Opinion ID: 900985
Heading Depth: 1
Heading Rank: 2

Heading: Contractor's Excise Tax under SDCL 10-46A

Text: [¶ 6.] AT & T contends that the sale and installation of its 5ESS equipment is not subject to excise tax because these devices create no improvement to realty. Relying on cases such as Brink Electric Construction Company v. State Department of Revenue, AT & T points out that although this equipment must be installed by its own technicians in climate-controlled communication rooms on racks bolted down for support, the devices are readily removable and easily transferred to other locations. 472 N.W.2d 493, 498 (S.D.1991). In AT & T's view, because these devices cannot be designated as fixtures, their installation cannot constitute the improvement of realty, and thus no excise tax can be assessed. [¶ 7.] Two years after Brink, the excise tax statutes were amended. [2] Our Legislature evidently wanted to simplify classification for excise tax purposes. If we read SDCL 10-46A-1 by itself, it might still appear that excise tax is imposed only on prime contractors engaged in realty improvement contracts[.] However, SDCL 10-46A-2, as amended in 1993, provides: Prime contractors and subcontractors subject to the tax imposed by § 10-46A-1 include without limitation those enumerated in the Standard Industrial Classification Manual of 1987 [SIC Manual] ... construction (division c). Reinforcing the extended reach of the tax, SDCL 10-46A-2.2 defines a prime contractor as a person entering into a realty improvement contract or a contract for construction services as enumerated in division c of the Standard Industrial Classification Manual, 1987.... [¶ 8.] Whenever practicable, we adhere to the ordinary meaning of statutory language. SDCL 2-14-1. Our duty is to construe laws on the same subject compatibly, rendering them harmonious and workable where possible. Faircloth v. Raven Industries, Inc., 2000 SD 158, ¶ 8, 620 N.W.2d 198, 201. Taken together, SDCL 10-46A-1, SDCL 10-46A-2, and 10-46A-2.2 embrace the activities to be taxed. Thus, the Legislature intended excise taxes to apply not just to prime contractors engaged in realty improvement contracts, but also to those who contract for construction services as enumerated in division c of the Standard Industrial Classification Manual. SDCL 10-46A-1 and 10-46A-2.2. This interpretation is supported by the following passage from 10-46A-2.2: If a contractor engages in services not specifically listed in division c of the [SIC] Manual, 1987, then the services must entail the construction, building, installation, or repair of a fixture to realty before the gross receipts are subject to the tax imposed by § 10-46A-1. With this provision, it is clear that the tax applies to certain industry contracts as well as to contracts for realty improvements. [¶ 9.] To summarize, SDCL 10-46A-2 declares that excise tax shall be levied on all contractors, prime and sub-, enumerated in division c (construction) of the SIC Manual. The tax also applies under SDCL 10-46A-2.2 to any contractor not enumerated in division c, whose services entail the construction, building, installation, or repair of a fixture to realty. Therefore, to decide whether excise tax applies, we ask two questions: first, does the contractor's enterprise fall under division c of the SIC? If so, it is subject to the tax. If not, we ask, second, is the contractor engaged in construction, building, installation, or repair of a fixture to realty? If so, it is, again, subject to the tax. If not, then no excise tax applies. [¶ 10.] It remains, then, to decide first whether AT & T's activity here falls under division c of the SIC Manual. If it does, there is no need to decide whether the work also constitutes an improvement to realty. AT & T had been filing excise tax returns and paying contractor's excise tax on its labor charges for installation. Nonetheless, the Department assessed excise tax on the gross receipts of the entire transaction, equipment and labor, classifying both sales and installation under the SIC Manual, division c, § 1731Electrical Work, which includes telecommunications equipment installationcontractors and telephone and telephone equipment installationcontractors. [3] The ALJ deemed this classification a critical fact. On this point, the circuit court likewise reasoned that because AT & T is a prime contractor selling and installing telecommunications equipment, it renders a construction service listed in division c. [¶ 11.] The SIC Manual classifies business entities by the type of economic activity they perform. SIC Manual at 11. These classifications are based on the primary or predominant activity of the subject industries. Id. at 15. The activity in which a particular service industry is primarily engaged is determined by the value of the receipts or revenues generated by the various activities of the business. Id. at 