exempting the

services of “pipe lines” in SDCL 10-45-12.1. SDCL 10-45-12.1 provides that “[t]he

following services enumerated in the Standard Industrial Classification Manual . . .

are exempt from the provisions of this chapter: . . . pipe lines, except natural gas

(major group 46)[.]” SDCL 10-45-12.1.

[¶9.]        “When interpreting a statute, we ‘begin with the plain language and

structure of the statute.’” In re Pooled Advocate Trust, 2012 S.D. 24, ¶ 32, 813

N.W.2d 130, 141 (quoting State ex rel. Dep’t of Transp. v. Clark, 2011 S.D. 20, ¶ 10,

798 N.W.2d 160, 164). “When the language in a statute is clear, certain, and

unambiguous, there is no reason for construction, and this Court’s only function is

to declare the meaning of the statute as clearly expressed.” Id. (quoting Clark, 2011

S.D. 20, ¶ 5, 798 N.W.2d at 162). Further, “‘[w]hile every word of a statute must be

presumed to have been used for a purpose, it is also the case that every word

excluded from a statute must be presumed to have been excluded for a purpose.’”

Wheeler v. Farmers Mut. Ins. Co. of Neb., 2012 S.D. 83, ¶ 21, 824 N.W.2d 102, 109

(citation omitted).

[¶10.]       “Statutes exempting property from taxation should be strictly

construed in favor of the taxing power.” Graceland Coll. Ctr. for Prof’l Dev. &

Lifelong Learning, Inc. v. S.D. Dep’t of Revenue, 2002 S.D. 145, ¶ 5, 654 N.W.2d 779,

782 (quoting Matter of Sales & Use Tax Refund Request of Media One, Inc., 1997


                                          -4-
#26553

S.D. 17, ¶ 9, 559 N.W.2d 875, 877). “The words in such statutes should be given a

reasonable, natural, and practical meaning to effectuate the purpose of the

exemption.” Id. (citation omitted). Further, the taxpayer “carries the burden of

proving that [it] fall[s] within the exemption.” Id. ¶ 12.

[¶11.]       The Department asks this Court to find that SDCL 10-45-12.1

differentiates between Magellan’s pipeline transportation services and its additive

injection and equipment calibration pipeline services. If we were to interpret SDCL

10-45-12.1 to exempt pipeline transportation services and not additive injection and

equipment calibration pipeline services, it would require us to read the word

transportation into the statute. A plain reading of the statutory text, however,

makes clear that SDCL 10-45-12.1 does not include the word “transportation” when

referencing the “pipe lines” exemption.

[¶12.]       Also helpful in assessing the Legislature’s intent in SDCL 10-45-12.1 is

the Legislature’s treatment of pipe lines transporting natural gas. SDCL 10-45-12.1

provides an exemption for the services of “pipe lines, except natural gas[.]” SDCL

10-45-67 governs pipe lines transporting natural gas. It provides: “[t]he provision of

natural gas transportation services by a pipeline is exempted from the provisions of

this chapter and from the computation of the tax imposed by this chapter.”

(Emphasis added.) If the Legislature had intended that SDCL 10-45-12.1 also be

limited to petroleum pipeline transportation services, it would have limited the

petroleum pipeline services exemption as it did for natural gas pipelines in SDCL

10-45-67. Accordingly, we hold that the trial court erred in concluding that the

additive injection and equipment calibration pipeline services provided by Magellan


                                          -5-
#26553

were not the type of services the legislature intended to be exempt from tax under

SDCL 10-45-12.1.

[¶13.]       We also note that an entity seeking an exemption for “pipe lines”

services under SDCL 10-45-12.1 must be eligible for the exemption. That inquiry

requires reference to the Standard Industrial Classification (SIC) Manual, which is

directly referenced within SDCL 10-45-12.1. Graceland, 2002 S.D. 145, ¶ 7, 654

N.W.2d at 783 (stating that “SDCL 10-45-12.1 adopts the classification scheme set

forth in the Standard Industrial Classification Manual (SIC) making it necessary to

examine the SIC Manual in order to determine the proper classification”); Sioux

Falls Shopping News v. Dep’t of Revenue & Regulation, 2008 S.D. 34, ¶ 20, 749

N.W.2d 522, 526 (stating that “[t]he greater part of [SDCL 10-45-12.1] employs the

SIC Manual to define specified exempt services”).

