ROBINSON & MUENSTER ASSOCIATES, INC., Appellee, v. SOUTH DAKOTA DEPARTMENT OF REVENUE, Appellant, 601 N.W.2d 610

AMUNDSON, Justice. [¶ 1.] South Dakota Department of Revenue (Department) appeals from the circuit court’s determination that transactions between Robinson & Muenster Associates, Inc., (Robinson) and its suppliers were not taxable under South Dakota’s Use Tax. We affirm. FACTS [¶ 2.] Robinson is a research, fundrais-ing, and grass roots telecommunications business located in Sioux Falls, South Dakota.

For purposes of conducting its business, Robinson purchases telematching services along with samples and lists of telephone numbers for demographically identified groups or areas (collectively samples) from out-of-state providers. The research by Robinson is done both for end-use clients and for other research firms. [¶ 3.] When Robinson contracts with a customer, the customer outlines the type of service requested. The samples are then ordered, tailored to the customer’s needs by what Robinson deems appropriate to achieve the requested information.

Robinsoi obtains these samples under agreements whereby Robinson uses the sample' to conduct the research or polling for its customers and then transfers this sample along with the final results to the contracting customer. Some of Robinson’s customers provide their own samples. Some samples are purchased by Robinson and delivered to Robinson’s customers without any further function provided by Robinson. Robinson is reimbursed by the customer for obtaining the samples. Robinson does not receive any profit for providing these samples.

The costs for the samples and analysis services are separately itemized and Robinson charges sales tax for the entire report, including samples, for sales made to resident customers within South Dakota. Robinson does not pay a sales tax on its purchase of the samples. [¶4.] At no time does Robinson have title to the samples. The samples are obtained under agreements whereby title remains in the firms from whom Robinson purchases the right to use the information. [¶ 5.] Once the results are submitted to Robinson’s customers, Robinson destroys its electronic copy of the information.

The information is not usable for another of Robinson’s customers. [¶ 6.] Department conducted a sales and use tax audit of Robinson for the period of January 1993 through January 1996. As a result of the audit, use taxes were assessed on these samples purchased by Robinson from an out-of-state provider. Robinson was assessed for South Dakota and city use tax of $21,999.54, plus interest of $5921.68, for a total assessment of $27,-921.22. Robinson appealed the assessment. The hearing examiner determined that these samples were subject to a use tax and upheld the assessment.

Robinson appealed to circuit court raising the issue whether Robinson used the samples in the regular course of its business or whether it sold the samples to its customers. The circuit court reversed, determining Robinson was not subject to the use tax because there was no “ownership” of the samples as provided by statute. Department appeals. We conclude the following issue to be determinative on appeal: [¶7.] Whether the samples purchased from out-of-state providers for Robinson’s customers were sold in the regular course of business and, thus, not subject to the South Dakota use tax.

STANDARD OF REVIEW The question of whether statute imposes a tax under a given factual situation is a question of law. Statutes which impose taxes are to be construed liberally in favor of the taxpayer and strictly against the taxing body. Statutes exempting property from taxation should be strictly construed in favor of the taxing power. The words in such statutes should be given a reasonable, natural, and practical meaning to effectuate the purpose of the statute. Matter of Sales & Use Tax Refund Request of Media One, Inc., 1997 SD 17, ¶ 9, 559 N.W.2d 875, 877; National Food Corp. v. Aurora Cty.

Bd. of Comm’rs, 537 N.W.2d 564, 566 (S.D.1995); Thermoset Plastics, Inc. v. Department of Revenue, 473 N.W.2d 136, 138-39 (S.D.1991). “ 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.’ ” Department of Revenue v. Sanborn Tel. Coop., 455 N.W.2d 223, 225 (S.D.1990) (alterations in original) (quoting Midcontinent Broad. Co. v. Revenue Dep't, 424 N.W.2d 153, 154 (S.D.1988)).

DECISION [¶ 8.] Whether the samples purchased from out-of-state providers for Robinson’s customers were sold in the regular course of business and, thus, not subject to the South Dakota use tax. [¶ 9.] According to the Department, Robinson is a provider of research services and failed to pay the required use tax on certain samples used in providing research services to its customers. Robinson argues, on the other hand, that these samples are sold as part of the report sold to its customers in the regular course of business and, therefore, are exempt from the use tax.

The issue before this Court is whether the samples purchased by Robinson were purchased for resale, i.e., sold in the regular course of business. [¶ 10.] SDCL 10-46-2 provides a tax on tangible personal property purchased for use in the state: An excise tax is hereby imposed on the privilege of the use, storage, and consumption in this state of tangible personal property purchased on or after July 1, 1939, for use in this state at the same rate of percent of the purchase price of said property as is imposed by §§ 10-45-2 and 10-45-3 or amendment which may hereafter be made thereto. [¶ 11.] A “Use” is defined as including “the exercise of right or power over tangible personal property incidental to the ownership of that property, except that it does not include the sale of that property in the regular course of business.” SDCL 10-46-1(12) (emphasis added). “We understand this to mean that use tax, consistent with its complementary relationship to sales tax, generally applies to retail transactions and not to transactions where items are purchased for resale.” Sioux Falls Newspapers, Inc. v.

Secretary of Revenue, 423 N.W.2d 806, 810 (S.D.1988); see also Sanborn Tel. Coop., 455 N.W.2d at. 225. [¶ 12.] To assist in making this determination of whether the samples were sold in the regular course of business, a court examines the essence of the transaction between Robinson and its customers. Questar Data Sys., Inc. v. Commissioner of Revenue, 549 N.W.2d 925, 928 (Minn.1996) (citations omitted). A review of this record discloses the Department’s auditor made no investigation regarding the essence of the transaction, and merely examined bare invoices.

