Morton Bldgs., Inc. v. C.I.R.

• Decision Date: 07 August 1992
• Docket Number: No. C7-92-82,C7-92-82
• Citation: 488 N.W.2d 254
• Parties: MORTON BUILDINGS, INC., Respondent, v. COMMISSIONER OF REVENUE, Relator.
• Court: Minnesota Supreme Court

Page 254

488 N.W.2d 254

MORTON BUILDINGS, INC., Respondent, v. COMMISSIONER OF REVENUE, Relator.

No. C7-92-82.

Supreme Court of Minnesota.

Aug. 7, 1992.

Rehearing Denied Sept. 21, 1992.

Syllabus by the Court

The state use tax, Minn.Stat. § 297A.14, applies to materials purchased and processed into building components outside the state, and used to construct buildings within Minnesota.

Hubert H. Humphrey, III, Atty. Gen., Gregory P. Huwe, Asst. Atty. Gen., Tax Litigation Div., St. Paul, for relator.

John W. Windhorst, Jr., Dorsey & Whitney, Minneapolis, for respondent.

Considered and decided by the court en banc without oral argument.

GARDEBRING, Justice.

This case arises from the Commissioner of Revenue's (commissioner) appeal of a Minnesota Tax Court Order granting a use tax refund to Morton Buildings, Inc. (Morton). In 1988, Morton initially applied for a refund of the use taxes paid from April 1985 through December 1987 (the tax periods). The commissioner granted Morton's application in part but denied a refund for use taxes paid on raw materials it purchased out of state, manufactured into building components, and brought to Minnesota to construct pre-fabricated buildings. On appeal, the tax court granted the refund, finding that the raw materials purchased by Morton outside Minnesota are "us[ed], stor[ed] and consum[ed]" outside of Minnesota in the making of new and different items of tangible personal property, hardware and building components; are not "purchased" within the meaning of the statute; and are not purchased "for use, storage or consumption" in Minnesota. The tax court therefore concluded that the raw materials do not satisfy the required conditions for the imposition of the use tax under Minn.Stat. § 297A.14.

The facts, as stipulated by the parties, are as follows: Morton Buildings, Inc. is an Illinois corporation with its principal place of business in Morton, Illinois, and seven sales offices in Minnesota. Morton sells and erects prefabricated buildings for industry and farm use in Minnesota and other states. Morton purchases the raw materials it uses outside Minnesota, stores them outside Minnesota and makes them into building components at factories located outside Minnesota. The raw materials are not purchased for any particular project. When a customer orders a building, Morton withdraws the necessary raw materials from storage and makes them into the building components needed for that building, according to the specific design specifications chosen by the customer. These include the type and location of windows, doors, overhangs, skylights, etc. About 16.6% of the raw materials Morton uses in its buildings do not have any work done on them at the factories; they are purchased in their final form outside Minnesota. These materials include some of the lumber and nails, cement, staples, insulation bats and plastic sheeting. ¹

The building components Morton makes at the factories include trusses, lower columns, upper columns, purlins, wind ties and overhang rafters. Making these components involves sawing the lumber to certain lengths and at different angles, drilling holes if needed, and assembling the wooden pieces using metal gussets, connector plates or nails. At the factories, Morton also makes the metal panels which make up the building's interior and exterior walls and roof panels. The panels are made from coils of galvanized cold-rolled steel which is coated prior to its arrival at the factory. The steel is run through a machine to roll channels into it to strengthen it and then cut to the proper size. Morton's building components must be within approximately one-eighth to one-half inch of being "square" in order to properly fit together into the finished building.

Once all the factory work is complete, Morton transports all the necessary building components to the building site. Morton employs a three-person crew to erect the building, using the components made at Morton factories and some materials Morton buys completely finished. Morton subcontracts to independent contractors any plumbing, heating, electrical or finish carpentry work the customer orders. The erection of the building constitutes an improvement to real property for sales and use tax purposes.

