Connexus Energy v. Comm'r of Revenue, A14–1996.

• Decision Date: 05 August 2015
• Docket Number: No. A14–1996.,A14–1996.
• Citation: 868 N.W.2d 234
• Parties: CONNEXUS ENERGY et al., Relators, v. COMMISSIONER OF REVENUE, Respondent.
• Court: Minnesota Supreme Court

868 N.W.2d 234

CONNEXUS ENERGY et al., Relators

v.COMMISSIONER OF REVENUE, Respondent.

No. A14–1996.

Supreme Court of Minnesota.

Aug. 5, 2015.

Thomas R. Muck, Masha M. Yevzelman, Fredrikson & Byron, P.A., Minneapolis, MN, for relators.

Lori Swanson, Attorney General, Shannon M. Harmon, Tamar N. Gronvall, Assistant Attorneys General, Saint Paul, MN, for respondent.

Took no part, PAGE and LILLEHAUG, JJ.

OPINION

STRAS, Justice.

This case presents two questions regarding the sales-tax treatment of electric cooperatives. The first question is whether electric cooperatives may reclassify portions of monthly payments by their customers as equity contributions and receive sales-tax refunds based on the reclassification. The second question requires us to determine the applicable statute of limitations for the recovery of sales taxes erroneously refunded by the Commissioner of Revenue.

After considering both questions, the tax court concluded that the cooperatives were not entitled to a sales-tax refund. With respect to the taxability of the monthly payments made by the cooperatives' customers, the tax court concluded, and we agree, that those payments were taxable as consideration for sales of electricity. However, with regard to four of the cooperatives, we conclude, contrary to the decision of the tax court, that the Commissioner's assessments to recover sales-tax refunds are subject to the 2–year statute of limitations governing erroneous refunds, see Minn.Stat. § 289A.37, subd. 2 (2014), not the 3–1/2–year statute of limitations generally applicable to the Commissioner's assessment authority, see Minn.Stat. § 289A.38, subd. 1 (2014). We therefore affirm in part, reverse in part, and remand to the tax court for further consideration of the timeliness of the Commissioner's assessments of four of the cooperatives.

I.

The relators are 16 electric cooperatives located in Minnesota and organized under Minn. Stat. ch. 308A (2014), which authorizes businesses to operate as cooperatives and provides rules governing their management.¹ In order to generate working capital and to satisfy their lenders, the cooperatives raise equity from their customers, referred to as “patrons” or “members.” Before the start of each year, the cooperatives approve a budget that includes an estimate of how much they will pay for electricity from their wholesale suppliers. In order to raise a sufficient amount of equity, the cooperatives also include a line item in their budgets, designated as a “target margin,” which represents the anticipated revenues in excess of operating costs and expenses.

Consistent with the practice of many electric utilities, the cooperatives bill their members at the end of each month based on the amount of electricity each member has used. The cooperatives calculate their monthly electricity rates by dividing the sum of their estimated expenses and the target margin by the estimated units of electricity they expect to sell. The bills itemize various charges related to the price of electric service, but they do not separately list a charge for the target margin. The cooperatives collect sales tax based on the total monthly charge to each member.

At the end of each year, if a cooperative's actual margin is positive, the cooperative converts the excess revenues into “capital credits,” which are distributed to members based on the amount of electricity each member purchased during the year. These credits become the members' equity in the cooperative, and remain on the cooperative's balance sheet as equity until the credits are “retired” through repayment to the members. Because capital-credit retirement is at the discretion of the board of each cooperative and equity contributions are subordinate to a cooperative's debt, a member does not know when, or whether, the cooperative will retire the capital credit.

Based on the annual allocation of capital credits, the cooperatives filed amended sales-tax returns for tax periods spanning the years 2004–06 to recover sales taxes they had paid for the portion of the revenues that they later converted into equity. Initially, the Commissioner granted the refunds claimed on the cooperatives' amended returns. Later, the Commissioner changed her view, and accordingly assessed the cooperatives to recover the amounts she had refunded to them.

