Acton Const. Co. v. Commissioner of Revenue

• Citation: 391 N.W.2d 828
• Decision Date: 15 August 1986
• Docket Number: No. C1-85-1516,C1-85-1516
• Parties: ACTON CONSTRUCTION CO., et al., Appellants, v. The COMMISSIONER OF REVENUE, Respondent.
• Court: Supreme Court of Minnesota (US)

Page 828

391 N.W.2d 828

ACTON CONSTRUCTION CO., et al., Appellants, v. The COMMISSIONER OF REVENUE, Respondent.

No. C1-85-1516.

Supreme Court of Minnesota.

Aug. 15, 1986.

Syllabus by the Court

1. The Commissioner of Revenue may, under the facts of this case, require the contractors to return the refunded amount of sales tax to their contract customers as a condition of the refund under Minn.Stat. Sec. 297A.35 (1984).

2. Application of Minn.Stat. Sec. 297A.35 (1984) to appellants' sales tax refund claims does not impair the obligation of contract in violation of the Constitution of the United States or the Constitution of the State of Minnesota.

3. The Commissioner of Revenue has not applied Minn.Stat. Sec. 297A.35, subd. 5 (1984) in violation of federal and state constitutional guarantees of equal protection of law and of uniform taxation.

4. A claim for refund of sales tax must be brought within the statute of limitations prescribed by Minn.Stat. Sec. 297A.35, subd. 1 (1984).

Jon Sarff, Minneapolis, for appellant.

Hubert H. Humphrey, III, Atty. Gen., Thomas K. Overton, Sp. Asst., Atty. Gen., Dept. of Revenue, St. Paul, for respondent.

Mark D. Thompson, Metropolitan Waste Control Commission, St. Paul, amicus curiae.

Heard, considered and decided by the court en banc.

WAHL, Justice.

This is an appeal from a decision of the Tax Court affirming an order of the Commissioner of Revenue. The Commissioner denied appellant general contractors' claims to a sales tax refund in accordance with Minn.Stat. Sec. 297A.35 (1984) unless the contractors would agree to remit the refunded amount of tax to their contract customers. ¹ We affirm the decision of the Tax Court.

The facts have been stipulated. Appellants, Shafer Contracting, Inc. and Progressive Contractors, Inc., are Minnesota general contractors. They contracted with governmental entities to build public works projects that included installation of water mains and storm or sanitary sewers. These were fixed-price contracts ² and included provisions requiring the contractor to pay all sales and use taxes incurred in completing the project.

At the time these contracts were entered into, it was the position of the Department of Revenue that when a contractor installed sewers or water mains as part of a construction project, the transaction was characterized for tax purposes as an improvement to the contract customer's real property. The result of this characterization was that when the contractor purchased pipe from a supplier for use in the construction, that purchase was considered a "retail sale" of building materials for use in real property improvement and was taxable. ³ Minn.Stat. Sec. 297A.01, subd. 4 (1984). Both appellant contractors and their contract customers understood this to be the tax consequence of the projects for which they were contracting, and Progressive and Shafer state they estimated and factored this expected tax liability into the price they bid for these contracts. Their bids were accepted and when Progressive and Shafer purchased pipe for completion of the water main and sewer construction projects, they paid sales tax to their suppliers who remitted the tax to the state.

In 1983, this court changed the prevailing understanding of the law by holding that a contractor's installation of sewage treatment equipment as part of a contract to build a sewage treatment plant was not to be characterized for tax purposes as an improvement to the contract customer's real property, but was instead to be characterized as a sale of tangible personal property to the customer. Zimpro, Inc. v. Commissioner of Revenue, 339 N.W.2d 736 (Minn.1983). Thus, in Zimpro, when the contractor purchased from its supplier the pipe necessary for fulfilling its construction contract, this purchase was not a taxable event but was, rather, a tax exempt purchase for resale. Id. at 738, 741. The installation of the equipment by the contractor in Zimpro would have been taxable as a retail sale of tangible personal property to the customer except that the customer was a governmental entity exempt from sales tax on the retail sales of tangible personal property under Minn.Stat. Sec. 297A.25, subd. 1(j) (1984). The taxable event in the cases before us was the contractor's installation of the water mains and sewers ⁴ in the customer's project, but Progressive's and Shafer's contract customers are also exempt governmental entities. Thus, all parties agree the sales tax was erroneously collected and paid to the state. Progressive and Shafer applied to the Commissioner of Revenue, through their suppliers, for refund of the erroneously paid sales tax. The contractors have stipulated they intend to retain any refund received and will not remit the refunded amount to their contract customers. The Commissioner denied the refund claims unless the contractors would provide adequate assurance that the refunded amount of tax would be remitted to the customers who paid it. The Tax Court affirmed the Commissioner's order, holding that under Zimpro, excess sales tax had been paid and refunds were due, but further holding that under the sales tax refund statute, Minn.Stat. Sec. 297A.35 (1984), the appellants' contract customers were entitled to the refunded amount of tax. The court determined the Commissioner could, therefore, condition refunds to Progressive and Shafer on receipt of satisfactory assurances that the refunds would be remitted to the proper parties. Under the court's decision, the customers themselves could also apply for the refunds.

