Opinion ID: 2041947
Heading Depth: 2
Heading Rank: 1

Heading: Royal is a contractor within the purview of SDCL 10-46-5. Therefore, it is entitled to exclude fabrication costs from tax.[1]

Text: The standard of review for administrative appeals is governed by SDCL 1-26-36. We review the record in the same light as does the trial court and determine whether or not the administrative agency's decision was clearly erroneous in light of all the evidence. Deuschle v. Bak Const. Co., 443 N.W.2d 5, 6 (S.D.1989). Questions of law are fully reviewable. When the issue is a question of fact, the clearly erroneous standard applies. In re State and City Sales Tax Liability of Quality Service Railcar Repair Corp., 437 N.W.2d 209 (S.D.1989). Also, it should be noted that in construing sales and use tax statutes, statutes imposing a tax are construed liberally in favor of the taxpayer. Nash Finch Co. v. South Dakota Dept. of Rev., 312 N.W.2d 470 (S.D.1981). However, statutes allowing a tax exemption are strictly and narrowly construed in favor of the taxing power and are given a reasonable, natural and practical meaning to effectuate the purpose for which the exemption was granted. KMART Corp. v. S.D. Dept. of Revenue, 345 N.W.2d 55 (S.D.1984). The statute in question, SDCL 10-46-5, states: [2] If a contractor or subcontractor uses tangible personal property in the performance of his contract or to fulfill contract or subcontract obligations, whether the title to such property is in the name of the contractor, subcontractor, contractee, subcontractee, or any other person, or whether the titleholder of such property would be subject to pay the sales or use tax, such contractor or subcontractor shall pay a tax at the rate prescribed by § 10-45-2, measured by the purchase price or fair market value of such property, whichever is greater, unless such property has been previously subjected to a sales or use tax, in this state and the tax due thereon has been paid. However, if the contractor or subcontractor fabricates tangible personal property for use in the performance of his contract, fair market value excludes the value of the contractor's or subcontractor's fabrication costs. (emphasis added). At the circuit court level, the Department contended that SDCL 10-46-5 pertains only to construction contractors and thus Royal is not entitled to exclude fabrication costs from fair market value of the molds. However, the circuit court disagreed with the Department, concluding that Royal is a contractor within the plain meaning of the statute. Therefore, the circuit court determined that Royal is entitled to the benefits of SDCL 10-46-5 as to capitalized molds. We agree. Neither SDCL 10-46-5 nor any other statute specifically define the term contractor. This Court did consider the purpose of enacting SDCL 10-46-5 in Friessen Construction Co. v. Erickson, 238 N.W.2d 278 (S.D.1976). In Friessen, SDCL 10-46-5 was construed to impose a use tax on contractors who use personal property in the performance of a contract, even though the property may not be owned by the contractor. However, the last sentence was not interpreted by the Friessen court because it was not part of the statute at the time that case was decided. It states explicitly, that if a contractor fabricates personal property for use in the performance of his contract, then fair market value excludes the value of the contractor's fabrication costs. Therefore, since this statute imposes a tax, it is to be construed liberally in favor of Royal. Nash Finch Co., supra . We agree with the circuit court that there is no reason to distinguish between construction contractors and manufacturing contractors under SDCL 10-46-5. Contractor defined under common law is one who contracts to supply labor and materials. County of Hennepin v. Minnesota, 263 N.W.2d 639 (Minn.1978). The words of the statute should be given their plain meaning. In re Famous Brands, Inc., 347 N.W.2d 882 (S.D.1984). Therefore, as to capitalized molds, Royal is allowed to exclude its fabrication costs under SDCL 10-46-5. [3]