Section 1 Annual Tax
A number of amendments were proposed to the whole of Article XI but were rejected. For instance, proposals to add a new Section 14 were rejected in 1988 and 1990. As for Section 1, an amendment approved in 1906 added the third paragraph.
This section relates to three different items of taxation: first, the annual tax for the estimated ordinary expenses of the state; second, taxation to pay deficiencies from preceding years; and third, taxation to pay the public debt (In re Limitation of Taxation, 1893). Although, the legislature is confined to a certain fixed rate for the first and third items of taxation, it has more discretion in levying a tax to cover a deficiency occurring when ordinary expenses exceed the revenues available to pay those expenses. However, all revenues raised to pay such deficiency must be used exclusively for that purpose and cannot be diverted to any other use.
As the court noted in In re Limitation of Taxation, Section 2 of Article XII must be read together with Article XI, Section 1. In that former section, the South Dakota Constitution dictates that appropriations for ordinary expenses can be made by a simple majority vote by the legislature. However, all other appropriations must be made by a two-thirds vote of the legislature. Thus, to make an appropriation for a deficiency, as authorized in Article XI, Section 1, it must pass by a two-thirds vote in each house and must be the subject of an independent and separate bill. As the court explained:
We regard this plainly marked distinction between ordinary and extraordinary expenses, and the extreme carefulness with which the Constitution has undertaken to guard the taxpayers and the public treasury against hasty and ill-advised outlays for extraordinary expenses, as peculiarly significant in construing the constitutional provisions involved.
As the court further stated:
Because of the possibility of anticipating such extraordinary contingencies, and the consequent impracticability of fixing in advance an arbitrary and inexorable rule for the limitation and control of taxation necessary to meet them, the constitution attempts to furnish an adequate restriction and protection in the requirement that no bill appropriated money for an extraordinary purpose can become a law without the support of two-thirds of all the members of each house.
Therefore, when read together, Article XI, Section 1 and Article XII, Section 2 place significant restrictions on the legislature’s appropriations abilities when dealing with deficiencies or extraordinary expenditures.
Section 2 Classification of Property for Taxation—Income
Two amendments to this section were approved in 1912 and 1918. Another amendment was rejected in 1954. The 1912 amendment inserted a provision that taxes should be collected for public purposes only and inserted a sentence reading “franchises and licenses to do business in the state, gross earnings and net income, shall be considered in taxing corporations and the power to tax corporate property shall not be surrendered or suspended by any contract or grant to which the state shall be a party.” The 1918 amendment authorized a division of property into classes and substituted the sentence treating privileges, franchises and licenses as property for the sentence inserted by the 1912 amendment. The 1918 amendment also added the provisions relating to consideration of income in taxing property and to taxation of incomes and occupations. Finally, it deleted the sentence requiring that corporate property be assessed and taxed on the same basis as individual property.
This section requires all taxes to be uniform. It relates exclusively to the ordinary property tax; it does not relate to a tax like the inheritance tax (In re McKennan’s Estate, 1910). This provision does not prevent the legislature from changing the object of a tax from regulation to revenue; what it does prevent is a diversion of the proceeds of taxes which have already been levied or collected (State ex rel. Parker v. Youngquist, 1943).
The valuation of property for taxation purposes shall not exceed the actual value of the property (Tidball v. Miller, 1948). Furthermore, taxes can only be levied for public purposes; however, courts give the legislature wide latitude in determining whether a particular statutory purpose is public or private (Meierhenry v. City of Huron, 1984). For instance, the court upheld the loaning of public money to settlers, since the promotion of land settlement is a public and not a private purpose (Wheelon v. South Dakota Land Settlement Board, 1921). A legislative appropriation to a member of the state militia, to compensate him for injuries received while in an off-duty tussle with fellow members of the militia, was determined to be of a public purpose, since it would tend to create and maintain an efficient state militia; thus, it was not invalid as a gift of public money for a private benefit (Nancolas v. Jones, 1924). And finally, ethanol production payments and an appropriation to a council promoting technical and marketing assistance to producers of certain crops did not constitute (p. 188) an invalid use of public funds for private purposes—the court found that the legislature could reasonably conclude that laws encouraging production and export of ethanol made from corn would achieve the purpose of promoting agriculture (General Contractors of South Dakota, Inc. v. Schreiner, 1992).
