#27413-a-JMK
2016 S.D. 47

                             IN THE SUPREME COURT
                                     OF THE
                            STATE OF SOUTH DAKOTA

                                    ****
BLACK HILLS TRUCK &
TRAILER, INC.
License No. 1020-0886-ST,

DAKOTA VOLVO TRUCKS, INC.
License No. 1015-3946-ST,

NORTH CLIFF USED & REBUILT
TRUCK PARTS, INC.
License No. 1016-4988-ST,

SFK LEASING, INC.
License No. 1015-0596-ST,

SIOUX FALLS KENWORTH, INC.
License No. 1015-4684-ST,

SIOUX FALLS TRAILER SALES,
INC. (SIOUX FALLS, SD)
License No. 1016-0511-ST,

and

SIOUX FALLS TRAILER SALES,
INC. (WATERTOWN, SD)
License No. 1016-0513-ST,                    Appellants,

v.

SOUTH DAKOTA
DEPARTMENT OF REVENUE,                       Appellee.

                                ****
                  APPEAL FROM THE CIRCUIT COURT OF
                     THE SECOND JUDICIAL CIRCUIT
                  MINNEHAHA COUNTY, SOUTH DAKOTA
                                ****
                 THE HONORABLE DOUGLAS E. HOFFMAN
                                Judge
                                ****
                                          CONSIDERED ON BRIEFS
                                          ON JANUARY 11, 2016
                                          OPINION FILED 06/22/16
DAVID L. EDWARDS
Breit Law Office, PC
Sioux Falls, South Dakota          Attorneys for appellants.


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

                            ****
#27413

KERN, Justice

[¶1.]         The South Dakota Department of Revenue subjected Black Hills Truck

& Trailer and other corporations owned by North American Truck & Trailer, Inc.,

(collectively Taxpayers) to a sales-and-use-tax audit. The audit uncovered errors

regarding Taxpayers’ reporting of use tax. The Department assessed Taxpayers for

unpaid use taxes. Taxpayers paid the assessment under protest and demanded an

administrative hearing. At the hearing, Taxpayers argued that the shop supplies

assessed were exempt from use tax because they were purchased for resale to

customers. Taxpayers offered an invoice demonstrating a typical transaction in

support of their position. The hearing examiner declined to consider the invoice

because Taxpayers submitted it more than 60 days after the audit began, in

violation of SDCL 10-59-7. Upon appeal, both the Department and the circuit court

affirmed the exclusion of the exhibit and the assessment. Taxpayers appeal. We

affirm.

                                         Facts

[¶2.]         North American Truck & Trailer, Inc., owns Black Hills Truck &

Trailer, Inc., and several other truck and trailer dealerships in various cities in

South Dakota. 1 These dealerships perform multiple services related to the lease,

sale, and repair of trucks, trailers, and similar equipment.




1.      Taxpayers include Black Hills Truck & Trailer, Inc., Dakota Volvo Trucks, -
        Inc., North Cliff Used & Rebuilt Truck Parts, SFK Leasing, Inc., Sioux Falls
        Kenworth, Inc., Sioux Falls Trailer Sales, Inc. (Sioux Falls, S.D.), and Sioux
        Falls Trailer Sales, Inc. (Watertown, S.D.).

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[¶3.]        The Department began its audit of each corporation in September

2012. It requested Taxpayers’ tax returns, worksheets, sales reports, expense

invoices, sales invoices, and other documents for the reporting periods of May 2009

through April 2012. During the audit, the Department narrowed its focus to a one-

year time frame within the audit period. The audit uncovered what the

Department believed to be use-tax errors regarding shop supplies used by

Taxpayers in their repair service. Taxpayers did not pay sales tax on the supplies

at the time of purchase or use tax at the time the supplies were used and consumed.

The Department attributed the mistakes to human error rather than intent to

evade taxation. The Department assessed Taxpayers $27,691.91 in unpaid use tax.

[¶4.]        Taxpayers paid the tax under protest and requested an administrative

hearing. At the hearing on May 30, 2013, Taxpayers challenged the use tax

assessment and offered exhibits in support of their position. The Department

objected to ten of Taxpayers’ exhibits because Taxpayers did not present them to

the auditor within 60 days from the beginning of the audit as required by SDCL 10-

59-7. The Department also objected because several of the exhibits were dated

outside of the audit period. The hearing examiner excluded the exhibits because

they were not timely presented.

