Decision Date30 June 2005
Docket NumberNo. A04-2190.
Citation698 N.W.2d 408
CourtMinnesota Supreme Court

John W. Windhorst, Jr., William R. Goetz, Dorsey & Whitney, L.L.P., Minneapolis, MN, for Relator.

Mike Hatch, Attorney General, Barry R. Greller, Assistant Attorney General, St. Paul, MN, for Respondent.

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


HANSON, Justice.

We review the question of whether the MinnesotaCare tax on the gross revenues of health-care providers transacting business in Minnesota violates the Commerce Clause of the United States Constitution because it allows an exemption for revenues received from other health-care providers who are also subject to the MinnesotaCare tax. Relator Mayo Collaborative Services, Inc. (Mayo) argues that the statute imposes an unreasonable burden on interstate commerce because it allows an exemption for intrastate transactions but not for interstate transactions. The tax court upheld the MinnesotaCare tax and affirmed the decision of respondent Commissioner of Revenue (Commissioner) to deny Mayo's claims for exemption of revenues from non-Minnesota health-care providers. Mayo Collaborative Servs., Inc. v. Comm'r of Revenue, No. 7605, 2004 WL 2199503 (Minn.Tax Regular Div. Sept. 21, 2004). We affirm, although on slightly different grounds.

The parties submitted the case to the tax court on stipulated facts. Mayo is a Rochester, Minnesota, medical reference laboratory that performs tests on medical samples. As a health-care provider transacting business in Minnesota, Mayo was subject to a 1.5% MinnesotaCare tax on gross revenues. Minn.Stat. §§ 295.50, subd. 4; 295.51, subd. 1; 295.52, subd. 7 (2000). To avoid "pyramiding" tax liability, Minn.Stat. § 295.53, subd. 1(a)(4)-(5) (2000) provided a resale exemption that permitted providers such as Mayo to exclude revenue received from other health-care providers that will resell Mayo's services and will themselves be subject to the MinnesotaCare tax on that resale. The version of the statute applicable to this case contained the following exemptions:

(a) The following payments are excluded from the gross revenues subject to the hospital, surgical center, or health care provider taxes under sections 295.50 to 295.59:
* * * *
(4) payments received from hospitals or surgical centers for goods and services on which liability for tax is imposed under section 295.52 * * *.
(5) payments received from health care providers for goods and services on which liability for tax is imposed under this chapter * * *.

Minn.Stat. § 295.53, subd. 1(a)(4)-(5).1

For the tax years 1998 through 2001, Mayo reported its gross revenues from all sources but then deducted, as exempt, revenue received from all health-care providers, including those located and transacting business outside of Minnesota and regardless of whether the provider was liable for MinnesotaCare tax on its revenue. The Commissioner allowed Mayo to deduct as exempt revenue received from "Minnesota entities" but disallowed deductions for "non-Minnesota receipts," and then imposed an additional tax of $4,450,502 and interest of $860,977.

On appeal to the tax court, Mayo argued that the MinnesotaCare revenue exemption violated the Commerce Clause because it discriminated against interstate commerce and was not "fairly apportioned," violating two prongs of what has come to be known as the Complete Auto test.2 Mayo argued that the exemption facially discriminated against interstate commerce because it provided an exemption for revenue received from a provider that would resell the service in Minnesota but not from a provider that would resell the service in any other state. See Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564, 575-76, 117 S.Ct. 1590, 137 L.Ed.2d 852 (1997) (stating that a tax is facially discriminatory, and therefore "virtually per se invalid," if it "expressly distinguishes between entities that serve a principally interstate clientele and those that primarily serve an intrastate market"). In addition, Mayo argued that the exemption was not fairly apportioned because it violated the United States Supreme Court's "internal consistency" test. See Oklahoma Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. 175, 185, 115 S.Ct. 1331, 131 L.Ed.2d 261 (1995) ("Internal consistency is preserved when the imposition of a tax identical to the one in question by every other State would add no burden to interstate commerce that intrastate commerce would not also bear.").

The Commissioner argued that the exemption was not facially discriminatory because, by its plain language, the exemption was based on whether the customer had already paid the tax, not on whether the customer was located out of state. The Commissioner argued that the exemption was internally consistent because the MinnesotaCare tax scheme ensures that tax is imposed on a specific medical service only once, albeit on different taxpayers: when Mayo serves a Minnesota customer, that customer pays the MinnesotaCare tax; but when Mayo serves a non-Minnesota customer, Mayo pays the tax.3

The tax court held in favor of the Commissioner, reasoning that the MinnesotaCare tax exemption was not facially discriminatory because it was not based on geography, and was internally consistent and thus fairly apportioned because the tax was being assessed on a "single taxpayer, the Minnesota lab," and there was no risk that any state would impose tax on the same health-care service more than once. Mayo Collaborative Servs., 2004 WL 2199503 at *7-*9.