An appropriation of public money must be for some use or object which directly or indirectly materially aids in the proper functioning of some governmental agency, and in so doing serves a public purpose (Mackey v. Reeves, 1919). As the court has stated, an absence of a public purpose will only be found if it clearly appears from the act and the appropriation that it is for a purely private purpose. If any reasonable doubt exists as to whether the appropriation is for a public or private purpose, the legislation must be upheld (Torigian v. Saunders, 1959). Since the promotion of the dairy industry is a matter with which the legislature may properly be concerned, a tax imposed on butter fat, so as to provide funds for the promotion of the dairy industry, is a tax levied for a “public purpose” within the meaning of Section 2.
Nonetheless, the court has on occasion found an appropriation to be for a private purpose. Feed loans to livestock raisers were held not a public purpose for which the legislature could authorize the expenditure of public money (In re Opinion of the Judges, 1971). In addition, the court has ruled that the state cannot levy and collect taxes so as to enter and finance the business of selling gasoline, since there is no constitutional authority for the state to own and operate such a business (White Eagle Oil and Refining Company v. Gunderson, 1925).
In ruling that an appropriation bill empowering the state of South Dakota to engage in the business of retail sales and gasoline was not a public purpose, the South Dakota Supreme Court did recognize that some business ventures constituted a public purpose:
It is generally conceded that the supplying of water from municipalities as a public service for which taxes may be levied; the same be said of furnishing gas for electricity. The usual reason being that such commodities as water, gas, and electricity cannot be furnished by private persons or corporations without the exercise of eminent domain.
(White Eagle Oil and Refining Co. v. Gunderson, 1925)
However, the court found that the retail selling of gasoline was not a business that could be entered into by the government and supported by public taxation. As the court stated:
There is nothing essentially different in the business of retailing gasoline from that of any other commodity, and while it may be conceded that gasoline under present economic conditions is a necessity, there is no reason why it may not be retailed by private enterprise.
On the other hand, the court has recognized that the acquisition of land in blighted areas and the sale or leasing of this land for private redevelopment can be a legitimate public purpose (Meierhenry v. City of Huron, 1984).(p. 189)
The constitutional requirement of equality and uniformity of taxation relates to the levy of taxes; it does not limit the legislature’s authority to allocate or distribute public funds (Meierhenry v. City of Huron, 1984). Moreover, the valuation of a taxpayer’s property in one county at twice its assessed value in another county did not violate the constitutional requirement for equality and uniformity in taxation, since the principles of equality and uniformity in taxation apply only to the particular taxing district or county in which the properties involved are situated (West Two Rivers Ranch v. Pennington County, 2002). The constitution does not require uniformity of taxation between classes of property as well as within property classes (Matter of Refusal of State Board of Equalization to Hear Appeal of Lake Poinsett Area Development Association, 1983). In fact, the uniformity clause implies that different classes of property may be taxed at different rates (Commercial State Bank of Wagner v. Wilson, 1928). Under the Section 2 uniformity clause, the tax rate must be the same on each separate item of taxable property, for each separate purpose, within each taxing district (Ewert v. Taylor, 1916). The constitutional demand for uniformity applies within a class, and not between classes of property (Burlington Northern Railroad Company v. Green, 2001). In Burlington Northern, the individual, as a county taxpayer, was not a centrally assessed taxpayer, as was a railroad; thus, the requirement of uniformity did not apply to an individual’s claim that railroad received a better tax treatment than he did.
The assessment and collection of taxes must be such that every person and corporation be taxed in proportion to the value of their property, and the laws providing for the assessing of taxes on corporation property must be by the same methods as for the assessing and levying of taxes on individual property (Johnson v. Wells Fargo Company, 1915). Under the South Dakota Constitution, property for taxation purposes cannot be valuated under a method that considers gross income. Rather, property must be assessed according to the value of that property, without reference to the income derived from the property. The Johnson court held that making gross earnings in the state the controlling factor in determining the taxation value of corporation property violated Section 2, which requires taxes on corporate property to be assessed in the same manner as that provided for taxes on individual property.