[¶5.]        During the hearing, the Department contended that Taxpayers had

purchased shop supplies without payment of sales tax. To determine if use tax was

due, the Department divided the shop supplies into various categories. These

included shop supplies consumed during the repair of customer vehicles, shop

supplies used to repair customer vehicles that become part of the vehicle, and


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maintenance items used to repair Taxpayer-owned vehicles. Examples of shop

supplies consumed during a repair service included: sand paper, glass cleaner, dust

masks, nitrile gloves, razor blades, thinner or reducer, rubbing compound, VIS

polish, bars and buffing wheels, sandblasting sand, packing tape, masking tape,

solvent, shop towels, brake cleaner, carb cleaner, and drill bits. Shop supplies that

became part of the customer’s vehicle include products such as filters and

windshield sealant. Maintenance items are things such as oils, antifreeze, and

other fluids used on Taxpayer-owned vehicles.

[¶6.]         The Department argued that use tax was due and owing on supplies

used and consumed in the repair of customer vehicles. The Department did not

assess use tax on shop supplies that were put into customers’ vehicles and left the

shop with the vehicles. But the Department assessed use tax on maintenance items

put into Taxpayer-owned vehicles either being prepared for resale or for items used

to repair leased vehicles. In response, Taxpayers alleged that none of the items

were subject to use tax because they were all purchased for resale and therefore

exempt.

[¶7.]         When analyzing whether use tax was due, the hearing examiner

considered in part whether the supplies became part of the customer’s vehicle as

defined in ARSD 64:06:02:58. 2 The hearing examiner affirmed the assessment,




2.      ARSD 64:06:02:58 provides:
              All charges for repair services, including maintenance
              agreements, are subject to sales tax. Repair of personal
              property or any product transferred electronically is a service in
              which property is restored to or near its former condition or
                                                                (continued . . .)
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finding that the Department properly distinguished between the categories of

supplies and assessed the tax due on each.

[¶8.]        Taxpayers appealed the hearing examiner’s decision to the circuit

court. Taxpayers first alleged that because the Department had unrestricted access

to all of their records during the audit, prior submission of the exhibits was

unnecessary. The circuit court agreed regarding most of the exhibits holding that

all but four were admissible pursuant to SDCL 10-59-7. It held that Exhibit 18—a

sales invoice that described the agreement for repair services including the cost of

supplies used during the repair—was not from the designated audit period and was

not material evidence. Therefore, the circuit court affirmed the Department’s

decision to exclude Exhibit 18 under the statute.

[¶9.]        Taxpayers next argued that the supplies used were exempt from use

tax because they were actually resold to customers in the regular course of business.

The circuit court disagreed. It reasoned that Taxpayers were selling the repair
_________________________________
(. . . continued)
               usefulness. A person engaged in the repair business must have
               a sales tax license and report tax on the gross receipts.
             Items purchased by a repair person which become part of the
             repaired property may be purchased exempt from sales tax by
             the repair person. The charges to the customer for the parts and
             service are taxable. Tools, equipment, and supplies consumed
             by a repair person are subject to sales tax when purchased. A
             business is liable for use tax on all items of tangible personal
             property and any product transferred electronically used by the
             business even though an item may have been especially
             fabricated to produce a product for a particular customer, is
             completely consumed in completing the customer’s order, and
             the cost of the item is included in the charge to the customer.
             A person who occasionally does some repair work but does not
             hold out to the public that the person does repair work is not
             considered to be in a repair business subject to sales tax.

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service itself, not the supplies used during the service. The circuit court affirmed

the Department’s assessment of use tax.

[¶10.]         On appeal, Taxpayers raise two issues: 3

               1.     Whether the Hearing Examiner erred by refusing to consider
                      Exhibit 18.

               2.     Whether the Hearing Examiner erred by affirming the
                      Department’s assessment of use tax on shop supplies used
                      during the repair process.

                                   Standard of Review

[¶11.]         The standard of review governing an agency’s decision is set forth in

SDCL 1-26-36. We “give great weight to the findings of the agency and reverse only

when those findings are clearly erroneous in light of the entire record.” Williams v.

