Opinion ID: 2007026
Heading Depth: 1
Heading Rank: 1

Heading: The Limitation on the Occupation Tax

Text: With respect to occupation taxes, the issue is: Whether Erie is entitled to apportionment in determining the statutory limitation of its occupation tax liability under Minn.Stat. § 298.40, subd. 1(b) (1982). And, if so, whether Erie is entitled to a refund of occupation tax overpayments, or, instead, a credit against occupation taxes otherwise payable under Minn.Stat. § 298.09, subd. 4 (1982). The occupation tax is a tax imposed upon every person engaged in the business of mining or producing taconite in Minnesota. Section 298.01, subd. 2 (1982). The taconite is currently taxed at 15% of its value. The taxable value of the taconite is the ore's value at the place where the ore is brought to the earth's surface (mouth-of-the-mine value) and is determined by the Commissioner through administrative computations. Section 298.03 (1982). The Commissioner has historically determined the mouth-of-the-mine taxable value by beginning with the published Lake Erie sale price of the taconite and then working backwards, deducting the costs incurred after the ore has been brought to the surface, i.e., beneficiation and transportation expenses, to determine the mouth-of-the-mine value. These deductions are called nonstatutory deductions. Other deductions (such as the cost of extracting the ore) are made as provided by section 298.03 (1982) to arrive at the taxable value of the taconite. The effective tax rate is applied to the net figure after all deductions to determine a company's occupation tax liability. Although section 298.01, subd. 2 (1982), imposes a 15% tax rate, that rate is reduced by the labor credit to a current effective rate of 6.75% pursuant to section 298.02 (1982). Further, the occupation tax liability is subject to the statutory limitation imposed under section 298.40 (1982). It is the construction of this statute that is central to this appeal. This statutory limitation is made secure by the Taconite Amendment to the Minnesota Constitution, art. 10, § 6, which prohibits any amendment, modification or repeal of section 298.40 for 25 years, i.e., until 1989. The statutory limitation was enacted in 1963 and the constitutional amendment the following year. The Taconite Amendment was enacted to ensure investors in the taconite industry of fair tax treatment and thereby to encourage taconite development. Further, it appears that the legislature had in mind the contention of the mining industry that historically occupation taxes on the mining companies had exceeded income taxes on other kinds of corporations. In Reserve Mining Co. v. State, 310 N.W.2d 487, 494 (Minn.1981), we noted that the Taconite Amendment created a contract between the taconite producers and the State of Minnesota and observed that [w]hen the people of this state make a bargain, mining companies as well as the least of us have a right to expect that the bargain will be kept. It is Erie's contention, adopted by the Tax Court, that the occupation tax assessed by the Commissioner for 1974 exceeds the tax ceiling imposed by section 298.40. Thus the questions for this court are what limitation does section 298.40 impose and has that limit been exceeded. Section 298.40 is set out in full below. [1] Essentially it provides that the occupation, royalty and excise taxes imposed on Erie shall not exceed the greater of two limitations: Clause (a)  the amount Erie would pay if its tax were computed under the laws as they existed on July 1, 1963; or Clause (b)  the amount Erie would pay if Erie were taxed under the income, franchise and excise tax laws generally applicable to manufacturing corporations transacting business within Minnesota, but subject to specified exceptions. Since both parties concede that Erie's 1974 occupation, royalty and excise tax liability exceeds the clause (a) limitation, the question here is whether it exceeds the greater limitation set by clause (b). Clause (b), it is observed, does not freeze Erie's tax liability, but allows the limitation to be whatever the income, franchise and excise taxes generally applicable to manufacturing corporations may be from time to time, subject to specified exceptions. Since Erie does not pay income taxes, it is necessary under clause (b) to compute hypothetically what Erie's income taxes would be were it taxed like other corporations. Erie's occupation tax liability for 1974 under the laws applicable in that year (if a deduction were permitted for the section 298.241 production tax, to be discussed later) would be $2,732,600. To this figure must be added Erie's royalty and excise tax liabilities for 1974 of $1,144,274, for a total occupation, excise and royalty tax liability of $3,876,874. If the Commissioner's interpretation of clause (b) is adopted, all of Erie's 1974 net income will be apportioned to Minnesota and the $3,876,874 actual figure computed for 