Comm'r of Revenue v. Enbridge Energy, LP, A18-0864
| Decision Date | 13 February 2019 |
| Docket Number | A18-0864 |
| Citation | 923 N.W.2d 17 |
| Parties | COMMISSIONER OF REVENUE, Appellant, v. ENBRIDGE ENERGY, LP, Respondent. |
| Court | Minnesota Supreme Court |
Keith Ellison, Attorney General, Jennifer A. Kitchak, Assistant Attorney General, Saint Paul, Minnesota, for appellant.
Paul B. Kilgore, Eric S. Johnson, Fryberger, Buchanan, Smith & Frederick, P.A., Duluth, Minnesota, for respondent.
This case requires that we decide whether the tax court must follow an administrative rule on how utilities, including pipelines, should be valued for tax purposes. We conclude that the rule, including its valuation formula, is binding on the tax court.
This case arises from challenges filed by Enbridge Energy, LP ("EELP") to the Commissioner of Revenue’s valuation of EELP’s petroleum pipeline system for property taxes payable in 2013, 2014, and 2015. The tax court consolidated these challenges for trial in the spring of 2015. Then, the tax court stayed the consolidated proceedings pending the final resolution of Minnesota Energy Resources Corp. v. Commissioner of Revenue ("MERC "), 886 N.W.2d 786 (Minn. 2016). MERC considered, in part, the applicability of administrative rules, promulgated by the Commissioner, to valuation challenges in the tax court.
Our decision in MERC was filed on November 9, 2016. The tax court then lifted the stay in this case, discovery was conducted in the consolidated proceedings, and a trial was held in October 2017. The tax court, on May 15, 2018, filed its decision, in which it (1) concluded that the Commissioner had overvalued EELP’s pipeline system for all three years, (2) issued a new valuation for all three years, and (3) ordered the Commissioner and EELP to "discuss procedures for addressing the method by which the court should allocate" the pipeline system’s unit value between Minnesota and other states.
In determining the value of EELP’s pipeline system for the three years at issue, the tax court rejected both the sales-comparison approach and the cost approach. The cost approach is explicitly used in Minnesota Rule 8100 ("Rule 8100" or "the Rule"), an administrative rule adopted by the Commissioner after our decision in Independent School District No. 99 v. Commissioner of Taxation , 297 Minn. 378, 211 N.W.2d 886 (1973), to guide the valuation of utilities, including pipeline systems. But the tax court concluded that it was not bound by Rule 8100 in determining market value, because the formula in the Rule applied only to the Commissioner during her valuation of the pipeline system.
After rejecting the cost approach, the tax court applied the income approach to valuation, setting the unit value of the pipeline system for the three years at issue. The court declined, however, "to allocate [the] system unit value between Minnesota and other states," because the court (1) was not limited to the formula the Commissioner used under Rule 8100 and (2) had not utilized the cost approach, which therefore rendered the allocation formula in Rule 8100 unworkable. The tax court therefore "invited the parties to submit proposals for allocating" the system unit value.
The Commissioner objected to the tax court’s conclusion that it is not bound by Rule 8100 when valuing a pipeline system and in allocating system unit value, and filed a timely petition for discretionary review. See Minn. R. Civ. App. P. 105.01. We granted her petition.
The question presented in this appeal is whether the tax court erred when it concluded that it is not bound by Rule 8100 when valuing a pipeline system. The tax court is an agency in the executive branch, which, subject to our review, is granted "sole, exclusive, and final authority for the hearing and determination of all questions of law and fact arising under the tax laws of the state ...." Minn. Stat. § 271.01, subd. 5 (2018). The tax court must "hear, consider, and determine ... every appeal de novo." Minn. Stat. § 271.06, subd. 6 (2018) ; see also Conga Corp. v. Comm’r of Revenue , 868 N.W.2d 41, 47–48 (Minn. 2015).
Our review of tax court decisions is well-defined; we "determine whether the tax court lacked subject matter jurisdiction, whether the tax court’s decision is supported by evidence in the record, and whether the tax court made an error of law." Hohmann v. Comm’r of Revenue , 781 N.W.2d 156, 157 (Minn. 2010). "When questions of law arise, [we] ha[ve] plenary powers to review the tax court’s decision." Nw. Nat’l Life Ins. Co. v. Cty. of Hennepin , 572 N.W.2d 51, 52 (Minn. 1997) (citing Nagaraja v. Comm’r of Revenue , 352 N.W.2d 373, 376 (Minn. 1984) ). Review of the tax court’s conclusion that it is not bound by Rule 8100 is a question of law that we review de novo. MERC , 886 N.W.2d at 799.