The legislature does have the power under Section 2 to impose taxes on privileges, occupations, or licenses to do business, and the funds so collected may be appropriated for the purpose of regulation or revenue (Parker v. Youngquist, 1943). But the court in Parker recognized the general rule that license, privilege, or occupation taxes may not be imposed under authority of the police power for revenue purposes, and that the licenses required of useful occupations can carry with them only such fee as is necessary to pay the expense of licensing and supervision. The court in Botkin v. Welsh (1933) found that privilege and occupation taxes levied for the purpose of revenue were valid under Section 2. And in Peterson Oil Company v. Frary (1924), the court held that (p. 190) a law “which combines regulation with revenue sharing” does not violate the constitution.
Section 3 Corporate Tax Power of State Not Suspended
In interpreting this section, the South Dakota Supreme Court upheld an imposition on insurance companies of an annual tax on the gross premiums received in the state during the preceding year. The court stated that this tax related solely to taxes on corporations and was not a tax on corporate property (Queen City Fire Insurance Company v. Basford, 1911).
Section 4 Banks and Bankers Taxed
The court has held that even though this section provides for the taxing of financial investments, the bonds of a municipal corporation are not subject to taxation, for that would cause a conflict between the borrowing and taxation power of the state (National Surety Company v. Starkey, 1919).
Section 5 Public Property Exempt from Taxation—Exceptions
A 1930 amendment added the provision permitting the taxation of rural credit lands. A 1948 amendment added the provision permitting the taxation of public shooting areas.
Under this section, the properties owned by taxing districts and governmental subdivisions are not subject to taxation (City of Sioux Falls v. State Board of Equalization, 1973). The constitutional exemption of (p. 191) public property from taxation includes all property of municipal corporations, irrespective of the use of that property (Petition of CM Corporation, 1983). Furthermore, the constitutional exemption of government-owned property from taxation is self-executing and is not dependent on any condition other than ownership (Egan Independent Consolidated School District v. Minnehaha County, 1936).
An independent consolidated school district is a “municipal corporation” within the meaning of Section 5 (Egan Independent Consolidated School District v. Minnehaha County, 1936). Property which is owned by a municipality, but which is leased and subleased in connection with an economic development project, is still exempt from taxation (Petition of CM Corporation, 1983). However, this section does not exempt a city-owned liquor store from a statutory tax of 10 percent of wholesale price of all stocks of liquor held in inventory as of a certain date, since the tax was not a property tax (City of Pierre v. Stout, 1937).
As the court explained in Whittaker v. City of Deadwood (1909), a special assessment for a local improvement by a municipal corporation against property of the county or municipality does not fall within the Section 5 tax exemption. According to the court, a special assessment for local street improvement is not taxation, and such a special assessment does not conflict with a constitutional exemption of property from taxation. Thus, the power of cities to make special assessments is not restricted as to the ownership of the property against which the levy may be made.
Section 6 Property Exempt from Taxation—Personal Property
A 1958 amendment to this section exempted property used for highway purposes. This section is related to both Sections 2 and 5 of Article XI; thus, cases involving Section 6 may also involve those sections. In State v. Johns (1920), the court stated that the provisions in Section 2 of Article XI giving the legislature the power to determine what property shall not be subject to taxation are consistent with the provision in Section 6 giving the legislature the power to exempt from taxation personal property of any amount not exceeding in value $200 for each individual liable to taxation.
Because this section is not self-executing, it does not diminish the powers of the legislature to determine what class or classes of property shall be subject to taxation or what property is not subject to taxation (National College of Business v. Pennington County, 1966). According to the court, the public policy expressed by Section 6 is to exempt from taxation all property owned (p. 192) by religious societies and used exclusively for religious purposes (McFarland v. Keenan, 1957).