16. The activity generating the greatest relative share of value added is the business's primary activity. Id. at 15. [¶ 12.] As the introductory material of the SIC Manual explains, division c includes establishments primarily engaged in construction, and [e]stablishments primarily engaged in the distribution and construction or installation of equipment often present classification problems. Since value added is not available for distinguishing the relative importance of sales versus installation or construction activities, payroll or employment may be used as measures yielding approximately the same results. On this basis, separate establishments primarily engaged in the sale and installation of the following illustrative types of structures or integral parts of structures, generally site-assembled, are classified in construction rather than in trade: a. Steel work on bridges or buildings; b. Elevators and escalators; c. Sprinkler systems; d. Central air-conditioning and heating equipment; e. Communications equipment; and f. Insulation materials. On the other hand, establishments primarily engaged in the sale and installation of the following illustrative types of preassembled equipment are classified in trade rather than in construction: a. Major household appliances, such as refrigerators, dishwashers, clothes washers and dryers, stoves and ranges; and b. Partitions for banks, stores, and restaurants. SIC Manual at 54 (emphasis added). [¶ 13.] Are 5ESS devices more like structures or integral parts of structures, generally site-assembled, or are they more like preassembled appliances? If the former, then AT & T's activities are primarily construction or installation; if the latter, then its activities are primarily trade or sales. 5ESS equipment is manufactured off-site and transported to the customer's location for installation. These units must be installed to exacting standards by AT & T technicians. They are bolted down on concrete floors to provide stability and to comply with OSHA requirements. These devices are continuously updated so that the telecommunications provider can remain competitive. Components in the 5ESS include circuit packs, devices similar to memory or processor cards. When more or less switching capacity is needed, these circuit packs can be added or removed and installed elsewhere. Only AT & T technicians perform these services. [¶ 14.] Helpful, but not dispositive, to our analysis is the SIC Manual's illustration that the sale and installation of communications equipment falls under the construction category. But AT & T contends that the proper SIC classification here is under division d, Manufacturing. SIC Manual, division d, at 67. In this category are manufacturers of electric computer systems. See § 3571, SIC Manual. The 5ESS devices perform computer functions, AT & T argues, and thus they fall under the manufacturing classification. [¶ 15.] As the SIC Manual attests, classifying this activity is difficult and the more so here considering the nature of AT & T's contract with its customers. Through its general procurement agreement, AT & T furnishes not only manufactured, delivered, and installed equipment, but a host of attendant services as well. These services include configuring, engineering, maintaining, upgrading, warranting, and removing the equipment. And if the customer sells this equipment to another telephone provider, the contract provides for the dismantling and transportation of it to the new location. All these services are provided by AT & T as part of its contract. [¶ 16.] Like the ALJ and the circuit court, we are left with little more than the bare SIC classification as basis for decision. In deciding this classification, we cannot use the underlying methodology of the SIC Manual because we have no monetary breakdown to determine the predominate revenue-generating activity here. We cannot distinguish the relative importance of manufacture and sales versus installation and related contractual services, all encompassed in a single contractual arrangement. Nor can we apply payroll or employment figures as a gauge to achieve an equivalent measure. Such information is not in the record. [¶ 17.] In the end, which classification this activity falls under is a finding of fact, and the ALJ, as the fact finder, found that AT & T's activities in selling and installing 5ESS equipment were more properly classified as construction than as manufacturing. We cannot overturn fact findings unless they are clearly erroneous in view of the entire evidence in the record. SDCL 1-26-36. Although we acknowledge the difficulty in classification, no argument can be mounted on the record that the ALJ's findings are clearly erroneous. Since AT & T's activities fall under division c of the SIC Manual, gross receipts from the sale and installation of 5ESS devices are subject to contractor's excise tax.