In the Matter of the State Sales and Use Tax Liability for SIOUX FALLS NEWSPAPERS, INC., License No. 51-12054-OS Sioux Falls Newspapers, Inc., Licensee and Appellee, and Lewis Drugs, Inc., Intervenor, v. SECRETARY OF REVENUE, and The South Dakota Department of Revenue, Licensor and Appellant.
No. 15855.
Supreme Court of South Dakota.
April 27, 1988.
Rehearing Denied June 6, 1988.
423 N.W.2d 806
Rita D. Haverly of Hagen & Wilka, P.C., Sioux Falls, for intervenor.
Gene R. Woodle, Asst. Atty. Gen., Pierre, for licensor and appellant; Roger A. Tellinghuisen, Atty. Gen., Pierre, on the brief.
The Department of Revenue (Department) appeals a circuit court decision which revеrsed an administrative determination of sales tax on retail printing charges and use tax on syndicated materials. We agree with Department‘s assessment of sales tax on printing charges but disagree on use tax on syndicated materials.
Facts
Department conducted a sales and use tax audit of the Sioux Falls Argus Leader (Argus) for the years 1982, 1983, and 1984. Argus was assessed additional tax and interest for sales and use during this period. The taxes were paid under protеst and Argus sued to recover the assessed taxes. An administrative hearing was held on April 15th, 1986. Secretary (who did not attend the hearing) entered an order upholding the assessment. Argus appealed two issues to the circuit court: (1) the assessment for the four-page printed advertising insert sold to Lewis, and (2) the assessment for use tax on syndicated material utilized by Argus. The circuit court reversed the decision of Secretary. The circuit court held that the transactions between Argus and Lewis were tax exempt as a sale of advertising services under
Findings of Fact and Scope of Review
Department appears to be claiming, not that some of the circuit court‘s findings are per se erroneous, but that the findings are not based upon the record developed at the administrative agency level. A review of the transcript of the administrative hеaring and the exhibits show that the circuit court‘s findings are based upon direct evidence presented at the hearing (or reasonable inferences therefrom) and stipulations between the parties.
Whether a statute imposes a tax under a given set of facts is a question of law. Modern Merchandising, Inc. v. Department of Revenue, 397 N.W.2d 470, 471 (S.D.1986).
“Resolution of this dispute depends upon the interpretation and application of statutes. Because this is a question of law, we accord no deference to the conclusions reached by the Department or the circuit court. (citing Permann v. Dept. of Labor, 411 N.W.2d 113, 117 (S.D. 1987))”
In the Matter of the State Sales and Use Tax Liability of Townley, 417 N.W.2d 398, 399 (S.D.1987).
1. SALES TAX LIABILITY FOR PRINTING CHARGES
A. Exemption From Sales Tax Liability For Advertising Services
Argus asserts that any tangible property produced was merely incidental to the advertising service performed by Argus for Lewis. Argus also cites to
Argus cites to Department‘s own regulation, ARSD 64:06:02:03 and Department‘s own published guidelines to substantiate its argument that charges for advertising in newspapers are not taxable.1 There is no question that regular newspaper advertising, such as classified, quarter page, and full page ads are within the scope of the exemption. Argus contends that these advertising supplements should be treated similarly. Argus argues that differences in size and color of advertisements are distinctions which do not change the nature of the activity or the transaction. However, Argus overlooks the third paragraph of ARSD 64:06:02:03 which states, “[s]ales tax applies to gross receipts from sales of tangible personal property[.]” (See footnote 1.)
There was a tangible product produced in this case. Argus argues that it is exempt from sales tax on the рrinting charges. As we have said many times, tax exemption statutes are construed strictly against the person claiming exemption. Matter of Townley, supra at 400. Argus’ printing transactions with Lewis are equivalent to the commercial printing transactions held taxable in K Mart Corp., Inc. v. S.D. Dept. of Revenue, 345 N.W.2d 55 (S.D.1984). It is the similarity in the transactions and not the character of the participants upon which we must focus. Regardless of whether Argus is characterized as a printer, an advertising service or a newspaper, its transаctions with Lewis in printing the inserts were those of a retailer selling tangible personal property to a consumer.
