BLACK HILLS TRUCK & TRAILER, INC. License No. 1020-0886-ST,
SOUTH DAKOTA DEPARTMENT OF REVENUE, Appellee. DAKOTA VOLVO TRUCKS, INC. License No. 1015-3946-ST, NORTH CLIFF USED & REBUILT TRUCK PARTS, INC. License No. 1016-4988-ST, SFK LEASING, INC. License No. 1015-0596-ST, SIOUX FALLS KENWORTH, INC. License No. 1015-4684-ST, SIOUX FALLS TRAILER SALES, INC. (SIOUX FALLS, SD) License No. 1016-0511-ST, and SIOUX FALLS TRAILER SALES, INC. (WATERTOWN, SD) License No. 1016-0513-ST, Appellants,
CONSIDERED ON BRIEFS ON JANUARY 11, 2016
FROM THE CIRCUIT COURT OF THE SECOND JUDICIAL CIRCUIT
MINNEHAHA COUNTY, SOUTH DAKOTA THE HONORABLE DOUGLAS E.
L. EDWARDS Breit Law Office, PC Sioux Falls, South Dakota
Attorneys for appellants
YAEGER of South Dakota Department of Revenue Pierre, South
Dakota Attorneys for appellee.
The South Dakota Department of Revenue subjected Black Hills
Truck & Trailer and other corporations owned by North
American Truck & Trailer, Inc., (collectively Taxpayers)
to a sales-and-use-tax audit. The audit uncovered errors
regarding Taxpayers' reporting of use tax. The Department
assessed Taxpayers for unpaid use taxes. Taxpayers paid the
assessment under protest and demanded an administrative
hearing. At the hearing, Taxpayers argued that the shop
supplies assessed were exempt from use tax because they were
purchased for resale to customers. Taxpayers offered an
invoice demonstrating a typical transaction in support of
their position. The hearing examiner declined to consider the
invoice because Taxpayers submitted it more than 60 days
after the audit began, in violation of SDCL 10-59-7. Upon
appeal, both the Department and the circuit court affirmed
the exclusion of the exhibit and the assessment. Taxpayers
appeal. We affirm.
North American Truck & Trailer, Inc., owns Black Hills
Truck & Trailer, Inc., and several other truck and
trailer dealerships in various cities in South
Dakota. These dealerships perform
multiple services related to the lease, sale, and repair of
trucks, trailers, and similar equipment.
[¶3.] The Department began its audit of each corporation
in September 2012. It requested Taxpayers' tax returns,
worksheets, sales reports, expense invoices, sales invoices,
and other documents for the reporting periods of May 2009
through April 2012. During the audit, the Department narrowed
its focus to a one-year time frame within the audit period.
The audit uncovered what the Department believed to be
use-tax errors regarding shop supplies used by Taxpayers in
their repair service. Taxpayers did not pay sales tax on the
supplies at the time of purchase or use tax at the time the
supplies were used and consumed. The Department attributed
the mistakes to human error rather than intent to evade
taxation. The Department assessed Taxpayers $27, 691.91 in
unpaid use tax.
Taxpayers paid the tax under protest and requested an
administrative hearing. At the hearing on May 30, 2013,
Taxpayers challenged the use tax assessment and offered
exhibits in support of their position. The Department
objected to ten of Taxpayers' exhibits because Taxpayers
did not present them to the auditor within 60 days from the
beginning of the audit as required by SDCL 10-59-7. The
Department also objected because several of the exhibits were
dated outside of the audit period. The hearing examiner
excluded the exhibits because they were not timely presented.
During the hearing, the Department contended that Taxpayers
had purchased shop supplies without payment of sales tax. To
determine if use tax was due, the Department divided the shop
supplies into various categories. These included shop
supplies consumed during the repair of customer vehicles,
shop supplies used to repair customer vehicles that become
part of the vehicle, and maintenance items used to repair
Taxpayer-owned vehicles. Examples of shop supplies consumed
during a repair service included: sand paper, glass cleaner,
dust masks, nitrile gloves, razor blades, thinner or reducer,
rubbing compound, VIS polish, bars and buffing wheels,
sandblasting sand, packing tape, masking tape, solvent, shop
towels, brake cleaner, carb cleaner, and drill bits. Shop
supplies that became part of the customer's vehicle
include products such as filters and windshield sealant.
Maintenance items are things such as oils, antifreeze, and
other fluids used on Taxpayer-owned vehicles.
The Department argued that use tax was due and owing on
supplies used and consumed in the repair of customer
vehicles. The Department did not assess use tax on shop
supplies that were put into customers' vehicles and left
the shop with the vehicles. But the Department assessed use
tax on maintenance items put into Taxpayer-owned vehicles
either being prepared for resale or for items used to repair
leased vehicles. In response, Taxpayers alleged that none of
the items were subject to use tax because they were all
purchased for resale and therefore exempt.
When analyzing whether use tax was due, the hearing examiner
considered in part whether the supplies became part of the
customer's vehicle as defined in ARSD
64:06:02:58. The hearing examiner
affirmed the assessment, finding that the Department properly
distinguished between the categories of supplies and assessed
the tax due on each.
Taxpayers appealed the hearing examiner's decision to the
circuit court. Taxpayers first alleged that because the
Department had unrestricted access to all of their records
during the audit, prior submission of the exhibits was
unnecessary. The circuit court agreed regarding most of the
exhibits holding that all but four were admissible pursuant
to SDCL 10-59-7. It held that Exhibit 18-a sales invoice that
described the agreement for repair services including the
cost of supplies used during the repair-was not from the
designated audit period and was not material evidence.
Therefore, the circuit court affirmed the Department's
decision to exclude Exhibit 18 under the statute.
Taxpayers next argued that the supplies used were exempt from
use tax because they were actually resold to customers in the
regular course of business. The circuit court disagreed. It
reasoned that Taxpayers were selling the repair service
itself, not the supplies used during the service. The circuit
court affirmed the Department's assessment of use tax.
On appeal, Taxpayers raise two issues:
1. Whether the Hearing Examiner erred by refusing to consider
2. Whether the Hearing Examiner erred by affirming the
Department's assessment of use tax on shop supplies used