Puetz v. S.D. Dep't of Revenue , 871 N.W.2d 632 ( 2015 )

#27282-rev & rem-JMK
2015 S.D. 82
IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
****
PUETZ CORPORATION a/k/a
PUETZ CONSTRUCTION, INC., Plaintiff and Appellee,
v.
SOUTH DAKOTA DEPARTMENT
OF REVENUE, Defendant and Appellant.
****
APPEAL FROM THE CIRCUIT COURT OF
THE FIRST JUDICIAL CIRCUIT
DAVISON COUNTY, SOUTH DAKOTA
****
THE HONORABLE PATRICK SMITH
Judge
****
TIMOTHY G. BOTTUM of
Morgan Theeler LLP
Mitchell, South Dakota Attorneys for plaintiff and
appellee.
ROSA YAEGER of
South Dakota Department
of Revenue
Pierre, South Dakota Attorneys for defendant and
appellant.
****
CONSIDERED ON BRIEFS
ON AUGUST 31, 2015
OPINION FILED 11/04/15
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KERN, Justice
[¶1.] After an audit of the taxpayer’s construction management at-risk
services, the South Dakota Department of Revenue issued a certificate of
assessment against the taxpayer’s gross receipts because it determined that the
taxpayer’s services were subject to contractor’s excise tax under SDCL 10-46A-1.
The taxpayer challenged the assessment and requested a hearing. The taxpayer
asserted that its services were not subject to excise tax because it was not a prime
contractor engaged in a realty improvement contract when it provided construction
management at-risk services. Ultimately, the circuit court reversed the
Department’s certificate of assessment, ruling that the taxpayer’s services were not
subject to a contractor’s excise tax under SDCL 10-46A-1. The Department appeals.
We reverse the circuit court’s decision and remand with direction that the circuit
court reinstate the Department’s final decision upholding the certificate of
assessment.
BACKGROUND
[¶2.] In September 2012, the South Dakota Department of Revenue
(Department) commenced an audit on Puetz Construction, Inc.’s (Puetz Inc.) excise
tax and sales tax licenses for tax periods June 2009 through June 2012. Puetz Inc.
is a South Dakota Corporation located in Mitchell, South Dakota. It engages in
multiple construction-related services for both private and public entities. At issue
here is whether Puetz Inc.’s construction management at-risk services provided to
public and non-profit entities are subject to a contractor’s excise tax under SDCL
10-46A-1. An excise tax is imposed under SDCL 10-46A-1 “upon the gross receipts
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of all prime contractors engaged in realty improvement contracts, at the rate of two
percent.” It is undisputed that Puetz Inc. did not remit excise tax on the gross
receipts it received from its construction management at-risk services provided to
public and non-profit entities.
[¶3.] Puetz Inc. submits that a construction management at-risk service
involves a contract with a public entity whereby the construction manager agrees to
provide a completed project for the public entity at a specified cost and by a
specified date. The purpose of Puetz Inc.’s construction management at-risk service
is to “streamline” the construction “process and better protect government entities
from the dire effects of cost overruns, construction delays and unsatisfactory
work[.]” Further, with a construction management at-risk service, “the risk,
uncertainty and burden of managing construction projects is removed from city or
county officials and transferred to an expert in the construction field.”
[¶4.] The audit began with a meeting between Auditor Joseph Thury and
Puetz Inc.’s chief financial officer Peggy Nolz. Nolz had participated in past audits
by the Department and informed Auditor Thury that the Department had not
previously imposed excise tax on construction management at-risk services
although the issue had been discussed. Auditor Thury examined the language of
SDCL chapter 10-46A, a document prepared by the Department entitled
“Contractor’s Excise Tax Guide,” and sample construction management at-risk
contracts provided by Puetz Inc. From his review of this information, he
determined that Puetz Inc.’s actions in the performance of its construction
management at-risk contracts “more clearly align with that of a Prime Contractor
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than that of a Construction Manager.” Thury therefore concluded that the gross
receipts from Puetz Inc.’s construction management at-risk services were subject to
excise tax.