[¶14.]       The Department classifies Magellan under industry number 4613

(refined petroleum pipelines), which falls within Major Group 46 in the SIC

Manual. The portion of the SIC Manual that addresses Major Group 46 is titled

“pipelines, except natural gas.” This portion of the SIC Manual defines a refined

petroleum pipeline as an: “[e]stablishment[] primarily engaged in the pipeline

transportation of refined products of petroleum, such as gasoline and fuel oil.”

Office of Mgmt. & Budget, Standard Industrial Classification Manual 279 (1987).

Because Magellan is an establishment primarily engaged in the pipeline

transportation of refined petroleum products, it is eligible to receive the benefit of

tax exemptions under SDCL 10-45-12.1. We hold that SDCL 10-45-12.1 exempts




                                           -6-
#26553

additive injection and equipment calibration pipeline services, and that Magellan is

eligible for such exemptions because of its Major Group 46 status.

[¶15.]       The Department argues that Magellan’s position that the additive

injection and equipment calibration pipeline services are exempt from tax under

SDCL 10-45-12.1 is contrary to our prior holdings in which we have stated that:

“when examining whether a tax applies, the focus belongs on the transaction, not

the character of the participants.” Sioux Falls Shopping News, 2008 S.D. 34, ¶ 23,

749 N.W.2d at 527 (citation omitted). The Department’s argument is misplaced.

The types of transactions at issue in this appeal, additive injection and equipment

calibration services, squarely fall within the exemption for “pipe lines” services as

set forth in SDCL 10-45-12.1.

[¶16.]       The parties disagree as to how our past case law should be utilized in

deciding this dispute. For example, both parties rely on Mauch v. S.D. Dep’t of

Revenue & Regulation, 2007 S.D. 90, 738 N.W.2d 537, to support their differing

arguments. In Mauch, this Court reversed the Department’s assessment of tax

against the services of an engineer. Id. ¶ 24. The Court found that the engineer’s

educational background and years of experience qualified him to provide

“engineering services” as required under the exemption, even though he did not

hold a professional license. Id. ¶ 22. In reversing the portion of the tax assessment

related to engineering services, this Court found, in part, that the Department erred

in incorporating other, unrelated statutes, which defined professional engineer. Id.

¶¶ 12-20. Like our ruling in Mauch, we will not apply text that is absent from a




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particular statute. Accordingly, we decline the Department’s request to read-in the

term transportation to SDCL 10-45-12.1.

[¶17.]       The parties also disagree as to the proper application of Watertown

Coop. and the Court’s use of the “predominant activity test” in that case. See

Watertown Coop. Elevator Ass’n v. S.D. Dep’t of Revenue, 2001 S.D. 56, 627 N.W.2d

167. Watertown Coop. involved a use tax assessment against Watertown Coop. for

fees it paid for the services of crop production specialists (production specialists).

Id. ¶ 5. The production specialists were employed directly by product distributors,

however, Watertown Coop.’s practice was to “reimburse the distributors for all

actual expenses of the production specialists, including salary, social security,

income tax withholding, workers’ compensation, equipment leases, travel, and other

incidental expenses.” Id. ¶ 2. The ranchers and farmers purchasing agronomy

products from Watertown Coop. did not pay a direct fee for product specialist

services, but Watertown Coop. built the cost of those services into the purchase

price of the agronomy products. Id. ¶ 3. Tax related to the sale of the agronomy

products themselves was not at issue because the sale of agronomy products was

tax exempt. Id. ¶ 11.

[¶18.]       Watertown Coop. argued that the services were “an ‘inextricable part’

of the sale of exempt agronomy products.” Id. The Court disagreed, concluding that

use tax should be applied because the services involved the performance of services,

rather than the sale of agronomy products. Id. ¶ 14. The Court clarified its use of

the predominant activity test by noting that: “[h]ere, the dispositive transaction

occurred with the distributors and [Watertown Coop.], not with the ultimate sale of


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#26553

agronomy products or in providing production specialist services to farmers and

ranchers.” Id. ¶ 12.

