Paul Nelson Farm v. South Dakota Department of Revenue

#26795, #26805-aff in pt & rev in pt-DG

2014 S.D. 31

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

****

PAUL NELSON FARM, Appellee,

v.

SOUTH DAKOTA
DEPARTMENT OF REVENUE, Appellant.

****

APPEAL FROM THE CIRCUIT COURT OF
THE SIXTH JUDICIAL CIRCUIT
HUGHES COUNTY, SOUTH DAKOTA

****

THE HONORABLE PATRICIA DEVANEY
Judge

****

JUSTIN LEE BELL
May, Adam, Gerdes & Thompson, LLP
Pierre, South Dakota Attorneys for appellee.

JOHN T. RICHTER
South Dakota Department of Revenue
Pierre, South Dakota Attorneys for appellant.

****
ARGUED ON MARCH 25, 2014

OPINION FILED 05/21/14
#26795, #26805

GILBERTSON, Chief Justice

[¶1.] The Department of Revenue and Regulation conducted an audit on

Paul Nelson Farm and assessed use tax and interest against Paul Nelson Farm for

its purchases of food, beverages, and ammunition. Paul Nelson Farm contested the

assessment of use tax and appealed to the circuit court. The circuit court held Paul

Nelson Farm was not liable for use tax on food, but was liable for use tax on

beverages and ammunition. The Department appeals the decision of the circuit

court, arguing Paul Nelson Farm owes tax on all three categories of goods. Paul

Nelson Farm responds that its possession of these goods does not constitute “use”

under the taxing statute, because they are purchased for sale in the regular course

of business. We affirm in part and reverse in part, holding that use tax is not

properly imposed on any of these goods.

FACTS

[¶2.] Paul Nelson Farm, a South Dakota corporation, operates an all-

inclusive hunting lodge near Agar, South Dakota. A typical hunting package at

Paul Nelson Farm includes three days of pheasant hunting with the lodge’s guides

and dogs, overnight lodging, all meals and beverages, unlimited use of a private

sporting clays range, ammunition, use of a shotgun, and five pheasants per day

with accompanying bird-cleaning and packaging services. Customers are charged a

single “package price” for all of these items, with the option to shoot additional birds

for an extra fee. 1 Customers are not given the option to purchase any of the items

1. A typical package costs between $4,395 and $5,895 per person, depending on
group size.

-1-
#26795, #26805

separately; they must be purchased as an all-inclusive hunting package. Upon

request, Paul Nelson Farm would provide customers with an itemized receipt

allocating costs to various portions of the hunting package. 2

[¶3.] Paul Nelson Farm collected and timely remitted sales tax on each

hunting package sold to its customers. When Paul Nelson Farm purchased food,

non-alcoholic beverages, and ammunition, it did not pay sales or use tax on these

items. The Department conducted an audit on Paul Nelson Farm covering

November 2006 to October 2009 and determined that Paul Nelson Farm owed use

tax and interest totaling $29,428.06. The assessment included $17,405.14 in tax

and interest for unpaid use tax on food, beverages, and ammunition.

[¶4.] Paul Nelson Farm requested an administrative hearing to contest this

portion of the assessment. At the administrative hearing, Paul Nelson Farm

asserted that the food, beverages, and ammunition were not purchased for end use

by Paul Nelson Farm, but were instead purchased for resale to hunting lodge

customers in its ordinary course of business. Accordingly, Paul Nelson Farm

2. For instance, the itemized receipt for one hunter in 2007 indicated the
following cost breakdown:

Guided Hunting $2400
Lodging $1495
4 Buffet Breakfasts @ $25 $100
3 Buffet Lunches @ $35 $105
4 Buffet Dinners @ $75 $300
1 Case Field Ammo $175
1 Case Target Ammo $125
Bird Cleaning & Packaging $ 195
Total* $4,895

*Plus S.D. Sales Tax 5%

-2-
#26795, #26805

argued it was not required to pay use tax on those items. The Hearing Examiner

rejected this reasoning and entered a proposed decision affirming the Department’s

assessment of the use tax. The Examiner’s proposed order was adopted in full by

the Department Secretary. Paul Nelson Farm appealed the order to the circuit

court. The circuit court affirmed in part and reversed in part, holding that Paul

Nelson Farm was not required to remit use tax on the food, but was required to

remit use tax on the beverages and ammunition.

