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Valley Power Systems v. South Dakota Department of Revenue

Supreme Court of South Dakota

December 13, 2017

VALLEY POWER SYSTEMS, Appellant,
v.
SOUTH DAKOTA DEPARTMENT OF REVENUE, Appellee.

          CONSIDERED ON BRIEFS ON NOVEMBER 6, 2017

         APPEAL FROM THE CIRCUIT COURT OF THE SIXTH JUDICIAL CIRCUIT HUGHES COUNTY, SOUTH DAKOTA THE HONORABLE MARK BARNETT Judge

          JUSTIN L. BELL of May, Adam, Gerdes & Thompson, LLP Attorneys for appellant.

          STACY R. HEGGE Attorneys for appellee.

          ZINTER, JUSTICE

         [¶1.] Valley Power Systems, Inc., contracted to install new exhaust manifolds on five "mobile power units" that were used by a utility company to provide supplemental power at one of its power plants. Valley Power did not pay contractor's excise tax or use tax with respect to the transaction. Following audits of both companies, the Department of Revenue issued a certificate of assessment requiring Valley Power to pay alternate contractor's excise tax, use tax, interest, and a penalty. An administrative hearing examiner and the circuit court affirmed the assessment, and Valley Power appeals. We affirm.

         Facts and Procedural History

         [¶2.] Valley Power is an industrial-engine distributor based in California. It entered into a contract with Black Hills Power, Inc. (BHP), a utility company that operated the "Ben French" coal-fired power plant in Rapid City. Under the contract, Valley Power agreed to provide and install new exhaust manifolds with diesel oxidation catalysts on five "Electro-Motive Diesel" MP36 power units located at the Ben French plant. The purpose of the replacements was to reduce emissions and bring the power units into compliance with new federal regulations.

         [¶3.] The five power units were used by BHP to generate supplemental electricity during peak-load-electrical usage. Each unit was approximately forty feet long, ten feet wide, and eleven feet high; and each unit weighed approximately 110, 000 pounds. The units were located in a fenced enclosure on a gravel pad but were not bolted to the ground. Each unit was connected to a fuel source and the electrical-power-transmission grid.

          [¶4.] Valley Power installed the exhaust manifolds over the course of two months. The contract required BHP to pay Valley Power $808, 648: $496, 618 for equipment and $312, 030 for labor and other expenses. Valley Power was to "obtain all necessary tax licenses and pay all sales, gross receipts, use, and any other tax imposed." However, for reasons not material here, Valley Power did not pay any tax. Instead, BHP paid use tax on the transaction.

         [¶5.] BHP was subsequently audited by the Department. After reviewing the contract and related invoices, auditor Marlin Zerbel determined that the use tax remitted by BHP should be refunded. Zerbel reasoned that the contract involved a transaction for which Valley Power should have paid both alternate contractor's excise tax on its gross receipts and use tax on the equipment used in the contract. Consequently, the Department refunded BHP's use tax and audited Valley Power. Following the audit, the Department issued a certificate of assessment requiring Valley Power to pay $54, 404.18 ($22, 560.14 in use tax, $16, 172.97 in excise tax, $12, 797.75 in interest, and a $3, 873.32 penalty). Valley Power objected to the assessment and requested an administrative hearing.

         [¶6.] The power units' status as fixtures was one of the central issues in the administrative hearing. Two witnesses testified on the units' movability and permanency. David Peterson, Valley Power's manager, testified that the power units were mobile and were designed to be moved wherever power was needed. Zerbel countered that although he did not personally inspect the Ben French plant, BHP employees informed him that the power units were stationary. He also stated that according to BHP's website, the units were installed in 1965. He finally indicated that he had frequently driven by the units for twenty years and had never seen them move.

         [¶7.] The hearing examiner concluded that the power units were fixtures to realty. The hearing examiner also concluded that Valley Power's work was classified under "division c" of the Standard Industrial Classification Manual of 1987 (SIC Manual).[1] For both reasons, the hearing examiner determined that Valley Power was a "contractor" subject to alternate contractor's excise tax under SDCL 10-46B-1 and use tax under SDCL 10-46-5. The circuit court affirmed.

         [¶8.] On appeal, Valley Power challenges the hearing examiner's and circuit court's conclusions that the power units were fixtures and that Valley Power's work was classified under division c of the SIC Manual. Because the fixture question is ...


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