The South Dakota Supreme Court appears to have added the South Dakota sales tax to the list of fees associated with automated teller machine (ATM) usage. TRM ATM Corporation v. South Dakota Dep’t. of Rev., 2010 SD 90 (December 8, 2010). In TRM, an Oregon company that owned, operated, sold, leased, and serviced ATM machines was assessed South Dakota sales tax on transaction processing and surcharge fees received from sponsor banks and core-data companies (parties that serve as intermediaries in the ATM transaction by contracting with card-holders’ depository banks to make ATM services available to cardholders).
While TRM conceded the taxability of its transaction processing and surcharge fees under South Dakota’s sales and use tax laws, TRM claimed it was not liable for payment of the South Dakota sales tax. TRM made two arguments. First, it claimed that, because there are several intermediaries in the ATM transaction and TRM’s activity was not the predominant activity in an ATM transaction, the sponsor banks and core-data companies should be responsible for the payment of South Dakota use tax on the services received from TRM (rather than hold TRM responsible for payment of sales tax). The court concluded that this argument was without merit because the South Dakota sales tax, on its face, applies to the “gross receipts of any person from the engaging or continuing in the practice of any business in which a service is rendered.” Because TRM rendered ATM services for other persons in South Dakota and received consideration for those services, the receipts were subject to South Dakota’s sales tax.
Second, TRM argued that even if the court concluded that the fees for services performed by TRM were subject to sales tax, the majority of such fees were “pass through” fees received only “temporarily” by TRM and thus were not TRM’s “gross receipts.” Prior to the audit period, TRM sold most of its ATMs to third-party merchants on whose premises the machines were located. TRM then became contractually obligated to pay the third-party merchants a portion of the transaction processing and surcharge fees received from sponsor banks and core-data companies. TRM claimed that it was not entitled to all of the fees it received, because it was obligated to pay to the third-party merchants a portion of the fees. Therefore, TRM claimed the pass-through fees could not be its “gross receipts.” However, TRM never disclosed the specifics of its contractual obligations with the third-party merchants and never claimed any statutory deductions from gross receipts. Accordingly, the court concluded that this argument was without support, in the record, and sales tax was due on all of the transaction processing and surcharge fees received by TRM.
This decision raises the question of whether the result would have been different if TRM had produced its contracts with third-party merchants. If TRM had been able to demonstrate that it had no right to a percentage of the fees, TRM may have been permitted to exclude the pass-through fees from tax. While this case appears to increase the cost of ATM usage in South Dakota, the ramifications in other states may not be widespread because the majority of states, unlike South Dakota, do not tax most services (including ATM-related services).