The determination of whether property is used exclusively for benevolent purposes within the meaning of a tax exemption statute requires an evaluation of the purpose of the property’s use (Loyal Order of Moose Lodge No. 1137 v. Pennington County, 1997). The property of a benevolent organization is not used exclusively for the purpose for which it is organized, as required by the tax exemption statute, if its activities and income inure primarily to the benefit of its members, even if there are incidental benefits to the public. For instance, a non-profit fraternal organization’s lodge was not entitled to a complete property tax exemption where the lodge was primarily used to facilitate social activities exclusive to its members, where the majority of income from member dues, fees, and donations was used to operate the facility; where the lodge was open to the public only on special occasions; and where the lodge’s bar and restaurant were maintained for the convenience of the members and the recruitment of new members. In another case, a wellness center that included exercise facilities, a retail sales area, and a cafeteria did not qualify as a charitable organization exempt from property tax, even though the center had a policy that no person would be denied membership based upon an ability to pay. It was found that of the 2,669 memberships involving 4,836 members, only 14 memberships were reduced or free—and there was no showing that the center provided a service that would otherwise have been provided by government (Appeal of Sioux Valley Hospital Association, 1994).
An institution will be classified as charitable for tax exemption purposes if the dominant purpose of its work is for the public good and the work done for its members is but a means adopted for this purpose; but if the dominant purpose of its work is to benefit its members or a limited class of persons, it will not be so classed, even though the public may derive an incidental benefit from such work (South Dakota State Medical Association v. Jones, 1966). A benevolent property-owning corporation is not entitled to tax exemption solely on the basis of ownership; the property itself must also be used exclusively for charitable, benevolent, or religious purposes.
The operation of a school for profit, in and of itself, does not exclude the school from acquiring a tax-exempt status as an educational institution (South Dakota Hair Styling Inc. v. Minnehaha County, 1975). To qualify for a property tax exemption as an educational institution, a for-profit school must be used exclusively for instructional or administrative purposes and must provide at least some substantial part of the educational training which would otherwise be furnished by tax-supported schools. For instance, a hair styling academy that taught only one subject slightly related to subjects taught in the public schools of the state and that was operated primarily for commercial purposes was not entitled to a property tax exemption as an educational institution. In another case, property owned (p. 193) by a privately-owned, for-profit business college, which offered courses similar to courses taught in tax-supported institutions, was exempt from taxation, even though the courses completed by students at the college were not given full faith by tax-supported colleges and universities of the state (National College of Business v. Pennington County, 1966).
Section 7 Other Exemption Laws Void
For a related constitutional provision dealing with classes of property exempted by the legislature, see Section 2 of Article XI. Under Section 7, the legislature is without power to exempt property from taxation other than the classes of property that are mentioned in the constitution (National Surety Company v. Starkey, 1919). Section 7 relates exclusively to property exemptions, and does not control, for instance, exemptions made under inheritance tax laws (In re McKennan’s Estate, 1910).
Section 8 Object of Tax to Be Stated—Use of Vehicle and Fuel Taxes
A 1940 amendment to this section added the provisions relating to motor vehicle fees and fuel taxes.
The requirement that a tax law state the purpose of the tax prevents diversion of taxes that have been previously levied or collected or that have been appropriated to other purposes. However, amending a statute to provide a different use for taxes to be levied in the future does not violate this section (Meierhenry v. City of Huron, 1984).
To award damages out of a state highway fund for a litigation claim arising out of work performed on a highway construction project, or as a result of a construction contract entered into by the state, would not violate this section, which requires that license and registration fees, as well as revenues from fuel taxes, be used exclusively for maintenance, construction, and supervision of public highways (Candee Construction Company Inc. v. South Dakota Department of Transportation, 1989).(p. 194)
The intent of the framers and ratifiers of this section was to dedicate the proceeds of motor vehicle fuel taxes to the maintenance, construction, and supervision of public highways (South Dakota Auto Club Inc. v. Volk, 1981). However, this section does not prevent the state from compensating a Department of Transportation employee for salary that was not paid (Chilstrom v. State Dept. of Transportation, 1978).
A statute requiring the state treasurer to transfer 10 percent of the gross tax receipts of the State Highway Commission to the state’s general fund violated Section 8, insofar as it diverts such funds to the general fund without providing any assurance that they will be used exclusively for highway purposes (Parker v. Youngquist, 1943). The statute contained no appropriation or allocation of these special funds in definite amounts to designated departments of government for highway administration, facilities, or services, with proper administrative regulation preventing the misuse of the funds. In addition, a statute that imposed an additional tax on motor fuels and appropriated the proceeds of that tax to fund railroad operations and maintenance was unconstitutional, violating the requirement that proceeds from any excise tax on motor fuels be used exclusively for highway construction and supervision (South Dakota Auto Club Inc. v. Volk, 1981).
