#27055-r-JKK

2014 S.D. 91

                          IN THE SUPREME COURT
                                  OF THE
                         STATE OF SOUTH DAKOTA
                                   ****
FIRST GOLD, INC., MINERAL
PALACE, LP and FOUR ACES
GAMING, LLC,                              Plaintiffs and Appellants,

      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

                                   ****

                     THE HONORABLE MARK BARNETT
                                Judge

                                   ****

SANDRA HOGLUND HANSON of
Davenport, Evans, Hurwitz & Smith, LLP
Sioux Falls, South Dakota                 Attorneys for plaintiffs
                                          and appellants.


MARTY J. JACKLEY
Attorney General

JARED C. TIDEMANN
JEROMY J. PANKRATZ
Assistant Attorneys General
Pierre, South Dakota                      Attorneys for defendant
                                          and appellee.

                                   ****
                                          ARGUED ON
                                          NOVEMBER 17, 2014
                                          OPINION FILED 12/17/14
#27055

KONENKAMP, Justice

[¶1.]        Three Deadwood casinos jointly brought a declaratory judgment action

in circuit court seeking a ruling that their “free play” promotional programs are not

subject to gaming tax under SDCL chapter 42-7B. After an adverse ruling in circuit

court, the casinos appealed.

                                    Background

[¶2.]        First Gold Hotel, Mineral Palace Hotel and Gaming, and Four Aces

Gaming, LLC (Establishments) each run promotional programs intended to attract

patrons to their casinos. If the patrons join an establishment’s “club,” they receive

coupons or credits called “free play.” Each establishment has its own operating

rules, but it is agreed that free play allows patrons to play slot machines without

using any of their personal money. Patrons cannot purchase free play, and

distributed free play credits or coupons have an expiration date. Free play cannot

be redeemed for cash, merchandise, or other promotional offers. Yet patrons can

win money from the use of free play credits or coupons.

[¶3.]        The Establishments brought suit in circuit court against the South

Dakota Department of Revenue and Regulation requesting a declaration that free

play is not part of adjusted gross proceeds and, therefore, is not subject to gaming

tax. Both sides moved for summary judgment. The Establishments contended that

free play is not subject to gaming tax under SDCL chapter 42-7B because no statute

or regulation “dictates that free play must be included in gross revenue in the first

place.” The Department responded that free play is taxable because the gaming tax

regulations specifically say that promotional awards are not a deductible event.


                                          -1-
#27055

The Department relied on a ruling from the South Dakota Gaming Commission

declaring that “promotional money shall be reported as gross revenue and/or

adjusted gross proceeds[.]”

[¶4.]         The circuit court issued a number of rulings, but only the taxability

question remains for our consideration. On that subject, the court held that the

Establishments were not entitled to declaratory relief because the administrative

regulations on gaming clearly and unambiguously provide that promotional play —

i.e., free play — is not a deductible event in the calculation of adjusted gross

revenue. See ARSD 20:18:18:26. Reasoning that free play has value “in its

possibility of enticing patrons to play, which also translates to money,” the court

concluded that any ambiguity in the administrative regulations must be construed

to mean that promotional awards are not deductible. Thus, the court granted the

Department’s motion for summary judgment, holding that free play must be

included in adjusted gross proceeds.

                               Analysis and Decision

[¶5.]         In this appeal, we address only the interpretation of South Dakota’s

gaming tax statutes and regulations; specifically, whether slot machine free play is

subject to gaming tax as adjusted gross proceeds under SDCL 42-7B-28, -28.1.* The



*       The circuit court considered additional issues, such as whether the
        Establishments could obtain a refund and whether a declaratory action was
        the proper vehicle for tax questions. The Establishments concede that they
        cannot obtain a refund in this declaratory action, and the Department
        concedes that a declaratory action is proper for addressing taxability
        questions. See SDCL 21-24-1 (the circuit court has the “power to declare
        rights, status, and other legal relations whether or not further relief is or
        could be claimed”).