[¶19.]         In Watertown Coop., the Court used the predominant activity to clarify

that the services being provided were between the taxpayer, Watertown Coop., and

the distributors, rather than Watertown Coop. and the farmers and ranchers (who

were the actual recipients of the agronomy products, which qualified for the

exemption). Id. ¶¶ 12-14. The case before us is distinguishable from Watertown

Coop. because that case involved the imposition of tax when the taxpayer attempted

to attach services that were separate and distinct from the actual tax exemption.

Here, it is not necessary to apply the predominant activity test because of our

finding that additive injection and equipment calibration pipeline services squarely

fall within the pipeline services tax exemption provided in SDCL 10-45-12.1.

Watertown Coop. required this Court to utilize the predominant activity test to

distinguish the relationships among three separate parties: the taxpayer, its

customer, and its distributor. Our case is distinctly different in that the services at

hand involve only two parties: Magellan and its customers. 2

                                   CONCLUSION

[¶20.]         Under the plain language of SDCL 10-45-12.1, Magellan’s additive

injection and equipment calibration pipeline services are exempt from sales tax.

We reverse.




2.       Because we find that Magellan’s additive injection and equipment calibration
         pipeline services are tax exempt under SDCL 10-45-12.1, we need not reach
         the issue of interest assessed against Magellan on the COA.

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[¶21.]         SEVERSON, Justice, concurs.

[¶22.]         ZINTER, Justice, and KERN, Circuit Court Judge, concur specially.

[¶23.]         KONENKAMP, Justice, dissents.

[¶24.]         KERN, Circuit Court Judge, sitting for WILBUR, Justice, disqualified.



ZINTER, Justice (concurring specially).

[¶25.]         SDCL 10-45-12.1 is a lengthy listing of sales tax exemptions. The

Legislature used different language in the statute to describe two types of

exemptions. In the first, the Legislature exempted specifically described “services”

performed by “establishments” referenced in the SIC. Representative examples

include “health services,” “educational services,” “social services,” “agricultural

services,” “forestry services,” and “trucking and courier services.” See SDCL 10-45-

12.1. 3 In the second, the Legislature more broadly exempted entire



3.       SDCL 10-45-12.1 provides:

               The following services enumerated in the Standard Industrial
               Classification Manual, 1987, as prepared by the Statistical
               Policy Division of the Office of Management and Budget, Office
               of the President are exempt from the provisions of this chapter:
               health services (major group 80); educational services (major
               group 82) except schools and educational services not elsewhere
               classified (industry no. 8299); social services (major group 83);
               agricultural services (major group 07) except veterinarian
               services (group no. 074) and animal specialty services, except
               veterinary (industry no. 0752); forestry services (group no. 085);
               radio and television broadcasting (group no. 483); railroad
               transportation (major group 40); local and suburban passenger
               transportation (group no. 411) except limousine services; school
               buses (group no. 415); trucking and courier services, except air
               (group no. 421) except collection and disposal of solid waste;
               farm product warehousing and storage (industry no. 4221);
                                                                (continued . . .)
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“establishments” or “industries.” Representative examples of those exemptions

