VALLEY POWER SYSTEMS, Appellant, v. SOUTH DAKOTA DEPARTMENT OF REVENUE, Appellee.
#28168-a-SLZ
IN THE SUPREME COURT OF THE STATE OF SOUTH DAKOTA
12/13/17
2017 S.D. 84
THE HONORABLE MARK BARNETT Judge
APPEAL FROM THE CIRCUIT COURT OF THE SIXTH JUDICIAL CIRCUIT HUGHES COUNTY, SOUTH DAKOTA. JUSTIN L. BELL of May, Adam, Gerdes & Thompson, LLP Pierre, South Dakota Attorneys for appellant. STACY R. HEGGE South Dakota Department of Revenue Madison, South Dakota Attorneys for appellee. CONSIDERED ON BRIEFS ON NOVEMBER 6, 2017
ZINTER,
[¶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
[¶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
[¶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 dispositive, we do not address the question regarding classification under the SIC Manual.
Decision
[¶9.] An agency‘s findings of fact are reviewed for clear error.
[¶11.] Valley Power argues it was not subject to excise or use tax because it was not a contractor whose services involved the repair of a fixture to realty. To determine whether property is a fixture, we consider the property‘s: “(1) annexation to the realty; either actual or constructive; (2) its adaptability to the use and purpose for which the realty is used; and (3) the intention of the party making the annexation.” In re Tax Appeal of Logan & Assocs., 331 N.W.2d 281, 282 (S.D. 1983). The intent of the party is the “controlling criterion“; the “other tests derive their chief value as evidence of such intention.” Id. at 282-83.
[¶12.] Valley Power argues that MP36 power units4 are not fixtures. Valley Power focuses on the general intended purposes for which the units were designed. Peterson, Valley Power‘s manager, provided extensive testimony at the hearing regarding the design and purpose of such power units. He testified that the power units are designed to be mobile and that each unit is completely self-contained in a metal housing with eyelets to lift the unit and move it to any location where power is needed. He explained that power companies often move these units to different locations depending on usage and the need for additional power generation. He also explained that mobile power units are generally purchased and sold separately from the real property on which they sit. Ultimately, because BHP‘s units were designed to be mobile, Valley Power contends they cannot be fixtures within the meaning of
[¶13.] Whether property is a fixture is not based exclusively on the purposes
[¶14.] Valley Power, however, also contends that BHP did not intend the units to be stationary and permanent. Valley Power vigorously disputes the hearing officer‘s findings on how long the units had been there and whether BHP intended them to be permanent. Valley Power contends that we should review that matter de novo.
[¶15.] The hearing examiner made findings of fact on permanency and each of the Logan factors for evaluating whether property is a fixture. Crucial to the decision here, the hearing officer found that: the units were stationary and had been there since 1965; the units promoted the use of the realty; and BHP intended the units be permanent. Although these findings include the language in the Logan test, the findings are not legal conclusions concerning the fixture determination; they also do not determine the taxability of the transaction. Instead, they are factual determinations concerning the character of the property and BHP‘s actual use of it. Accordingly, they are findings of physical and historical fact entitled to deference under the clearly erroneous standard of review.5 See
[¶16.] Applying the clearly erroneous standard, we find no error in the hearing examiner‘s factual findings. Although the MP36 power units may not have been designed to be stationary and permanent, there was evidence showing that historically, BHP‘s power units were stationary and had been there since 1965. There was also evidence supporting the hearing examiner‘s findings that the units promoted the use of the realty as an electric power plant and that BHP intended the units to be permanent.
[¶17.] Considering those findings, we conclude that the power units were fixtures. Rushmore Shadows is an analogous case. There, a campground used fourteen recreational-park trailers as cabins for lodging. Rushmore Shadows, 2013 S.D. 73, ¶ 2, 838 N.W.2d at 815. The trailers were designed to be mobile: they “were built on a single chassis with wheels” and they were not physically attached to the ground. Id. ¶ 3. But half of the trailers were never registered as vehicles, and none of them had been moved since they
[¶18.] We concluded that the trailers were taxable as annexations to realty under the Logan tests. First, despite their mobile design, the trailers had never been moved and were “constructively attached to the real estate.” Id. ¶ 13, 838 N.W.2d at 818. We noted that “[p]roperty need not be actually attached to the real estate” and that “[c]onstructive attachment also indicates that a party intended to permanently affix the property to the real estate.” Id. ¶ 17, 838 N.W.2d at 819. Second, the trailers were adapted to promote the use of the realty as a campground. Id. ¶ 14, 838 N.W.2d at 818. Third, the length of time the trailers “remained in the same location for use as places of lodging” was “a strong indication that Rushmore Shadows intended to affix the cabins to the real estate for the economic life of the trailers.” Id. ¶ 17, 838 N.W.2d at 819.
[¶19.] This case is not legally different. Each power unit weighed 110,000 pounds; sat in a fenced enclosure where it was connected to a fuel source and the electrical transmission grid; and each would require a crane for removal. Cf. Brink, 472 N.W.2d at 499 (concluding that the heavy electrical equipment used in a substation, some of which were not bolted to the ground, were fixtures). There was also evidence that the power units had been installed in 1965, that they had not been moved in the last twenty years, and that a BHP employee indicated the units were stationary. Similar to the trailers in Rushmore Shadows, the fact that the units had remained in the same location for nearly fifty years is a strong indication that BHP intended them to be permanently annexed “to the real estate for the economic life of the” power units. See 2013 S.D. 73, ¶ 17, 838 N.W.2d at 819. Finally, the evidence indicated that the units were adapted to the use and purpose for which the real estate was used as an electrical power plant.
[¶20.] We acknowledge Valley Power‘s point regarding the use for which the power units were designed. But intent is the controlling criterion, and “[i]ntent is ‘deduced from the circumstances of a particular case,’ with consideration given to all the circumstances.” Id. ¶ 12, 838 N.W.2d at 818 (quoting Logan & Assocs., 331 N.W.2d at 283). Here, although the power units were designed to be generally mobile, BHP‘s actual use reflected its intention to constructively annex them to the land for purposes of providing supplemental power at its power plant. Accordingly, the Department did not err in concluding that Valley Power‘s services constituted a repair of a fixture to realty, thereby subjecting Valley Power to the alternate contractor‘s excise tax under
[¶21.] Valley Power was also subject to use tax. For the reasons just explained, Valley Power was a “contractor . . . as defined in chapters 10-46A and 10-46B.” Further, there is no dispute that Valley Power used “tangible personal property [the exhaust manifolds] . . . in the performance of [its] contract.” See
[¶22.] Affirmed.
[¶23.] GILBERTSON, Chief Justice, and SEVERSON, KERN, and JENSEN, Justices, concur.
Notes
Prime contractors and subcontractors subject to the tax imposed by
§ 10-46B-1 include without limitation those enumerated in the Standard Industrial Classification Manual of 1987 as prepared by the Statistical Policy Division of the Office of Management and Budget, Office of the President: construction (division c). If a contractor engages in services not specifically listed in division c of the Standard Industrial Classification Manual, 1987, then the services must entail the construction, building, installation, or repair of a fixture to realty before gross receipts are subject to the tax imposed by§ 10-46B-1 .