Zip Sort, Inc. v. Commissioner of Revenue, C0-96-1938

• Decision Date: 24 July 1997
• Docket Number: No. C0-96-1938,C0-96-1938
• Citation: 567 N.W.2d 34
• Parties: ZIP SORT, INC., Relator, v. COMMISSIONER OF REVENUE, Respondent.
• Court: Minnesota Supreme Court

Page 34

567 N.W.2d 34

ZIP SORT, INC., Relator, v. COMMISSIONER OF REVENUE, Respondent.

No. C0-96-1938.

Supreme Court of Minnesota.

July 24, 1997.

Syllabus by the Court

1. Equipment that uses information procured from the United States Postal Service to create and print 11-digit bar codes on individual pieces of mail, manufactures those bar codes within the meaning of Minnesota Statutes section 297A.01, subdivision 16(a) (Supp.1993).

2. Eleven-digit bar codes created and printed on individual pieces of mail are tangible personal property within the meaning of Minnesota Statutes section 297A.01, subdivision 11 (1996).

3. The transfer of 11-digit bar codes in exchange for value-added refunds is a sale within the meaning of Minnesota Statutes 297A.01, subdivision 3(a) (1996), and a retail sale within the meaning of Minnesota Statutes section 297A.01, subd. 4 (1996).

Kay Nord Hunt, Terrance W. Moore, Lommen, Nelson, Cole & Stageberg, P.A., Minneapolis, for Relator.

Barry R. Greller, Assistant Attorney General, Hubert H. Humphrey, III, Minn. Atty. General, Tax Litigation Division, St. Paul, for Respondent.

Heard, considered and decided by the court en banc.

OPINION

TOMLJANOVICH, Justice.

The relator, Zip Sort, Inc., filed claims for a refund of sales taxes imposed upon its purchase of two multi-line optical character readers ("character readers") and a bar code sorter. Minnesota law allows taxpayers to receive a refund of state and local sales taxes paid pursuant to the purchase of "capital equipment," which is defined in part as equipment that manufactures or fabricates tangible personal property for sale at retail. The Department of Revenue ("DOR") concluded that Zip Sort uses the character readers and the bar code sorter to provide a service and denied Zip Sort's claim. The appeals office of the DOR affirmed that decision and concluded that Zip Sort did not use either the character readers or the bar code sorter for the manufacture or fabrication of tangible personal property for retail sale and affirmed the denial of Zip Sort's claim. Zip Sort appealed to the tax court, which also denied both claims, but on more specific grounds. The tax court concluded that the only tangible property at issue was the mail, and that Zip Sort did not sell the mail at retail. We, too, conclude that Zip Sort did not sell the mail at retail, but we determine that Zip Sort uses the character readers to manufacture bar codes, which are tangible personal property that is sold at retail to the United States Postal Service ("USPS"). In addition, we determine that Zip Sort does not use the bar code sorter to manufacture or fabricate tangible personal property for sale at retail. As a result we hold that the tax court erred in denying Zip Sort's refund claim for sales taxes paid upon the purchase of the two character readers, but that the tax court did not err in denying Zip Sort's refund claim for the sales taxes paid upon the purchase of the bar code sorter.

The case was tried on stipulated facts, which are as follows:

Zip Sort is a Minneapolis based corporation that is engaged in the business of receiving mail from third parties, reading addresses on the mail, applying scanable bar codes to the mail, and sorting the mail by zip code into bundles for which Zip Sort receives value-added refunds from the USPS. Between October 1, 1990 and December 31, 1992, Zip Sort purchased equipment and machinery for the expansion of its mail-related businesses. Zip Sort specifically purchased two character readers and one bar code sorter. Zip Sort paid $52,589.50 in Minnesota sales tax and $4,213.71 in Minneapolis sales tax on the two character readers. It also paid $10,387.47 in Minnesota sales tax and $817.61 in Minneapolis sales tax on the bar code sorter.

Zip Sort filed claims pursuant to Minnesota Statutes section 297A.15, subdivision 5, seeking a full refund of sales taxes paid on both of the character readers and the bar code sorter. The DOR on November 1, 1993 denied the claims and Zip Sort filed a protest on December 10, 1993. A DOR appeals officer on March 13, 1995 affirmed the denial on the grounds that Zip Sort did not primarily use the equipment in a trade or business of manufacturing tangible personal property for sale at retail. Zip Sort on May 4, 1995 filed an appeal with the tax court, which ultimately determined on cross motions for summary judgment that the mail was not sold at retail, regardless of whether bar codes had been added.

