McLane Western, Inc. v. S.D. Department of Revenue

#30217-a-SPM
2024 S.D. 1

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

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MCLANE WESTERN INC.,
MCLANE MINNESOTA, INC., Appellants,

v.

SOUTH DAKOTA DEPARTMENT
OF REVENUE, Appellee.

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APPEAL FROM THE CIRCUIT COURT OF
THE SIXTH JUDICIAL CIRCUIT
HUGHES COUNTY, SOUTH DAKOTA

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THE HONORABLE CHRISTINA L. KLINGER
Judge

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AARON T. GALLOWAY of
Lynn Jackson Shultz & Lebrun, P.C.
Rapid City, South Dakota

JOSEY M. BLARE of
Lynn Jackson Shultz & Lebrun, P.C.
Sioux Falls, South Dakota Attorneys for appellants.

KIRSTEN E. JASPER
Special Assistant Attorney General
Pierre, South Dakota Attorneys for appellee.

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CONSIDERED ON BRIEFS
OCTOBER 3, 2023
OPINION FILED 01/10/24
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MYREN, Justice

[¶1.] McLane Western, Inc. and McLane Minnesota, Inc. (collectively

McLane) made numerous refund requests totaling $537,522.07 to the South Dakota

Department of Revenue. The Department denied McLane’s refund requests, and

McLane subsequently requested a contested case hearing before the South Dakota

Office of Hearing Examiners (OHE). OHE granted the Department’s motion for

summary judgment in its proposed decision. The Department adopted the proposed

decision and denied McLane’s refund requests. McLane appealed to the circuit

court, which issued a memorandum decision and order affirming the Department’s

denial of McLane’s refund requests. McLane appeals.

Factual and Procedural Background

[¶2.] McLane is a South Dakota-licensed wholesaler of tobacco products.

McLane purchased tobacco products, known as Other Tobacco Products (OTP) 1,

from U.S. Smokeless Tobacco Brands, Inc. (UST Sales), also a South Dakota-

licensed wholesaler of tobacco products. UST Sales did not manufacture the

products it sold to McLane. It purchased the OTP from its affiliate, U.S. Smokeless

Tobacco Manufacturing Company, LLC (UST Manufacturing), a federally licensed

tobacco manufacturer. 2

1. OTP includes “cigars, snuff, chewing tobacco, and any other products made
up or composed of tobacco in whole or in part, except cigarettes.” SDCL 10-
50-1(8).

2. Prior to 1990, McLane purchased the OTP from a federally licensed
manufacturer known as UST Co. In 1990, UST Co. formed two subsidiaries
(UST Sales and UST Manufacturing). The company’s reorganization caused
McLane to purchase the OTP from a licensed wholesaler. In May 2014, UST
(continued . . .)
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[¶3.] After purchasing the OTP from UST Sales, McLane brought the

tobacco product into South Dakota. 3 Accordingly, McLane paid South Dakota’s 35%

tobacco tax imposed in SDCL 10-50-61 which provides:

[T]here is imposed, whether or not a sale occurs, a tax upon all
tobacco products in this state and upon any person engaged in
business as a licensed distributor or licensed wholesaler thereof,
at the rate of thirty-five percent of the wholesale purchase price
of such tobacco products. Such tax shall be imposed at the time
the distributor or wholesaler brings or causes to be brought into
this state tobacco products for sale; makes, manufactures, or
fabricates tobacco products in this state for sale in this state; or
ships or transports tobacco products to dealers in this state to be
sold by those dealers. For the purposes of this chapter,
wholesale purchase price is the price for which a manufacturer
sells tobacco products to a licensed distributor or licensed
wholesaler exclusive of any discount or other reduction. Any
licensed distributor or licensed wholesaler who has paid tax
pursuant to this section and subsequently sells the tobacco
products to another licensed distributor or licensed wholesaler
for resale, or sells the tobacco products outside of this state,
shall receive a credit for the tax paid pursuant to this section on
such tobacco products.

(Emphases added.)

[¶4.] From July 2011 until May 2014, McLane calculated the tobacco

tax it owed by using the amount it paid to UST Sales for the OTP as the tax

base. The amount McLane paid UST Sales for the OTP was more than what

UST Sales paid UST Manufacturing for the same OTP. The price paid by

________________________
(. . . continued)
Sales merged with UST Manufacturing and McLane resumed purchasing
OTP directly from a federally licensed manufacturer.