The court in Associated General Contractors of South Dakota Inc. v. Schreiner (1992) further elaborated on the highway fund provisions of Section 8. According to the court, the language of Section 8 indicates that “the people who ratified the constitutional amendment intended the taxes on fuel not used to propel vehicles on the state highways was excepted from the state highway fund.” In that case, the court found that the ethanol incentive tax was an unconstitutional diversion of highway funds under Section 8. As the court explained the section:
The history of Article XI, Section 8 of our constitution...and the cases of the South Dakota Supreme Court since the enactment of that constitutional provision clearly indicates that this is a restricted and impressed fund created by the constitution that prevents the use of the funds described in the article for payment of any obligation of the state other than those described in the article.
According to the court, the legislature is not allowed to directly appropriate the proceeds of the motor vehicle fuel tax for any use other than the maintenance, construction, and supervisions of highways and bridges. But through the use of tax credits applied before collection, the legislature was found to be indirectly diverting tax proceeds dedicated to the maintenance, construction, and supervision of highways and bridges. Thus, according to the court, the ethanol tax credit was an attempt by the legislature to do indirectly what it is forbidden to do directly.
In Candee Construction Company Inc. v. South Dakota Department of Transportation (1989), the South Dakota Supreme Court had to decide (p. 195) whether damages for a breach of contract action concerning a highway construction project could be paid out of the state highway fund, or whether Section 8 prevented such a payment, since it would not be “used exclusively for the maintenance, construction, and supervision of highways and bridges of the state.” Recognizing that previous opinions had strictly construed the meaning of Section 8 to prevent the payment of any state obligation other than those specifically described in the constitution, the court held that payment of damages for work performed on a highway construction project did not violate Section 8. In doing so, the court reversed an earlier decision in Lindekugel & Sons Inc. v. South Dakota State Highway Commission (1972), where the court had held that Section 8 did not authorize payment of damages for a breach of contract action brought by a contractor, as distinguished from payments due under a contract.
Section 9 Taxes Paid into Treasury—Appropriations Required for Expenditure
A proposed amended to this section was rejected on November 6, 1984.
The primary purpose of Section 9, prohibiting the incurrence of indebtedness except in pursuance of a specific appropriation, was to limit indebtedness to such subjects and to such amounts as were expressly approved by the department of the government that was responsible for its payment (Carter v. Thorson, 1894). A statute authorizing circuit judges to act in circuits other than their own and providing that their expenses in so doing shall be paid out of any money in the state treasury not otherwise appropriated violated Section 9, which provides that no warrant be drawn on the state treasurer, except in pursuance of an appropriation for a specific purpose.
In Candee Construction Company v. South Dakota Dept. of Transportation (1989), involving a breach of contract action brought against the State Department of Transportation by a highway construction company, the court held that Section 9 did not preclude an award for damages. The court found that the underlying statute provided a continuing appropriation for damages awarded against the state as a result of a lawsuit brought against the state pursuant to an authorizing statute. In so finding, the court stated that the previous interpretation provided by Lindekugel was overly restrictive. In Lindekugel & Sons Inc. v. South Dakota State Highway Commission (1972), the court adhered to the previous rule that where funds are only available for highway construction and maintenance, an action cannot be maintained by a contractor for damages for breach of contract. Prior to that, in Sigwald (p. 196) v. State (1926), the court had held that, pursuant to Section 9, monies levied and collected for state highway purposes were not available for the payment of damages for breach of contract actions. Essentially, the court found that there was no appropriation for payment of damages accruing from a breach of contract.
In Brams v. State (1935), the court stated that Section 9 is intended as a limitation upon the power of officers, departments, and agencies of the state other than the legislature; it does not prevent the legislature from incurring or directing the incurrence of indebtedness. The court in Brams found that if there was legislative authority for a contract, then there was also a liability created on the part of the state, which in turn constituted the appropriation for all liability incurred by that contract. Consequently, the court found that in fact the legislature had made an appropriation for payment of damages in a breach of contract action.