                                           -2-
#27055

Establishments contend that the circuit court erred when it declared that free play

must be counted as part of adjusted gross proceeds under SDCL chapter 42-7B

because no statute or regulation includes free play in the calculation of adjusted

gross proceeds. They further assert that regulatory language regarding the

deductibility of promotional awards is immaterial; this case concerns whether free

play is includable in the first place.

[¶6.]        “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 or the circuit court.” Midcontinent Broad. Co. v. S.D. Dep’t of Revenue,

424 N.W.2d 153, 154 (S.D. 1988). Moreover, when the question is whether a statute

imposes a tax, we construe the statute “liberally in favor of the taxpayer and strictly

against the taxing body.” Nat’l Food Corp. v. Aurora Cnty. Bd. of Comm’rs, 537

N.W.2d 564, 566 (S.D. 1995) (quoting Thermoset Plastics, Inc. v. S.D. Dep’t of

Revenue, 473 N.W.2d 136, 138 (S.D. 1991)) (internal quotation mark omitted). “The

purpose of statutory construction is to discover the true intention of the law, which

is to be ascertained primarily from the language expressed in the statute.” Goetz v.

State, 2001 S.D. 138, ¶ 16, 636 N.W.2d 675, 681 (quoting US West Commc’ns, Inc. v.

Pub. Utils. Comm’n, 505 N.W.2d 115, 123 (S.D. 1993)). We must give a statute’s

language “a reasonable, natural, and practical meaning” to effect its purpose.

Robinson & Muenster Ass’n v. S.D. Dep’t of Revenue, 1999 S.D. 132, ¶ 7, 601 N.W.2d

610, 612. Essentially the same tenets apply to our construction of administrative

rules. Hartpence v. Youth Forestry Camp, 325 N.W.2d 292, 295 (S.D. 1982).




                                          -3-
#27055

[¶7.]         Here, the Legislature imposes a tax of eight plus one percent on the

adjusted gross proceeds from allowed gaming. SDCL 42-7B-28, -28.1. “Adjusted

gross proceeds” is defined as “gross proceeds less cash prizes.” SDCL 42-7B-4(1).

“Gross proceeds” is not further defined by statute, so we look to the administrative

rules promulgated by the Gaming Commission as part of the Commission’s rule-

making authority. See SDCL 42-7B-7. The gaming regulations refer to “gross

revenue” rather than “gross proceeds,” but, for the purpose of this proceeding, both

sides agree the terms are synonymous. Under ARSD 20:18:22:12, gross revenue for

each slot machine “equals drop less fills to the machine jackpot payouts, hand pay

credit lockups, and vouchers issued.”

[¶8.]         It is not readily apparent from ARSD 20:18:22:12 that “free play” is

included in the calculation of gross revenue. The “drop” is the only inclusion in the

calculation, and “drop” is defined as “the total amount of money, chips, and tokens

removed from the drop boxes[.]” ARSD 20:18:01:01(8) (emphasis added). A “chip” is

defined as “a nonmetal or partly metal representative of value, redeemable for cash,

issued and sold by a licensee for use at gaming[.]” ARSD 20:18:20:01(1). A “token”

is defined as “a metal representative of value, redeemable for cash, issued and sold

by a licensee for use at gaming.” Id. at (2). “Free play,” however, is the “use of a

coupon that is issued to a patron by an establishment for play for which no bet is

required[.]” ARSD 20:18:01:01(11). Because free play is a coupon and not money,

chips, or tokens, it is not part of the drop.

[¶9.]         The Department argues that free play is “in essence a computerized

token” and “has value” to the Establishments, a value taxable as income. Our


                                            -4-
#27055

function is to “construe administrative rules according to their intent[,]” as

ascertained from the rules as a whole. Estate of He Crow v. Jensen, 494 N.W.2d

186, 191 (S.D. 1992). We confine ourselves to the language used in the regulations.

