Court Opinion

ID: 9514585
Source: CourtListenerOpinion
Date Created: 2023-08-06 22:50:36.077653+00
Date Added: 2024-06-11T09:06:18.992883
License: Public Domain

*615SABERS, Justice
(dissenting).
[¶ 18.] The use tax applies in this case because we are dealing with tangible personal property that was used, stored and consumed within the State of South Dakota. The claimed exemptions of SDCL 10-46-1(12) and 10-46-9 do not apply because the property was not purchased for resale nor was it an integral part of the product sold to its clients.
[¶ 19.] Robinson provides the following services to its clients: (1) full service custom research; (2) fund-raising services; and (3) grass roots telecommunications services. Most of its work is performed through telephone surveys. Depending on which service is being provided to its client, Robinson will purchase either customized lists, samples, or telematching from out-of-state providers. Robinson purchases the right to use lists of names, addresses, and phone numbers from American Business Lists or the right to use samples from Survey Sampling. It does not purchase the lists/samples themselves. Instead, it purchases a right to use the lists/samples for the limited purpose of completing the client’s research project. Sales tax was not charged to Robinson from these out-of-state providers.
[IT 20.] Robinson made judicial admissions, on the face of its “Amended Request for Hearing,” that the lists, samples and telematching are tangible personal property. It did not raise the issue that the lists were not tangible personal property at the trial court level and cannot be allowed to do so now.
STANDARD OF REVIEW
[¶ 21.] “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 [DOR] or the circuit court.” Dept. of Revenue v. Sanborn Tel. Co-Op., 455 N.W.2d 223, 225 (S.D.1990).
[¶ 22.] 1. THE USE TAX APPLIES TO THESE FACTS
[¶ 23.] Under SDCL 10-46-2, if one purchases tangible personal property to use, store or consume in South Dakota, a use tax is imposed.4 See Matter of Thermoset Plastics, Inc., 473 N.W.2d 136, 138-39 (S.D.1991) (stating “SDCL 10-46-2 imposes use tax on the privilege of using in South Dakota tangible personal property that is purchased for use in the state”) (emphasis in original). It is NOT a tax on property itself. Friessen Const. Co., Inc. v. Erickson, 90 S.D. 60, 238 N.W.2d 278, 281 (1976). “Use” is defined by SDCL 10-46-1(12): “the exercise of right or power over tangible personal property incidental to the ownership of that property, except that it does not include the sale of that property in the regular course of business.”
[¶ 24.] As stated above, Robinson made judicial admissions that the lists/samples were tangible personal property. These lists/samples were used, stored and consumed in South Dakota and Robinson had qualified ownership (SDCL 43-2-6) thereof. See also Friessen, 238 N.W.2d at 280 (imposing a use tax on construction firms who used tangible personal property in the performance of a contract, even though the property was not owned by the construction firms). Clearly, the use tax applies. The next step is to determine whether either claim of exemption from taxation applies.
STANDARD FOR EXEMPTION FROM TAXATION
[¶ 25.] “Statutes exempting property taxation should be strictly construed in *616favor of the taxing power.” Thermoset, 473 N.W.2d at 139 (citation omitted). “The words in such statutes should be given a reasonable, natural, and practical meaning to effectuate the purpose of the exemption.” Id. (citation omitted). “[W]e construe the statute strictly against the party claiming the exemption.” Sanborn, 455 N.W.2d at 225 (citation omitted). “Doubts are resolved in favor of taxation.” Id. (citation omitted).
[¶ 26.] 2. ROBINSON’S FIRST CLAIM OF EXEMPTION FROM TAXATION
[¶ 27.] Robinson claims that the lists/samples are exempt from use tax under SDCL 10-46-1(12) because they were purchased for resale to its clients. The “[u]se tax generally applies to retail transactions and not to transactions where items are purchased for resale.” Id. (citation omitted). In order for Robinson to prevail on this argument, it must prove: (1) that it actually made a sale of the list/samples, and (2) that the sale occurred in the regular course of their business. Id.
[¶ 28.] In this case, Robinson purchased tangible personal property, lists/samples, in order to offer its services to its clients. Robinson’s clients were purchasing Robinson’s services including the ultimate database that it generated by presenting questionnaires to people named on the list/sample. The lists/samples were attached to the report, but were not the focus of the contract between Robinson and its clients, rather the service of generating the database was the contractual object. Even Robinson stated: “[t]he end use is not the phone numbers themselves .... ” Thus, the primary purpose in purchasing the lists and samples was not to resell them, but to use them to fulfill its contractual obligations.