Zip Sort operates its mail-related business as follows:

Zip Sort receives mail from persons who take advantage of its bar coding and sorting facility. It then places the mail on one of the two character readers. The character readers then scan the addresses on each piece of mail, and utilize information contained in software procured from the USPS to access the appropriate 11-digit code for each address. The character readers apply a bar code that contains the 11-digit number to each piece of mail and then scan the mail again for accuracy. Zip Sort then places the bar-coded mail on the bar code sorter for the purpose of sorting the mail to either the fifth or seventh digit. ¹ After the bar code sorter sorts the mail, Zip Sort bundles the mail and delivers it to the USPS facility located on its premises. Upon receiving the envelopes or other mail containing the bar codes, the USPS can use machines to scan the bar codes and sort the individual pieces of mail to the 11th digit. ² Without the bar codes, the USPS would have to sort the mail by hand.

Under USPS regulations, a person who provides mail with a proper bar code is eligible to receive value-added refunds payable by the USPS. The USPS has authorized Zip Sort to apply for and receive such refunds, which are payable in amounts of one cent or more per eligible piece of bar-coded mail. Zip Sort argues that it uses the two character readers and the one bar code sorter for fabricating or manufacturing bar codes for retail sale to the USPS. The Commissioner, on the other hand, argues that Zip Sort uses both types of equipment to provide a mailing service for those customers who pay to have their mail presorted.

I.

This court reviews a grant of summary judgment de novo and will affirm only if the record shows that there is no genuine issue of material fact and the court below has not erred in its application of law. Offerdahl v. University of Minn. Hosps. and Clinics, 426 N.W.2d 425, 427 (Minn.1988). In reviewing questions of law posed by the tax court, this court has plenary power. Morton Bldgs., Inc. v. Commissioner of Revenue, 488 N.W.2d 254, 257 (Minn.1992). The application of law by the tax court to stipulated facts is a question of law and is, thus, reviewed de novo. Id.

Minnesota law allows a taxpayer to seek a refund of sales taxes paid upon the retail purchase of capital equipment. Minn.Stat. § 297A.15, subd. 5 (1996); see also Minn.Stat. § 297A.25, subd. 42 (1996) (exempting from sales tax the gross receipts from the sale of capital equipment). The sales tax statute defines capital equipment as "machinery and equipment and the materials and supplies necessary to construct or install the machinery or equipment." Minn.Stat. § 297A.01, subd. 16(a) (Supp.1993). To qualify under this definition, "the capital equipment must be used by the purchaser or lessee for manufacturing, fabricating, mining, quarrying, or refining tangible personal property * * * to be sold at retail." Id. To qualify for the tax exemption, therefore, Zip Sort must show that the purchased equipment is 1) used for the manufacturing, fabricating, mining, quarrying or refining 2) of tangible personal property ³ 3) to be sold at retail. ⁴ Id.

The tax court did not specifically address whether Zip Sort uses the equipment for the manufacturing, fabricating, mining, quarrying or refining of tangible personal property, but instead denied the claim on the grounds that Zip Sort did not effect a "retail sale." The statutory definition of "sale" relied upon by the tax court is:

[t]he production, fabrication, printing, or processing of tangible personal property for a consideration for consumers who furnish either directly or indirectly the materials used in the production, fabrication, printing, or processing.

Minn.Stat. § 297A.01, subd. 3(b) (1996). We conclude, however, that the tax court's reliance upon Minnesota Statute section 297A.01, subdivision 3(b) was misplaced. Section 297A.01, subdivision 3 includes 11 nonexclusive ⁵ events within the statute's definition of "sale" or "purchase." Subdivision 3(b) is only one of those 11 nonexclusive events, and as we have twice made clear, the legislative purpose behind this portion of the subdivision was to impose a sales tax on the value of those activities that improve the particular pieces of tangible personal property to be sold or purchased. U.S. West Material Resources, Inc. v. Commissioner of Revenue, 511 N.W.2d 17, 20 (Minn.1994) (stating that process of cutting cable for a customer who ultimately purchased the improved cable qualified as a sale under section 297A.01); Emil Olson, Inc. v. Commissioner of Revenue, 293 N.W.2d 831, 834 (Minn.1980) (stating that process of crushing gravel for a customer who ultimately purchased the improved gravel qualified as a sale under section 297A.01). In U.S. West, we stated that:

the legislature, in making the sales tax applicable to consideration paid by a third party for processing, was concerned with taxing the enhancement in value resulting from an operation or series of operations upon tangible personal property. [The taxpayer] received valuable consideration from its customer * * * for its cable cutting activity because this activity enhanced the commercial value of the cable.

511 N.W.2d at 20.

Zip Sort is correct in asserting that the placement of a bar code on mail makes it more suitable for a particular commercial use (namely machine sorting). ⁶ Zip Sort is...