1974 will not exceed the hypothetical tax. If, however, Erie's and the Tax Court's interpretation of clause (b) is followed, only 30% of Erie's net income would be apportioned to Minnesota and thus subject, hypothetically, to the 12% state corporate income tax imposed on manufacturing companies. This would result in a hypothetical total income, franchise and excise tax liability for Erie of $2,233,880, which is less than the occupation, royalty and excise taxes actually imposed. Under Erie's interpretation of clause (b), its actual occupation, royalty and excise tax liability for 1974 exceeds the statutory limitation by $1,642,994. If this latter contention is affirmed by this court, then Erie is entitled to either a credit or a refund in this amount. [2] In other words, the issue is whether Erie is to be allowed income apportionment. Whether Erie has paid too much tax because its payment exceeds the hypothetical tax limitation of clause (b) depends on whether, in computing the hypothetical tax liability, the Commissioner must apportion Erie's income in the same manner that other Minnesota manufacturing companies apportion their income. The formula for income apportionment for Minnesota manufacturing companies doing business partly within and partly without Minnesota is set out in Minn.Stat. §§ 290.19 and 290.17, subd. 2(4) (1982). If this apportionment formula is applicable to computing Erie's hypothetical income tax under the clause (b) limitation, then only 30% of Erie's hypothetical income is allocated to Minnesota, thus lowering the clause (b) limitation, thereby reducing the amount of occupation tax liability the Commissioner can assess against Erie. The Commissioner argues that the apportionment formula does not apply because: (1) an examination of clause (b) of section 298.40 shows that the apportionment formula of section 290.19 was not intended to apply to taconite producers; and (2) even if section 290.19 were intended to apply, an examination of section 290.19 shows that it is not applicable to Erie. The Tax Court rejected both of the Commissioner's contentions. We disagree with the Tax Court. Minn.Stat. § 298.40, subd. 1, is, unfortunately, not free of ambiguity. Clause (b) provides in part that Erie's taxes are to be limited to: the amount which would be payable if such person or corporation were taxed with respect to such mining, production, or beneficiation under the income, franchise, and excise tax laws generally applicable to manufacturing corporations transacting business within the state, as such laws may be enacted or amended from time to time   . Clause (b), however, does not end there; if it did, we would have no problem. It goes on to provide: except that for the purpose of the computation under this clause (b), (1) income shall be apportioned to Minnesota in the manner which may be otherwise specified by law   . What is the significance of this proviso? Erie takes the position the phrase means that the apportionment formula of section 290.19 is to be used in computing a taconite company's hypothetical income; in other words, section 290.19 is, in effect, incorporated by reference into clause (b) of section 298.40. We do not agree. Were the apportionment formula of section 290.19 meant to apply, the proviso would not have been inserted. The preceding language of clause (b) plainly says that taconite companies are to be taxed in the same manner as other manufacturing companies, and other manufacturing companies are subject to section 290.19. In other words, if the proviso were intended to include section 290.19, it is unnecessary and redundant. There has to be a different reason or purpose for the proviso. Erie suggests, alternatively, that the phrase at least means that section 290.19 should apply until such time as the legislature specifies a different apportionment formula. This alternative interpretation, however, is also subject to the infirmity that the phrase was unnecessary because section 290.19 would apply without it; if the legislature intended section 290.19 to apply until the legislature enacted a different statutory formula, we think the legislature would have said so directly, instead of making an exception to the apportionment formula of general application and stating that income would be apportioned in the manner which may be otherwise specified by law. We conclude the only reasonable interpretation of the proviso is that the taconite company's hypothetical income is to be apportioned otherwise than as specified in section 290.19. The proviso language must be read in conjunction with the language that precedes it. Clause (b) says that the taconite company's occupation tax shall not exceed its hypothetical income tax liability except that in computing the hypothetical tax limitation, income shall be apportioned in the manner which may be otherwise specified by law. [3] In other words, the legislature did not intend the apportionment