[¶5.] As a result of the audit, the Department issued Puetz Inc. a certificate
of assessment for $43,020.63, which included $31,879.83 in excise tax and
$11,140.80 in interest. Puetz Inc. requested an administrative hearing to challenge
the assessment. At the administrative hearing, Auditor Thury testified that in
addition to talking to Nolz, he and his supervisor examined the sample contracts
and “determined that these construction manager at risk fees will be subject to the
prime contractor’s excise tax[.]” Puetz Inc. received money from the public entity to
pay “the contractors working underneath [Puetz Inc.], [and] had also reported excise
tax on all other fees or all other amounts received from [the public entity.]”
[¶6.] In response, Puetz Inc. asserted that it merely acted as a pass-through
for the public entities’ funds when it paid the subcontractors for work completed. It
further claimed that although it paid the contractor’s excise tax due on the projects,
it did so as part of its construction management at-risk services to the public
entities. According to Puetz Inc., “all the excise tax is being paid on the actual
construction by the contractors,” and, therefore, an excise tax should not be imposed
on Puetz Inc.’s services. Puetz Inc. also emphasized that it did not act in the
capacity of a prime contractor engaged in a realty improvement contract. Rather, it
provided management and inspection services “to ensure the timely and efficient
delivery of public projects[.]” Puetz Inc. directed the hearing examiner to SDCL
chapter 5-18B, which defines and sets forth the duties related to differing
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construction delivery methods. In support of its position, Puetz Inc. also submitted
two official Attorney General opinions and one email from the Attorney General’s
Office as evidence that a construction management at-risk delivery method
specifically prohibits the construction manager from acting as a prime contractor
when the construction manager is also the architect on a public improvement
project. Under the sample contracts, Puetz Inc. is listed as the architect.
[¶7.] During the hearing, Puetz Inc. also presented testimony from Wayne
and Mark Puetz. Wayne and Mark explained that the construction manager
purchases no materials and performs no actual construction work on the project.
They asserted that the prime contractors receive the bids, provide the realty
improvement, and engage in the actual construction service contracts. The
construction manager, by contrast, supervises and manages the various prime
contractors, schedules work, and ensures satisfactory completion of the project at a
specified cost and by a specified date.
[¶8.] After the hearing, the examiner issued a written proposed decision
holding “that Puetz clearly enters into realty improvement contracts or contracts for
construction services.” The hearing examiner reasoned that Puetz Inc. acted in the
capacity of a prime contractor because it managed the subcontractors, ensured
satisfactory completion of the construction projects, and assumed complete
responsibility for the entire construction project. The hearing examiner relied on
the Standard Industrial Classification Manual (SIC Manual). The SIC Manual is
implicated in this case under SDCL 10-46A-2, which statute provides that “[p]rime
contractors . . . subject to the tax imposed by § 10-46A-1 include without limitation
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those enumerated in the Standard Industrial Classification Manual of 1987 . . .
construction (division c).”∗ According to the hearing examiner, Puetz Inc.’s
construction management at-risk service is properly classified in the SIC Manual
(division c) Industry Group 1542, “General Contractors-Nonresidential Buildings,
Other Than Industrial Buildings and Warehouses.”
[¶9.] The hearing examiner rejected Puetz Inc.’s argument that SDCL
chapter 5-18B and the Attorney General opinions prevent the imposition of excise
tax on construction management at-risk services. It found that the Legislature
intended that contractor’s excise tax be assessed because the Legislature referred to
excise tax in SDCL 5-18B-7 and SDCL 5-18B-17. Furthermore, the hearing
examiner determined that a chapter regulating a business practice (chapter 5-18B)
does not establish taxability of a business transaction within the tax code (chapter
10-46A) and cited Mauch v. South Dakota Department of Revenue and Regulation,
2007 S.D. 90, 738 N.W.2d 537, for this proposition.
∗ In Mauch v. South Dakota Department of Revenue and Regulation, we
recognized that:
The Standard Industrial Classification (SIC) is a system for
classifying establishments by type of economic activity. Its
purposes are: (1) to facilitate the collection, tabulation,
presentation, and analysis of data relating to establishments,
and (2) to promote uniformity and comparability in the
presentation of statistical data describing the economy. The SIC
is used by agencies of the United States Government that collect
or publish data by industry. It is also widely used by state
agencies, trade association, private businesses, and other
organizations.