Further, a review of the auditor’s testimony reveals he had no idea as to the taxpayer’s business. Nevertheless, we must consider whether the sample was an inextricable part of the finished product. Sioux Falls Newspapers, 423 N.W.2d at 811 (holding that syndicated columns are an “inextricable part of the definition of a newspaper,” composing the very essence of a newspaper and, thus, were not subject to use tax); c.f. Thermoset Plastics, 473 N.W.2d at 139-40 (holding poly pails were not “essential ingredient” of finished product, therefore, not entitled to exemption under SDCL 10-46-9).

In determining whether material was part of a final product under SDCL 10-46-9, this Court stated in Thermoset Plastics: [T]he rule evolves that material which only accidentally or incidentally becomes incorporated into a finished product, and which is not an essential ingredient of the finished product, is subject to use tax. This rationale is grounded upon the recognition that such material is not an ingredient or component part of tangible personal property either manufactured, fabricated or compounded for ultimate sale at retail. 473 N.W.2d at 140.

Therefore, in the present case, if the sample is an ingredient essential to and incorporated within the final product, the samples are not subject to the use tax. [¶ 13.] In Questar Data Systems, 549 N.W.2d at 927, the Supreme Court of Minnesota addressed similar facts involving the issue of whether printed materials used in conducting surveys were sold in the regular course of business and, therefore, not subject to the use tax.

Questar, a Minnesota corporation, was also a survey-based research firm, providing a number of “consulting and data processing services to its customers, including data tabulation and analysis, development and design of printed materials, and preparation of reports.” Questar, 549 N.W.2d at 927. Questar purchased and transferred printed materials in providing research services. Id.

The Minnesota Supreme Court held that, since Questar did not exercise any right or power of ownership over the materials, the transfer of the printed materials from Questar to its customers constituted a sale of property to the customers in the regular course of Questar’s business. Id. at 928. The court reasoned: [T]he printed materials are designed for the customer’s needs, and in and of themselves, do not contain any information useful to Questar.... This use of the printed materials comes well after and is secondary to the customers’ use of the printed materials.

Further, while Questar may tabulate and/or analyze the information contained on the printed materials which are returned, Questar has no ownership interest in the information itself. Finally, Questar transfers the title of the printed materials to the customer[.] Id. Considerations of such facts convinced the court the transfer of printed materials to customers constituted a sale of property in the regular course of its business. Id. at 929. Likewise, in the present case, every sample was tailored to the needs of the customer. Robinson did not purchase these samples for personal use.

See Sioux Falls Newspapers, 423 N.W.2d at 811. The samples are inextricably incorporated into the final product and then transferred to the customer. The sample is purchased strictly for the customer and its use is strictly limited.

Furthermore, agreements between Robinson and its customers often provided that: “At all times during this program, any lists acquired by [Robinson] either directly or indirectly from or for [customer] remain the sole property of [customer] and cannot be used or sold by [Robinson] or anyone else without [customer’s] expressed written permission.” Once the finished product was provided to client along with the sample, the sample was destroyed in accordance with contract and Robinson could make no further use of it.

While Robinson sold the samples at cost, and received no profit, this does not negate the fact that the samples were sold. “Sale” is defined as “any transfer, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, for a consideration.” SDCL 10-45-1(8). [¶ 14.] Considering the foregoing, and under the facts and contracts of this case, we determine these samples were an essential part of the final product sold to Robinson’s customers. The samples were purchased for incorporation into the final product and then sold in the ordinary course of business.

Consequently, the samples are not subject to the use tax under SDCL 10-46-2. See Sioux Falls Newspapers, 423 N.W.2d at 811. Therefore, we affirm the trial court’s reversal of the assessment. [¶ 15.] Affirmed. [¶ 16.] MILLER, Chief Justice, KONENKAMP and GILBERTSON, Justices, concur. [¶ 17.] SABERS, Justice, dissents. . Grass roots telecommunications is where a political group will hire the firm to make phone calls to the group’s membership and educate them about a particular issue and ask the membership to call or write their politician. .

Telematching is the process of fitting telephone numbers to lists of names or addresses. . For example, the licensing agreement Robinson had with Survey Sampling, Inc., provided strict limitations on use of the samples: Limitation on Use of the Samples. All samples developed by SSI for CLIENT under the terms of this Agreement remain the sole property of SSI and are to be used by CLIENT only for the purposes of conducting survey research. CLIENT AGREES NOT TO USE ANY INFORMATION CONTAINED IN AN SSI SAMPLE TO GENERATE ADDITIONAL SAMPLE.

Likewise, the agreement between Robinson and American Business Lists provided limitations on the use: Limitations on Use. Customer may rent information for confidential use by the Customer within one year from the date of rental to the Customer. Except with written consent. Customer shall not: (

i) rerent the information or otherwise permit any use of the information by or for the benefit of any part other than Customer; (ii) publish, distribute or permit disclosure of the information, other than to employees and agents of the Customer for use in the Customer’s business; (iii) use or permit use of the information for the purpose of compiling, enhancing, verifying, supplementing, adding to, or deleting from any mailing list, geographic or trade directories, business directories, classified directories, classified advertising, or other compilation of information which is sold, rented, published, furnished or in any manner provided to a third party; (iv) use or permit use of the information for generating any statistical information which is sold, rented, published, furnished or in any manner provided to a third party; (

v) use or permit use of the information to prepare any comparison to other information data bases, which is sold, rented, published, furnished or in any manner provided to a third party; or (vi) use or permit use of the information in connection with individual credit, employment or insurance applications.