formula generally applicable to manufacturing companies to be used, but it reserved the right to specify an apportionment formula at such time in the future as it deemed appropriate. Since the legislature has not seen fit for the years in question to enact a specific apportionment statute for the clause (b) computation, no apportionment is available to Erie. The legislature may have excluded the apportionment formula of section 290.19 in the clause (b) computation because the formula is not applicable to a cost company. At the time section 298.40 was enacted in 1963, the only taconite companies operating in this state were cost companies. [4] The apportionment formula of section 290.19 is available only to those corporations doing business partly within and partly without Minnesota. Minn.Stat. § 290.17, subd. 2(4) (1982), defines a trade or business located in Minnesota as doing business partly within and partly without the state if tangible personal property is sold by such trade or business and delivered or shipped to a purchaser located outside the state of Minnesota. (Emphasis added.) Here, Erie has not sold its taconite pellets; it only transfers the pellets to its out-of-state shareholders in exchange for payment to Erie of its cost of producing the pellets. To characterize this transaction as a sale elevates form over substance. Erie itself has recognized that, in substance, Erie's stockholders are joint venturers, using Erie as a vehicle for their enterprise. In 1952, when Erie and its shareholders applied for a closing agreement with the Internal Revenue Service for Erie to be treated as a cost company for federal income tax purposes, Erie stated in the application that, [i]f these stockholders are treated as joint venturers, which is in substance what they are, the Government will be giving recognition to a common and traditional method of doing business in the iron ore industry. (Emphasis added.) In other words, though a separate corporate entity, Erie is really a conduit by which parties to a joint venture acquire taconite pellets at cost. Thus, we have great difficulty in characterizing Erie as a Minnesota business that sells its products to out-of-state purchasers. Each shareholder's payment to Erie appears to be more like a contribution to capital insofar as money is transferred to Erie to enable it to produce the pellets. The payments are not simply made directly in exchange for pellets. In this context, we conclude Erie does not qualify as a Minnesota business that sells its product to out-of-state purchasers, and, consequently, Erie would be precluded from apportioning its income under section 290.19. Erie argues that disallowing income apportionment under section 290.19 defeats the purpose of the Taconite Amendment to keep the occupation taxes of a taconite company on a parity with the income taxes paid by other corporations. This begs the question. The constitutional amendment provides that section 298.40 shall not be repealed, modified or amended for 25 years. The issue here, however, is not repeal, modification or amendment, but simply what the statute says. The fact is that section 298.40 does not say that taconite producers are to be taxed in the same manner as other manufacturing companies generally, but, rather, they are to be taxed in the same manner except that the income apportionment formula used by other manufacturing companies does not apply. [5] Finally, both Erie and the Tax Court state that clause (b) compels apportionment because the proviso says that income shall be apportioned. But this mandatory shall advances the analysis nowhere, since it sheds no light on the rest of clause (b), especially the part we here italicize, namely, that income shall be apportioned to Minnesota in the manner which may be otherwise specified by law.  We hold, therefore, that the Tax Court erred in construing the aggregate occupation, royalty and excise tax ceiling under clause (b) of section 298.40 by allowing use of the apportionment formula under section 290.19 so as to lower the hypothetical income tax liability and thereby also lowering the ceiling on Erie's aggregate tax liability. We hold that clause (b) of section 298.40 is construed to read that a taconite producer's aggregate tax shall not exceed the amount such producer would pay if taxed under the income, franchise and excise tax laws generally applicable to manufacturing corporations transacting business in Minnesota, except that for the purpose of the computation of this hypothetical tax, income shall be apportioned to Minnesota as may be specified by the legislature otherwise than by sections 290.17 and 290.19. Since apportionment of Erie's hypothetical income is not allowed by any statute, all of Erie's income is deemed allocated within Minnesota, with the result that Erie's aggregate tax liability, as assessed by the Commissioner, does not exceed the limitation imposed by clause (b) of section 298.40.