Morton's refund claim has two parts. First, it seeks a refund of all of the use taxes it paid to Minnesota for the cost of the raw materials it used at its factories to make building components used in Minnesota, an amount of $586,749.87. Second, it seeks a refund of a portion of the taxes covered by the first claim to reflect taxes it had paid to Iowa on the purchase of the same materials, an amount of $223,749.14. The commissioner allowed the second claim, and ordered a refund of that tax plus interest, pursuant to Minn.Stat. § 297A.24 (1990), which allows credits for use taxes paid to other states on the same tangible personal property. Of the remaining $363,000.73 of the first claim, an amount representing approximately 16.6% was deducted, to represent the proportion of the building components Morton purchased in a completely finished form and for which it seeks no refund of the use tax. Morton's refund claim is therefore $302,697.60.

This court's review of tax court decisions is governed by the provisions of Minn.Stat. § 271.10, subd. 1 (1990), which limits review to cases where it is argued that the tax court was without jurisdiction the decision was not justified by the evidence or in conformity with law, or the tax court committed an error of law. In reviewing questions of fact this court's review is limited "to determining whether there is reasonable evidence to sustain the findings." Red Owl Stores, Inc. v. Comm'r of Taxation, 264 Minn. 1, 9-10, 117 N.W.2d 401, 407 (1962). In reviewing questions of law this court has plenary power. Nagaraja v. Comm'r of Revenue, 352 N.W.2d 373, 376 (Minn.1984). The application of the law to the stipulated facts is a question of law, and thus is freely reviewable.

During the 1930's, many states began imposing sales taxes on items sold within their borders. To counteract the tendency of consumers to shop in states with low or no sales taxes, complementary use taxes were introduced. Warren & Schlesinger, Sales and Use Taxes: Interstate Commerce Pays Its Way, 38 Colum.L.Rev. 49, 63-65 (1938). The goal of use taxes is to place in-state and out-of-state sellers on the same footing. If a consumer buys a product out-of-state where there is no sales tax, the use tax is imposed when the item is brought into the state for use. To prevent taxation by multiple states in interstate transactions, the sales and use tax statutes often allow a credit for taxes paid to other states on the same items. Annotation, Validity and Construction of Provisions Allowing Use Tax Credit for Tax Paid in Other State, 31 A.L.R. 4th 1206, 1208 (1984).

Minnesota first enacted its sales and use tax statutes in 1967. Act of June 1, 1967, ch. 32, Art. XIII, §§ 2 & 14, 1967 Minn.Laws 2143, 2179, 2182, codified at Minn.Stat. § 297A.02 and Minn.Stat. § 297A.14. "[T]his use tax protects the State's sales tax by eliminating the residents' incentive to travel to States with lower sales taxes to buy goods rather than buying them in Minnesota." Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460 U.S. 575, 577, 103 S.Ct. 1365, 1367-68, 75 L.Ed.2d 295 (1983).

The Minnesota use tax is imposed "for the privilege of using, storing or consuming in Minnesota tangible personal property or taxable services purchased for use, storage, or consumption in this state" unless the sales tax was paid on the sales price. Minn.Stat. § 297A.14 (1990). Thus, the tax court found that to uphold the imposition of the use tax on the tangible personal property Morton used in Minnesota to construct pre-fabricated buildings, three elements must be met:

(a) the item of tangible personal property must be used, stored or consumed in Minnesota;

(b) the item of personal property must be purchased; and

(c) the purchase of the item of personal property must have been for use, storage or consumption in Minnesota.

Morton argues, and the tax court found, that the items of tangible personal property Morton used, stored or consumed in Minnesota were not the raw materials they purchased, but the building components and hardware made out of the raw materials, which are "new and different items of tangible personal property." Thus, the raw materials on which the use tax was imposed were not used, stored or consumed in Minnesota, but were used, stored and consumed in Morton's building component factories outside Minnesota.

The tax court also concluded that what was used, stored, or consumed in Minnesota, the building components, were not purchased, because they were manufactured; and therefore they were not purchased for use, storage, or consumption in Minnesota. Thus, the tax court concluded, a tax on the raw materials is not justified because no part of the three-prong test is met. ²

We reverse the tax court because we believe that its underlying premise is wrong. The tax court decision, and that of the other jurisdictions in which Morton has prevailed, ³ is bottomed on the notion that the processing of the raw materials in other locations somehow precludes their later use in the construction of buildings in Minnesota. We conclude that this is contrary to the applicable statutory definitions and the common usage of the word "use."

The legislature has broadly defined "use" for the purposes of the use and sales tax statutes: " 'Use'...