3. The parties stipulated that McLane brought the OTP into South Dakota.
This is consequential because the tobacco tax is imposed at the time the
tobacco is brought into South Dakota.

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McLane presumably included the operating costs of UST Sales and any profit

margin.

[¶5.] From August 13, 2014, until February 10, 2016, McLane submitted

numerous refund requests to the Department regarding the tax payments it made

throughout a 35-month reporting period. 4 McLane opined that it had overpaid its

tax obligation by $537,522.07. McLane reported that it had paid a 35% tax to South

Dakota based on the price it paid to UST Sales for the OTP. McLane argued that

its tax obligation should have been based on the price UST Sales (a “licensed

wholesaler” under the statute) paid to UST Manufacturing (a “manufacturer” under

the statute). The Department initially granted McLane’s refund request for the

July 2011 reporting period and issued a $20,822.67 credit. The Department

subsequently placed the refund credit “on hold” to further research the issue. The

parties continued to exchange correspondence from September 19, 2014, until April

3, 2019, when the Department issued its final letter denying McLane’s refund

requests.

[¶6.] McLane requested a contested case hearing before OHE. OHE

proposed a decision granting the Department’s motion for summary judgment and

denying McLane’s refund requests. The Department adopted the proposed decision

in its final decision and order. McLane appealed the Department’s final decision

and order to the circuit court.

4. The parties have stipulated that the reporting period at issue is recognized as
being from July 2011 until May 2014.

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[¶7.] The circuit court issued a memorandum opinion affirming the

Department’s final decision and order. It held that the advance tax obligation

imposed by SDCL 10-50-61 was triggered when McLane caused the OTP to be

brought into South Dakota after purchasing the tobacco product from UST Sales. It

reasoned that under the circumstances, a strict reading of SDCL 10-50-61 would

cause an absurd result because it would permit McLane to bring the OTP into

South Dakota without being subjected to the state’s tobacco tax because McLane did

not purchase the OTP directly from a tobacco manufacturer. Based on this premise,

the circuit court concluded that it must look beyond the statute’s language to avoid

that absurd result. Ultimately, the circuit court concluded that the tax was

properly calculated based on the OTP purchase price McLane paid to UST Sales.

Standard of Review

[¶8.] This case involves the review of an interpretation of a statute as

applied to stipulated facts. Thus, “the application of a legal standard to those

[undisputed] facts is a question of law reviewed de novo.” State v. Doap Deng

Chuol, 2014 S.D. 33, ¶ 19, 849 N.W.2d 255, 261 (alteration in original) (quoting

State v. Lamont, 2001 S.D. 92, ¶ 12, 631 N.W.2d 603, 607). Under this standard,

“no deference is given to the circuit court’s conclusions of law.” Good Lance v. Black

Hills Dialysis, LLC, 2015 S.D. 83, ¶ 9, 871 N.W.2d 639, 643 (citing Stehly v. Davison

Cnty., 2011 S.D. 49, ¶ 7, 802 N.W.2d 897, 899).

Decision

[¶9.] In 1995, the South Dakota Legislature imposed a 10% tax on all

tobacco products brought into the state. SDCL 10-50-61. The tax is calculated

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based on the “wholesale purchase price,” which is “the price for which a

manufacturer sells tobacco products to a licensed distributor or licensed wholesaler

exclusive of any discount or other reduction.” Id. Furthermore, the tax is imposed

“at the time the distributor or wholesaler brings or causes to be brought into this

state tobacco products for sale; makes, manufactures, or fabricates tobacco products

in this state for sale in this state; or ships or transports tobacco products to dealers

in this state to be sold by those dealers.” Id. In 2006, the voters of South Dakota

approved Initiative 2, which increased the taxation rate in SDCL 10-50-61 to 35%

beginning January 1, 2007.

[¶10.] The parties stipulated that UST Manufacturing is a federally licensed

tobacco manufacturer and that UST Sales and McLane are both South Dakota-

licensed wholesalers of OTP. As South Dakota-licensed wholesalers, UST Sales and

McLane are each subject to the South Dakota tobacco tax for any OTP they bring

into South Dakota or cause to be brought into South Dakota. The parties stipulated

that McLane caused the OTP in question to be brought into South Dakota. Thus,

McLane was responsible for paying the tobacco tax when it brought the OTP into

South Dakota. The issue presented by these unique facts is what constitutes the

“wholesale purchase price” under SDCL 10-50-61 when the licensed wholesaler

responsible for submitting the advance tobacco tax did not purchase the OTP

directly from a tobacco manufacturer.