2007 S.D. 90, ¶ 12 n.2, 738 N.W.2d 537, 541 n.2 (quoting the SIC Manual,
Appendix B: “Principles and Procedures for the Review of the SIC,” § A, p.
699).
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[¶10.] The Department adopted the hearing examiner’s proposed decision in
full. Puetz Inc. appealed the decision to the circuit court. After considering the
parties’ written briefs and oral arguments, the circuit court issued a memorandum
decision, findings of fact and conclusions of law, and an order reversing the hearing
examiner’s decision. The circuit court held that the hearing examiner’s findings of
fact were clearly erroneous and “inconsistent with current statutory construction in
South Dakota and the record on this appeal[.]” The court relied on SDCL 5-18A-
1(6) for the definition of a construction manager and SDCL 5-18B-15 for the fact
that Puetz Inc. was prohibited from acting as both a construction manager and an
architect on a public improvement.
[¶11.] The court also held that the hearing examiner erred when it concluded
that Puetz Inc.’s construction management at-risk services fit within the SIC
Manual (division c), specifically Industry Group 1542. According to the court, the
plain meaning of the classifications within the SIC Manual (division c) do not
include construction management at-risk services. It noted that the SIC Manual
(division c) does not specifically mention the phrase “construction manager at-risk”
or identify “an intermediate service provider to the prime contractors” as a building
construction general contractor. The court further emphasized that “the SIC
Manual was written in 1987 and does not contain any construction manager-at-risk
language or provisions.” Ultimately, the court held that Puetz Inc. was not acting
as a prime contractor engaged in realty improvement contracts when it provided
construction management at-risk services to public and non-profit entities.
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[¶12.] On November 12, 2014, the circuit court issued an order reversing the
hearing examiner’s decision “in all respects[.]” The Department appeals asserting
that the circuit court erred when it reversed the Department’s final decision
adopting the hearing examiner’s decision in full.
STANDARD OF REVIEW
[¶13.] Our review of this administrative appeal is governed by SDCL 1-26-36.
Manuel v. Toner Plus, Inc., 2012 S.D. 47, ¶ 8, 815 N.W.2d 668, 670. “The court shall
give great weight to the findings made and inferences drawn by an agency on
questions of fact.” SDCL 1-26-36. “When, however, the issue is a question of law,
we review the decisions of both the administrative agency and the circuit court de
novo.” Burke v. Butte Cty., 2002 S.D. 17, ¶ 8, 640 N.W.2d 473, 477 (emphasis
omitted). Furthermore, we review questions of statutory interpretation de novo.
Nodak Mut. Ins. Co. v. McDowell, 2010 S.D. 54, ¶ 7, 784 N.W.2d 483, 485. A statute
that imposes a tax is “to be construed liberally in favor of the taxpayer and strictly
against the taxing body.” Robinson & Muenster Assocs., Inc. v. S.D. Dep’t of
Revenue, 1999 S.D. 132, ¶ 7, 601 N.W.2d 610, 612.
ANALYSIS
[¶14.] The Department asserts that “[t]he law in this matter is clear, and, in
this case, the Department correctly assessed contractor’s excise tax” on Puetz Inc.’s
construction management at-risk services under SDCL 10-46A-1. A prime
contractor is defined in SDCL 10-46A-2.2 as “a person entering into a realty
improvement contract or a contract for construction services as enumerated in
division c of the Standard Industrial Classification Manual, 1987[.]” The
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Department acknowledges that the phrase “realty improvement contract” is not
defined by statute. However, the Department contends that Puetz Inc. entered into
a contract for realty improvement because Puetz Inc. agreed to provide the public
entity a completed building—an improvement to realty. The Department further
contends that an excise tax under SDCL 10-46A-1 is implicated because Puetz Inc.
entered into a contract for construction services listed in the SIC Manual (division
c).
