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Modern Merchandising, Inc. v. Department of Revenue, 397 N.W.2d 470

Facts

LaBelle's is a Minnesota corporation that sells consumer goods through mail order and retail stores in Minnesota, North Dakota, and South Dakota. The South Dakota Department of Revenue assessed use taxes and interest against LaBelle's for catalogs and flyers mailed to South Dakota residents from April 1, 1982, to February 29, 1984. LaBelle's contracted with out-of-state printers to print and mail the catalogs directly to residents, and the materials were delivered free of charge. The Department argued that LaBelle's exercised control over the catalogs and thus should be taxed, while LaBelle's contended it had no ownership or control once the materials were delivered.

LaBelle's is a Minnesota corporation that sells consumer goods through mail order and retail stores in Minnesota, North Dakota, and South Dakota. The South Dakota Department of Revenue assessed use taxes and interest against LaBelle's for catalogs and flyers mailed to South Dakota residents from April 1, 1982, to February 29, 1984.

Issue

Whether LaBelle's had sufficient 'right or power … incidental to the ownership' of the catalogs and flyers once in South Dakota to qualify as a 'use … in this state' under SDCL 10–46–1(2) and 2.

Whether LaBelle's had sufficient 'right or power … incidental to the ownership' of the catalogs and flyers once in South Dakota to qualify as a 'use … in this state' under SDCL 10–46–1(2) and 2.

Rule

An excise tax is imposed on the privilege of the use, storage, and consumption in the state of tangible personal property purchased for use in the state, as defined under SDCL 10–46–1(2). The definition of 'use' includes the exercise of right or power over tangible personal property incidental to ownership.

An excise tax is imposed on the privilege of the use, storage, and consumption in the state of tangible personal property purchased for use in the state, as defined under SDCL 10–46–1(2).

Analysis

The court analyzed the facts and determined that LaBelle's did not retain sufficient control over the catalogs and flyers once they were delivered to South Dakota residents. Unlike the K-Mart case, where the retailer maintained control over the distribution of its advertisements, LaBelle's had no in-state contracts or power over the catalogs after they were mailed. The court emphasized that the Department's focus on the generation of sales rather than the statutory language led to an incorrect application of the tax statutes.

The court analyzed the facts and determined that LaBelle's did not retain sufficient control over the catalogs and flyers once they were delivered to South Dakota residents.

Conclusion

The Supreme Court reversed the circuit court's judgment and ordered that LaBelle's request for a refund of $42,673 be honored.

The Supreme Court reversed the circuit court's judgment and ordered that LaBelle's request for a refund of $42,673 be honored.

Who won?

LaBelle's prevailed in the case because the court found that it did not have sufficient control over the catalogs and flyers to be subject to the use tax, distinguishing its situation from that of K-Mart.

LaBelle's prevailed in the case because the court found that it did not have sufficient control over the catalogs and flyers to be subject to the use tax, distinguishing its situation from that of K-Mart.

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