CAMBRIDGE STATE BANK, et al., Norwest Bank Duluth, National Association (formerly First National Bank of Duluth), Respondents, v. Arthur C. ROEMER, Commissioner, Department of Revenue, and the State of Minnesota, Appellants.
No. C0-89-2097
Supreme Court of Minnesota
July 20, 1990
457 N.W.2d 716
Affirmed.
Robert J. Schnell, Jr. and Walter A. Pickhardt, Faegre & Benson, Minneapolis, for Norwest Bank Duluth.
Christopher J. Dietzen, Andrew J. Mitchell, Larkin, Hoffman, Daly & Lindgren, and Laurence R. Waldoch, James R. McCarthy, and Thomas L. Fabel, Lindquist & Vennum, Minneapolis, for Cambridge State Bank.
YETKA, Justice.
In the autumn of 1984, respondent banks commenced a tax refund claim in the district court of Ramsey County pursuant to
The record in this case includes a detailed stipulation of facts entered into by the parties. The trial was bifurcated into two phases: Phase I, a liability phase, and Phase II, a remedy phase. The issue of liability was tried before the court on November 6-17, 1986. By agreement of counsel and order of the court, evidence was presented by four banks for the 1979 tax year. The four banks were: Cambridge State Bank, Midway National Bank of St. Paul, First Security State Bank of Sleepy Eye, and Norwest Bank Duluth. The court heard lengthy and detailed testimony from several expert witnesses concerning the economic impact of the tax on the borrowing power of the federal government. The parties agreed that the conclusion of the court on the liability phase would be conclusive as to all tax years at issue and all of the plaintiff banks. Pursuant to statute, the measure of the tax paid by these banks included interest income earned on obligations of the United States government, but did not include interest income earned
The trial court concluded that the tax violated
The trial court also concluded that, although the tax imposed by
I. The first issue raised by this appeal is whether the bank tax imposed under
The trial court‘s conclusion on this issue is inconsistent with the legislative history of
In Reuben, this court noted that
Our review of the relevant statutes convinces us that the tax in question is discriminatory. Banks doing business in the State of Minnesota during the relevant period were required to pay a tax measured by their net income.
The trial court, in reliance on Memphis Bank & Trust Co. v. Garner, 459 U.S. 392, 398, 103 S.Ct. 692, 696, 74 L.Ed.2d 562 (1983), concluded that, during the 1979 through 1983 calendar years, the bank tax was discriminatory because interest from certain State of Minnesota obligations was exempt.5 Appellants concede that, at least as to IDB‘s and SUB‘s, the bank tax is discriminatory. Although we question the judgment of appellants in making this concession, the trial court‘s conclusion that the bank tax was discriminatory is affirmed as the law of this case.
II. The second issue presented by this appeal is whether the bank tax falls within a de minimis exception to
We cannot regard the impact of the discrimination as de minimis. According to the United States, which filed a brief as amicus curiae in support of reversal, if all 50 States enacted provisions comparable to the Tennessee bank tax, the United States would incur additional annual borrowing costs estimated at $280 million at an interest rate of 12%.
Id. at 398 n. 8, 103 S.Ct. at 696 n. 8 (citation omitted).
In the present case, the trial court concluded that there is no de minimis defense and found that, even if there were such an exception, “[t]he economic incidence of this discrimination would be far from de minimis, reaching into the billions of dollars of increased federal expense.” We cannot say that the trial court‘s finding was clearly erroneous; thus, we conclude that the impact of the bank tax on federal borrowing was not de minimis. Accordingly, even assuming, arguendo, that there is a de minimis exception to section 3124, it is not applicable in the instant case.
III. Appellants argue that respondents should be estopped from asserting their claims that exemption of IDB‘s and SUB‘s from the bank tax discriminated against federal obligations under the acceptance-of-benefits doctrine. In Gale v. Commissioner of Taxation, 228 Minn. 345, 37 N.W.2d 711 (1949), the taxpayer sought to invoke the provisions of a tax statute to secure the benefit of a tax computation and, at the same time, challenged the constitutionality of another provision of the same act. Id. at 352, 37 N.W.2d at 716. This court said: “[H]e who assumes the validity of a statute by invoking its provisions to obtain a tax reduction may not attack its constitutionality.” Id. (citing Byard v. Commissioner of Taxation, 209 Minn. 215, 296 N.W. 10 (1941)).