[¶15.] Puetz Inc., on the other hand, argues that there is an ambiguity
whether SDCL 10-46A-1 applies because “South Dakota’s excise tax regime was
enacted prior to the creation of the construction manager at risk entity.” Puetz Inc.
also claims that the definition of “prime contractor” is ambiguous because it is
unclear whether the phrase “as enumerated in division c of the [SIC] Manual”
applies to both “a person entering into a realty improvement contract” and “a
contract for construction services[.]” In light of these alleged ambiguities and the
general rule that statutes imposing tax are construed liberally in favor of the
taxpayer, Puetz Inc. asserts that the circuit court correctly determined that Puetz
Inc.’s construction management at-risk services are not subject to excise tax under
SDCL 10-46A-1. See Nat’l Food Corp. v. Aurora Cty. Bd. of Comm’rs, 537 N.W.2d
564, 566 (S.D. 1995) (explaining that statutes imposing tax are construed liberally
in favor of the tax payer and strictly against the taxing entity).
[¶16.] We begin our interpretation of a statute with its plain language and
structure. State v. Clark, 2011 S.D. 20, ¶ 10, 798 N.W.2d 160, 164.
The purpose of statutory construction is to discover the true
intention of the law, which is to be ascertained primarily from
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the language expressed in the statute. The intent of a statute is
determined from what the Legislature said, rather than what
the courts think it should have said, and the court must confine
itself to the language used. Words and phrases in a statute
must be given their plain meaning and effect. When the
language in a statute is clear, certain, and unambiguous, there
is no reason for construction, and this Court’s only function is to
declare the meaning of the statute as clearly expressed.
Id. ¶ 5 (quoting In re Guardianship of S.M.N., T.D.N., and T.L.N., 2010 S.D. 31, ¶
9, 781 N.W.2d 213, 271-18).
[¶17.] Here, SDCL 10-46A-1 “impose[s] an excise tax upon the gross receipts
of all prime contractors engaged in realty improvement contracts, at the rate of two
percent.” A “prime contractor” is defined under SDCL 10-46A-2.2 as “a person
entering into a realty improvement contract or a contract for construction services
as enumerated in division c of the Standard Industrial Classification Manual,
1987[.]” If not specifically listed in the SIC Manual (division c), SDCL 10-46A-2.2
further provides that “the services must entail the construction, building,
installation, or repair of a fixture to realty before the gross receipts are subject to
the tax imposed by § 10-46A-1.”
[¶18.] From our review of these statutes, there is no ambiguity. An excise tax
under SDCL 10-46A-1 applies if (1) a construction manager is a prime contractor
engaged in a realty improvement contract, or (2) Puetz Inc.’s construction
management at-risk contract is for construction services enumerated in the SIC
Manual (division c). Our decision in AT&T Corporation v. South Dakota
Department of Revenue, supports this conclusion. See 2002 S.D. 25, ¶ 8, 640 N.W.2d
752, 754-55. There we interpreted SDCL 10-46A-1, -2, and -2.2 to mean the
Legislature intended “that the tax appl[y] to certain industry contracts as well as to
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contracts for reality improvements.” AT&T Corp., 2002 S.D. 25, ¶ 8, 640 N.W.2d at
755 (emphasis added). We explained that “SDCL 10-46A-2 declares that excise tax
shall be levied on all contractors, prime and sub-, enumerated in division c
(construction) of the SIC Manual” and SDCL 10-46A-2.2 imposes the tax on “any
contractor not enumerated in division c, whose services entail the construction,
building, installation, or repair of a fixture to realty.” Id. ¶ 9. Thus, “excise taxes”
apply under SDCL 10-46A-1 “not just to ‘prime contractors engaged in realty
improvement contracts,’ but also to those who ‘contract for construction services as
enumerated in division c of the Standard Industrial Classification Manual.’” Id. ¶ 8
(quoting SDCL 10-46A-1; SDCL 10-46A-2.2).
[¶19.] We, therefore, examine whether Puetz Inc.’s construction management
at-risk services fall under the SIC Manual (division c). “If it does, there is no need
to decide whether the work also constitutes an improvement to realty.” See id. ¶ 10.