S.D. Dep’t of Agric., 2010 S.D. 19, ¶ 5, 779 N.W.2d 397, 400. The determination of

whether a statute imposes a tax under a given factual scenario is a question of law,

and our review is de novo. We give no deference to any conclusion of law reached by

the circuit court or the Department. Paul Nelson Farm v. S.D. Dep’t of Revenue,

2014 S.D. 31, ¶ 7, 847 N.W.2d 550, 554. “Statutes exempting property from

taxation should be strictly construed in favor of the taxing power.” Butler Mach. Co.

v. S.D. Dep’t of Revenue, 2002 S.D. 134, ¶ 6, 653 N.W.2d 757,759 (quoting Robinson

& Muenster Assocs., Inc. v. S.D. Dept. of Revenue, 1999 S.D. 132, ¶ 7, 601 N.W.2d

610, 612). “[T]he taxpayer has the burden of proving entitlement to a statutory


3.       Taxpayers raised five issues in their docketing statement but elected to brief
         only two issues in this appeal. Other than by a brief reference, Taxpayers did
         not address maintenance items or repair software in their appellate brief. As
         “we will consider only those issues that the parties actually briefed[,]” these
         issues are waived. Daily v. City of Sioux Falls, 2011 S.D. 48, ¶ 10 n.6,
         802 N.W.2d 905, 910 n.6.

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exemption.” In re State Sales & Use Tax Liab. of Pam Oil, Inc., 459 N.W.2d 251,

255 (S.D. 1990).

                                Analysis and Decision

[¶12.]         1.     Whether the Hearing Examiner erred by refusing to consider
                      Exhibit 18.

[¶13.]         This issue concerns whether Exhibit 18, a sample invoice from outside

the audit period, should have been received into evidence by the hearing examiner.

Both SDCL 10-59-3 and 10-59-7 notify taxpayers that they must provide to the

Department all documents evidencing reduction, deduction, or exemption of

taxation to the auditor within 60 days from initiation of the audit. 4 It is undisputed

that Taxpayers herein were given proper notice. The Department is not required to

consider documents presented more than 60 days after the commencement of the

audit. However, additional pertinent documents “shall be considered[,]” if the

documents are material, there is a good reason for the failure to present them

within the proper timeframe, and they are submitted within a reasonable time prior

to any hearing scheduled pursuant to SDCL 10-59-9. SDCL 10-59-7.




4.       SDCL 10-59-3 requires each notice of intent to audit include the following
         statement:
               All records, books, and documents must be prepared for
               presentation to the auditor on the date of commencement of the
               audit. All 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.


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[¶14.]         Taxpayers argue that the invoice meets all three requirements of

SDCL 10-59-7. 5 With reference to the first factor, they assert that the exhibit was

material because it illustrated the resale of the products to the customer in support

of their claim that the products were exempt from use tax. Exhibit 18 states, “We

have included a charge equal to 8% of total cost of parts and labor, not to exceed

$350.00, in the misc. charges amount for shop supplies used in connection with this

repair.” Taxpayers argue that other invoices considered by the Department did not

explain the charges in such detail.

[¶15.]         While it is true that Exhibit 18 provides more information about the

charges, it does not more clearly illustrate Taxpayers’ resale theory compared to

other exhibits that were considered during the audit. It also describes a transaction

that occurred outside the period of the audit. The admission of Exhibit 18 would

not have significantly affected the hearing examiner’s analysis. As it would not

have added anything substantial, it was not material. Because Taxpayers failed to

5.       SDCL 10-59-7 provides in part:
               Any 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. However, additional pertinent
               papers or documents shall be considered if all the following
               apply:
                     (1) The additional pertinent papers or documents are
                     material;
                     (2) There were good reasons for failure to present other
                     pertinent papers or documents as referenced in § 10-45-45
                     or 10-46-43, within the prescribed time period; and
                     (3) The additional pertinent papers or documents are
                     submitted within a reasonable time period prior to any
                     hearing scheduled pursuant to § 10-59-9.

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establish that the exhibit was material, it is unnecessary to analyze the remaining

criteria. We affirm the hearing examiner’s decision to exclude Exhibit 18 as

untimely.

[¶16.]         2.    Whether the Hearing Examiner erred by affirming the
                     Department’s assessment of use tax on shop supplies used during
                     the repair process.

[¶17.]         SDCL 10-45-2 imposes a broad-based sales tax of four-and-one-half

percent. 6 The sales tax applies to a business’s gross receipts from the retail sale of

tangible personal property to customers or users unless specifically exempted.

Likewise, the gross receipts from repair services are taxable pursuant to SDCL 10-

45-5. If sales tax was not included in the price of a transaction involving taxable

property, the user of such property is then required to pay use tax. See SDCL 10-

46-2; SDCL 10-46-4; Sioux Falls Newspapers, Inc. v. Sec’y of Revenue, 423 N.W.2d

806, 810 (S.D. 1988).