[¶5.] The circuit court held that Paul Nelson Farm’s final product consisted

of three essential parts: 1) lodging, 2) hunting, and 3) three full buffet meals per

day. The court determined that the food provided to customers had value

independent from the hunting and lodging services provided and that customers

took this value into consideration when deciding whether to purchase the package.

Therefore, the circuit court held that a sale of the food occurred between Paul

Nelson Farm and its customers and use tax should not be assessed against Paul

Nelson Farm. Conversely, the court held that the ammunition and beverages were

consumed in providing the service and customers would likely pay the same

package price had these items not been included. Thus, it held that use tax was

appropriate on the beverages and ammunition.

[¶6.] On appeal to this Court, the Department requests that we reverse the

circuit court’s decision and uphold the Department’s assessment of use tax on the

food purchased by Paul Nelson Farm. Paul Nelson Farm filed a Notice of Review

asserting that use tax should not be imposed on the beverages and ammunition in

question.

-3-
#26795, #26805

STANDARD OF REVIEW

[¶7.] “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.” Butler Machinery Co. v. S.D. Dep’t of

Revenue, 2002 S.D. 134, ¶ 6, 653 N.W.2d 757, 759-60 (quoting Robinson & Muenster

Assocs., Inc. v. S.D. Dep’t of Revenue, 1999 S.D. 132, ¶ 7, 601 N.W.2d 610, 612).

“[O]n questions of law, we may ‘interpret statutes without any assistance from the

administrative agency.’” In re State Sales & Use Tax Liab. of Pam Oil, Inc., 459

N.W.2d 251, 255 (S.D. 1990) (citation omitted).

ANALYSIS AND DECISION

[¶8.] The question before this Court is whether the food, beverages and

ammunition purchased by Paul Nelson Farm and included as part of an all-

inclusive hunting package are subject to South Dakota use tax. 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 for use in this state at the same rate of
percent of the purchase price of said property as is imposed
pursuant to chapter 10-45. 3

Furthermore, SDCL 10-46-4 states:

In addition, said tax is hereby imposed upon every person using,
storing, or otherwise consuming such property within this state
until such tax has been paid directly to a retailer or the
secretary of revenue as hereinafter provided.

3. SDCL chapter 10-45 codifies South Dakota sales tax.

-4-
#26795, #26805

[¶9.] The Department contends that Paul Nelson Farm owes use tax on the

food, beverages, and ammunition under SDCL 10-46-2 and SDCL 10-46-4 because

Paul Nelson Farm purchased these items without paying the sales tax imposed by

SDCL 10-45-2. The Department argues that Paul Nelson Farm is the end consumer

of these goods as a service provider and that there are no applicable use tax

exemptions for goods incorporated into a service. Paul Nelson Farm, however,

contends that it does not owe use tax because its control over the goods did not

constitute “use” as defined by SDCL 10-46-1(17).

[¶10.] Accordingly, this Court is called upon to interpret the meaning of “use”

under the applicable South Dakota statutes. “When engaging in statutory

interpretation, we give words their plain meaning and effect, and read statutes as a

whole, as well as enactments relating to the same subject. When the language in a

statute is clear, certain and unambiguous, there is no reason for construction, and

this Court’s only function is to declare the meaning of the statute as clearly

expressed.” State v. Hatchett, 2014 S.D. 13, ¶ 11, 844 N.W.2d 610, 614 (citations

and internal quotation marks omitted).

