Northern States Power Co. v. Commissioner of Revenue

• Decision Date: 20 November 1997
• Docket Number: No. C9-97-698,C9-97-698
• Citation: 571 N.W.2d 573
• Parties: NORTHERN STATES POWER COMPANY, et al., Relators, v. COMMISSIONER OF REVENUE, Respondent.
• Court: Minnesota Supreme Court

Page 573

571 N.W.2d 573

NORTHERN STATES POWER COMPANY, et al., Relators, v. COMMISSIONER OF REVENUE, Respondent.

No. C9-97-698.

Supreme Court of Minnesota.

Nov. 20, 1997.

Syllabus by the Court

Step-down, load tap, and line transformers are exempt capital equipment under Minn.Stat. § 297A.01, subd. 16 (1992) and Minn.Stat. § 297A.01, subd. 16 (1993).

Sue Ann Nelson, Steven G. Mahon, Tracy N. Smith, Doherty, Rumble & Butler, P.A., Minneapolis, for relators.

Hubert H. Humphrey III, Atty. Gen., Barry R. Greller, Asst. Atty. Gen., Tax Litigation Division, St. Paul, for respondent.

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

OPINION

PAGE, Justice.

Northern States Power Company ("NSP") and United Power Association ("UPA") separately purchased step-down, load tap, and line transformers between June 1, 1990, and March 31, 1994, for use in their business operations. Each paid the Minnesota sales tax on the transformers they purchased and then each filed for refunds of those taxes, claiming that the transformers are exempt from the sales tax as capital equipment under Minn.Stat. § 297A.25, subd. 42 (1992). The Commissioner of Revenue denied their refund claims, finding that none of the transformers qualified as exempt capital equipment under the statute. Both NSP and UPA filed separate notices of appeal to the Minnesota Tax Court. In each case, the tax court denied NSP's and UPA's motions for summary judgment and granted summary judgment to the commissioner, finding that the transformers were not capital equipment as defined in either the 1992 or 1993 statutory definitions. See Minn.Stat. § 297A.01, subd. 16. We reverse.

NSP is a Minnesota corporation doing business in Minnesota as a public utility. NSP produces and sells its electricity to retail and wholesale customers in Minnesota, North Dakota, and South Dakota. UPA is a rural electric cooperative engaged in the production of electricity to be sold at retail through member distribution cooperatives in Minnesota and Wisconsin. Both NSP and UPA purchased a number of step-down, load tap, and line transformers for use in the production of electricity.

According to NSP and UPA, the transformers in question are an integral part of the process of producing electricity because they transform the electricity leaving the power plant into a form usable by the ultimate consumer. The production process, simplified for purposes of this discussion, is as follows: At the power plant, generators convert raw material, usually water, coal, or nuclear fuel, into electrical energy. The electricity then passes through a step-up transformer located adjacent to the power plant that increases the voltage of the electricity exiting the power plant before it is transmitted to substations where step-down transformers decrease the voltage. ¹ Load tap transformers keep the voltage at constant levels during increased or decreased loads on the electrical power system. Finally, after the electricity leaves the substation, it passes through line transformers that reduce the voltage to levels usable by the ultimate consumer. NSP and UPA contend that the primary function of the transformers is not to move or transport electricity from point A to point B, but to further process the electricity at points A or B to complete the product sold at retail. NSP and UPA further contend that although it is feasible to conceive of a system without the use of multiple transformers, under the modern power system, these transformers are necessary to make electricity production safe, efficient, and economical.

Under Minn.Stat. § 297A.25, subd. 42 (1992), capital equipment is exempt from Minnesota's sales tax. When a company purchases capital equipment, it must first pay the sales tax and then apply to the Commissioner of Revenue for a refund. Minn.Stat. § 297A.15, subd. 5 (1992). Capital equipment is defined in Minn.Stat. § 297A.01, subd. 16 (1992), as equipment used for "manufacturing * * * a product to be sold at retail." The legislature amended this statute in 1993, defining capital equipment as equipment used for "manufacturing * * * tangible personal property, or for the generation of electricity or steam, to be sold at retail." Minn.Stat. § 297A.01, subd. 16(a) (Supp.1993). Both NSP and UPA paid the sales taxes on the transformers and then filed for refunds of those taxes pursuant to Minn.Stat. § 297A.15, subd. 5. UPA filed one of its claims before the legislature amended the capital equipment definition in 1993. NSP and UPA filed all of the remaining claims after the 1993 statutory changes became effective.

The commissioner denied all of NSP's and UPA's refund claims, concluding that the transformers were not capital equipment. Both NSP and UPA appealed the denial. The tax court affirmed the commissioner's denial of the refunds, concluding that the transformers are not used in the manufacturing of a product to be sold at retail under the 1992 definition of capital equipment, nor are they used in the generation of electricity under the 1993 definition. NSP and UPA together appealed to this court.

NSP and UPA argue that the transformers are exempt from the sales tax under both the 1992 and 1993 definitions of capital equipment. They contend that transformers are used in the manufacturing of electricity under the 1992 definition, and that the 1993 definition was only a clarification of the earlier statute. The commissioner agrees that the 1993 statute only clarified the 1992 definition. The commissioner argues, however, that the transformers are not used in the manufacturing or generation of electricity and therefore do not qualify under either statute. NSP and UPA argue further that exclusion of transformers from the exemption violates their rights to equal protection and uniformity of taxation, and finally that "in the event the 1993 definition is determined to be more restrictive than the 1992 definition, NSP and UPA are entitled to have their claims for refund reviewed under the 1992 definition." ²

The issue here is ultimately one of statutory construction, a question of law. As such, this court has plenary power to review the tax court's decision. Nagaraja v. Comm'r of Revenue, 352 N.W.2d 373, 376 (Minn.1984). When this court interprets a statute, the words of the statute are to govern. Minn.Stat. § 645.08 (1996). When the words of a statute are "clear and free from all ambiguity," they should not be disregarded. Minn.Stat. § 645.16 (1996). Words are to be given their common and approved usage, except for technical words which are to be construed according to their special meaning. Minn.Stat. § 645.08(1) (1996).

In resolving the issues presented by this case, we first look to the capital equipment definition in effect in 1992 when UPA filed the first of the claimed refunds. The 1992 statute defined capital equipment as equipment used for "manufacturing * * * a product to be sold at retail." ³ Minn.Stat. § 297A.01, subd. 16 (1992). This court has determined that electricity is a manufactured product. Minn. Power & Light Co. v. Personal Property Tax, Taxing Dist., City of Fraser, Sch. Dist. No. 695, 289 Minn. 64, 75, 182 N.W.2d 685, 691 (1970) (concluding that electricity is a "manufactured, marketable product" under Minn.Stat. § 272.02(11))....