The cooperatives filed administrative appeals of the assessments, but the Commissioner denied relief. The cooperatives then appealed to the tax court, which affirmed the Commissioner's assessments following a trial. The tax court found that “[e]ach monthly transaction involved one and only one sale: a retail sale of electricity,” and that “[e]ach monthly sale transaction was complete no later than when [a cooperative] received a [member's] monthly payment.” The tax court further determined that the annual allocation of actual margin, which the cooperatives used to award capital credits, constituted a second transaction, “distinct from, and different in kind from” the electricity sales. Based on those findings, the tax court concluded as a matter of law that the consideration for each monthly sale of electricity was “the total price the [cooperative] stated on its bill and received from its [member] for electric service.” Because the total monthly charge was the taxable “sales price” for each transaction, the cooperatives were not legally entitled to sales-tax refunds for any earnings that they later converted into equity.

In a separate order denying partial summary judgment to four of the cooperatives, the tax court concluded that certain challenged assessments were timely because the Commissioner made them within 3–1/2 years of the filing of the cooperatives' amended returns. The cooperatives timely appealed the tax court's judgment by filing a petition for a writ of certiorari with this court. See Minn.Stat. § 271.10 (2014).

II.

The first question presented in this case is whether the tax court correctly determined that a member's entire monthly payment for electricity service is subject to Minnesota sales tax, even when the cooperatives convert some of those earnings into equity at the end of the year. In reviewing a tax court decision, we determine whether the “tax court lacked subject matter jurisdiction, whether the tax court's decision is supported by the 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). We review the tax court's factual findings for clear error and the tax court's legal determinations de novo. Soyka v. Comm'r of Revenue, 834 N.W.2d 711, 713 (Minn.2013). A factual finding is clearly erroneous only if we are “left with a definite and firm conviction that a mistake has been committed.” Beck v. Cty. of Todd, 824 N.W.2d 636, 638 (Minn.2013) (quoting Berry & Co., Inc. v. Cty. of Hennepin, 806 N.W.2d 31, 33 (Minn.2011) ).

Minnesota imposes a sales tax on “gross receipts from retail sales.” Minn.Stat. § 297A.62, subd. 1 (2014). A “retail sale” includes “the furnishing for a consideration of electricity, gas, water, or steam for use or consumption” within Minnesota. Minn.Stat. § 297A.61, subds. 3(e), 4(a)(2) (2014). “Gross receipts” are “the total amount received, in money or by barter or exchange, for all sales at retail as measured by the sales price.” Minn.Stat. § 297A.61, subd. 8 (2014). The “sales price,” in turn, is “the total amount of consideration ... for which personal property or services are sold.” Id., subd. 7(a). Whether the cooperatives owed sales tax on the monthly sales of electricity depends on whether the earnings that the cooperatives later converted into equity were part of the “total amount of consideration” for which electricity was sold. If they were, as the Commissioner argues, then the entire amount charged in each monthly bill was subject to Minnesota sales tax.

The parties agree that the monthly sales of electricity are retail sales subject to sales tax. However, the cooperatives argue that, because they reclassified a portion of the members' payments as equity interests at the end of the years in question, they were entitled to sales-tax refunds on those reclassified amounts because equity contributions are not taxable. The cooperatives further argue, based on the annual reclassifications, that the amount stated on a member's monthly bill does not accurately reflect the “consideration” for electricity. Instead, in their view, the amount includes “both the consideration members pay in exchange for electricity and also an equity contribution that members make in exchange for equity interests.” Before addressing the broader legal question of whether the entire monthly charge is the “total amount of consideration” for electricity, we first examine the tax court's factual findings about the cooperatives' operations.

A.

Following a trial in which the parties presented evidence in support of their respective theories of the taxability of the monthly charges to members, the tax court found that each monthly transaction “involved one and only one sale: a retail sale of electricity.” As the tax court noted, the monthly bills sent by the cooperatives indicated that the monthly charges were in exchange for electrical service. For example, a representative Connexus bill specified that the charges were for “Electric Service,” and reported a member's total energy usage in kilowatt-hours. The bill separately listed the “Cost of Basic Service,” a “Residential Energy Charge” based on the number of kilowatt-hours of energy used, and a “Power Cost Adjustment.” It also described the “Total Amount Due” as the “Total Cost for Electric Service (Actual Charges).” Nothing in the bill suggested that the monthly charge was for anything other than the purchase of electrical service, such as for an equity interest or a non-electricity item. In fact, the bill itself forecloses such a reading by describing the “Total Cost” as “for Electric Service.” We therefore...