Valley Power Sys. v. S.D. Dep't of Revenue

#28168-a-SLZ

2017 S.D. 84

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

****
VALLEY POWER SYSTEMS, Appellant,

v.

SOUTH DAKOTA DEPARTMENT
OF REVENUE, Appellee.

****

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

****

THE HONORABLE MARK BARNETT
Judge

****

JUSTIN L. BELL of
May, Adam, Gerdes & Thompson, LLP
Pierre, South Dakota Attorneys for appellant.

STACY R. HEGGE
South Dakota Department of Revenue
Madison, South Dakota Attorneys for appellee.

****

CONSIDERED ON BRIEFS ON
NOVEMBER 6, 2017

OPINION FILED 12/13/17
#28168

ZINTER, Justice

[¶1.] Valley Power Systems, Inc., contracted to install new exhaust

manifolds on five “mobile power units” that were used by a utility company to

provide supplemental power at one of its power plants. Valley Power did not pay

contractor’s excise tax or use tax with respect to the transaction. Following audits

of both companies, the Department of Revenue issued a certificate of assessment

requiring Valley Power to pay alternate contractor’s excise tax, use tax, interest,

and a penalty. An administrative hearing examiner and the circuit court affirmed

the assessment, and Valley Power appeals. We affirm.

Facts and Procedural History

[¶2.] Valley Power is an industrial-engine distributor based in California. It

entered into a contract with Black Hills Power, Inc. (BHP), a utility company that

operated the “Ben French” coal-fired power plant in Rapid City. Under the contract,

Valley Power agreed to provide and install new exhaust manifolds with diesel

oxidation catalysts on five “Electro-Motive Diesel” MP36 power units located at the

Ben French plant. The purpose of the replacements was to reduce emissions and

bring the power units into compliance with new federal regulations.

[¶3.] The five power units were used by BHP to generate supplemental

electricity during peak-load-electrical usage. Each unit was approximately forty

feet long, ten feet wide, and eleven feet high; and each unit weighed approximately

110,000 pounds. The units were located in a fenced enclosure on a gravel pad but

were not bolted to the ground. Each unit was connected to a fuel source and the

electrical-power-transmission grid.

-1-
#28168

[¶4.] Valley Power installed the exhaust manifolds over the course of two

months. The contract required BHP to pay Valley Power $808,648: $496,618 for

equipment and $312,030 for labor and other expenses. Valley Power was to “obtain

all necessary tax licenses and pay all sales, gross receipts, use, and any other tax

imposed.” However, for reasons not material here, Valley Power did not pay any

tax. Instead, BHP paid use tax on the transaction.

[¶5.] BHP was subsequently audited by the Department. After reviewing

the contract and related invoices, auditor Marlin Zerbel determined that the use tax

remitted by BHP should be refunded. Zerbel reasoned that the contract involved a

transaction for which Valley Power should have paid both alternate contractor’s

excise tax on its gross receipts and use tax on the equipment used in the contract.

Consequently, the Department refunded BHP’s use tax and audited Valley Power.

Following the audit, the Department issued a certificate of assessment requiring

Valley Power to pay $54,404.18 ($22,560.14 in use tax, $16,172.97 in excise tax,

$12,797.75 in interest, and a $3,873.32 penalty). Valley Power objected to the

assessment and requested an administrative hearing.

[¶6.] The power units’ status as fixtures was one of the central issues in the

administrative hearing. Two witnesses testified on the units’ movability and

permanency. David Peterson, Valley Power’s manager, testified that the power

units were mobile and were designed to be moved wherever power was needed.

Zerbel countered that although he did not personally inspect the Ben French plant,

BHP employees informed him that the power units were stationary. He also stated

that according to BHP’s website, the units were installed in 1965. He finally

-2-
#28168

indicated that he had frequently driven by the units for twenty years and had never

seen them move.

[¶7.] The hearing examiner concluded that the power units were fixtures to

realty. The hearing examiner also concluded that Valley Power’s work was

classified under “division c” of the Standard Industrial Classification Manual of

1987 (SIC Manual).1 For both reasons, the hearing examiner determined that

Valley Power was a “contractor” subject to alternate contractor’s excise tax under

SDCL 10-46B-1 and use tax under SDCL 10-46-5. The circuit court affirmed.

[¶8.] On appeal, Valley Power challenges the hearing examiner’s and circuit

court’s conclusions that the power units were fixtures and that Valley Power’s work

was classified under division c of the SIC Manual. Because the fixture question is

dispositive, we do not address the question regarding classification under the SIC

Manual.

Decision

[¶9.] An agency’s findings of fact are reviewed for clear error. SDCL 1-26-

37; AT & T Corp. v. S.D. Dep’t of Revenue, 2002 S.D. 25, ¶ 17, 640 N.W.2d 752, 757.