The property-tax system rests on the principle that all property must be "valued at its market value." Minn. Stat. § 273.11, subd. 1 (2018). Each item of personal or real property must be separately and independently valued. Id. (). Generally, property tax is assessed by local taxing authorities. See Minn. Stat. §§ 273.17, subd. 1, .062 (2018).
The Legislature has created several exceptions to this arrangement of local valuation, one of which is the valuation of pipeline systems. The Commissioner must annually list and assess "[t]he personal property, consisting of the pipeline system of mains, pipes, and equipment attached thereto, of pipeline companies and others engaged in the operations or business of transporting products by pipelines." Minn. Stat. § 273.33, subd. 2 (2018). The Commissioner then must provide this list and assessment to the various taxing jurisdictions in which the property "is usually kept"—that is, through which the pipeline runs. Id. , subd. 1.
Instead of providing an individualized valuation, the Commissioner assesses pipeline property as a whole, using the unit-rule method. Cty. of Aitkin v. Blandin Paper Co. , 883 N.W.2d 803, 812 (Minn. 2016) (). The unit-rule method "value[s] the entirety of a business, including all property, as a going concern when the business enterprise is located in more than one jurisdiction." Id. at 811.
The Legislature has given the Commissioner considerable authority to make administrative rules. "The [C]ommissioner shall, from time to time, make, publish, and distribute rules for the administration and enforcement of state revenue laws," including the pipeline valuation statute, and "[those] rules have the force of law." Minn. Stat. § 270C.06 (2018) ; see also State ex rel. Indep. Sch. Dist. No. 6, Morrison Cty. v. Johnson , 242 Minn. 539, 65 N.W.2d 668, 673 (1954) (). An administrative rule promulgated pursuant to statutory authority " ‘is valid and is as binding upon a court as a statute if it is (a) within the granted power, (b) issued pursuant to proper procedure, and (c) reasonable.’ " State ex rel. Spannaus v. Hopf , 323 N.W.2d 746, 752 (Minn. 1982) (quoting 1 Kenneth Culp Davis, Administrative Law Treatise § 5.03, at 299 (1958) ); see also Marks v. Comm’r of Revenue , 875 N.W.2d 321, 327 (Minn. 2016) ().
Pursuant to her rule-making authority, the Commissioner promulgated Rule 8100, regarding ad valorem taxes for utilities, including pipeline systems. See generally Minn. R. 8100 (2017). Under the Rule, valuation and allocation is a four-step process. First, the Commissioner must "establish[ ] an estimate of the unit value for each utility company." Minn. R. 8100.0200. Then, the "resulting valuation is allocated to each state in which the utility company operates." Id. The Commissioner then subtracts the "value of property located in Minnesota that is exempt from property tax or that is locally assessed" from Minnesota's allocation. Id. Finally, the Commissioner apportions the remaining allocation "to the various taxing districts" in which the pipeline property is located. Id.
To establish unit value, the Commissioner relies primarily upon a mix of the cost and income methods. Minn. R. 8100.0300. The Rule also allows for the use of other indicators of value, including the market approach and obsolescence. Id. , subp. 4a. Generally, the Rule calls for an equal weighting of the cost and income methods. Id. , subp. 5. If the Commissioner concludes "the market indicator can be quantified, is reliable, and is indicative of value for a company," she may include it, but its weight cannot exceed five percent. Id. , subp. 4a. The Commissioner is also able to make weighting adjustments for obsolescence and other indicators of value, so long as she "state[s] in writing the findings that necessitate deviation from the default weightings ...." Id. The allocation equation, however, relies primarily on cost factors. Minn. R. 8100.0400, subp. 4.
In addition to allowing for discretion in the elements of the valuation formula, the Rule also includes a general reservation of the right for the Commissioner "to exercise discretion whenever the circumstances of a valuation estimate dictate the need for it." Minn. R. 8100.0200. The Commissioner may exercise this right to ensure: (a) "a balance between a prescriptive rule and sound appraisal judgment;" (b) "that all relevant data pertaining to value is considered;" (c) "that a reasonable estimate of market value is derived;" (d) "predictability and stability in estimations of market value;" and (e) "that utility valuation is easily understood and administered." Id.
We turn now to the legal issue in this case. This is not the first time the question of the applicability of Rule 8100 to the tax court has come before us. We directly addressed the question...
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