MAGELLAN PIPELINE COMPANY, LP LIC. NO. 1011-0693-ST, Petitioner and Appellant,
SOUTH DAKOTA DEPARTMENT OF REVENUE AND REGULATION, Respondent and Appellee,
APPEAL FROM THE CIRCUIT COURT OF THE SECOND JUDICIAL CIRCUIT MINNEHAHA COUNTY, SOUTH DAKOTA THE HONORABLE WILLIAM J. SRSTKA, JR. Retired Judge
JAMES E. MOORE MATTHEW P. BOCK of Woods, Fuller, Shultz & Smith, PC Sioux Falls, South Dakota Attorneys for petitioner and appellant.
ROSA YAEGER South Dakota Department of Revenue and Regulation Pierre, South Dakota Attorneys for respondent and appellee.
GILBERTSON, Chief Justice
[¶1.] Magellan Pipeline Company, LP (Magellan) appeals a sales tax assessment by the Department of Revenue and Regulation (the Department) on additive injection and equipment calibration pipeline services. The Hearing Examiner, Department Secretary, and circuit court found that Magellan's additive injection and equipment calibration pipeline services are non-exempt from tax under SDCL 10-45-12.1. We reverse.
[¶2.] We rely on the parties' stipulated facts. Magellan is a Delaware limited partnership headquartered in Tulsa, Oklahoma. Magellan's principal business is the transportation of refined petroleum products. Magellan owns and operates a refined petroleum products pipeline system, which covers a 13-state area, including South Dakota. Magellan has refined petroleum terminals in both Watertown and Sioux Falls.
[¶3.] The refined petroleum products originate from direct connections to refineries and interconnections with other interstate pipelines. For the most part, Magellan's customers own the refined petroleum products transported through Magellan's pipeline. Magellan charges its customers a tariff rate for transporting refined petroleum products through its pipeline. When the refined petroleum products enter the terminal in Sioux Falls or Watertown, the products are either stored onsite or delivered to Magellan customers through a rack. Magellan also charges its customers for services Magellan provides at its terminals. Those services include: ethanol and biodiesel unloading and loading, additive injections, custom blending, laboratory testing, data services, other system services, and product storage. Additives are injected into the refined petroleum at the rack, which is the time Magellan customers take delivery of their products from a Magellan terminal. Some additives are mandated by law (e.g., gasoline detergent, diesel lubricity additive, and diesel dye) whereas others are non-mandatory (e.g., jet deicer, diesel detergent, and diesel cold flow improver).
[¶4.] In September 2009, the Department notified Magellan that it would begin an audit in March 2010. The audit would cover the period of September 2006 through September 2009. Later, the Department and Magellan agreed to extend the audit period through January 2010. Department Auditor Angela Bormann conducted the audit at Magellan headquarters in Tulsa, Oklahoma. Following the audit, the Department issued a certificate of assessment (COA) against Magellan, alleging a balance due of $241, 274.52. Of the amount alleged to be owed, $190, 268.50 was attributed to unpaid sales and use tax, and $51, 006.02 was attributed to interest. The COA largely alleged unpaid sales tax for certain pipeline services, including charges related to additive injections.
[¶5.] Magellan notified the Department that it was contesting the total assessment but, under protest, paid the full tax assessment of $190, 268.50. Initially Magellan requested a hearing. Later, however, the parties agreed to forgo a hearing and submitted stipulated facts for the Hearing Examiner's review. The primary issue before the Hearing Examiner was whether the fees Magellan charged for additive injections and equipment calibration pipeline services were subject to South Dakota sales tax. The Hearing Examiner entered a proposed decision affirming the Department's tax assessment of Magellan. The Secretary of the Department adopted the Hearing Examiner's decision in full.
[¶6.] Magellan appealed to the circuit court. The circuit court found that Magellan's additive injection and equipment calibration pipeline services were subject to South Dakota sales tax under SDCL 10-45-4, concluding that SDCL 10-45-12.1 exempts only pipeline transportation services. On appeal we consider whether Magellan's additive injection and equipment calibration pipeline services are exempt from South Dakota's sales tax under SDCL 10-45-12.1.
STANDARD OF REVIEW
[¶7.] "Whether a statute imposes a tax under a given factual situation is a question of law [reviewed de novo] and thus no deference is given to any conclusion reached by the Department of Revenue or the circuit court." TRM ATM Corp. v. S.D. Dep't of Revenue & Regulation, 2010 S.D. 90, ¶ 3, 793 N.W.2d 1, 3 (quoting S.D. Dep't of Revenue v. Sanborn Tel. Coop., 455 N.W.2d 223, 225 (S.D. 1990)); see also Mauch v. S.D. Dep't of Revenue & Regulation, 2007 S.D. 90, ¶ 8, 738 N.W.2d 537, 540. Further, "[s]tatutory interpretation and application are questions of law, and are reviewed by this Court under the de novo standard of review." Pourier v. S.D. Dep't of Revenue & Regulation, 2010 S.D. 10, ¶ 8, 778 N.W.2d 602, 604.
ANALYSIS AND DECISION
[¶8.] Magellan argues that its additive injection and equipment calibration pipeline services are exempt from South Dakota's sales tax under SDCL 10-45-12.1. The critical inquiry is what the South Dakota legislature intended by exempting the services of "pipe lines" in SDCL 10-45-12.1. SDCL 10-45-12.1 provides that "[t]he following services enumerated in the Standard Industrial Classification Manual . . . are exempt from the ...