B. Exemption From Sales Tax Liability For Newspaper Sales and Subscriptions
Department contends that these advertising inserts cannot be exempt as a sale of newspapers under
In Daily Record Co. v. James, 629 S.W.2d 348 (Mo.banc 1982), the court distinguished supplements printed by the newspaper and billed to the advertiser, which were held to be nontaxable services, from supplements printed by a commercial printer at the direction of the advertiser and then shipped directly to the newspaper for incorporation and distribution. See also Sears, Roebuck and Co. v. State Tax Commission, 370 Mass. 127, 345 N.E.2d 893 (1976). The Daily Record court went on, however, to find that the character of the printer was an inapрropriate focus. This point was echoed in Eagerton v. Dixie Color Printing Corp., 421 So.2d 1251 (Ala. 1982), where the court stated that they could see no reason why “the tax consequences of identical transactions should differ, based entirely and solely on who makes the purchase” and that “[i]t is the transaction which is taxable and not the identity of the purchaser.” Id. at 1253-1254. We agree. As noted above, determinations of taxability should focus on the transaction. Because we held tax was correctly imposed on an equivalent transaction in K Mart, supra, we hold that tax was correctly imposed here.
The advertising inserts, printed on yellow newsprint and appearing in Argus on Wednesdays and Sundays, are not entitled to an exemption as sales of newspapers. The inserts were merely added to and distributed with the newspaper. Only sales of newspaper to the reader/consumer are exempt under the newspaper sales exemption and Argus is not selling newspapers to Lewis. To hold otherwise would constitute unfair discrimination in favor of a newspaper and against a printer based on a purely artificial distinction, i.e., who is doing the printing?
In K Mart, supra, the taxpayer also contended that the supplements were an integral or component part of the newspaper and should qualify for the exemption. This court cited Ragland v. K Mart Corp., 274 Ark. 297, 624 S.W.2d 430 (1981), for six factors to be utilized in determining whether advertising supplements were a component pаrt of a newspaper. The six factors identified by the Ragland court were: ownership, preparation, regular feature, privity of contract, logo, and distribution. Argus claims that there are factual differences between this case and K Mart, supra. Even if such factual distinctions exist, Argus misapprehends the analysis in K Mart, supra. The Ragland factors were simply tools to aid in answering the component part test. We held in K Mart, supra, that advertising inserts were not component parts of a newsрaper. They still are not.
In summary,
C. Imposition Of Tax On These Transactions Is Not Prohibited By The State Or Federal Constitution or by SDCL 10-45-9 because the tax applies equally to all retailers
Department and intervenor Lewis each charge that the other raises the constitutionality issue. Lewis cites Grosjean v. American Press Co., 297 U.S. 233, 56 S.Ct. 444, 80 L.Ed. 660 (1936), for the rule that the imposition of taxes which abridge freedom of the press are unconstitutional. Lewis then argues that because newspapers derive a substantial portion of their revenue from advertising, the imposition of tax on newspaper advertising “could have a devastating effect on First Amendment freedoms.”
It is not necessary for this court to address the constitutionality question as
2. USE TAX LIABILITY FOR SYNDICATED MATERIALS
Department claims that the paper containing syndicated material which is received and used by Argus is tangible personal property and is taxable under
An excise tax is hereby imposed on the privilege of the use, storage, and consumption in this state of tangible personal property purchased ... for use in this state at the same rate of percent of the purchase price of said property as is imposed by §§ 10-45-2 and 10-45-3....
Argus makes several arguments. First, it contends that the syndicated materials are not the pieces of paper which are received but the intangible information on that paper which is merely transferred by means of a tangible medium. Argus claims that the pieces of paper have no inherent value independent of the information imprinted upon them. Second, Argus argues that the use of syndicatеd materials is a nontaxable resale use under
A. Tangible Personal Property
It is not necessary for us to determine whether intangible information may be severed from the tangible medium of transmission. The items involved in this assessment are not raw information, but the tangible end product of an individual‘s skills. See Columbia Pictures Industries, Inc. v. Tax Commissioner, 176 Conn. 604, 611, 410 A.2d 457, 461 (1979). Columns, features, and editorials such as those written by Art Buchwald, Ann Landers, Erma Bombeck, Sylvia Porter, George Will, and Ellen Goodman, are not just rote reporting of current news events; they are the finished product of a writer‘s skills. Likewise, the comics are the finished product of an artist‘s or writer‘s skills. Therefore, we hold that these syndicated materials are tangible personal property.
B. Nontaxable resale use under SDCL 10-46-1(2) , SDCL 10-45-1(2) , and SDCL 10-45-1(5)
MORGAN and MILLER, JJ., concur.
WUEST, C.J., concurs in part and dissents in part.
HENDERSON, J., dissents.
WUEST, Chief Justice (concurring in part and dissenting in part).