________________________
(. . . continued)
               establishments primarily engaged in transportation on rivers
               and canals (group no. 444); establishments primarily engaged in
               air transportation, certified carriers (group no. 451);
               establishments primarily engaged in air transportation,
               noncertified carriers (group no. 452) except chartered flights
               (industry no. 4522) and airplane, helicopter, balloon, dirigible,
               and blimp rides for amusement or sightseeing; pipe lines, except
               natural gas (major group 46); arrangement of passenger
               transportation (group no. 472); arrangement of transportation of
               freight and cargo (group no. 473); rental of railroad cars (group
               no. 474); water supply (industry no. 4941); sewerage systems
               (industry no. 4952); security brokers, dealers and flotation
               companies (group no. 621); commodity contracts brokers and
               dealers (group no. 622); credit counseling services provided by
               individual and family social services (industry no. 8322);
               construction services (division C) except industry no. 1752 and
               locksmiths and locksmith shops; consumer credit reporting
               agencies, mercantile reporting agencies, and adjustment and
               collection agencies (group no. 732), if the debt was incurred out-
               of-state and the client does not reside within the state. The
               following are also specifically exempt from the provisions of this
               chapter: financial services of institutions subject to tax under
               chapter 10-43 including loan origination fees, late payment
               charges, nonsufficient fund check charges, stop payment
               charges, safe deposit box rent, exchange charges, commission on
               travelers checks, charges for administration of trusts, interest
               charges, and points charged on loans; commissions earned or
               service fees paid by an insurance company to an agent or
               representative for the sale of a policy; services of brokers and
               agents licensed under Title 47; the sale of trading stamps;
               rentals of motor vehicles as defined by § 32-5-1 leased under a
               single contract for more than twenty-eight days; advertising
               services; services provided by any corporation to another
               corporation which is centrally assessed having identical
               ownership and services provided by any corporation to a wholly
               owned subsidiary which is centrally assessed; continuing
               education programs; tutoring; vocational counseling, except
               rehabilitation counseling; and motion picture rentals to a
               commercially operated theater primarily engaged in the
               exhibition of motion pictures.

      (Emphasis added.)

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#26553

include “establishments” primarily engaged in river transportation,

“establishments” primarily engaged in air transportation, certain centrally assessed

corporations, water supply and sewage system “industr[ies],” security and

commodity “brokers” and “dealers,” and “credit and collection agencies.” See id.

[¶26.]         The statutory language at issue in this case is of the second type

exempting pipeline establishments. See id. (exempting “pipe lines, except natural

gas (major group 46)”). Unlike the first exemption for specifically described

services, the Legislature did not limit the “pipe line” exemption to any particularly

described service provided by pipelines. See id. Because the Legislature chose to

exempt pipeline establishments rather than any particular service they provide, 4

and because there is no dispute that Magellan’s economic activity falls within major

group 46 (pipeline establishments), Magellan is entitled to the exemption for the

pipeline services it provides. Further, because the Department does not dispute




4.       The dissent opines that there are not two types of exemptions, suggesting
         that there is no establishment exemption. The dissent reasons that “the
         Legislature simply took the language used by the SIC and chose which
         services it intended to allow service exemptions.” See Dissent ¶ 39. But this
         disregards the clear difference in the statutory language describing each
         exemption. Moreover, the SIC Manual “was developed for use in the
         classification of establishments by the type of activity in which they are
         engaged[.]” SIC Manual at 11 (emphasis added). And establishments are
         defined as “an economic unit . . . where business is conducted or where
         services or industrial operations are performed.” Id. at 12 (emphasis added).
         Therefore, the SIC Manual also recognizes the distinction between a business
         establishment and the services it may provide. Because the SIC Manual
         incorporates this distinction, one cannot simply sweep aside the Legislature’s
         decision to in some cases use language exempting entire establishments
         without qualification, but in other cases use language limiting the exemption
         to a particular service provided by a classified establishment.


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that additive injection and equipment calibration are services provided by pipelines,

those services are exempt.

[¶27.]       Had the Legislature intended to exempt only the “transportation”

services provided by pipelines, the Legislature would have used the word

“transportation” in a specifically described service exemption, as it did throughout

most of SDCL 10-45-12.1. Any question about legislative intent is resolved by

examining the Legislature’s treatment of other establishments.