Questions of law are reviewed de novo. Martz v. Hills Materials, 2014 S.D. 83, ¶ 14,

857 N.W.2d 413, 417. “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.” Paul Nelson Farm v.

S.D. Dep’t of Revenue, 2014 S.D. 31, ¶ 7, 847 N.W.2d 550, 553-54.

1. The examiner concluded that the work was classified as “electrical work and
electrical repair at the site of construction” and “power generation equipment
installation.”

-3-
#28168

[¶10.] The alternate contractor’s excise tax is imposed under SDCL chapter

10-46B. SDCL 10-46B-1 provides that “an excise tax [is imposed] upon the gross

receipts of all prime contractors and subcontractors engaged in realty improvement

contracts for those persons subject to tax under chapter . . . 10-35.”2 To be subject to

the tax, the contractor’s services must either be enumerated in the SIC Manual as

“construction (division c)” or “entail the construction, building, installation, or

repair of a fixture to realty.” SDCL 10-46B-2.3 If the entity performing the work is

a “contractor” within the foregoing definitions, the contractor may also be subject to

use tax under SDCL chapter 10-46. SDCL 10-46-5 provides that a “contractor or

subcontractor, as defined in chapters 10-46A and 10-46B,” must pay tax on the use

of “tangible personal property . . . in the performance of a contract or to fulfill

contract or subcontract obligations” unless sales or use tax has already been paid in

this state.

[¶11.] Valley Power argues it was not subject to excise or use tax because it

was not a contractor whose services involved the repair of a fixture to realty. To

2. It is undisputed that BHP was a power company subject to tax under SDCL
chapter 10-35.

3. SDCL 10-46B-2 provides:
Prime contractors and subcontractors subject to the tax imposed
by § 10-46B-1 include without limitation those enumerated in
the Standard Industrial Classification Manual of 1987 as
prepared by the Statistical Policy Division of the Office of
Management and Budget, Office of the President: construction
(division c). If a contractor engages in services not specifically
listed in division c of the Standard Industrial Classification
Manual, 1987, then the services must entail the construction,
building, installation, or repair of a fixture to realty before gross
receipts are subject to the tax imposed by § 10-46B-1.

-4-
#28168

determine whether property is a fixture, we consider the property’s: “(1) annexation

to the realty; either actual or constructive; (2) its adaptability to the use and

purpose for which the realty is used; and (3) the intention of the party making the

annexation.” In re Tax Appeal of Logan & Assocs., 331 N.W.2d 281, 282 (S.D. 1983).

The intent of the party is the “controlling criterion”; the “other tests derive their

chief value as evidence of such intention.” Id. at 282-83.

[¶12.] Valley Power argues that MP36 power units4 are not fixtures. Valley

Power focuses on the general intended purposes for which the units were designed.

Peterson, Valley Power’s manager, provided extensive testimony at the hearing

regarding the design and purpose of such power units. He testified that the power

units are designed to be mobile and that each unit is completely self-contained in a

metal housing with eyelets to lift the unit and move it to any location where power

is needed. He explained that power companies often move these units to different

locations depending on usage and the need for additional power generation. He also

explained that mobile power units are generally purchased and sold separately from

the real property on which they sit. Ultimately, because BHP’s units were designed

to be mobile, Valley Power contends they cannot be fixtures within the meaning of

SDCL 10-46B-2.

[¶13.] Whether property is a fixture is not based exclusively on the purposes

for which the property was designed. The controlling criterion is the “intention of

the [property owner] with regard to making the article a permanent accession to the

realty.” See Logan & Assocs., 331 N.W.2d at 282-83. Thus, this Court has upheld

4. MP stands for “mobile power.”

-5-
#28168

fixture determinations despite the fact that the property was designed to be mobile.

See Rushmore Shadows, LLC v. Pennington Cty. Bd. of Equalization, 2013 S.D. 73,

¶¶ 9, 17, 838 N.W.2d 814, 817, 819 (concluding recreational-park trailers used in a

campground were part of the real property because the trailers were intended to be

permanent accessions); Brink Elec. Constr. Co. v. State, Dep’t of Revenue,

472 N.W.2d 493, 499-500 (S.D. 1991) (“Here, the equipment could be moved, but

frequent movement was not contemplated unless replacement was necessary. In

this sense, the installations were permanent.”).

[¶14.] Valley Power, however, also contends that BHP did not intend the

units to be stationary and permanent. Valley Power vigorously disputes the

hearing officer’s findings on how long the units had been there and whether BHP

intended them to be permanent. Valley Power contends that we should review that

matter de novo.

[¶15.] The hearing examiner made findings of fact on permanency and each

of the Logan factors for evaluating whether property is a fixture. Crucial to the

decision here, the hearing officer found that: the units were stationary and had been

there since 1965; the units promoted the use of the realty; and BHP intended the

units be permanent. Although these findings include the language in the Logan

test, the findings are not legal conclusions concerning the fixture determination;

they also do not determine the taxability of the transaction. Instead, they are

factual determinations concerning the character of the property and BHP’s actual

use of it. Accordingly, they are findings of physical and historical fact entitled to

-6-
#28168

deference under the clearly erroneous standard of review.5 See SDCL 1-26-36, -37;

see also Welu v. Twin Hearts Smiling Horses, Inc., 386 P.3d 937, 942 (Mont. 2016)

(noting factual determinations concerning irrigation system’s status as a fixture are

reviewed for clear error and application of those facts to the law of fixtures is

reviewed de novo).

