April 5, 2004FOR IMMEDIATE RELEASE
Minnesota Supreme Court Determines Telecommunications Network Equipment is Exempt Capital
Equipment Used in Manufacturing.
The Minnesota Supreme Court ("Supreme Court") reversed the appellate court's
denial of refund claims in
Sprint
Spectrum LP, et al., v. Minnesota Commissioner of Revenue, April
1, 2004. In this decision, the Supreme Court determined that purchases of
network equipment that transformed sound into an electronic form for transmission
and then reconstructed for delivery to a recipient were capital equipment
and eligible for the manufacturing exemption.
Sprint Communications Company LP, Sprint Spectrum LP, and United Telephone
Company of Minnesota (collectively "Relators") applied for a refund of sales
and use taxes paid on equipment used in providing telecommunications
services to customers. The refund was denied by the Minnesota Department
of Revenue, and Relators appealed to the Tax Court, which affirmed the denial
determining that the equipment did not process tangible personal property.
The Tax Court ruled that the definition of corporeal did not include things
that can only be heard and not touched or seen.
In a 1993 amendment to Minnesota Statutes, section 297A.01, the legislature
substituted tangible personal property for product in the definition of
the requirements for capital equipment qualifying for the exemption. The
Tax Court determined that this change narrowed the exemption and after the
amendment the equipment in question would not qualify for the exemption
as capital equipment.
The Supreme Court utilized legislative history to determine the legislative
intent of the 1993 amendment. The purpose of this amendment was to "confirm
and clarify the original intent of the legislature in enacting the exemption
for capital equipment ... . [It] does not create a new category of items
that are subject to sales and use tax, nor does it exclude from exemption
machinery, equipment, or other items which were intended to be exempted
as capital equipment, as defined in Minnesota Statutes, section 297A.01,
subdivision 16." The Supreme Court also reviewed several cases to determine
that telecommunication service providers did deliver products.
The Supreme Court ruled that the claimants did meet the burden of proof
entitling them to a tax exemption. The equipment purchased in providing
telecommunication services to customers did produce telecommunications products
that were tangible personal property that were sold at retail, and as such
they were exempt as capital equipment.
If you have any questions regarding this information, please call Mr. Jim
Kranjc, Principal in Charge of the Ryan & Company Chicago office, at 630.515.0477.
Mr. Kranjc can also be reached by
e-mail.