TRM ATM Corp. v. South Dakota Department of Revenue & Regulation ( 2010 )

#25546-a-SLZ
2010 S.D. 90IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
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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
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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
[¶2.] 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. 1 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. 2 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.)
[¶3.] 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.
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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.
[¶5.] 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.”).
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[¶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, 2001 S.D. 56, 627 N.W.2d
167, and Sioux Falls Shopping News, Inc. v. Dep’t. of Revenue and Regulation, 2008
S.D. 34, 749 N.W.2d 522. 3
[¶7.] Watertown Coop. and Shopping News involved the imposition of use
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, 749 N.W.2d at 527; Watertown Coop., 2001 S.D. 56, ¶ 12, 627 N.W.2d
at 172. TRM argues that its services are not the predominant activity in an ATM
transaction. TRM further argues that because use tax was imposed on
intermediaries in Watertown Coop. and Shopping News, the Department must
3. The predominant activity test was not specifically mentioned in Shopping
News. Instead, we cited Coop. Agronomy Serv. v. S.D. Dep’t. of Revenue, 2003
S.D. 104, ¶ 8, 668 N.W.2d 718, 721, which applies the same test.
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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., 2001 S.D. 56, ¶ 11, 627 N.W.2d at
171-72. Similarly, Shopping News did not utilize the predominant activity test “to
determine whether use tax or sales tax applied to the transaction.” Appellant’s Br.
7. The type of applicable tax – sales or use – was not at issue. The issue was
“[w]hether the distribution and delivery services [used by an advertiser were]
exempt from the use tax.” Shopping News, 2008 S.D. 34, ¶ 17, 749 N.W.2d at 525.
[¶9.] Furthermore, the fact that use tax was ultimately imposed on
intermediaries in both cases was not important to this Court’s reasoning. In fact,
we expressly noted that “the focus belongs on the transaction, not the character of
the participants.” Id. ¶ 23, 749 N.W.2d at 527. Therefore, Shopping News and
Watertown Coop. do not stand for the proposition that intermediary transactions
not involving a final consumer are only subject to use tax. Both cases merely stand
for the proposition that in analyzing the taxability of a service, the dispositive
inquiry focuses on the predominant activity in the transaction between those
parties who exchange consideration for the service. In this case, TRM’s provision of
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ATM services is the predominant activity in its transactions with the sponsor banks
and core-data companies.
[¶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, 513 N.W.2d 390, 392 (S.D. 1994). Therefore, use tax
applies if an entity has paid another entity for the use of services. But sales tax
applies if an entity has received payment from another entity for services rendered.
[¶11.] In this case, TRM “rendered” ATM services “for other persons,” and
TRM “receive[d]” consideration for those services. See SDCL §§ 10-45-4, -4.1,-1.14.
Because TRM was the party rendering services to others for money, its services fall
within the definition of “service” under the sales tax statutes, SDCL §§ 10-45-4 and
10-45-4.1.
[¶12.] TRM’s argument also fails to recognize that a transaction may be
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
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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 4 to the third-party merchants was based on
some contractual obligation, the specifics of which TRM has not disclosed on appeal.
[¶14.] 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.
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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. 5 See SDCL 10-45-1.14(1), (2).
[¶15.] 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.
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[¶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, 2006 S.D. 25, 711 N.W.2d 926. In Choice Hotels, a
franchisor mandated that its franchisee hotels participate in a commission program.
When a reservation was booked through a travel agent, the franchisor collected the
travel agent’s commission from the franchisee. The Department claimed the
franchisor’s collection of the travel agent’s commissions was subject to sales tax.
The franchisor claimed a statutory travel agent commission exemption, arguing
that it was merely transferring the exempt commission from the franchisee to the
travel agent. The Department ruled that the tax exemption applied only if the
franchisee paid the travel agent commission directly to the travel agents. This
Court reversed, noting that “[t]o interpret the exemption [that narrowly]
contravenes the legislative intent that travel agent commissions be exempt from
sales tax.” Id. ¶ 14, 711 N.W.2d at 929. We concluded “it [was] unreasonable to
hold that solely because the commissions [were] collected by the franchisor from the
franchisees and then paid to the travel agents they [were] no longer exempt from
tax.” Id. ¶ 15, 711 N.W.2d at 930 (emphasis added). But in this case TRM claims
no statutory exemption. And, as previously noted, the tax is imposed on all gross
receipts except for statutory exemptions and deductions. Therefore, Choice Hotels is
substantively inapplicable.
[¶17.] TRM’s services provided to sponsor banks and core-data companies are
subject to sales taxation under SDCL 10-45-4. Because TRM has identified no
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statutory deduction or exemption for the fees it collected for those services, the
assessment is affirmed.
[¶18.] GILBERTSON, Chief Justice, and KONENKAMP, MEIERHENRY,
and SEVERSON, Justices, concur.
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