We are all familiar with the sales tax. When we encounter it while making a purchase at a grocery store or a shop, most of us pay the extra amount without much consideration. The process is straightforward for consumers, and there’s simply no need to spend time thinking about it. The stakes are higher for businesses, though, and the process is more complicated as well. Companies face sales tax issues both in terms of payment when they buy items and collection when they sell items; failure to successfully navigate the sales tax rules can lead to squandered money at best and tax liabilities and penalties at worst. Truly, this seemingly straightforward process carries a lot of uncertainty, and many sales tax issues can realistically go either way. A strong understanding of the sales tax, then, can save money for Minnesota businesses.
What is the sales tax?
Minnesota imposes a tax on the sale of retail goods, calculated as a percent of the gross sale (currently 6.875%). The tax must be paid by the purchaser, but it must be charged, collected, and returned to the government by the seller. Some items are exempt from sales tax (food stamps, meals at school, and clothes are a few examples). Some items, such as tobacco products and liquor, are taxed at a higher rate (more information on MN tobacco tax registration). There is a long list of exempted products in the statute, but these examples illustrate how Minnesota (and other states) rewards the purchase of some items and punishes the purchase of others. Sometimes, it is unclear whether a product fits inside a certain exemption, and the sales tax treatment is disputed.
Another ideology within the sales tax is that it should only be paid once. When an item is sold and resold, the sales tax won’t be levied until the purchase by the final customer. For example, if a retail store purchases an order of shirts from the wholesaler, it won’t have to pay the sales tax. When those shirts are sold in stores to customers, though, the customer does have to pay the sales tax. Again, this distinction can get tricky. Imagine that the retail store doesn’t put the shirts on its shelves to be purchased, but instead uses them as displays, or to decorate the walls of the store. Should the store be responsible for paying a sales tax?
What does the statute say?
Minnesota Statute § 297A.62, subd. 1 imposes a tax on the gross receipts from “retail sales”. Retail sale is defined by § 297A.61, subd. 4 as “any sale, lease, or rental for any purpose, other than resale, sublease, or subrent of items by the purchaser in the normal course of business.” The subdivision goes on to address whether particular sales are considered to have been purchased for resale. For instance, a sale of property used by the owner only by leasing it to others or by holding it in an effort to lease it, and put to no use by the owner other than resale after the lease or effort to lease, is a sale of property for resale—there would be no sales tax on the owner. On the other hand, the sale of building material to owners, contractors, subcontractors, or builders for the erection of buildings or the alteration, repair, or improvement of real property is a retail sale, and would be subject to a sales tax. Importantly, sale and purchase are broadly defined by § 297A.61, subd. 3. They include not only the transfer of title, but many other things as well. These definitions play a leading role in many sales tax disputes.
Sections 67-71 of the statute list products that are exempt from sales tax, and try to address many borderline cases which might or might not be included within those categories. Section 67 describes general exemptions such as food and clothes. Section 68 exempts certain business products, such as “materials consumed in industrial production” and “capital equipment”. Section 69 covers agricultural exemptions. Section 70 covers exemptions for governments and nonprofit groups. Section 71 lists construction exemptions from the sales tax, such as materials purchased for the building of correctional facilities, chair lifts, ramps and elevators, mineral production facilities, and other projects that have been deemed beneficial to the public.
Legal Issues
Even with the thorough descriptions provided by the statute, disagreements arise as to the proper implementation of the sales tax. Although many types of disputes exist, they typically come in two main flavors: whether something is a “retail sale” or is instead being purchased for resale in the normal course of business, and whether a sale fits into a statutory exemption. It should be noted that in Minnesota, the burden of proof is on the person seeking to utilize the tax exemption, and there is a presumption that all gross receipts are subject to a tax until the contrary is established (Minn. Stat. 297A.665).
Retail Sale or Purchased for Resale?
A & H Vending Co. v. Comm’r of Revenue, 608 N.W.2d 544 was decided by the Minnesota Supreme Court in 2000, and dealt with whether businesses charging guests to use entertainment machines (arcade games, pinball machines, etc.) should have had to pay a sales tax when purchasing these machines. Only a “retail sale” is taxable, and property purchased for resale is not a retail sale. A & H pointed to statutory language defining one type of “sale”:
“The granting of the privilege of admission to places of amusement, recreational areas, or athletic events, except a world championship football game sponsored by the national football league, and the privilege of having access to and the use of amusement devices.”
Because A & H was selling the privilege to use the machines, and was collecting a sales tax on this revenue, A & H argued that the initial purchase of these machines was for resale and thus non-taxable.
The court disagreed, drawing a line between the customers’ use of the machines and the customers’ purchase of the privilege of having access to the machines, and labeling the latter as the taxable event. Customers do not temporarily purchase the machines, nor do they purchase a license to operate the machines. Instead, customers pay for the amusement that they expect to receive from the machines. The court held that the purchase of the machines was not for resale, but rather to support the service of entertainment; this makes the purchase taxable.
Another “purchased for resale” case is Northwest Territories Gold & Silver Exchange, Inc. v. Commissioner of Revenue, 377 N.W.2d 448 (Minn. 1985). The debate here centered on the sale of gold and silver coins by a coin exchange company, and whether its customers were in fact making retail purchases as contemplated by statute. The exchange company asked customers whether they intended to resell the coins; if customers said yes, the company did not charge them a sales tax. Most of these reselling customers planned to hold the coins and hope for an eventual increase in value.
While the court accepted that such practice would constitute purchase for resale, it was not convinced that the practice resulted in resale in the ordinary course of business. This would require that the customers’ resales “are of a kind and frequency characteristic of a regular course of business, meeting the requirement of commercial continuity or consistency implicit in the operation of a business”. Here, most customers were making an investment, hoping that the market price would go up over time so that they could sell eventually; they would not be selling in the ordinary course of business. The court held the company liable for the uncollected sales tax on most sales. For the subset of customers who were actually coin dealers, however, the court was willing to allow the exemption.
Does the Product Fit Into an Exemption?
In Bituminous Roadways, Inc. v. Commissioner of Revenue, 324 N.W.2d 799 (Minn. 1982), BRI had purchased “bituminous mix” from others for their asphalt paving business. Usually it produced its own, but sometimes bought from others to keep up with business demands. Although this purchase was a “retail sale”, BRI claimed that the purchase fit inside an exemption to the sales tax: all materials used or consumed in industrial production of personal property intended to be sold ultimately at retail. BRI argued that the taxable sale would come when they sold the paving material by installing it for customers.
The court agreed that the purchase of this bituminous mix would fit within the exemption. However, BRI had never actually used the mix; it had used only the materials it had produced itself. Because of this, the material was not “used or consumed” in producing goods for retail sale, and thus was subject to a sales tax.
Summary
For consumers, the sales tax is a basic part of life, unworthy of much consideration. For businesses, however, knowing how to navigate sales tax law can save money or help to avoid penalties or liability. Though the sales tax requirements are often clear-cut, and the statute usually provides detailed descriptions of exemptions, there are times when the rules are hazy and there is room for debate.