[¶18.]         Use tax is required by SDCL 10-46-2, which provides in part that “an

excise tax is hereby imposed on the privilege of the use, storage, and consumption in

this state of tangible personal property[.]” “Use” is defined as “the exercise of right

or power over tangible personal property” but does not “include the sale of that

property in the regular course of business.” SDCL 10-46-1(17). Use tax is

complementary and supplemental to sales tax to ensure that property sold or used

in the state will be taxed once for the support of state government. Sioux Falls



6.       When Taxpayers filed this appeal, the rate was four percent. The state
         legislature increased the amount during the 2016 legislative session.
         2016 S.D. Sess. Laws ch. 65, § 1.


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Newspapers, Inc., 423 N.W.2d at 810, n. 3. “We understand this to mean that use

tax . . . generally applies to retail transactions and not to transactions where items

are purchased for resale.” Id. at 810; see also Paul Nelson Farm, 2014 S.D. 31, ¶ 12,

847 N.W.2d at 555.

[¶19.]       As the shop supplies were purchased without paying sales tax, the

Department issued use-tax assessments on certain transactions. As referenced

above, the Department when examining the transactions divided the supplies into

categories. One category included supplies used and consumed in the repair

process, such as sandpaper and rubber gloves. The Department distinguished these

supplies from those that actually become part of the customer’s vehicle such as

windshield sealant. The Department did not assess use tax on those supplies that

became part of a customer’s vehicle and left the shop with the vehicle. Maintenance

items used on Taxpayer-owned vehicles were assessed but are not appealed herein.

The only tax assessed that remains at issue is that on supplies used and consumed

in the repair process.

[¶20.]       Taxpayers contend that the shop supplies are exempt from use tax

because they are resold to customers as a part of Taxpayers’ repair services.

Taxpayers claim that they have a service contract with their customers—the sales

invoice—which illustrates this charge to their customers for miscellaneous supplies.

They submit this “resale” of shop supplies occurs in the regular course of business

and is therefore exempt from use tax. Because their customers pay sales tax on the

entire bill, Taxpayers also contend that the use-tax assessment constitutes “double




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taxation.” In support of their position they rely primarily on our holdings in Paul

Nelson Farm and Robinson.

[¶21.]       To determine whether use tax is due we first determine whether a sale

has occurred in the regular course of business. “Sale” is defined as “any transfer,

exchange, or barter, conditional or otherwise, in any manner or by any means

whatsoever, for a consideration[.]” SDCL 10-45-1(12). We recently discussed the

definition of “sale” in Paul Nelson Farm. In that case, customers purchased a

hunting package from an all-inclusive hunting lodge. 2014 S.D. 31, 847 N.W.2d

550. The package included unlimited food, beverages, and ammunition during the

stay. Id. ¶ 2, 847 N.W.2d at 552. The Department assessed use tax on all three

items, but the taxpayer alleged the goods were purchased for resale. Id. ¶ 4, 847

N.W.2d at 553. In analyzing the issue, we determined that the actual transfer of

goods determines whether a sale occurs, even if the consideration paid by the

customer is mostly for a service. Id. ¶ 14, 847 N.W.2d at 555. Focusing on the

“essence of the transaction,” we agreed with the taxpayer, found that the goods were

sold in the regular course of business, and reversed the assessment. We found

relevant that the sale occurred as a steady and uniform occurrence at the hunting

lodge. Id. ¶ 26, 847 N.W.2d at 558-59. We noted that while the hunting services

rendered were likely the most important component of the sale, the customers also

placed value on the tangible personal property they received. Id. ¶ 17, 847 N.W.2d

at 556.

[¶22.]       Taxpayers’ reliance on Paul Nelson Farm is unpersuasive as that case

is distinguishable from the facts of this case. The customer here gains no right or


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interest in the supplies that are used and consumed during the Taxpayers’ repair

process. The customer does not drive out of the repair shop with pieces of

sandpaper, drill bits, or gloves attached to the vehicle. The supplies are consumed

in the repair process, and no change of ownership occurs. As the hearing examiner

found, these supplies do not become part of the vehicle and are properly subject to

use tax. ARSD 64:06:02:58. This applies whether the repair was to a third-party

customer’s vehicle, a leased vehicle, or a Taxpayer-owned vehicle.

[¶23.]       Taxpayers ask us to compare this case to Robinson. In Robinson &

Muenster Associates, Inc., we held that to determine whether something was sold in

the regular course of business, “we must consider whether the [product] was an

inextricable part of the finished product” that was provided to the customers.