[¶16.] Applying the clearly erroneous standard, we find no error in the

hearing examiner’s factual findings. Although the MP36 power units may not have

been designed to be stationary and permanent, there was evidence showing that

historically, BHP’s power units were stationary and had been there since 1965.

There was also evidence supporting the hearing examiner’s findings that the units

promoted the use of the realty as an electric power plant and that BHP intended the

units to be permanent.

[¶17.] Considering those findings, we conclude that the power units were

fixtures. Rushmore Shadows is an analogous case. There, a campground used

fourteen recreational-park trailers as cabins for lodging. Rushmore Shadows,

2013 S.D. 73, ¶ 2, 838 N.W.2d at 815. The trailers were designed to be mobile: they

“were built on a single chassis with wheels” and they were not physically attached

to the ground. Id. ¶ 3. But half of the trailers were never registered as vehicles,

and none of them had been moved since they were placed in the campground. Id.

5. Valley Power requests that we give Peterson’s testimony “greater weight”
because he “was familiar with mobile power units in general and actually
viewed the units in question.” However, “we defer to the agency on the
credibility of a witness who testified live because the agency is in a better
position than an appellate court to evaluate the persuasiveness of witness
testimony.” In re Jarman, 2015 S.D. 8, ¶ 18, 860 N.W.2d 1, 8-9.

-7-
#28168

¶ 4. Further, each was connected to utilities. Id. ¶ 5. The trailers had been used

for five to thirteen years for seasonal lodging. Id. ¶ 4.

[¶18.] We concluded that the trailers were taxable as annexations to realty

under the Logan tests. First, despite their mobile design, the trailers had never

been moved and were “constructively attached to the real estate.” Id. ¶ 13,

838 N.W.2d at 818. We noted that “[p]roperty need not be actually attached to the

real estate” and that “[c]onstructive attachment also indicates that a party intended

to permanently affix the property to the real estate.” Id. ¶ 17, 838 N.W.2d at 819.

Second, the trailers were adapted to promote the use of the realty as a campground.

Id. ¶ 14, 838 N.W.2d at 818. Third, the length of time the trailers “remained in the

same location for use as places of lodging” was “a strong indication that Rushmore

Shadows intended to affix the cabins to the real estate for the economic life of the

trailers.” Id. ¶ 17, 838 N.W.2d at 819.

[¶19.] This case is not legally different. Each power unit weighed 110,000

pounds; sat in a fenced enclosure where it was connected to a fuel source and the

electrical transmission grid; and each would require a crane for removal. Cf. Brink,

472 N.W.2d at 499 (concluding that the heavy electrical equipment used in a

substation, some of which were not bolted to the ground, were fixtures). There was

also evidence that the power units had been installed in 1965, that they had not

been moved in the last twenty years, and that a BHP employee indicated the units

were stationary. Similar to the trailers in Rushmore Shadows, the fact that the

units had remained in the same location for nearly fifty years is a strong indication

that BHP intended them to be permanently annexed “to the real estate for the

-8-
#28168

economic life of the” power units. See 2013 S.D. 73, ¶ 17, 838 N.W.2d at 819.

Finally, the evidence indicated that the units were adapted to the use and purpose

for which the real estate was used as an electrical power plant.

[¶20.] We acknowledge Valley Power’s point regarding the use for which the

power units were designed. But intent is the controlling criterion, and “[i]ntent is

‘deduced from the circumstances of a particular case,’ with consideration given to

all the circumstances.” Id. ¶ 12, 838 N.W.2d at 818 (quoting Logan & Assocs.,

331 N.W.2d at 283). Here, although the power units were designed to be generally

mobile, BHP’s actual use reflected its intention to constructively annex them to the

land for purposes of providing supplemental power at its power plant. Accordingly,

the Department did not err in concluding that Valley Power’s services constituted a

repair of a fixture to realty, thereby subjecting Valley Power to the alternate

contractor’s excise tax under SDCL 10-46B-2.

[¶21.] Valley Power was also subject to use tax. For the reasons just

explained, Valley Power was a “contractor . . . as defined in chapters 10-46A and 10-

46B.” Further, there is no dispute that Valley Power used “tangible personal

property [the exhaust manifolds] . . . in the performance of [its] contract.” See

SDCL 10-46-5. Accordingly, the Department did not err in concluding that Valley

Power was also required to pay use tax under SDCL 10-46-5.

[¶22.] Affirmed.

[¶23.] GILBERTSON, Chief Justice, and SEVERSON, KERN, and JENSEN,

Justices, concur.

-9-