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Sprint Spectrum LP v. Commissioner of Revenue

April 01, 2004

SPRINT SPECTRUM LP, ET AL., RELATORS,
v.
COMMISSIONER OF REVENUE, RESPONDENT.



SYLLABUS BY THE COURT

The purchase of telecommunications equipment that produces electronic signals that have physical characteristics is exempt from sales tax as "capital equipment" used for manufacturing "tangible personal property" to be "sold ultimately at retail" under Minn. Stat. § 297A.01, subd. 16(a) (2000) (repealed and recodified at Minn. Stat. § 297A.61, subd. 10 (2002)).

Reversed.

The opinion of the court was delivered by: Gilbert, Justice.

Dissenting, Anderson, Russell A., J. and Anderson, Paul H., J.

Took no part, Blatz, C.J.

Heard, considered, and decided by the court en banc.

OPINION

This is a tax case that involves a consolidated appeal of the Commissioner of Revenue's denial of requested refunds of sales tax paid on capital equipment purchases by three companies: Sprint Communications Company LP, Sprint Spectrum LP, and United Telephone Company of Minnesota (collectively "relators"). These companies argue that their purchases of equipment for their local exchange, wireless, and long distance services should qualify for sales tax exemption as "capital equipment" that is used in manufacturing "tangible personal property."

The parties agreed to stipulated facts. Relators operate in three different segments of the telecommunications business. United Telephone Company of Minnesota operates local exchange networks. Sprint Spectrum provides wireless phone services. Sprint Communications provides long distance telephone services. All three entities purchased equipment for use in their business and paid sales tax on the purchases.*fn1

Relators' network equipment transforms a caller's voice or data to electronic form in order to convey it to the intended recipient. The sound wave is processed and converted into various forms. These forms include digital signals, analog signal waves, optical forms, light pulses, data streams, and electrical signals. The particular form is deconstructed to enable it to travel over distances and then reconstructed. It is then transformed from an electronic format into an electronic reproduction of the original voice or data input. Data streams undergo a similar transformation for high-speed transmission called "packet switching," which includes breaking the data streams into smaller fragments before routing to the receiver. To qualify for sales tax exemption as capital equipment, the equipment must be used to manufacture "tangible personal property * * * to be sold ultimately at retail." See Minn. Stat. § 297A.01, subd. 16(a) (2000); Minn. Stat. § 297A.01, subd. 16(d)(4) (2000). The statute at issue defined "tangible personal property" as "corporeal personal property of any kind whatsoever * * *." Minn. Stat. § 297A.01, subd. 11 (2000).

Relators' product is taxed and sold at retail. To access the three different networks, customers pay fees. The fees are taxable per Minn. Stat. § 297A.01, subd. 3(f) (2000), defining as taxable sales and purchases of various telephone services. Relators' customers have paid $53,921,415 in sales taxes during the relevant period on purchases from the businesses that use the equipment at issue. These taxes are not in contention.

During the relevant dates, September 1996 - July 2000, relators purchased large amounts of equipment for inclusion in their local exchange, wireless, and long distance telecommunications networks. Relators paid sales tax of approximately $9 million on the purchases and incorporated the equipment into their various communications systems. The parties agreed that the sales tax paid would be subject to verification by the Commissioner of Revenue if we determine that the exemption applies. Relators seek a tax refund for taxes paid on these purchases.

The tax court affirmed the denial of relators' refund claims. Relying on a previous tax court decision, Qwest Corp. v. Comm'r of Rev., Nos. 7214 and 7283, 2001 WL 355861 (Minn. T.C. Apr. 2, 2001), aff'd by an evenly divided court, 640 N.W.2d 351 (Minn. 2002), the tax court noted that "the common definition of 'corporeal' 'does not include a product that can only be heard and not touched or seen.'" Sprint Spectrum LP, et al. v. Comm'r of Rev., Nos. 7299-R, 7308-R and 7309-R, 2003 WL 21246600 at *5 (Minn. T.C. May 23, 2003) (quoting Qwest, 2001 WL 355861 at *3).*fn2 Based on this definition of corporeal, the tax court held that relators' equipment does not manufacture tangible personal property as defined in Minn. Stat. § 297A.01, subd. 11, and therefore the equipment is not exempt from sales tax as capital equipment under Minn. Stat. § 297A.25, subd. 42. Sprint, 2001 WL 21246600 at *5, 6. We reverse.

I.

