Opinion ID: 2151526
Heading Depth: 1
Heading Rank: 3

Heading: Services Subject to Use Tax

Text: [¶ 10.] Our standard of review in an administrative appeal is governed by SDCL 1-26-36. We give deference to the agency on factual matters, applying the clearly erroneous standard of review. Sopko v. C & R Transfer Co., Inc., 1998 SD 8, ¶ 6, 575 N.W.2d 225, 228 (citations omitted). When factual determinations are made on the basis of documentary evidence, however, we review the matter de novo unhampered by the clearly erroneous rule. Kurtz v. SCI, 1998 SD 37, ¶ 10, 576 N.W.2d 878, 882. But see SDCL 15-6-52(a) (as amended effective July 1, 2000). Whether a statute imposes a tax under a given factual situation is a question of law and thus no deference is given to any conclusion reached by [the] Department [of Revenue] or the circuit court. Dep't. of Revenue v. Sanborn Tel. Co-op., 455 N.W.2d 223, 225 (S.D.1990) (citing Midcontinent Broadcasting Co. v. Dept. of Revenue, 424 N.W.2d 153, 154 (S.D.1988)) (bracketed text in original). Statutes allowing tax exemptions are exactingly and narrowly construed in favor of the taxing entity. Matter of State & City Sales Tax Liability of Quality Service Railcar Repair Corp., 437 N.W.2d 209, 211 (S.D. 1989). [¶ 11.] The Department identifies two separate transactions between the distributors and the taxpayers: one providing for the assignment of production specialists for a fee, a taxable service under SDCL 10-45-4, and another involving the sale of tax exempt agronomy products for resale. [4] The taxpayers dispute this interpretation, insisting that the service is an inextricable part of the sale of exempt agronomy products. See SDCL 10-45-4.1. The Department seeks to impose a use tax on the service as authorized by SDCL 10-46-2.1. [5] It argues that since the distributors did not collect sales tax when providing the taxpayers with production specialist services, such services are subject to use tax. See generally Sanborn, 455 N.W.2d at 225. [¶ 12.] A sales tax is imposed upon the gross receipts of any person from the engaging or continuing in the practice of any business in which a service is rendered. SDCL 10-45-4. Services are defined in SDCL 10-45-4.1 and are presumed taxable unless specifically exempted. Id. Service means 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. In determining what is a service, the intended use, principle objective or ultimate objective of the contracting parties shall not be controlling. For purposes of this chapter services rendered by an employee for his employer are not taxable. SDCL 10-45-4.1. As required by this statute, we use the predominant activity test in deciding if services were subject to sales tax. See Nash Finch Co. v. South Dakota Dept. of Revenue, 312 N.W.2d 470, 472 (S.D.1981). Accord EG & G, Inc. v. Director of Revenue, 94 N.M. 143, 607 P.2d 1161, 1164 (N.M.App.1979) (predominant ingredient test). [6] We have also emphasized that determinations of taxability should focus on the transaction. Sioux Falls Newspapers, Inc. v. Secretary of Revenue, 423 N.W.2d 806, 809 (S.D.1988). Here, the dispositive transaction occurred with the distributors and the taxpayers, not with the ultimate sale of agronomy products or in providing production specialist services to farmers and ranchers. [¶ 13.] From our review of the record, the distributors and the taxpayers were engaged in two distinct transactions. The taxpayers signed a crop production specialist program agreement to participate in the program. In this contract, the distributors agreed to recruit, hire, and train each CPS. In turn, the taxpayers agreed to reimburse the distributors for one hundred percent of the specialists' salaries and expenses. A representative of the distributors testified that the reason for such an arrangement was that local cooperatives couldn't attract the kind of personnel [needed] to compete in the marketplace. Furthermore, he conceded that the program was very similar to that of an employment agency. These activities may increase product sales, but they are sufficiently distinct from the sale of agronomy products to be classified as a separate service. [¶ 14.] The taxpayers contend that because the cost of the production specialist program is recovered through their profit margin that it constitutes only one transaction. Yet, countless business expenses may be recovered through a retailer's profit margin, some wholly unrelated to the sale of tangible personal property. We conclude that the production specialist program involves predominantly the performance of a service as distinguished from selling property. See SDCL 10-45-4.1. Consequently, use tax may be properly imposed on the payments for those services under SDCL 10-46-2.1.