Summary of a Recent
Judicial Development in
Cooperatives

Cooperative's Fertilizer Storage Service
Subject to State Sales Tax

Ross H. Pifer
National AgLaw Center Graduate Assistant

Summary of Decision

In Cooperative Agronomy Services v. South Dakota Department of Revenue, 668 N.W.2d 718 (S.D. 2003), the Supreme Court of South Dakota ruled that sales tax was properly assessed upon a fertilizer storage service operated by an agricultural cooperative.

Background

Plaintiff Cooperative Agronomy Services (Agronomy Services) was a cooperative association "incorporated by approximately twelve North and South Dakota locally owned cooperatives." Id. at 719. Agronomy Services was organized by the member cooperatives to reduce costs "through joint action in purchasing and distributing supplies such as fertilizer." Id. To that end, Agronomy Services provided a fertilizer storage service where it neither sold nor delivered any product, but merely operated a warehouse for storage. See id. at 719-20. The member cooperatives made all of the arrangements for deliveries into and out of the warehouse. See id. Agronomy Services charged a "$6 per ton through-put fee" for the storage service. Id. at 720.

Agronomy Services complied with instruction from the South Dakota Department of Revenue and paid sales tax on the storage service revenue beginning in December 1998. See id. In October 2000, however, Agronomy Services applied for a refund of sales tax paid. See id. The Department denied Agronomy Services' application, and Agronomy Services appealed the decision to the circuit court. The circuit court reversed the tax assessment, ruling that "the fertilizer storage service was entitled to a sales tax exemption." Id. The Department appealed to the South Dakota Supreme Court. See id.

Arguments

Agronomy Services argued that it was entitled to a sales tax exemption under S.D. Codified Laws § 10-45-12.1 because "the fertilizer is ultimately used for agricultural purposes." Id. at 721-22. According to Agronomy Services, its storage of fertilizer is merely "one step in the sale of fertilizer: a sale starting with the manufacturer and ending with the farm customer." Id. at 721. The Deparment countered that Agronomy Services' storage of fertilizer was a separate activity from the member cooperatives' sale of fertilizer, and as such, it could not take advantage of the member cooperatives' exemption for its sale of fertilizer. See id. at 721.

Analysis and Holding

The court first determined that Agronomy Services was not an "auxiliary" of the member cooperatives because there was not proof of "more than 50 percent common ownership between any member cooperative" and Agronomy Services. Id. at 722. The court therefore determined that Agronomy Services was not entitled to utilize the exemptions possessed by the member cooperatives for their sale of fertilizer. See id. at 721-22. Since Agronomy Services was not "entitled to the 'auxiliary' classification," the court applied "the predominate activity and separate transaction test." Id. at 722. In applying this test, the court found that "[b]ecause the storage service is the predominate activity of [Plaintiff], and because that activity is a separate and distinct transaction from the other cooperatives' subsequent sale of fertilizer, the storage service is subject to the service tax." Id.

The court then determined that Agronomy Services' fertilizer storage service was not entitled to a statutory tax exemption as it was not engaged in "farm product warehousing and storage." See id. at 723-24. As the term "farm product" had not been defined by the statute, the court cited with approval the definition provided by Black's Law Dictionary 607 (6th ed. 1990), which defined "'farming products' as products that are produced on the farm, by farm labor." Id. at 724. The court found that "[b]ulk fertilizer is not a farm product in this sense because it does not have its situs of production on the farm. Furthermore, bulk fertilizer is not produced by the 'labor of those in agricultural pursuits.'" Id.

The court then determined that Agronomy Services' fertilizer storage service was not entitled to a statutory tax exemption as it was not engaged in "agricultural services." See id. at 724-25. The court relied upon the fact that Agronomy Services was not applying fertilizer or involved with the actual planting of crops. See id. at 725. The court did not consider "fertilizer storage for other cooperatives" as an "agricultural service." Id.

The case was decided on August 20, 2003; this summary was posted Jan. 13, 2005.