I concur, except for the holding of the majority that Argus‘s transaction with Lewis in printing the inserts were those of a retailer selling tangible personal property to a consumer. The majority relied upon our decision in K Mart which cited Caldor for the characteristics of a newspaper. However, the following chart illustrates the facts are different in many respects.
| K Mart | Lewis |
|---|---|
| 1. K Mart owned and thus controlled the supplements until delivery, while the newspaper was merely paid for distribution. | 1. Lewis never owned “inserts” that were in the newspaper; the advertising was Argus Leader property until delivery to subscribers. |
| 2. The supplements were not prepared by the newspaper. | 2. Lewis‘s advertising was prepared by the Argus. |
| 3. The supplements were not a regular feature of a newspaper. | 3. Lewis‘s four-page advertising was a fairly regular, semi-weekly feature of the Argus. |
| K Mart | Lewis |
|---|---|
| 4. Instead of paying for the insertion of the advertising supplement, the newspaper was paid for distributing the advertising supplements. | 4. The Argus was paid for its advertising services, but it produced the ads itself for the purpose of including them in the newspaper. |
| 5. Instead of bearing only the logo of the specific newspaper, the advertising supplements bear a logo which is preceded by the words “supplement to.” | 5. Lewis‘s advertising in the Argus bоre only the Argus logo. |
| 6. The advertising supplements are sometimes offered as free handouts to stores in addition to being distributed within the newspaper. | 6. The Argus does pay sales tax on Lewis‘s advertising that is not distributed as a part of the newspaper, but which is delivered separately. |
In my opinion the inserts owned by the Argus and delivered to subscribers are an integral part of the Argus Leader and therefore exempt.
HENDERSON, Justice (dissenting).
This dissent is respectfully tendered to the mаjority opinion; the concurrence in part/dissent in part of Chief Justice Wuest is not joined hereby, for the reason that this dissent is based upon a clear statutory exemption.
It is my opinion that the circuit court should be affirmed upon the basis that the Argus was rendering advertising services which are exempt under state law, namely,
The Department of Revenue also had its Guidelines ST-132, same to be used by taxpayers, accountants, and auditors, which provided in part: “The services of advertising is not within the services selected for taxation. Charges for advertising in newspapers, magazines or other publications are charges for service and therefore not taxable. Likewise, charges by advertising agencies for preparing and placing advertising in the media are not taxable.”
The Department of Revenue must abide by its own rules and guidelines. The administrative rules have the force and effect of law. Stellner v. Woods, 355 N.W.2d 1, 3 (S.D.1984); Thorsness v. Daschle, 285 N.W.2d 590, 591 (S.D.1979); Corbly v. City of Colton, 278 N.W.2d 459, 461 (S.D.1979).
Under
“Service” means all activities engaged in for other persons for a fee, retainer, commission, or other monetary charge, which activities involve predominantly the performance of a service as distinguished from selling property. In determining what is a service, the intended use, principal objective or ultimate objective of the contracting parties shall not be controlling.... (Emphasis added.)
Argus’ transaction with Lewis predominantly involved the perfоrmance of a service. It was not selling property. Argus is not in the business of selling property to advertisers; it sells advertisements to advertisers. Any activity which is a service under the last-mentioned statute is exempt as an advertising service by virtue of
As this case pertains to charges for advertising services, and as our state law clearly exempts taxation for advertising services, it being the clear intent of the State Legislature to pass such a lаw, it is our duty to give meaning to the statutory exemption. Construction of a statute must be according to the manifest intent which is derived from the statute as a whole. Western Surety Co. v. Mydland, 85 S.D. 172, 179 N.W.2d 3 (1970). Therefore, I would affirm the circuit court.
Notes
ARSD 64:06:02:03 states:
Advertising services are the business of preparing advertisements for publication in newspapers, magazines, or handbills or for broadcast and welcoming services which contact new residents and others to explain business services within the area and leave promotional literature.
Charges for advertising in newspapers or magazines are not taxable. Likewise, charges made by advertising agencies for preparing and placing advertising in advertising media are charges for services and therefore not taxable.
Sales tax applies to gross receipts from sales of tangible personal property to persons providing advertising services for use and consumption in preparing advertisements. Tax applies to the following: paper; ink; paint; tools; office supplies; type; art work purchased from independent artists; compositor‘s charges for setting copy in type and art work plate in form; engraver‘s charges for making metal plates; electrotyper‘s charges for making electrotypes or matrices; and charges by printers for production of pamphlets, booklets, brochures, and other matеrial printed by them.
Guideline ST-132 provides:
The services of advertising is not within the services selected for taxation. Charges for advertising in newspapers, ... are charges for service and ... not taxable. Likewise, charges by advertising agencies for preparing and placing advertising in the media are not taxable.
There are hereby specifically exempted from the provisions of this chapter and from the computation of the amount of tax impоsed by it, the gross receipts from sales of tangible personal property which this state is prohibited from taxing under the Constitution or laws of the United States or under the Constitution or laws of the state of South Dakota.