Appellants challenge the Tax Court's interpretation of the sales tax refund statute and argue, in the alternative, that if this interpretation was intended by the legislature, the statute unconstitutionally impairs the obligation of contract and violates constitutional guarantees of equal protection of law and uniform taxation. Finally, appellants argue the statute's two-year statute of limitations should be replaced by a six-year limitations period.

I.

We will first address the issue of whether the Commissioner of Revenue may require the contractors to return refunded sales tax to their customers as a condition of the refund under Minn.Stat. Sec. 297A.35 (1984). Appellants claim the sales tax refund statute should be interpreted to mean that they, and not their contract customers, are entitled to retain any refund of sales tax erroneously paid in the course of these contracts. In Minnesota, the right to claim a refund of taxes voluntarily paid in error is governed by statute. There is no common law action or equitable basis for such recovery. ⁵ Horn v. City of Minneapolis, 182 Minn. 172, 234 N.W. 289 (1930) (no common law cause of action for taxes voluntarily paid in error); Minneapolis Brewing Co. v. Village of Bagley, 142 Minn., 16, 19, 170 N.W. 704, 705 (1919) (equitable claims for recovery of taxes paid in error have been embodied in tax refund statute).

The sales tax refund statute provides:

A person who has * * * paid to the commissioner an amount of tax for any period in excess of the amount legally due * * * may file with the commissioner a claim for refund of such excess subject to the conditions specified in subdivision 5.

Minn.Stat. Sec. 297A.35, subd. 1 (1984) (emphasis added). Subdivision 5 requires:

If a vendor has collected from a purchaser and remitted to the state a tax on a transaction which is not subject to the tax imposed by this chapter, the tax shall be refundable to the vendor only if and to the extent that it will be credited to the amounts due to the vendor by the purchaser or returned to the purchaser by the vendor.

Minn.Stat. Sec. 297A.35, subd. 5 (1984) (emphasis added). Subdivision 1 establishes the right to refund of excess sales tax paid and subjects that right to the conditions of subdivision 5. Subdivision 5 provides for refund to the "vendor" only if the refunded amount will be returned to the "purchaser." The purpose of the statute is evident from its provisions. Sales tax refunds are to be returned to the purchaser who actually bore the burden of the tax and are not to become a windfall to the vendor. We must ask, then, who, in this case, is the vendor and who is the purchaser for purposes of the statute.

The Commissioner argues the contractors are vendors who erroneously collected sales tax from their customers, who purchased sewers or water mains. The contractors contend they are the purchaser for purposes of the statute, because the sales tax was actually collected from them when they purchased pipe from their suppliers.

We reject the contractors' interpretation as inconsistent with the reasoning of our decision in Zimpro, supra. According to the rationale of that case, the contractor is characterized for tax purposes as a vendor whose transfer of the finished pipe product to the customer is taxed as a retail sale. As purchaser, the contract customer has paid the sales tax, while the contractor, as vendor, merely remits the tax to the state. Under the facts of this case, appellants' contract customers are the purchasers to whom the refund of excess sales tax paid must be remitted. We hold that the Commissioner of Revenue may require the contractors to return refunded sales tax to their customers as a condition of the refund under Minn.Stat. Sec. 297A.35 (1984).

II.

Appellants next contend that if the sales tax refund statute is interpreted to require them to remit the refunded amount of tax to their contract customers, their contract rights will be unconstitutionally impaired in violation of article I, section 10 of the United States Constitution and article I, section II of the Minnesota Constitution. ⁶ Such an interpretation, appellants argue, has the effect of reducing the amount of profit they are entitled to accrue from the performance of a pre-existing contract. The underlying assumption of appellants' argument is that the terms of the fixed price construction contracts in ...