Goetz, 2001 S.D. 138, ¶¶ 15-16, 636 N.W.2d at 681. As with statutes, when the

meaning of a regulation is clear and unambiguous, we only declare its meaning “as

clearly expressed.” See US West Commc’ns, Inc., 505 N.W.2d at 123. Here, a free

play coupon is not money, a token, or a chip. The language defining a “drop” is clear

and unambiguous, and therefore, we must only declare the meaning of the

regulation. It is immaterial that free play might be valuable to the Establishments,

and whether it is “in essence” a token does not mean a free play coupon is a token.

On the contrary, the clear language of ARSD 20:18:20:01(2) defines a token as “a

metal representative of value, redeemable for cash, issued and sold by a licensee for

use at gaming.”

[¶10.]       On another tack, the Department argues that free play must be

included in the calculation of adjusted gross revenue because ARSD 20:18:18:26

specifically provides that “[p]romotional awards are not a deductible event in the

adjusted gross revenue calculation,” and ARSD 20:18:20.02:01 provides that an

establishment that “engages in promotions to increase business . . . may not deduct

payouts made pursuant to the promotion from adjusted gross income[.]” And the

Department relies on the Gaming Commission’s ruling in 2007 that promotional

awards must be included in the calculation of adjusted gross proceeds under SDCL

chapter 42-7B.




                                          -5-
#27055

[¶11.]       The Gaming Commission’s legal opinion that the gaming statutes and

regulations impose a gaming tax upon a promotional program similar to the

Establishments’ free play program in this case is not controlling. See Midcontinent

Broad. Co., 424 N.W.2d at 154. We review de novo whether a statute or regulation

imposes a tax, and based on our review of ARSD 20:18:18:26 and ARSD

20:18:20.02:01, neither regulation supports the conclusion that the value of free

play is included in the calculation of adjusted gross revenue. True, both regulations

clearly provide that promotional awards and payouts cannot be deducted. But

prohibiting a deduction for awards and payouts from promotions does not perforce

mean that the regulations therefore include the value of a free play coupon. On the

contrary, ARSD 20:18:18:26 and ARSD 20:18:20.02:01 confirm that these

regulations do not include free play in the calculation of adjusted gross revenue.

[¶12.]       Under ARSD 20:18:18:26, “[p]romotional and bonus systems” are

described as “gaming devices that are configured to participate in electronically

communicated promotional and bonus award payments from an approved host

system.” Promotional awards “entitle players to special promotional awards based

on patrons’ play activity or awards gifted by the casino to guests.” Id. These

awards, therefore, “are not a deductible event in the adjusted gross revenue

calculation.” Id. Unlike promotional awards, however, “[p]ayouts as a result of a

bonus event are a deductible event in the adjusted gross revenue calculation.” Id.

This is because “[b]onus awards are based on a specific wager or specific event and

are available to all patrons playing bonused slot machines.” Id. Looking then to

ARSD 20:18:20.02:01, when a promotional award is the result of a specific wager,


                                         -6-
#27055

the establishment may deduct the payouts made pursuant to the promotion. Free

play is not the result of a specific wager because it is defined as a “play for which no

bet is required[,]” ARSD 20:18:01:01(11), and a “bet” requires a “wager in a game of

chance[,]” SDCL 42-7B-4(2). (Emphasis added.)

[¶13.]       The only reasonable, natural, and practical interpretation of the

gaming laws and regulations is that the value of free play is not included in

calculating adjusted gross revenue and, therefore, is not part of adjusted gross

proceeds under SDCL chapter 42-7B. Indeed, the Establishments receive no

income, and the patron wagers nothing. Consequently, there is nothing to include,

and any awards or payouts as a result of free play provide nothing to deduct.

Because the statutes and regulations do not include the value of free play for slot

machines in the calculation of an establishment’s adjusted gross revenue, the circuit

court erred when it ruled that the Establishments must remit gaming tax under

chapter 42-7B for the value of free play.

[¶14.]       Reversed with instructions to enter a declaratory judgment for the

Establishments in accordance with this decision.

[¶15.]       GILBERTSON, Chief Justice, and ZINTER, SEVERSON, and

WILBUR, Justices, concur.




                                            -7-