[¶11.] “[S]tatutory interpretation is a question of law, reviewed de novo.”

Fluth v. Schoenfelder Constr., Inc., 2018 S.D. 65, ¶ 12, 917 N.W.2d 524, 528

(alteration in original) (quoting Upell v. Dewey Cnty. Comm’n, 2016 S.D. 42, ¶ 6, 880

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N.W.2d 69, 71). “In discerning the intent of the Legislature, we examine statutory

language by ‘attempt[ing] to give words their plain meaning and effect. . . .’” Id.

(alteration and omission in original) (quoting Gloe v. Union Ins. Co., 2005 S.D. 30,

¶ 8, 694 N.W.2d 252, 256). “When the language in a statute is clear, certain and

unambiguous, there is no reason for construction, and the Court[’]s only function is

to declare the meaning of the statute as clearly expressed.” Fair v. Nash Finch Co.,

2007 S.D. 16, ¶ 7, 728 N.W.2d 623, 628 (quoting In re Yanni, 2005 S.D. 59, ¶ 8, 697

N.W.2d 394, 397).

[¶12.] McLane acknowledges that it owed an advance tobacco tax obligation

based on the “wholesale purchase price” of the OTP it purchased from UST Sales.

However, it argues that the statutory definition of “wholesale purchase price”

requires that its tax obligation should have been calculated based on the price UST

Sales paid the tobacco manufacturer, UST Manufacturing. McLane notes that UST

Sales resold the OTP it purchased from UST Manufacturing at a higher value than

the price it paid. Subsequently, McLane reported its tobacco tax obligations based

on the higher price charged by UST Sales. As a result, McLane paid the tobacco

taxes it owed to South Dakota based on the price of the tobacco it purchased plus

the amounts UST Sales added to cover its cost of operations and profit. McLane

contends that its inflated tax obligation report resulted in an overpayment of the

taxes intended by the statute. Thus, McLane argues that a tax refund is justified

under the statute based on the difference. McLane contends a plain reading of the

statute indicates that the South Dakota Legislature intended the tobacco tax to be

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solely based on the price the tobacco manufacturer charged when it sold the tobacco

product to a licensed wholesaler.

[¶13.] A plain reading of SDCL 10-50-61 indicates that the South Dakota

Legislature intended to impose a uniform tax by establishing a consistent time of

taxation (when the tobacco product is brought into the state) and a consistent time

and method for the determination of the taxable value (at the time a manufacturer

sells the tobacco products to a “licensed distributor or licensed wholesaler exclusive

of any discount or other reduction”). In other words, the South Dakota Legislature

intended the advance tobacco tax to be paid by the South Dakota-licensed

distributor or wholesaler that brought the tobacco product into South Dakota at the

time the tobacco product entered the state. It is equally clear that the South

Dakota Legislature intended the tax to be imposed on the price the tobacco

manufacturer charged for the OTP when it was sold to a licensed wholesaler. UST

Sales was a South Dakota-licensed wholesaler when it purchased the OTP from

UST Manufacturing. 5

5. The Department asserts various alleged logistical problems with its ability to
audit the price charged by tobacco manufacturers for OTP. These arguments
are unconvincing for two reasons. First, both UST Sales and McLane are
South Dakota-licensed wholesalers and subject to all the Department’s
reporting and auditing requirements. The existing regulations impose
detailed and stringent reporting requirements. See, e.g., ARSD 64:44:03:01
(which requires licensed distributors and wholesalers to “distinguish each
cigarette and tobacco shipment by manufacturer and individual brand and
must identify the source of all cigarettes received or shipped into South
Dakota” and to provide “invoices establishing the amount of cigarettes sold
from such manufacturer”). If the current regulations do not provide sufficient
means to obtain the information necessary to audit the manufacturer’s price
for OTP, those regulations can be amended by the Department through
promulgation of new rules. See SDCL 10-50-60. Second, even if such
(continued . . .)
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[¶14.] Under the statutory scheme created by the South Dakota Legislature,

the tobacco tax imposed is determined by multiplying the tax rate (35%) by the

wholesale purchase price. The price of tobacco products increases as the products

progress through the distribution chain because each participant (distributor,

wholesaler, dealer) adds something to the price to compensate for its efforts. SDCL

10-50-61 authorizes a tax on tobacco products. It does not empower the Department

to impose or collect any tax beyond the price of the tobacco products when the

manufacturer sold the OTP to a South Dakota-licensed wholesaler or distributor.