[¶28.]       The Legislature’s comparative treatment of petroleum and natural gas

pipelines is especially significant. In contrast to the establishment exemption

provided for petroleum pipelines, the Legislature used the particularly described

service exemption for natural gas pipelines. As previously noted, SDCL 10-45-12.1

has no language limiting the exemption for petroleum pipelines as long as they are

classified in “major group 46.” But when the Legislature decided to exempt natural

gas pipelines, it used the particularly described service language, only exempting

“[t]he provision of natural gas transportation services by a pipeline.” SDCL 10-45-

67 (emphasis added). And this is not the only example of the Legislature’s decision

to use the more limited and particularly described service exemption when it

desired to restrict an establishment’s exemption to a particular service. See SDCL

10-45-12.1 (limiting an exemption to “credit counseling services provided by

individual and family social services”). Thus, when the Legislature has intended to

limit an establishment’s exemption to a particular service, whether in SDCL 10-45-

12.1 or in a separate statute, it has done so. But in the case of petroleum pipelines,

the Legislature chose not to limit the exemption to transportation services.


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[¶29.]         The dissent would deny an exemption in this case, but it does so only

by adding the words “transportation services” to the pipeline establishment

exemption statute. The dissent correctly notes that major group 46 “includes

establishments primarily engaged in the pipeline transportation of petroleum or

other commodities[.]” See SIC Manual at 279. But the dissent then incorrectly

relies on other SIC Manual language indicating that where “distinct and separate”

“economic activities” are provided at a single physical location, each activity should

be classified as a separate “establishment” (presumably with different, non-exempt

classification numbers). 5 See Dissent ¶¶ 42-43 (concluding that there is no evidence




5.       The Department makes a closely related argument based on our decisions in
         Mauch v. South Dakota Department of Revenue & Regulation, 2007 S.D. 90,
         ¶¶ 9-24, 738 N.W.2d 537, 540-44, Cooperative Agronomy Services v. South
         Dakota Department of Revenue, 2003 S.D. 104, ¶¶ 14-15, 668 N.W.2d 718,
         722-23, and similar decisions. The Department points out that in those
         cases, we noted that taxability is based on the transaction and not the
         classification or primary business of the taxpayer. But in the Department’s
         cases, the issue involved the taxpayer’s entitlement to a particular
         classification. The “SIC Manual [is used under the statutory scheme] in
         order to determine the proper classification.” Graceland Coll. Ctr. for Prof’l
         Dev. & Lifelong Learning, Inc. v. S.D. Dep’t of Revenue, 2002 S.D. 145, ¶ 7,
         654 N.W.2d 779, 783. Therefore, in the Department’s cases, it was necessary
         to focus on the transactions to determine whether the entity fit within the
         claimed classification. Here, there is no dispute that Magellan is classified as
         a pipeline in major group 46. Therefore, the “transaction” cases are not
         helpful.

         The Department’s reliance on “predominant activity” cases is also misplaced.
         See, e.g., TRM ATM Corp. v. S.D. Dep’t of Revenue & Regulation, 2010 S.D.
         90, ¶ 9, 793 N.W.2d 1, 4 (“[I]n 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.”). Here,
         Magellan satisfies that test because there is no dispute that Magellan’s
         primary activity involves the transportation of petroleum products.
         Moreover, the predominant activity test is used in applying SDCL 10-45-4.1,
                                                               (continued . . .)
                                            -14-
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that a petroleum pipeline injects additives and calibrates its equipment as a part of

its service of transporting petroleum, and no industry classification has been cited

to include each of those activities).

[¶30.]       There are two errors in the dissent’s analysis. First, to qualify for the

SIC major group 46 exemption, each service provided by a petroleum pipeline need

not be classified as an “establishment ‘primarily engaged in the pipeline

transportation of petroleum.’” The SIC Manual provides that “[e]ach operating

establishment is assigned an industry code on the basis of its primary activity,

which is determined by its principal . . . services rendered.” SIC Manual at 15

(emphasis added). Consequently, to qualify for exempt classification in major group

46, the establishment need only be “primarily” engaged in the pipeline

transportation of petroleum. See id. at 279. And by basing classification on an

establishment’s primary activity and principal service rather than each included

service, the SIC Manual recognizes that the primary activity controls even though

other services may be provided.

[¶31.]       Nevertheless, the dissent contends that separate classifications are

required because the SIC Manual requires separate classification where “no one

industry description in the classification includes . . . combined activities[,]” and

“the employment in each . . . economic activity is significant.” See Dissent ¶¶ 41-42

(emphasis added) (citing SIC Manual at 12). The Department has not made this



________________________
(. . . continued)
         a statute that has a different purpose; i.e., to define a “service.” Here, there
         is no dispute that Magellan’s injection and calibration activities are services.