[¶11.] The parties argue at length over whether this case involves the

imposition of a tax or an exemption from a tax. “Statutes which impose taxes are to

be construed liberally in favor of the taxpayer and strictly against the taxing body.

Statutes exempting property from taxation should be strictly construed in favor of

the taxing power. The words in such statutes should be given a reasonable, natural,

and practical meaning to effectuate the purpose of the statute.” Butler Machinery,

2002 S.D. 134, ¶ 6, 653 N.W.2d at 759-60 (citations omitted). However, because the

-5-
#26795, #26805

language of the statute is clear, certain, and unambiguous we need not resort to

statutory construction in this case. We instead declare the meaning of the statute

as clearly expressed, without application of the rules of construction advanced by

either party.

[¶12.] SDCL 10-46-1(17) defines “use” as including “the exercise of right or

power over tangible personal property” but not “the sale of that property in the

regular course of business.” 4 “We understand this to mean that use tax, consistent

with its complementary relationship to sales tax, generally applies to retail

transactions and not to transactions where items are purchased for resale.”

Robinson & Muenster, 1999 S.D. 132, ¶ 11, 601 N.W.2d at 613 (quoting Sioux Falls

Newspapers, Inc. v. Sec’y of Revenue, 423 N.W.2d 806, 810 (S.D. 1988)).

[¶13.] To determine under SDCL 10-46-1(17) whether the food, beverages,

and ammunition were purchased for “the sale of that property in the regular course

of business,” we must examine whether there was a “sale” of the goods in question.

A “sale” is defined in the sales tax statute as “any transfer, exchange, or barter,

conditional or otherwise, in any manner or by any means whatsoever, for a

4. SDCL 10-46-1(17) provides:

“Use,” the exercise of right or power over tangible personal
property or any product transferred electronically incidental to
the ownership of that property, except that it does not include
the sale of that property in the regular course of business. Use
also includes the use of the types of services, the gross receipts
from the sale of which are to be included in the measure of the
tax imposed by chapter 10-45, and the delivery or causing
delivery into this state of tangible personal property or any
product transferred electronically intended to advertise any
product or service or promote or facilitate any sale to South
Dakota residents.

-6-
#26795, #26805

consideration[.]” SDCL 10-45-1(12). In this case, the transaction between Paul

Nelson Farm and its customers constitutes a sale within this definition.

[¶14.] Initially, we note that the goods in question were subjected to a

“transfer, exchange, or barter.” Transfer means “the conveyance of right, title, or

interest in real or personal property from one person to another by sale, gift, or

other process[.]” Webster’s Third New International Dictionary 2427 (1976). When

Paul Nelson Farm’s customers pay the package price, it includes the use and

consumption of an unlimited amount of food, beverages, and ammunition during

their stay. While staying at Paul Nelson Farm, the food and beverages are

transferred to the customers’ actual possession. The customers have the right to eat

and drink as much as they would like. Similarly, when the customers go into the

field or onto the sporting clays range, they are given the right to use an unlimited

amount of ammunition.

[¶15.] The Department disputes that any transfer occurs by arguing that the

goods are instead fully incorporated into a service and thereby used and consumed

by Paul Nelson Farm. The Department compares Paul Nelson Farm to a janitor,

who uses cleaning supplies to enhance or improve the service purchased by his

customer. However, this analogy ignores the actual transfer of goods occurring in

this case. A janitor’s customer never gains a right or interest in the janitor’s

cleaning supplies. 5 To the contrary, Paul Nelson Farm’s customers are given a

5. The Department makes a similar comparison using a barber shop’s use of
hairstyling products. The Department states that the pertinent questions
are “Who will use the property?” and “Where will the property be used?”
However, in this case it is the customer and not the service provider who
(continued . . .)
-7-
#26795, #26805

right to the food, beverages, and ammunition. Ultimately, it is the customers who

decide what quantity of these goods is consumed. Granted, this transfer is not

without conditions. Similar to the transfer of goods at any all-you-can-eat buffet,

customers at Paul Nelson Farm must consume the purchased goods onsite, during

the timeframe paid for by the customer.