The parties renew their arguments before this court. In addition, to demonstrate that the exemption was not geographically based and therefore not facially discriminatory, the Commissioner asserts that Mayo could not deduct revenue received from a Minnesota customer who was not subject to the MinnesotaCare tax, such as a patient who seeks Mayo's laboratory services directly without first visiting a hospital or clinic. And, to demonstrate that the MinnesotaCare tax scheme was fairly apportioned under the internal consistency test, the Commissioner argues that any threat of multiple taxation as a burden on interstate commerce is eliminated by a tax credit that is provided for a health-care provider "that has paid taxes to another jurisdiction measured by gross revenues and is subject to [MinnesotaCare] tax * * * on the same gross revenues * * *." Minn.Stat. § 295.54, subd. 1 (2000). Mayo does not dispute that it could not exclude revenue received from a Minnesota patient who seeks Mayo's services directly, but argues that this is irrelevant because the exemption applies only to revenue from sales for resale, not to retail sales. As for the tax credit, Mayo argues that it is inapplicable because any health-care provider that is subject to the MinnesotaCare tax could not have "paid taxes to another jurisdiction," construing the word "paid" to mean being legally liable for the tax.

When reviewing decisions from the Minnesota Tax Court, we determine (1) whether the tax court had jurisdiction, (2) whether the tax court decision was supported by the evidence and was in conformity with the law, and (3) whether the tax court committed any other error of law. Wilson v. Comm'r of Revenue, 656 N.W.2d 547, 551-52 (Minn.2003); Minn. Stat. § 271.10, subd. 1 (2004). When parties stipulate to underlying facts, we need consider only whether applicable law was applied properly and our review is de novo. Chapman v. Comm'r of Revenue, 651 N.W.2d 825, 830 (Minn.2002).

States have wide latitude to establish taxation schemes, and "a taxpayer challenging the constitutionality of a state tax statute bears a heavy burden." Id.; see also Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 164, 103 S.Ct. 2933, 77 L.Ed.2d 545 (1983) (citing precedent indicating that taxpayer bears "distinct burden" of proof by "clear and cogent evidence"). "The presumption is that a statute is constitutional, and we are required to place a construction on the statute that will find it so if at all possible." Kline v. Berg Drywall, Inc., 685 N.W.2d 12, 23 (Minn.2004).


We begin by examining whether the MinnesotaCare exemption discriminates against interstate commerce, in violation of prong 3 of the Complete Auto test. See note 2, supra. The petitioner bears the burden of providing "convincing evidence showing that the tax deters, or for that matter discriminates against, interstate activities." Am. Trucking Ass'ns, Inc. v. Michigan Pub. Serv. Comm'n, 545 U.S. ___, 125 S.Ct. 2419, 2425, ___ L.Ed.2d ___, 2005 WL 1421164, at *5 (2005). A state tax discriminates against interstate commerce if it "tax[es] a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the State." Fulton Corp. v. Faulkner, 516 U.S. 325, 331, 116 S.Ct. 848, 133 L.Ed.2d 796 (1996) (citations omitted). Stated another way, a state tax discriminates against interstate commerce if it gives "differential treatment [to] in-state and out-of-state economic interests that benefits the former and burdens the latter." Oregon Waste Sys., Inc. v. Dep't of Env'tl Quality, 511 U.S. 93, 99, 114 S.Ct. 1345, 128 L.Ed.2d 13 (1994). Such discrimination may occur in one of three ways: "if it is facially discriminatory, has a discriminatory intent, or has the effect of unduly burdening interstate commerce." Amerada Hess Corp. v. Dir., Div. of Taxation, New Jersey Dep't of Treas., 490 U.S. 66, 75, 109 S.Ct. 1617, 104 L.Ed.2d 58 (1989); Caterpillar, Inc. v. Comm'r of Revenue, 568 N.W.2d 695, 699 (Minn.1997).

Mayo does not argue that the exemption had a discriminatory intent or purpose. The Commissioner suggests, and Mayo does not disagree, that the purpose of the revenue exemption was to avoid "pyramiding" tax liability, based on an intent to avoid multiple taxation within...

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