In the current matter, no material facts are in dispute. The sole issue is whether the tax court properly applied the law to the stipulated set of facts. On an appeal from summary judgment, when the facts are stipulated, we review de novo whether the lower court erred in its application of the law. Burlington N. R.R. Co. v. Comm'r of Rev., 606 N.W.2d 54, 57 (Minn. 2000); Amoco Corp. v. Comm'r of Rev., 658 N.W.2d 859, 871 (Minn. 2003). When interpreting an exemption to general taxation, the exemption provision is to be strictly construed. Camping & Educ. Found. v. State, 282 Minn. 245, 250, 164 N.W.2d 369, 372 (1969). The party seeking an exemption has the burden of proof to establish entitlement to the exemption. Id. When a statute is ambiguous, we may look toward legislative intent to assist us in our interpretation. See Minn. Stat. § 645.16 (2002). Before doing that though, we will review the history of this dispute and discuss the product at issue.

Minnesota imposes sales tax on "the gross receipts from sales at retail made by any person in this state." Minn. Stat. § 297A.02, subd. 1 (2000). Minnesota imposes use tax "[f]or the privilege of using, storing, distributing, or consuming in Minnesota tangible personal property or taxable services purchased for use, storage, distribution, or consumption in this state * * *" unless sales tax was paid on the sales price. Minn. Stat. § 297A.14, subd. 1 (2000). However, receipts from the sale, storage, use, or consumption of "capital equipment," as defined in Minn. Stat. § 297A.01, subd. 16(a) (2000), are exempt from sales and use tax. Minn. Stat. § 297A.25, subd. 42 (2000).

In 1984, the Minnesota Legislature enacted a 2% lower sales tax exception for capital equipment to stimulate economic activity in Minnesota. This exception was expanded to a full tax exemption in 1989. Act of October 3, 1989, ch. 1, art. 12, § 7, 1990 Minn. Laws 201, 206-07. Receipts "from the sale of and storage, use, or consumption of capital equipment" are exempt from sales and use tax. Minn. Stat. § 297A.25, subd. 42 (2000). Per Minn. Stat. § 297A.01, subd. 16(a) (2000):

Capital equipment means machinery and equipment purchased or leased for use in this state and used by the purchaser or lessee primarily for manufacturing, fabricating, mining, or refining tangible personal property to be sold ultimately at retail and for electronically transmitting results retrieved by a customer of an on-line computerized data retrieval system * * *.

(emphasis added). "Tangible personal property" is defined as "corporeal personal property of any kind whatsoever, including property which is to become real property as a result of incorporation, attachment, or installation following its acquisition." Minn. Stat. § 297A.01, subd. 11 (2000).*fn3

In 1993, the legislature amended the statute to insert "tangible personal property" in place of "a product." Act of May 24, 1993, ch. 375, art. 9, § 25, subd. 16, 1993 Minn. Laws 2728, 2897 (codified as amended at Minn. Stat. § 297A.01, subd. 16(a) (Supp. 1993)). In 1994, the statute was amended again to update the language of subdivision 16(a), but left "tangible personal property" intact. Act of May 5, 1994, ch. 587, art. 2, § 2, 1994 Minn. Laws 1043, 1067-68 (codified as amended at Minn. Stat. § 297A.01, subd. 16(a) (2000)). Before the 1993 amendment, capital equipment was statutorily defined as follows:

Capital equipment means machinery and equipment and the materials and supplies necessary to construct or install the machinery or equipment * * * used by the purchaser or lessee for manufacturing, fabricating, mining, quarrying, or refining a product to be sold at retail and must be used for the establishment of a new or the physical expansion of an existing manufacturing, fabricating, mining, quarrying, or refining facility in the state.

Minn. Stat. § 297A.01, subd. 16 (1992) (emphasis added). Following the 1993 amendment, and prior to the 1994 amendment, the statute read:

Capital equipment means machinery and equipment and the materials and supplies necessary to construct or install the machinery or equipment * * * used by the purchaser or lessee for manufacturing, fabricating, mining, quarrying, or refining tangible personal property, for electronically transmitting results retrieved by a customer of an on-line computerized data retrieval system, or for the generation of electricity or steam, to be sold at retail and must be used for the establishment of a new or the physical expansion of an existing manufacturing, fabricating, quarrying, or refining facility in the state.

Minn. Stat. § 297A.01, subd. 16(a) (Supp. 1993) (emphasis added).*fn4

In Northern States Power Co. v. Comm'r of Rev., 571 N.W.2d 573, 575 (Minn. 1997) ("NSP"), we reviewed a question of whether electric transformers performed a manufacturing function that would qualify for tax exemption. We utilized legislative history to interpret the purpose of the 1993 amendment, noting:

The purpose of [the amendment] is to confirm and clarify the original intent of the legislature in enacting the exemption for capital equipment * * *. [It] does not create a new category of items that are subject to sales and use tax, nor does it exclude from exemption any machinery, equipment, or other items which were intended to be exempted ...


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