Respondents do not dispute that they accepted the tax benefits of the exemption for interest on State of Minnesota obligations. Instead, respondents suggest that the acceptance-of-benefits doctrine of estoppel is no longer good law. In Wegan v. Lexington, 309 N.W.2d 273, 277 (Minn.1981), this court did not reject the acceptance-of-benefits doctrine in tax cases like Gale and Byard. See Wegan at 277. We conclude, therefore, that, under the rule in Gale, respondents should be estopped from challenging the constitutionality of the bank tax. We do not, however, decide this case on that ground alone.
IV. Based on
If any provision of a law is found to be unconstitutional and void, the remaining provisions of the law shall remain valid, unless the court finds the valid provisions of the law are so essentially and inseparably connected with, and so dependent upon, the void provisions that the court cannot presume the legislature would have enacted the remaining valid provisions without the void one * * *.
It is the exemption for interest earned on state obligations that makes the bank tax discriminatory and, therefore, unconstitutional. Moreover, since the legislature amended the statutes in question by deleting the challenged exemptions, this court can presume that the legislature would have enacted the remaining provisions without the void one.
Indeed, when the legislature adopted the bank franchise tax in 1941, it did not exempt the disputed state interest revenue. See Act of Feb. 21, 1941, ch. 18, § 4, 1941 Minn. Laws 23, 24. The provisions exempting interest of certain state obligations were not enacted until 1957 and 1967. Act of Apr. 24, 1957, ch. 603, § 2, 1957 Minn. Laws 753 (SUB‘s); Act of May 4, 1967, ch. 297, § 12, 1967 Minn.Laws 456, 465 (IDB‘s). Can it be said that these later additions invalidated the entire original act? We think not. Since the original act was valid,
In Johnson Bros. Wholesale Liquor Co. v. Commissioner of Revenue, 402 N.W.2d 791 (Minn.1987), this court affirmed the tax court‘s use of a similar remedy in addressing a discriminatory tax on wine sales. See id. at 793. The Johnson Bros. court also observed that the United States Supreme Court has recognized that a withdrawal of benefits from the favored class is an acceptable remedy for unconstitutional discrimination. Id. (citing Iowa-Des Moines Nat‘l Bank v. Bennett, 284 U.S. 239, 247, 52 S.Ct. 133, 136, 76 L.Ed. 265 (1931)). In the case at bar, the trial court simply did not apply section 645.20.
Respondents seek to avoid such a result by emphasizing that the Minnesota Department of Revenue has stipulated that it will not collect Minnesota bank taxes on interest earned from SUB‘s issued pursuant to
Respondents cite Allegheny Pittsburgh Coal Co. v. County Commissioner of Webster County, 488 U.S. 336, 109 S.Ct. 633, 102 L.Ed.2d 688 (1989), as authority for the proposition that discriminatory taxation is not cured by raising a tax on someone else. However, they fail to point out that Allegheny was an equal protection property tax case presenting significant valuation problems and did not involve a statutory mandate such as
The recent decision in McKesson Corp. v. Division of Alcoholic Beverages and Tobacco, 496 U.S. 18, 110 S.Ct. 2238, 110 L.Ed.2d 17 (June 4, 1990), makes clear that a state may cure the invalidity of a discriminatory tax by assessing and collecting back taxes from those who benefited from the discrimination. Id. 110 S.Ct. at 2251-53. Although the Court concluded in McKesson that, in commerce clause cases, a state that selects this remedy must actually impose a retroactive tax, that conclusion was premised on the fact that actual collection is necessary in order to cure the comparative economic disadvantage caused by the discriminatory tax. See id. at 2251-55. The present case is distinguishable from McKesson because there is no need to remedy any comparative economic disadvantage. Accordingly, we hold that severing the invalid exemptions renders the bank excise tax non-discriminatory and thereby satisfies the due process requirement of a fully adequate post-deprivation remedy.