1999 S.D. 132, ¶ 12, 601 N.W.2d at 613; see also Sioux Falls Newspapers, Inc.,

423 N.W.2d at 811 (holding that syndicated materials to be published in a

newspaper were purchased for resale in the regular course of business when the

products were “the very essence of what has been traditionally perceived as a

‘newspaper’”). In Robinson, the taxpayer was a research and telecommunications

business that performed survey and polling services for customers. 1999 S.D. 132,

¶ 2, 601 N.W.2d at 611. The taxpayer contracted with customers and then obtained

samples and lists of telephone numbers (collectively, “samples”) to meet the

customers’ exact specifications. Id. ¶ 3, 601 N.W.2d at 611. The taxpayer then used

the samples to conduct the research for the customers and then transferred the

samples to the customers along with the final report. Id. The taxpayer did not pay

sales tax on the purchase of the samples, and the Department assessed use tax. Id.


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We reversed, holding that the samples were not subject to use tax as they were

purchased for incorporation into the final product and sold in the ordinary course of

business. Id. ¶ 14, 601 N.W.2d at 614.

[¶24.]       Robinson is distinguishable for several reasons. First, a sale requires a

change in ownership of some sort. The shop supplies taxed by the Department

(sandpaper, razor blades, etc.) never changed ownership. They do not become part

of the vehicle and are not an “inextricable part of the finished product” but are

consumed in the repair process. Additionally, Taxpayers do not purchase these

supplies with any particular customer’s needs in mind, whereas the taxpayer in

Robinson provided a product tailored to each customer’s specific needs. With

reference to the other category of shop supplies such as “sealants, grease and

caulk,” Taxpayers argue these items are part of the finished product. This

argument is moot because these items in this context were not taxed.

[¶25.]       3.     Taxpayers’ customer invoice.

[¶26.]       Nonetheless, Taxpayers claim that a “sale” of the shop supplies occurs

because they entered into a contract with their customers for the sale of the

supplies. To support this argument, Taxpayers rely on the language of the invoice

with their customers, which indicates a fee for shop supplies. It is immaterial that

the Taxpayers’ invoices purport to charge the customer for supplies. This contract

is simply a business practice used by Taxpayers to recoup the costs of the supplies.

There is no “sale” as contemplated by SDCL 10-45-1(12) for any of the goods

Taxpayers argue were wrongfully assessed. Regarding supplies consumed in the

repair process, the customers never obtain any right to the supplies. Furthermore,


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Taxpayers cannot contract around the law of use tax; thus, it is immaterial that

Taxpayers invoiced customers for these supplies. See SDCL 53-9-1 (“A contract

provision contrary to an express provision of law or to the policy of express law,

though not expressly prohibited or otherwise contrary to good morals, is unlawful.”).

[¶27.]         4.    Double Taxation.

[¶28.]         Lastly, Taxpayers argue that the Department’s assessment of use tax

on Taxpayers’ purchase of the shop supplies results in double taxation. Taxpayers

argue that this Court has previously rejected application of use tax and sales tax to

the same transaction. See Butler Mach., 2002 S.D. 134, ¶ 15, 653 N.W.2d at 761

(“As to the issue of double taxation, we have long held that the sales tax and the use

tax are meant to be complimentary and should not both be used to tax the same

transaction.”). 7 However, in this case, there are two separate transactions involved,

and each is taxed separately. The first transaction occurs when Taxpayers

purchase the supplies without paying sales tax. Accordingly, the Department

assessed use tax under SDCL 10-45-5 when Taxpayers used and consumed the

supplies during repair services. The second transaction occurs when the customers

purchase repair services. Sales tax is assessed on the total value of the service.

Our past holdings are only implicated if use tax and sales tax are applied to the

same transaction.



7.       While we acknowledge this holding, we also emphasize that there is no
         constitutional prohibition against double taxation. There are several
         instances where double taxation is permitted, including alcohol and tobacco,
         where an excise tax is combined with a sales tax. See SDCL 35-5-2 (alcohol
         excise tax), SDCL 10-50-3 (tobacco excise tax), SDCL 10-45-2 (general sales
         tax).

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                                   Conclusion

[¶29.]      The hearing examiner did not err when it affirmed the Department’s

refusal to consider Exhibit 18. The hearing examiner also did not err when it

affirmed the Department’s certificate of assessment of use tax due and owing on

transactions where shop supplies, purchased without payment of sales tax, were

used and consumed.

[¶30.]      Affirmed.

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

WILBUR, Justices, concur.




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