Case Information
*1 #25546-a-SLZ
IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
* * * *
TRM ATM CORPORATION
LICENSE NOS. -
73-001-931263309E-ET001
73-001-931263309e-ST-001, Plaintiff and Appellant,
v.
SOUTH DAKOTA DEPARTMENT
OF REVENUE AND REGULATION, Defendant and Appellee.
* * * *
APPEAL FROM THE CIRCUIT COURT OF THE SIXTH JUDICIAL CIRCUIT HUGHES COUNTY, SOUTH DAKOTA * * * *
HONORABLE MARK BARNETT
Judge
* * * *
HAVEN L. STUCK of
Lynn, Jackson, Shultz & Lebrun, P.C.
Rapid City, South Dakota
J. SCOTT MORRIS of
J. Scott Morris, P.C. Attorneys for plaintiff Austin, Texas and appellant.
JOHN T. RICHTER of
South Dakota Department of Revenue
and Regulation Attorney for defendant Pierre, South Dakota and appellee.
* * * *
CONSIDERED ON BRIEFS ON OCTOBER 4, 2010 OPINION FILED 12/08/10 *2 #25546
ZINTER, Justice
[¶1.] TRM ATM Corporation (TRM) appeals a sales tax assessment on services it rendered to intermediaries involved in providing automatic teller machine (ATM) banking. The case requires us to consider whether concededly taxable services are subject to sales tax that must be paid by TRM, the provider of the services; or, whether the services are subject to use tax that must be paid by the intermediaries that use TRM’s services. If the services are subject to sales tax, we must also determine whether TRM is obligated to pay the tax on receipts that it claims were received only “temporarily” until they were “passed-through” to third parties. We conclude that the services are subject to sales tax. We also conclude that TRM must pay the tax on all of its gross receipts.
Facts and Procedural History This case was submitted on stipulated facts. TRM is an Oregon
corporation that owns, operates, sells, leases, and services ATMs in South Dakota. The South Dakota Department of Revenue and Regulation assessed sales tax on transaction processing and surcharge fees that TRM received from sponsor banks and core-data companies. Sponsor banks and core-data companies are intermediaries in an ATM transaction. They contract with an ATM cardholder’s depository bank to make remote ATM services available for the cardholder. In order to provide the ATMs at remote locations, the sponsor banks and core-data 1. It appears that the processing and surcharge fees represent a small portion of the fees a cardholder pays a depository bank in an ATM transaction.
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companies contract with TRM to provide and service the ATMs. The sponsor banks then pay TRM for its services. The parties stipulated that:
Pueblo Bank and Trust and First Financial Bank (“sponsor banks”), and core-data companies Star Processing, Inc., . . . and Money Access Service . . . (“core- data companies”), contract with TRM to provide and service ATMs.
The transactions from which TRM is paid its fees are between TRM, the sponsor bank, and the core-data companies.
TRM receives its contractual share of the surcharge and transactional fees through either Pueblo Bank and Trust or First Financial Bank for every transaction. The transaction processing fees and surcharge fees paid here are taxable services to someone; they are not exempt services.
(Emphasis added.) The Department adopted a hearing examiner’s decision concluding
that the sales tax assessment was correct because: “TRM clearly provides a service 2. TRM’s contract for services requires that sponsor banks pay transaction processing fees as follows:
[Sponsor bank] agrees to pay [TRM] for each transaction made on the ATM. A “transaction” shall mean any cash withdrawal made from a cardholder’s account. [Sponsor bank] shall pay [TRM] ten cents ($.10) [this amount may vary] per transaction. Payments for transactions will be disbursed monthly by [sponsor bank] to [TRM.]
TRM’s contract also requires that sponsor banks pay transaction surcharges as follows:
In the event [TRM] is legally permitted and chooses to impose a surcharge upon each transaction, [TRM] will receive, from said transaction proceeds, one hundred percent (100%) of the gross surcharge income collected per month. [Sponsor bank] agrees that surcharge revenue shall be remitted to [TRM] at the time transaction fees . . . are paid.
and it does so for the transaction fees and surcharge fees. TRM provides its services to the sponsor banks [and the] core data companies.” The circuit court affirmed. “Whether a statute imposes a tax under a given factual situation is a question of law and thus no deference is given to any conclusion reached by the Department of Revenue or the circuit court.” S.D. Dep’t. of Revenue v. Sanborn Tel. Coop., 455 N.W.2d 223, 225 (S.D. 1990).
Decision
[¶4.] A sales tax is imposed on the gross receipts of businesses engaged in rendering services.
There is hereby imposed a tax at the same rate as that imposed upon sales of tangible personal property in this state upon the gross receipts of any person from the engaging or continuing in the practice of any business in which a service is rendered. Any service as defined by § 10-45-4.1 shall be taxable, unless the service is specifically exempt from the provisions of this chapter.
SDCL 10-45-4. Taxable services include “all activities engaged in for other persons for a fee . . . which activities involve predominantly the performance of a service[.]” SDCL 10-45-4.1. A number of entities provide services in a chain of transactions
necessary for ATM banking. TRM concedes that its services are taxable. But TRM argues that it is not the entity in the chain that is responsible to pay tax on those services. TRM contends that instead of it paying sales tax, the sponsor banks and core-data companies should be assessed use tax for their use of TRM’s services. See SDCL 10-46-2.1 (“For the privilege of using services in South Dakota . . ., there is imposed on the person using the service an excise tax equal to four percent of the value of the services at the time they are rendered.”).
[¶6.]