[¶15.] When enacting these taxation statutes, it is probable that the South

Dakota Legislature envisioned the traditional distribution chain in which a tobacco

manufacturer sells the OTP directly to a South Dakota-licensed wholesaler, which

then sells the product directly to dealers. This case involves a licensed wholesaler

selling to another licensed wholesaler where the second wholesaler causes the OTP

to be brought into South Dakota. The unique scenario in this case was perhaps not

specifically contemplated by the South Dakota Legislature. However, the South

Dakota Legislature’s intent is nonetheless clear from the plain language of SDCL

10-50-61—“wholesale purchase price is the price for which a manufacturer sells

tobacco products to a licensed distributor or licensed wholesaler exclusive of any

________________________
(. . . continued)
logistical problems were to exist, they would not alter the plain language of
the statute. If the language of the statute presents logistical problems the
Department cannot address through its existing regulatory authority, its
remedy lies with the South Dakota Legislature.

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discount or other reduction.” 6 In this scenario, the wholesale purchase price was

the price at which UST Manufacturing (a tobacco manufacturer) sold tobacco

products to UST Sales (a South Dakota-licensed distributor and wholesaler). The

tax was due when McLane brought the tobacco product into South Dakota. The

parties stipulated that McLane was the South Dakota-licensed wholesaler that

brought the tobacco product into South Dakota, and, consequently, McLane was

responsible for reporting that event and paying the advance tobacco tax. Because

McLane calculated the tax it owed based on the higher price it paid to UST Sales, it

overpaid the tobacco taxes due under SDCL 10-50-61. The Department erred in

concluding otherwise.

[¶16.] However, this does not mean that McLane was entitled to a refund for

these overpaid amounts. The South Dakota Legislature specified that the advance

tax obligation must be passed along the distribution chain and is paid by the

6. South Dakota is not the first jurisdiction to address this issue. See U.S.
Tobacco Sales & Mktg. Co. v. State, Dep’t of Revenue, 982 P.2d 652 (Wash. Ct.
App. 1999). In U.S. Tobacco Sales & Marketing Co. v. State, Department of
Revenue, the Washington Court of Appeals noted that the Washington
Legislature defined a distributor to be any person engaged in the business of
bringing tobacco products into the state. 982 P.2d at 655–56. In its decision,
the court found UST Manufacturing to have met the statutory definition of a
manufacturer and UST Sales to have met the statutory definition of a
distributor. Id. at 656. The Washington Court of Appeals further determined
that Washington’s OTP tax was to be calculated based on the value of the
OTP at the time the product was sold by the manufacturer. Id. at 658.

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ultimate consumer. SDCL 10-50-8. 7 Although McLane overpaid its advance tax

obligation, it fully recovered the advance tax it paid from the dealers to whom it

subsequently sold the OTP. The dealers then recovered that tax from the

consumers who purchased the OTP. McLane was made whole by its resale of the

OTP and is not entitled to any refund. On this basis, we affirm the Department’s

denial of McLane’s request for a refund.

[¶17.] JENSEN, Chief Justice, and KERN, SALTER, and DEVANEY,

Justices, concur.

7. SDCL 10-50-8 provides:

The impact of the tax levied by this chapter is hereby declared to be on
the vendee, user, consumer, or possessor of cigarettes or tobacco
products in this state and when said tax is paid by any other person
such payment shall be considered as an advance payment and shall
thereafter be added to the price of the cigarettes or tobacco products
and recovered from the ultimate consumer or user. In making a sale of
cigarettes or tobacco products in this state a distributor may
separately state and show upon the invoice covering such sale the
amount of tax on the cigarettes or tobacco products sold. The
provisions of this section shall in no way affect the method of collection
of such tax on cigarettes as now provided by existing law.

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