[¶16.] The goods in this case are also transferred “for consideration.” 6 We

have noted that to determine whether something was purchased for sale in the

regular course of business, it is helpful to look to the “essence of the transaction.”

Robinson & Muenster, 1999 S.D. 132, ¶ 12, 601 N.W.2d at 613. The price paid in

this case is for a package deal. The hunting guide services are arguably the most

important part of the package. However, we agree with the circuit court’s

determination that Paul Nelson Farm’s customers place value upon the unlimited

food they are provided as part of the package. We disagree with the circuit court

that the beverages and ammunition did not entice similar consideration.

[¶17.] Beverages provided in a normal hotel lobby may be offered as a

“convenience to the guest” not contemplated in the exchange between hotel and

guest. However, when a customer purchases an “all-inclusive” experience, like

________________________
(. . . continued)
actually controls the use and consumption of the product, unlike the cleaning
supplies used by a janitor or the hairstyling products used by a barber.

6. Consideration is “[a]ny benefit conferred or agreed to be conferred upon the
promiser by any other person to which the promiser is not lawfully entitled,
or any prejudice suffered or agreed to be suffered by such person, other than
such as he is at the time of consent lawfully bound to suffer as an inducement
to the promiser[.]” Behrens v. Wedmore, 2005 S.D. 79, ¶ 33, 698 N.W.2d 555,
569 (citation omitted).

-8-
#26795, #26805

those advertised by Paul Nelson Farm, unlimited beverages are expected by the

customer. Similarly, the unlimited ammunition is an advertised portion of the

package and therefore expected by the customer. Neither the beverages nor the

ammunition are of nominal value. Accordingly, the customers give consideration for

these items as part of the bargained-for exchange with Paul Nelson Farm—just as

the circuit court determined the customers give consideration for the food in

question.

[¶18.] The Department downplays the importance of the food, beverages, and

ammunition in the transaction. It asserts that Paul Nelson Farm is the end

consumer, providing these goods without consideration as a convenience to the

guest “in order to enhance the hunting experience.” To support this argument, the

Department points to Kehl v. Iowa Dep’t of Revenue & Finance, 2002 WL 31882962

(Iowa App. 2002) (unpublished). In Kehl, the Iowa Court of Appeals reasoned that

food provided to riverboat cruise guests was subject to use tax, because the food was

part of a package deal and the customers did not “separately bargain” for the food.

Id. at *3. Because there was no separate bargaining for the food, the court held that

there was no resale. Id. However, the reasoning in Kehl does not comport with our

decisions in Sioux Falls Newspapers, 423 N.W.2d 806 and Robinson & Muenster,

1999 S.D. 132, 601 N.W.2d 610.

[¶19.] In Sioux Falls Newspapers, we held that the Argus Leader was not

liable for use tax on syndicated materials because the materials were not purchased

for “personal use,” but were instead to be incorporated into a newspaper and resold

in the regular course of business. 423 N.W.2d at 811. Purchasers of the Argus

-9-
#26795, #26805

Leader were not able to separately bargain for each individual syndicated article

within a newspaper. Yet, we held that a retail sale of the syndicated material

occurred when the Argus Leader sold the completed newspapers. Id.

[¶20.] In Robinson & Muenster, we likewise rejected an attempt by the

Department to impose use tax on items incorporated into a larger final product.