Section 10 Special Assessments for Local Improvements—Taxes for Municipal Purposes
Section 10, insofar as it requires municipal taxation to be uniform with respect to property within the jurisdiction of the body levying the tax, is applicable to general taxation only, whereas the authority to level special assessments is controlled by constitutional Article VI, Section 17 (Haggart v. Alton, 1912). Section 10 is not applicable to special assessments for local improvements levied against all property benefited by an improvement in proportion to the benefits conferred (Haggart v. Alton, 1912). Special taxation or special assessments are lawful only when based upon a special benefit accruing from the local improvement for which the tax or assessment was made. General taxes, on the other hand, are imposed by a governing body to raise funds for the general expenses of the particular community or district, and are levied against all taxable property without reference to special benefits to those taxed (Attorney General Opinion No. 85-28, 1985).
A statute authorizing municipal corporations to acquire and maintain public convention halls and to finance costs of those halls by special assessments on all privately-owned property, except for one-family or two-family dwellings used only for residential purposes, violated the constitutional requirement that the legislature may vest local government units with the power to make (p. 197) local improvements by special taxation (Ruel v. Rapid City, 1969). Under a special assessment, the benefit to the property must be actual, physical, and material, and not merely speculative or conjectural. An assessment cannot be used to impose an unequal and non-uniform tax on a minority of property owners for the benefit of the public. Under the constitutional provision limiting the corporate authority of local governmental units to make local improvements by special taxation, the term “local improvement” is a public improvement which, by reason of its being confined to a locality, enhances the value of adjacent property as distinct from benefits diffused throughout the municipality. As the court explained:
Special assessments are understood to refer to money raised or levied for some local municipal purpose to which the funds so collected are to be specifically applied in making the local improvements. The assessment is not laid upon a whole community, but only on a small and defined part thereof; and, while a tax is levied upon all property of a state, county, city, or town without any reference to special benefits to the individuals taxed, special assessments are presumed to be made on account of special benefits to the property assessed, conferred by the improvements for which the special tax is levied. We believe it has been made clear by our decisions that the benefit resulting to private property from the construction of a local public improvement in order to be the basis for a special assessment, must be a special benefit, by which is meant a benefit above and beyond that enjoyed in common with the public at large or the rest of the community.
(Ruel v. Rapid City, 1969)
According to the court in Ruel, a public convention hall would undoubtedly on occasion attract large groups of people to Rapid City, thus contributing to the economy of the city. However, the benefit conferred by such a facility is general to the community and cannot be translated into a specific benefit to commercial and other non-exempt real estate within the city. Consequently, the court found that a special assessment for the public convention hall was not a local improvement and was thus unconstitutional. In essence, the assessment amounted to a special tax upon a minority of the property owners, even though the benefit was to the public at large. Furthermore, much of the real property within the proposed district would not at all be benefited by a public convention hall.
Section 11 Unauthorized Use of Public Money as Felony
As explained by the court in State v. Douglas (1944), this section prohibits the making of a personal profit by the state treasurer as a consequence of the performance of any official duty. According to the court:
Neither the constitution nor the statute in question makes it an offense for the Treasurer to profit by the performance of any official duty, but only by the use of state funds. Neither does the constitution nor the statute make it a felony for the State Treasurer to profit as a consequence of the use of such funds, but only to make profit out of the personal or private use of such funds. There is a marked distinction between making a profit out of state funds and making a profit as a consequence of using state funds.
Section 12 Annual Statement of Receipts and Expenditures
Because this section is not self-executing, the legislature must enact laws to make it effective (State v. South Dakota Rural Credit Board, 1922).
Section 13 Vote Required to Increase Certain Tax Rates or Valuations
A 1978 amendment added this section to the constitution.
To increase the rate on income, sales, or service taxes, voters must exercise the right of initiative, or each branch of the legislature must pass the rate increase by a two-thirds vote (In re Janklow, 1999). This provision, which specifies two exclusive methods by which the rate of taxation can be increased, is a strict limitation on the legislature’s inherent authority regarding taxation. However, any tax that is not imposed upon sales or income is not governed by this section; thus, a mineral severance tax was not subject to this provision (Homestake Mining Co. v. Johnson, 1985).
Section 14 Vote Required to Impose or Increase Taxes
A 1996 amendment to the constitution added this section.
Section 15 Inheritance Tax Prohibited
An initiated constitutional Amendment C, approved on November 7, 2000, added this section to the constitution.(p. 200)