ARGUED ON MARCH 25, 2014
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.
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.
[¶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. Customers are not given the option to purchase any of the items 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.
[¶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 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.
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 ...