More fundamentally, even if actually collecting the tax is a prerequisite to curing the constitutional infirmity of the tax in question, respondents do not explain where the Revenue Department gets the authority to limit this court‘s power to fashion an appropriate remedy for an unconstitutional tax. See Amundson v. Cloverleaf Memorial Park Ass‘n, 221 Minn. 353, 358, 22 N.W.2d 170, 172 (1946) (sug-
An additional reason for reversing the trial court is that it inappropriately applied the Memphis decision retroactively. The three factors governing non-retroactive application of judicial decisions were set forth in Chevron Oil Co. v. Huson, 404 U.S. 97, 106-07, 92 S.Ct. 349, 355, 30 L.Ed.2d 296 (1971) (citations omitted), as follows:
First, the decision to be applied nonretroactively must establish a new principle of law, either by overruling clear past precedent on which litigants may have relied, or by deciding an issue of first impression whose resolution was not clearly foreshadowed. Second, it has been stressed that “we must * * * weigh the merits and demerits in each case by looking to the prior history of the rule in question, its purpose and effect, and whether retrospective operation will further or retard its operation.” Finally, we have weighed the inequity imposed by retrospective application, for “[w]here a decision of this Court could produce substantial inequitable results if applied retroactively, there is ample basis in our cases for avoiding the ‘injustice or hardship’ by a holding of nonretroactivity.”
Applying these factors to the present case, we conclude that the decision in Memphis should be given prospective application only.
First, since the legislature passed the first state obligation interest exemption to the bank franchise tax in 1957, more than 20 years have elapsed before these taxpayers questioned the validity of this exemption. Yet, respondents argue that the Memphis case should be applied retroactively because it was not, they aver, a case deciding an issue of first impression whose resolution was not clearly foreshadowed. The fact that this case was not brought until immediately after the Memphis case was decided, however, completely eviscerates the argument that the Memphis decision was clearly foreshadowed.
Second, the primary purpose of
Finally, in weighing the equities involved in this case, it is obvious that retroactive application of the Memphis Bank decision would cause a hardship to the State of Minnesota. The excise taxes in question have long since been spent by the state in providing, among other things, regulatory and other public services for all taxpayers, including the respondent banks. See First Nat‘l Bank of Fredericksburg v. Commonwealth, 520 Pa. 244, 553 A.2d 937, 947 (1989) (Larsen, J., dissenting). By compari-
In construing the very same issue, the Oklahoma Supreme Court in First of McAlester Corp. v. Oklahoma Tax Commission, 709 P.2d 1026 (Okla.1985), also decided that Memphis Bank should be applied prospectively only. The McAlester court stated:
It is arguable that previous case law foreshadowed the Memphis Bank pronouncement. It is equally persuasive that the type of bank tax in question might reasonably have been assumed to be constitutional based on the longstanding and widespread practice of various states to which the United States Supreme Court had not specifically spoken.
*
Although the Memphis Bank case does not involve a reversal of a United States Supreme Court decision as in Texas Company [v. Oklahoma Tax Commission, 207 Okla. 385, 249 P.2d 985 (1952)], it does decide a new principle of law.
* * * Although the new principle of law established in Memphis Bank might be characterized as merely a progression from former decisions, it was not foreseen by the Commission, nor by the Oklahoma Legislature.
Id. at 1034-36. We believe that the position of the Oklahoma court is sound. See also American Trucking Ass‘ns, Inc. v. Smith, 496 U.S. 167, 110 S.Ct. 2323, 110 L.Ed.2d 148 (1990) (applying the Chevron Oil test in upholding the Arkansas Supreme Court‘s prospective application of a United States Supreme Court decision which established a new principle of law).
For all of the above reasons, the trial court is reversed in its finding that the Minnesota bank franchise tax is an income tax and in the remedies it imposed. Respondents’ request for refunds is denied in all respects.7
KELLEY, J., concurs specially with opinion.
KELLEY, Justice (concurring specially).
I concur in the result; although I do not join that part of the opinion that purports to hold that the banks should be estopped from challenging the constitutionality of the bank tax.
Notes
(a) Stocks and obligations of the United States Government are exempt from taxation by a State or political subdivision of a State. The exemption applies to each form of taxation that would require the obligation, the interest on the obligation, or both, to be considered in computing a tax, except—
(1) a nondiscriminatory franchise tax or another nonproperty tax instead of a franchise tax, imposed on a corporation * * *.
(Emphasis added.)(1) Industrial Development Bonds issued under
(2) State University Bonds issued under
Minnesota Higher Education Coordinating Board Bonds
Minnesota Higher Education Facilities Authority Bonds
Metropolitan Transit Commission Bonds
Public Water and Sewer Bonds
Hospital District Bonds
Hospital Revenue Bonds
St. Cloud Transit Commission Bonds
Metropolitan Waste Control Commission Bonds
Housing Redevelopment Authority Bonds
Area Redevelopment Agency Bonds
Minnesota State Armory Commission Bonds
Solid Waste Management District Bonds