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Carsforsale.Com, Inc v. South Dakota Department of Revenue

Supreme Court of South Dakota

January 9, 2019

CARSFORSALE.COM, INC., Plaintiff and Appellant,
v.
SOUTH DAKOTA DEPARTMENT OF REVENUE, Defendant and Appellee.

          OCTOBER 1, 2018

          APPEAL FROM THE CIRCUIT COURT OF THE SECOND JUDICIAL CIRCUIT MINNEHAHA COUNTY, SOUTH DAKOTA THE HONORABLE BRADLEY G. ZELL Judge

          SHAWN M. NICHOLS of Cadwell, Sanford, Deibert & Garry, LLP Sioux Falls, South Dakota Attorneys for plaintiff and appellant.

          JOHN T. RICHTER of South Dakota Department of Revenue Pierre, South Dakota Attorneys for defendant and appellee.

          KERN, JUSTICE

         [¶1.] The South Dakota Department of Revenue (Department) issued Carsforsale.com (Carsforsale) a certificate of assessment for alleged use tax violations. Carsforsale filed a formal objection to the audit. A hearing was held on the objection before the hearing examiner, who recommended reversing the certificate of assessment. The Department, through its Secretary, rejected the hearing examiner's proposed decision and reinstated the certificate in its entirety. Carsforsale appealed to the circuit court, which affirmed the Department's decision in part and reversed in part. Carsforsale appeals. We affirm.

         Facts and Procedural History

         [¶2.] Carsforsale is a web-based business that offers dealers and individuals an online forum to advertise their vehicle for sale. Carsforsale also provides other services, "such as a vehicle research database, social media integration, website hosting, an inventory management tool, lead and data management solutions, search engine optimization, and custom dealership websites." Carsforsale charges $99 per month to car dealers to upload and display their inventory. Dealers create their own listings and may include a link for shoppers to go directly to the dealer's website. At no additional cost, Carsforsale builds websites for dealers who do not have their own websites. Private sellers may create their own listings for free.

         [¶3.] On April 13, 2015, the Department began an audit of Carsforsale's records to determine whether sales and use taxes were properly reported for the January 2009 through December 2014 reporting periods. The audit determined that Carsforsale had no sales tax liability. However, the audit revealed suspected use tax errors related to transactions in which Carsforsale had not paid use tax on its purchases of tangible personal property or for services in which sales tax had not been charged to Carsforsale. The auditor created a list of disputed transactions. Upon request Carsforsale provided more information, including invoices, to the auditor, and the auditor adjusted the list of suspected transactions. On September 11, 2015, Carsforsale indicated there was no further documentation to provide and the audit was finalized. The Department issued a certificate of assessment to Carsforsale in the amount of $250, 479.61. The tax was $187, 905.71, interest was $57, 849.50, and the penalty was $4, 724.40.

         [¶4.] Carsforsale objected and requested an administrative hearing. The hearing examiner heard testimony from the owner of Carsforsale and its accountant regarding its business model and the purpose of the disputed transactions, as well as testimony from the Department's auditor. Based upon that testimony, the hearing examiner proposed that the certificate of assessment be reversed. The examiner characterized Carsforsale as "an internet advertising agency" and "like a classified ad section." The examiner determined that the out-of-state services, such as "cloud services, anti-virus software, and contract labor," purchased by Carsforsale without payment of sales tax were vital services needed to carry out its advertising business. Therefore, the examiner held that these purchases were "made by [Carsforsale] for preparing and placing advertising on the internet" and were "not taxable" under ARSD 64:06:02:03. The examiner deemed exempt Carsforsale's purchase of domain names from GoDaddy.com as an advertising service provided to its "customers [to] prepare and place the websites on Carsforsale.com."

         [¶5.] The Department, through its Secretary, rejected the examiner's proposed decision as "incomplete" and issued its final decision reinstating the certificate of assessment. It found that Carsforsale was not entitled to the advertising exemption on the disputed services because "[t]here [was] nothing in the record that evidences that Carsforsale used any of the above tangible personal property or services it purchased to assist it in completing . . . the listings on its website." Further, the Department found that "Carsforsale has produced no evidence to show that the tangible personal property or services Carsforsale purchased were used to prepare an advertisement and place it in the media." It also determined that Carsforsale failed to prove that it was entitled to the advertising exemption because it did not furnish service providers with exemption certificates as required by ARSD 64:06:02:03.

         [¶6.] The Department dismissed Carsforsale's argument that the purchases of domain names from GoDaddy.com were exempt under the sale-for-resale exemption of ARSD 64:06:01:08.03 because it found "Carsforsale does not resell any of the services in this matter." Additionally, it noted that "the services are not purchased on behalf of a current customer, are used by Carsforsale, and the services are not delivered or resold to the customer without any alteration or change."

         [¶7.] Carsforsale appealed to the circuit court, which affirmed the Department in part and reversed in part.[1] Carsforsale appeals, raising the following issues for our consideration:

1. Whether Carsforsale is entitled to the advertising tax exemption.
2. Whether Carsforsale is entitled to the sale-for-resale tax exemption.
3. Whether Carsforsale was required to present an exemption certificate to out-of-state vendors to exercise exemptions ...

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