[¶29.] In asserting that the samples were actually resold, Robinson stated: “The fallacy of [DOR’s] argument is that the sample ultimately goes to Robinson’s client, so how else would it get to Robinson’s client unless it were resold to the client by Robinson?” Correctly analyzed, Robinson purchases the sample for the limited purpose of compiling the database. After the database is completed, the sample can no longer be used, pursuant to Robinson’s contract with its supplier. So, when this sample is supplied to the client, it is useless; it is nothing more than a piece of paper. Basically, Robinson’s assertion is that mere attachment of the sample to the final report circumvents the application of the use tax. Clearly, Robinson did not purchase the samples or lists with the intention of reselling them. The lists were nothing more than equipment or supplies necessary to provide the services to the client. The cost of the list/sample was passed on to the client, but every business passes its costs of doing business onto the consumer. Therefore, that factor has little effect in this instance.
[¶ 30.] 3. ROBINSON’S SECOND CLAIM OF EXEMPTION FROM TAXATION
[¶ 31.] Robinson alternatively claims that the lists/samples are exempt from use tax, pursuant to SDCL 10-46-9, because they become an integral part of the database that is sold to its clients. Before the exemption of SDCL 10-46-95 applies, the “material must be an integral or component part of the finished product....” Thermoset, 473 N.W.2d at 139. Therefore, in order to prevail, Robinson must prove *617that the lists/samples are an integral component of the database it compiles for the client. We have stated that “material which only accidentally or incidentally becomes incorporated into a finished product, and which is not an essential ingredient of the finished product, is subject to use tax.” Id. at 140-41 (adhering to DOR’s argument that “items used and consumed ... in [the] manufacturing process, but which are not intended components of the final product, do not qualify for the exemption”). Incidental is defined as: “[d]epend-ing upon or appertaining to something else as primary; something necessary, appertaining to, or depending upon another which is termed the principal; something incidental to the main purpose.” BLACK’S LAW DICTIONARY 762 (6th ed.1990).
[¶31.] The court, in Sanborn Tel. CoOp., 455 N.W.2d at 226, dealt with this same claim of exemption. In that case, a telephone company purchased directories from out-of-state printers and paid no sales tax on them. Sanborn, 455 N.W.2d at 224. It claimed that the telephone “directories and guides [were] an ‘integral part’ of their product and that their cost [was] calculated into the service rates, thus evidencing a resale.” Id. at 225. In finding there was no resale, we stated: “although the publications are important to their cost of doing business, so are other goods and services purchased by them. They have not, nor could they assert that they are exempt from sales or use tax for their purchase of equipment, lines, etc.” Id. at 226.
[If 32.] In this case, the customers are purchasing the compiled database from Robinson. Even by Robinson’s own words (“[t]he end use is not the phone numbers themselves”), the list/sample is incidental to the principal purpose of the contract: the database. When delivering the database to the client, Robinson attaches the list/sample to the database, but the client obtains no rights to use it. The list/sample is merely a necessary cost incurred to accomplish the principal product that the client sought. Thus, the list/sample is merely an incidental component to the compiled database and it is not exempted under SDCL 10-46-9.
[¶33.] Because these transactions are not exempt, i.e., there was no resale of the lists/samples and the lists/samples are incidental to the principal product, the tangible personal property is subject to use tax. Therefore, I dissent to the majority opinion and would reverse and remand to the circuit court.

. SDCL 10-46-2 provides:
An excise tax is hereby imposed on the privilege of the use, storage, and consumption in this state of tangible personal property purchased on or after July 1, 1939, for use in this state at the same rate of percent of the purchase price of said property as is imposed by §§ 10-45-2 and 10-45-3 or amendment which may hereafter be made thereto.

. SDCL 10-46-9 provides:
The use in this state of tangible personal property including containers, labels and shipping case thereof which is intended shall, by means of fabrication, compounding or manufacture become a part of other tangible personal property intended to be sold ultimately at retail within or without the State of South Dakota, is hereby specifically exempted from the tax imposed by this chapter. The term tangible personal property shall be construed to include without limiting the meaning of said term, raw material and newspaper print.