Opinion ID: 901516
Heading Depth: 1
Heading Rank: 4

Heading: Travel Agent Centralized Commission Program

Text: [¶ 10.] Choice does not dispute that its forty-eight cent processing fee is a taxable gross receipt. However, it argues that transferring payment of the exempt travel agent commissions on behalf of the franchisees should not make the commissions taxable to Choice. Franchisees can pay the travel agent commissions directly to the travel agents. Choice merely acts as a pass through. [¶ 11.] The Department, on the other hand, asserts that Choice's circumstances do not fit the usual exemption for a travel agent commission. The exemption would apply, according to the Department, if the franchisee hotels paid the travel agent commissions to the travel agents directly. Here, however, the franchisees are making payment for travel agent commissions to Choice, which is not a travel agency. [3] Accordingly, the Department contends that Choice has failed to prove that it is entitled to the exemption under SDCL 10-45-12.1. [¶ 12.] A tax is imposed, under SDCL 10-45-4, upon the gross receipts of any person from the engaging or continuing in the practice of any business in which a service is rendered. Further, any service is subject to sales tax unless specifically exempted. Id. A service is defined in SDCL 10-45-4.1 as 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 SDCL 10-45-12.1, certain services are delineated as exempt from sales tax under SDCL ch. 10-45. [¶ 13.] It is undisputed that travel agent services are exempt from sales tax under SDCL 10-45-12.1. Yet, for Choice to be entitled to an exemption on the travel agent commissions it processes, it has the burden to prove such exemption. See Matter of Pam Oil, Inc., 459 N.W.2d 251, 255 (S.D.1990). According to the Department, Choice was required to identify a specific statute that exempts a pass-through service. [¶ 14.] This [C]ourt has repeatedly held that the rule that laws exempting property from taxation should be strictly construed in favor of the taxing power does not call for strained construction, but must always be reasonable and will not be applied to defeat the expressed intent of the Legislature. In the Matter of Veith, 261 N.W.2d 424, 426 (S.D.1978) (citing State v. Erickson, 44 S.D. 63, 182 N.W. 315 (1921); State v. Knudtson, 65 S.D. 547, 276 N.W. 150 (1937)). To interpret the exemption as narrowly as the Department has done in this case contravenes the legislative intent that travel agent commissions be exempt from sales tax. [¶ 15.] The commissions would be exempt if paid by the franchisees to the travel agents. Here, Choice sends invoices to the franchisees indicating what amounts the franchisees owe the travel agents for commissions earned on reservations made at those franchisee hotels. The franchisees then have the option of paying the travel agents directly or submitting payment for the commissions in one payment through the Travel Agent Centralized Commission Program account owned by Choice. If franchisees elect to make payment through the agent commission account, Choice does not retain any portion of the commissions; all commissions are paid to the travel agents. [4] Therefore, we conclude that it is unreasonable to hold that solely because the commissions are collected by the franchisor from the franchisees and then paid to the travel agents they are no longer exempt from tax. See Veith, 261 N.W.2d at 426. Choice met its burden to show that the travel agent commissions were exempt from tax under SDCL 10-45-12.1.