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argument on appeal, and the dissent errs in relying on this language because

neither test is satisfied in this case.

[¶32.]         The first test is not satisfied because major group 46 classification

describes the combined activities that Magellan provides. The dissent contends

that there is no evidence that additive injection and equipment calibration services

are part of Magellan’s primary service of transporting petroleum. But the

stipulated facts reflect that those services are a necessarily included part of the

services Magellan provides in transporting petroleum products. The stipulation

reflects that when petroleum products are transported in interstate pipelines, the

petroleum products are fungible, and Magellan must inject them with additives 6 at

the time its customers take delivery of the individual products at the terminal rack.

Those additive services are necessarily combined because some of the additives are

“end-product components” that are “mandated” to be injected under state and

federal law. Stipulated Facts ¶¶ 19-21. Other additives must be injected to

differentiate between proprietary brands or to enhance diesel performance. 7 Id.

[¶33.]         The second test is not satisfied because there is no dispute that the

additive injection and related equipment calibration services are a relatively



6.       Equipment calibration services are necessary to monitor the additive
         injections.

7.       The specific additives that must be injected at the rack include gasoline
         detergent, diesel lubricity additive, diesel dye, jet fuel deicer, diesel cold flow
         improver, diesel detergent, and proprietary additives. Proprietary additives
         are required because pipelines provide the same fungible petroleum products
         to competing retailers. The products must be injected with proprietary
         additives at the pipeline terminal so the products may be differentiated when
         sold at retail.

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insignificant part of Magellan’s pipeline services. This is a 9,500 mile pipeline

crossing thirteen states in its transportation of petroleum from refineries

throughout the country to fifty-one terminals, including those in South Dakota. But

the additives are injected only at the very end of that journey when the petroleum

products are being loaded into the customer’s trucks as they leave the terminals.

Because the injection and calibration services are a relatively insignificant part of a

pipeline’s economic activity, and because major group 46 describes those combined

services, the “distinct and separate economic activity” test is not satisfied.

Therefore, the SIC Manual provides no basis to require separate industry codes for

the injection and calibration services Magellan necessarily includes in its

transportation of petroleum products.

[¶34.]       Entitlement to a tax exemption must be based on the language of the

statute. Sioux Falls Shopping News, Inc. v. Dep’t of Revenue & Regulation, 2008

S.D. 34, ¶ 26, 749 N.W.2d 522, 527 (noting that a court may not include language in

the tax statutes that the Legislature did not employ). The Legislature limited the

natural gas pipeline exemption to “transportation services,” but the Legislature did

not use (or incorporate by reference) any language limiting the petroleum pipeline

exemption to “transportation” or any other particular service. Instead, the

Legislature broadly exempted petroleum “pipe line” establishments from sales

taxation. Because the Department agrees that Magellan is a petroleum pipeline

establishment that falls within major group 46, there is no statutory basis to limit

Magellan’s exemption to any of the pipeline services it provides. And because the




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injection and calibration services are pipeline services provided by an establishment

classified in major group 46, the services are exempt under SDCL 10-45-12.1.

[¶35.]       KERN, Circuit Court Judge, joins this special writing.



KONENKAMP, Justice (dissenting).

[¶36.]       The Court analyzes the issue here backwards. It begins with the

exemption statute, SDCL 10-45-12.1, without first looking to what taxable services

Magellan provides. To be exempt, the activity must first be taxable. As SDCL 10-

45-4 provides, the gross receipts of a service rendered by a business are taxable

“unless the service is specifically exempt from the provisions of this chapter.”

(Emphasis added.) A “service” is defined as “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.

[¶37.]       Magellan Pipeline Company provides multiple services for its

customers, including storing, transporting, and injecting additives into refined

petroleum products, and calibrating equipment. Because these services are

rendered to customers for a fee, those services are taxable unless specifically

exempted.