TRM points out that it has no contractual relationship with the
cardholder or the cardholder’s depository bank, and TRM provides no service
directly to the ATM cardholder. TRM only provides services to the core-data
companies and sponsor banks that contract with the depository banks that
ultimately provide their cardholders with access to ATMs. TRM also points out that
the core-data companies calculate and disburse the fees earned by each
intermediary in an ATM transaction. The core-data companies then charge the
cardholder’s bank account. Based on these facts, TRM argues that its transactions
are not subject to sales tax under the predominant activity test applied in
Watertown Coop. Elev. Assoc. v. S.D. Dep’t. of Revenue
,
tax on intermediary transactions not involving an ultimate consumer. In both cases
we applied (expressly or implicitly) the predominant activity test, and we
emphasized that the focus should be on the transaction.
See Shopping News
, 2008
S.D. 34, ¶ 23,
collect use tax from the sponsor banks and core-data companies for their use of TRM’s services rather than collecting sales tax from TRM for its sale of those services. We conclude that the Department is not so constrained.
[¶8.]
Contrary to TRM’s argument,
Watertown Coop.
did not utilize the
predominant activity test to determine which tax applied. The issue was whether
crop production specialist services provided in connection with the sale of exempt
agronomy products were exempt from all taxation because the services were a part
of the exempt product sold.
Watertown Coop
.,
[¶10.]
TRM’s attempt to shift all tax liability to the user of its services fails to
recognize that sales tax is imposed “upon the gross receipts of any person from the
engaging or continuing in the practice of any business in which a service is
rendered
.” SDCL 10-45-4 (emphasis added). Those services include “all activities
engaged in
for other
persons[.]” SDCL 10-45-4.1 (emphasis added). And, “gross
receipts means the total amount or consideration, . . . for which services are
sold
. . .
whether
received
in money or otherwise[.]” SDCL 10-45-1.14 (emphasis added). On
the other hand, use tax “is imposed on the person
using
the service[.]” SDCL 10-46-
2.1 (emphasis added). “A use tax is a tax on the enjoyment of that which was
purchased.”
State v. Dorhout
,
subject to either sales or use taxation. “In South Dakota, the use tax was passed by our [L]egislature to complement the sales tax, not to displace it.” Dorhout , 513 N.W.2d at 397 (Henderson, J., specially concurring). Moreover, the Legislature has *8 provided an exemption from use tax if the service is subject to the sales tax. See SDCL 10-46-6. Therefore, we see no statutory impediment to the Department’s decision to first focus on the entity providing a service rather than the entity using the service. We agree with the hearing examiner, the Department, and the circuit court that TRM’s services are subject to sales tax under SDCL 10-45-4.
[¶13.] TRM, however, contends that it received “some” of the fees only “temporarily” until they were “passed through” to third-party merchants. TRM points out that it originally owned and operated over thirty ATMs in South Dakota. Prior to the audit period, TRM sold all but three ATMs to third-party merchants on whose premises the ATMs were located. After those sales, TRM became contractually obligated to pay the third-party merchants some of the fees. But “[i]n every instance where TRM sold an ATM to a third-party merchant, TRM maintained the contract with the sponsor bank or core-data company. TRM continued to collect its contractual transaction fees and surcharges.” Stipulated Fact # 18. Moreover, the amount paid to the third-party merchants was based on some contractual obligation, the specifics of which TRM has not disclosed on appeal. Nevertheless, TRM insists that it acted “as a mere pass through,” and therefore, the money it was obligated to pay the third-party merchants was not TRM’s “gross receipts.” But under the facts of this case, whether TRM had contractual obligations to the third-party merchants is irrelevant. SDCL 10-45-4 imposes the tax “upon gross receipts.” And gross receipts include the “total amount 4. During the audit period, TRM kept $243,813 in fees: $11,081 in 2004; $87,767 in 2005; $81,229 in 2006; and $54,736 in 2007.
or consideration . . . received . . . without any deduction” for any “cost” of the service or “any other expense” of the seller except for statutory deductions and exemptions that are not claimed here. See SDCL 10-45-1.14(1), (2). Because TRM makes no claim to a statutory deduction or exemption
for its costs associated with the third-party merchants, TRM argues that it “ performs no services that would entitle it to receive and keep these fees; they are received and passed on without consideration received . These amounts are not . . . ‘[g]ross [r]eceipts.’” (Emphasis added.) But the record does not include the contracts with the third-party merchants reflecting the extent to which TRM performed services for consideration. This is important because, as indicated in the stipulated facts, even when TRM sold an ATM to a third-party merchant, TRM contracted with the core-data companies and sponsor banks “to continue[ ] to collect its contractual transactional fees and surcharges.” And notwithstanding the purported “pass through” of some of the fees, TRM acknowledges that it performed a contractual service by disbursing the fees to the third-party merchants. As the hearing examiner and circuit court observed, that service, “[a]t a minimum, [included TRM’s provision of] some accounting or bookkeeping service and handling service for those [third-party] merchants.” We conclude that this record does not support TRM’s claim that it received no gross receipts in those cases where third- party merchants purchased ATMs.
5. For a list of the extensive statutory deductions and exemptions, see SDCL ch. 10-45.
[¶16.]
TRM finally argues that the money it paid third-party merchants is
not taxable because this was a pass-through arrangement that is “structurally”
similar to the arrangement approved in
Choice Hotels Int’l, Inc. v. S.D. Dep’t. of
Revenue and Regulation,
subject to sales taxation under SDCL 10-45-4. Because TRM has identified no *11 statutory deduction or exemption for the fees it collected for those services, the assessment is affirmed. GILBERTSON, Chief Justice, and KONENKAMP, MEIERHENRY,
and SEVERSON, Justices, concur.
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