1999 S.D. 132, ¶ 14, 601 N.W.2d at 614. The taxpayer in that case was a research,

fundraising, and telecommunications business in Sioux Falls that provided research

and polling services tailored to individual customers’ needs. Id. ¶¶ 2-3. In order to

conduct its research, the taxpayer would purchase data samples encompassing

certain demographic groups or geographic regions. Id. These data samples were

eventually transferred to the customer along with the final research report

produced by the taxpayer for the customer. Id. ¶ 3. By contractual agreement, the

data samples in the taxpayer’s possession were then destroyed and not re-used by

the taxpayer. Id. ¶ 13. The Department argued that because the samples were

incorporated into a service provided by the taxpayer, they were used by the

taxpayer and not purchased for resale to the customer. Id. ¶ 9. Although the

taxpayer sold the samples at cost and the samples were just one portion of the final

product transferred to the customer, this Court held that the samples were sold in

the regular course of business. Id. ¶¶ 13-14. The holding did not depend on

whether the customer separately bargained for the samples. Rather, we

determined that the samples were an “essential part” of the final product sold to the

customer, and as such were purchased by the taxpayer for sale in the regular course

of business. Id. Given our decisions in Robinson & Muenster and Sioux Falls

-10-
#26795, #26805

Newspapers rejecting use tax imposed on goods incorporated into a final product, we

decline to apply Iowa’s “not separately bargained for” analysis in this case.

[¶21.] The Department also asserts that ARSD 64:06:02:75 supports its

position that Paul Nelson Farm does not purchase food, beverages, and ammunition

for sale in the regular course of business, because these items are simply offered as

a convenience to the guest. ARSD 64:06:02:75 provides in part:

Lodging establishments. Sales of supplies and equipment to
a lodging establishment are taxable. Lodging establishments
are the consumers of supplies and equipment which are
consumed or used by them in rendering their services. If the
sales tax on such items is not paid to a South Dakota licensed
supplier when they are purchased, the cost of such items must
be reported as a use tax item on the sales tax return. Examples
of such items include paper cups, plastic cups, laundry bags,
soap, shower caps, toilet tissue, facial tissue, shoe polish, toilet
bands, stationary, consumables and refreshments provided as a
convenience to the guest, cleaning products, and other items
consumed on the premises by the lodging establishment.

[¶22.] The Department asserts that ammunition, food, and beverages all are

“consumables” under this rule and that ammunition could also be considered

“supplies and equipment.” Accordingly, the Department argues that Paul Nelson

Farm is the consumer or user of the food, beverages, and ammunition by

administrative rule. “An agency is usually given a reasonable range of informed

discretion in the interpretation and application of its own rules when the language

subject to construction is technical in nature or ambiguous, or when the agency

interpretation is one of long standing.” Krsnak v. S.D. Dep’t of Env’t & Natural

Res., 2012 S.D. 89, ¶ 16, 824 N.W.2d 429, 436. However, the Department’s

application of this rule is misplaced.

-11-
#26795, #26805

[¶23.] The food, beverages, and ammunition purchased by Paul Nelson Farm

are not simply provided “as a convenience” to Paul Nelson Farm’s customers as

described by this rule. Unlike items listed in ARSD 64:06:02:75 such as soap,

shower caps, and napkins, the food, beverages, and ammunition promised to Paul

Nelson Farm’s customers as part of the package purchase price have significant

value. As described above, they are part of the bargained-for exchange between the

parties. When the average hotel guest pays for a room, however, the shampoo

provided by the hotel is usually not advertised, nor does its availability usually

affect whether or not the guest will rent the room. Thus, the “convenience” items

listed in the administrative rule are materially distinguishable.

[¶24.] Furthermore, “[r]ules adopted in contravention of statutes are invalid.”

In re Yanni, 2005 S.D. 59, ¶ 16, 697 N.W.2d 394, 400 (citing Cavanagh v. Coleman,

72 S.D. 274, 277, 33 N.W.2d 282, 284 (1948)). Neither an agency nor this Court

should “enlarge the scope of the statute by an unwarranted interpretation of its

language.” Id. ¶ 15 (citation omitted). See also In re Aiken, 296 N.W.2d 538, 540

(S.D. 1980). Thus, even if “consumables” under the administrative rule did

encompass the purchases made by Paul Nelson Farm, the rule’s application cannot

outstep the bounds of the use tax statute. State ex. rel. Ewing v. Prudential Ins. Co.

of Am., 273 N.W.2d 111, 114-15 (S.D. 1978). None of the arguments raised by the

Department convince us that a plain reading of the use tax statute imposes a use

tax upon the food, beverages and ammunition purchased by Paul Nelson Farm.

