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Black Hills Truck & Trailer, Inc. v. South Dakota Department of Revenue

Supreme Court of South Dakota

June 22, 2016

BLACK HILLS TRUCK & TRAILER, INC. License No. 1020-0886-ST,
v.
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

         APPEAL FROM THE CIRCUIT COURT OF THE SECOND JUDICIAL CIRCUIT MINNEHAHA COUNTY, SOUTH DAKOTA THE HONORABLE DOUGLAS E. HOFFMAN

          DAVID L. EDWARDS Breit Law Office, PC Sioux Falls, South Dakota Attorneys for appellants

          ROSA YAEGER of South Dakota Department of Revenue Pierre, South Dakota Attorneys for appellee.

          KERN, Justice

         [¶1.] 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.

         Facts

         [¶2.] North American Truck & Trailer, Inc., owns Black Hills Truck & Trailer, Inc., and several other truck and trailer dealerships in various cities in South Dakota.[1] 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.

         [¶4.] 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.

         [¶5.] 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.

         [¶6.] 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.

         [¶7.] 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.[2] The hearing examiner affirmed the assessment, finding that the Department properly distinguished between the categories of supplies and assessed the tax due on each.

         [¶8.] 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.

         [¶9.] 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.

         [¶10.] On appeal, Taxpayers raise two issues:[3]

1. Whether the Hearing Examiner erred by refusing to consider Exhibit 18.
2. Whether the Hearing Examiner erred by affirming the Department's assessment of use tax on shop supplies used ...

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