The SIC Manual (division c) included within the record comprises three pages. It
defines “The Division as a Whole” as: “This division includes establishments
primarily engaged in construction. The term construction includes new work,
additions, alterations, reconstruction, installations, and repairs. Construction
activities are generally administered or managed from a relatively fixed place of
business, but the actual construction work is performed at one or more different
sites.” Although division c describes “[t]hree broad types of construction activity[,]”
only one is implicated here—“(1) building construction by general contractors or by
operative builders[.]” In regard to this activity, the SIC Manual (division c)
provides that “[g]eneral contractors usually assume responsibility for the entire
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construction project, but may subcontract to others all of the actual construction
work or those portions of the project that require special skills or equipment.
General contractors thus may or may not have construction workers on their
payroll.”
[¶20.] With these concepts in mind, we review the scope of Puetz Inc.’s
services. It is undisputed that, as the construction manager, Puetz Inc. did not
assume the role of a traditional general contractor. It did not perform actual
construction work on the project but instead managed the construction project on a
contract or fee basis. However, the SIC Manual (division c) contemplates an
activity where “all of the actual construction work” is subcontracted to others and
the contractor “may or may not have workers on their payroll.” (Emphasis added.)
Indeed, the introductory text to the SIC Manual (division c) excludes
“[e]stablishments primarily engaged in managing construction projects for others on
a contract or fee basis, but assuming no responsibility for completion of the
construction project[.]” The pivotal inquiry, therefore, is whether Puetz Inc.
“assume[d] all responsibility for the entire construction project[.]” (Emphasis added.)
[¶21.] From our review of the record, Puetz Inc. assumed all responsibility for
the entire construction project as part of its construction management at-risk
services. In its brief to this Court, Puetz Inc. explained that the construction
manager “agrees to provide services that include completion of a specific project for
the government entity at a specified cost to be completed by a specified date.”
Further, the construction manager “requests bids from Prime Contractors for the
various aspects of the project, handles the scheduling and management of the
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various Prime Contractors and ensures the timely and satisfactory completion of
the project.” Therefore, although Puetz Inc. does not perform actual construction on
the project, Puetz Inc.’s construction management at-risk contract is “for
construction services as enumerated in division c of the Standard Industrial
Classification Manual” and is, therefore, properly subject to excise tax under SDCL
10-46A-1.
[¶22.] Nonetheless, Puetz Inc. claims that it cannot be subject to excise tax
under SDCL 10-46A-1 because “it would be illegal” under SDCL 5-18B-15 for Puetz
Inc. to be the prime contractor on a project when it also acts in the role of an
architect. SDCL 5-18B-15 provides in relevant part that “[n]o person, firm, or
corporation may act as architect or engineer and also contractor on any public
improvement project if the amount to be expended exceeds one hundred thousand
dollars.” Puetz Inc. further directs this Court to several South Dakota Attorney
General opinions in which the construction management at-risk construction
method was examined and the Attorney General opined that a construction
manager is prohibited from performing actual construction work as a contractor
when also acting as an architect.
[¶23.] First, SDCL chapter 5-18B regulates the rights and actions of parties
related to the procurement of public contracts, not whether a certain service is
subject to taxation. Second, simply because Puetz Inc. cannot be a contractor and
an architect under chapter 5-18B does not mean that the Department cannot
impose excise tax on Puetz Inc.’s construction management at-risk services. On the
contrary, tax is imposed here because SDCL 10-46A-1 embraces Puetz Inc.’s
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construction management at-risk services. Puetz Inc. does not perform the actual
construction but the “establishment” assumes all responsibility for the entire
construction project. See SDCL 10-46A-2.2; The SIC Manual (division c).
CONCLUSION
[¶24.] Puetz Inc., in its capacity as a construction manager, entered into a
contract with a public entity to guarantee a satisfactorily completed public
improvement project by a specific date for a specific cost. This service is subject to
excise tax under SDCL 10-46A-1. The circuit court erred when it reversed the
hearing examiner’s decision “in all respects[.]” We reverse the circuit court’s
decision and remand with direction that the circuit court reinstate the
Department’s final decision upholding the certificate of assessment.
[¶25.] GILBERTSON, Chief Justice, and ZINTER, SEVERSON, and
WILBUR, Justices, concur.
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