[¶38.]       After identifying the taxable services, the next step is to determine

whether any of those services are specifically exempted. Taxpayers have the

burden of proving entitlement to an exemption. In re State Sales & Use Tax Liab. of

Pam Oil, Inc., 459 N.W.2d 251, 255 (S.D. 1990). Exempting statutes are construed


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strictly in favor of the taxing power. Watertown Coop., 2001 S.D. 56, ¶ 10, 627

N.W.2d at 171 (citing In re State & City Sales Tax Liab. of Quality Serv. Railcar

Repair Corp., 437 N.W.2d 209, 211 (S.D. 1989)).

[¶39.]       Under SDCL 10-45-12.1, “[t]he following services enumerated in the

Standard Industrial Classification Manual, 1987, as prepared by the Statistical

Policy Division of the Office of Management and Budget, Office of the President are

exempt from the provisions of this chapter: . . . pipe lines, except natural gas (major

group 46)[.]” (Emphasis added.) Contrary to the special writing’s view, the

language of SDCL 10-45-12.1 does not show that the Legislature acted specifically

to create or describe “two types of exemptions.” Rather, a closer comparison of the

statute and the SIC Manual reveals that the Legislature simply took the language

used by the SIC Manual and chose which services it intended to allow service

exemptions. In particular, the language “pipe lines, except natural gas” is directly

from the SIC Manual. The SIC Manual, not the South Dakota Legislature,

excluded natural gas from major group 46. Thus, it is illogical to declare that the

Legislature’s different treatment of petroleum pipelines and natural gas is a

significant indication of the Legislature’s intent to treat petroleum pipelines “more

broadly.”

[¶40.]       Moreover, because the Legislature specifically referred to the SIC

Manual and because what constitutes “pipe lines,” as contemplated by SDCL 10-45-

12.1 is not clear from the text of the statute, we must examine the language of that

manual. In regard to “pipe lines, except natural gas,” SIC Group 46 is the starting

point. That group “includes establishments primarily engaged in the pipeline


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transportation of petroleum or other commodities, except natural gas.” Then,

within group 46, there are three Industry Groups. Relevant here is the industry

entitled, Refined Petroleum Pipelines. That industry is defined as

“[e]stablishments primarily engaged in the pipeline transportation of refined

products of petroleum, such as gasoline and fuel oil.” Magellan is an establishment

primarily engaged in the pipeline transportation of refined petroleum products.

[¶41.]       The analysis, however, should not stop there. Because Magellan’s

services of storing refined petroleum, calibrating equipment, and injecting additives

are not necessarily services offered by an establishment primarily engaged in the

pipeline transportation of refined petroleum, Magellan must prove entitlement to

an exemption for those services. On this point, the SIC Manual is controlling.

[¶42.]       The SIC Manual defines an “establishment” as “an economic unit,

generally at a single physical location, where business is conducted or where

services or industrial operations are performed.” “Where distinct and separate

economic activities are performed at a single physical location . . . such activity

should be treated as a separate establishment where: (1) no one industry

description in the classification includes such combined activities; (2) the

employment in each such economic activity is significant; and (3) separate reports

can be prepared on the number of employees, their wages and salaries, sales or

receipts, and other types of establishment data.” (Emphasis added.)

[¶43.]       Here, Magellan, a pipeline establishment, performs distinct and

separate economic activities with refined petroleum products: storing, transporting,

injecting additives either by customer request or by legal mandate, and calibrating


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equipment. There is no evidence that a pipeline establishment stores refined

petroleum, calibrates equipment, and injects additives as part of its service of

transporting refined petroleum. Moreover, there is no industry classification cited

to include all such activities. Thus, Magellan has failed to meet its burden of

proving an exemption. And Magellan keeps separate sales reports on its injecting of

additives and equipment calibration. Because we must remain cognizant of the fact

that “[e]xemptions are a matter of legislative grace and doubts are resolved in favor

of taxation[,]” Magellan’s separate and distinct services of injecting additives and

calibrating equipment should be deemed separate and distinct economic activities

with refined petroleum products. See In re State Sales & Use Tax Liab. of Townley,

417 N.W.2d 398, 400 (S.D. 1987).




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