Argued: March 24, 2015.
As corrected October 27, 2015.
APPEAL FROM THE CIRCUIT COURT OF THE SIXTH JUDICIAL CIRCUIT HUGHES COUNTY, SOUTH DAKOTA. THE HONORABLE MARK BARNETT, Judge.
SANDRA HOGLUND HANSON, CATHERINE A. TANCK of Davenport, Evans, Hurwitz & Smith, LLP, Sioux Falls, South Dakota, Attorneys for appellee.
JOHN T. RICHTER, South Dakota Department of Revenue, Pierre, South Dakota Attorneys for appellant.
ZINTER, Justice. GILBERTSON, Chief Justice, and WILBUR, Justice, concur. SEVERSON and KERN, Justices, dissent.
[¶1] Northern Border Pipeline Company operates an interstate pipeline business that provides transportation services to natural gas owners who desire to ship their gas. The South Dakota Department of Revenue (Department) assessed Northern Border for use tax on the value of the shippers' gas that the shippers allowed Northern Border to burn as fuel in compressors that moved the gas through the pipeline. The assessment was affirmed following an administrative hearing, but the circuit court reversed, holding that a tax exemption applied. The Department appeals, arguing that the exemption did not apply. By notice of review, Northern Border raises a number of additional issues, including the contention that the burning of the shippers' gas was not a taxable " use" by Northern Border. We conclude that there was no taxable " use" by Northern Border because the gas was owned by the shippers.
Facts and Procedural History
[¶2] Northern Border operates an interstate natural gas pipeline that extends from Monchy, Saskatchewan, through South Dakota, to North Hayden, Indiana. The Federal Energy Regulatory Commission (FERC) regulates interstate pipeline businesses. Under the federal regulatory scheme, Northern Border is a " transportation-only" pipeline, meaning that it cannot own the gas it transports in the pipeline. See infra ¶ 14. Northern Border is also bound by the terms of its FERC tariff. The tariff identifies the transportation services that Northern Border can offer and the rules under which it provides those services to shippers, the owners of the gas.
[¶3] Northern Border is authorized to provide different kinds of transportation services. For each type of service, the shipper designates the quantity of gas it desires to be transported through the pipeline. The gas is then delivered to Northern Border at a receipt point and returned to the shipper at a delivery point. No gas enters the pipeline in South Dakota.
[¶4] Pressure is required to move the gas through the pipeline. To maintain pressure, gas is continuously routed through compressors located at stations
along the pipeline. At each compressor station, the gas is compressed and then returned to the pipeline. There are three compressor stations in South Dakota.
[¶5] Although nearly all of the gas routed through the compressors returns to the pipeline, some of the shippers' gas is burned as fuel to operate the compressors. The gas burned to fuel the compressors is part of what is known as " company use gas."  Northern Border does not buy company use gas from shippers. Pursuant to the tariff, shippers must allow their gas to be burned as a condition of receiving Northern Border's pipeline transportation services. However, shippers retain title to the gas throughout the transportation process.
[¶6] The Department audited Northern Border's business activities for the period from July 2007 through December 2010. The Department issued a certificate of assessment for use tax on the value of the shippers' gas that was burned in the compressors. Northern Border contested the assessment and requested an administrative hearing. Following a hearing, an administrative law judge issued a proposed decision affirming the assessment. The proposed decision was adopted by the Department Secretary, and Northern Border appealed to the circuit court. The circuit court reversed the assessment. The court ruled that Northern Border's burning of the shippers' gas was exempt from use tax under SDCL 10-46-55, which exempts " [t]he provision of natural gas transportation services by a pipeline."
[¶7] The Department appeals the circuit court's exemption ruling. By notice of review, Northern Border challenges the tax, raising the ...