What is not taxed by statute cannot be taxed by administrative rule, even if the

-12-
#26795, #26805

items in question were to fall squarely within the rule’s description of taxed items.

Id.

[¶25.] Last, because we conclude there was a sale of the goods in question, we

must determine whether that sale was “in the regular course of business.” SDCL

10-46-1(17). The Department argues that Paul Nelson Farm’s regular course of

business is providing hunting services—not selling food, beverages, and

ammunition. The Department asserts that as a business primarily providing

hunting guide services, Paul Nelson Farm is distinguishable from a retail

establishment like a grocery store, restaurant, or ammunition store. The

Department notes that Paul Nelson Farm’s customers are not able to leave with

these goods, nor are members of the general public ordinarily welcome to purchase

these goods without purchasing a complete hunting package. Accordingly, the

Department argues that Paul Nelson Farm should pay use tax on these items

because they are not sold by Paul Nelson Farm in the regular course of business.

[¶26.] The Department adopts too narrow an interpretation of the phrase “in

the regular course of business.” Under the Department’s argument, for a sale of

tangible personal property to be “in the regular course of business,” the sale of that

particular property must be the entity’s primary or predominant business. 7 This

7. This Court has previously rejected similar attempts by the Department to
narrow the definition of sale “in the regular course of business.” See, e.g.,
Sioux Falls Newspapers, 423 N.W.2d at 811 (rejecting Department’s
argument that Argus Leader’s regular business was selling newspapers, not
syndicated materials); MidContinent Broad. Co. v. Dep’t of Revenue, 424
N.W.2d 153, 154-55 (S.D. 1988) (rejecting Department argument that
syndicated materials were consumed by MidContinent as end-product in
order to provide regular business of providing programmed broadcast time).

-13-
#26795, #26805

interpretation is not supported by a plain reading of the statute. “Regular” means

“steady or uniform in course, practice, or occurrence.” Webster’s Third New

International Dictionary 1913 (1976). We therefore do not ask whether customers

come to Paul Nelson Farm primarily for hunting experiences or whether they

instead come primarily for food, beverages, and ammunition. Instead, we examine

whether the sale of food, beverages, and ammunition is in Paul Nelson Farm’s

“steady or uniform” business practice. The record reflects that a sale of these items

happens every time a Paul Nelson Farm customer purchases an all-inclusive

hunting package. Thus, we conclude that the sale of these goods—although part of

a larger transaction—is a steady and uniform occurrence in Paul Nelson Farm’s

business. The sale of these goods is therefore a sale “in the regular course of

business” under SDCL 10-46-1(17).

CONCLUSION

[¶27.] In sum, we conclude that Paul Nelson Farm does not owe use tax on

the food, beverages, and ammunition in question under SDCL 10-46-2 or SDCL 10-

46-4. The items were purchased for resale to Paul Nelson Farm’s customers in the

regular course of business. Accordingly, Paul Nelson Farm’s control and possession

of these items does not constitute “use” as defined by SDCL 10-46-1(17). Therefore,

we affirm in part and reverse in part.

[¶28.] KONENKAMP and SEVERSON, Justices, and SABERS, Circuit Court

Judge, and MEIERHENRY, Retired Justice, concur.

[¶29.] SABERS, Circuit Court Judge, sitting for ZINTER, Justice,

disqualified.

-14-
#26795, #26805

[¶30.] MEIERHENRY, Retired Justice, sitting for WILBUR, Justice,

disqualified.

-15-