Dakota Drug, Inc., Respondent, vs. Commissioner of Revenue, Relator.
A23-1973
STATE OF MINNESOTA IN SUPREME COURT
November 6, 2024
Moore, III, J. Took no part, Hudson, C.J., Gaïtas, J.
Tax Court Filed: November 6, 2024 Office of Appellate Courts
Masha M. Yevzelman, Lynn S. Linné, Fredrikson & Byron, P.A., Minneapolis, Minnesota, for respondent.
S Y L L A B U S
Under
Affirmed.
O P I N I O N
MOORE, III, Justice.
Respondent Dakota Drug, Inc. (“Dakota Drug“) is a wholesale drug distributor subject to the Wholesale Drug Distributor Tax—a tax which partially funds Minnesota‘s subsidized health care program, MinnesotaCare. See generally
FACTS
The facts in this case are undisputed. Dakota Drug is a North Dakota corporation with its principal place of business in Anoka. Dakota Drug operates as a wholesale drug distributor selling “legend drugs”1—including generic prescriptions (“generic Rx“) and brand name prescriptions (“brand Rx“)—as well as over-the-counter medications, to smaller pharmacies, retail drug stores, hospitals, and veterinarians. Dakota Drug‘s gross revenues from selling legend drugs are subject to the Wholesale Drug Distributor Tax found in
The wholesale drug distribution market is highly competitive, and as such, many wholesale drug distributors—including Dakota Drug—utilize rebate programs to attract and maintain customers. Dakota Drug enters into written agreements with customers that set out the terms and conditions for the rebate program. Dakota Drug uses two distinct agreement forms—Rebate Agreements and Primary Supply Agreements. The agreements offer very similar benefits, and both entitle customers to monthly, and sometimes quarterly, rebates on generic Rx purchases and brand Rx purchases.
The rebate amounts are calculated based on an agreed upon percentage of the customer‘s total purchases of both generic Rx and brand Rx from the previous month; as a result, the rebate amount fluctuates as the customer‘s purchase amount fluctuates. The rebate percentage for generic Rx is standard for all customers, but the brand Rx percentage varies from customer to customer. In addition, customers with Rebate Agreements (as opposed to Primary Supply Agreements) are also eligible for an additional quarterly rebate based on the customer‘s “Generic Compliance Ratio.” This ratio is a percentage calculated as follows:
(Customer‘s Purchases of Generic Rx)
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(Customer‘s Purchases of Brand Rx) + (Customer‘s Purchases of Generic Rx)
When Dakota Drug fulfills an order, it sends the customer an invoice. These invoices state the full price of each product and the applicable MinnesotaCare tax associated with each product. Customers have numerous invoices—often hundreds—during a monthly or bi-monthly pay period. These invoices do not include any calculation of the earned rebate amount.
Customers do not pay individual invoices as they are received. Rather, at the end of each pay period, the customer receives an account statement that aggregates the invoices into a total account balance and calculates the rebate amount based on the customer‘s purchase amount and monthly Generic Compliance Ratio. The customer is ultimately responsible for the total account balance minus the total rebate amount. Customers who receive rebates via account credit will receive a monthly statement summarizing their invoices and credits—the rebate is then applied to the customer‘s total account balance. Customers who receive rebates via check pay the full account balance and then receive a check for the rebate amounts. If a customer is past due on their account, the rebate amount will be applied to the past due amount.
The Primary Supply Agreements provide that “no rebates will be paid in the event Customer is not maintaining the Primary Supplier Commitment as of the issue date of the rebates.” (Emphasis added.) The Rebate Agreements have an identical requirement that the customer use Dakota Drug as its primary wholesaler ”at the time the rebate is due.” (Emphasis added). During the tax years at issue, Dakota Drug did not apply these primary supplier provisions against any customer. However, if a rebate was not paid because a customer failed to meet the primary supplier requirement, Dakota Drug would include
Dakota Drug posts every invoice and every rebate to its general ledger account. At the end of the relevant tax filing period, Dakota Drug reports its “gross revenues” as all invoiced amounts minus all rebate amounts. Dakota Drug also subtracts all refunds given to customers for returned products. After the “gross revenue” is calculated, Dakota Drug then deducts the only available statutory exclusion for drug wholesalers—revenue from sales to veterinarians. See
Dakota Drug timely filed tax returns from 2016–2019, the tax years at issue in this case. In those returns, Dakota Drug did not include the rebate amounts from its reported gross revenues. Following an audit of Dakota Drug‘s tax returns, on September 15, 2021, the Commissioner of Revenue issued a tax order assessing additional tax plus interest, totaling more than $500,000. The Commissioner concluded that Dakota Drug incorrectly deducted the rebate amounts from its reported gross revenues under
Before the tax court, the parties filed cross-motions for summary judgment. Dakota Drug emphasized that
The tax court granted summary judgment in favor of Dakota Drug. The tax court concluded that rebate amounts paid to customers do not constitute gross revenues for purposes of the Wholesale Drug Distributor Tax—regardless of whether the rebates are received by account credit or by check. Applying the dictionary definition of “receive,” the tax court found that
The Commissioner appealed to this court.
ANALYSIS
“We review a tax court‘s order granting summary judgment to determine whether the tax court erred in applying the law and whether any material facts are disputed.” Billion v. Comm‘r of Revenue, 827 N.W.2d 773, 777 (Minn. 2013) (citation omitted) (internal quotation marks omitted). Because the material facts here are undisputed, “the only question before us is whether the tax court correctly applied Minnesota law.” Id. The tax court‘s conclusions of law and interpretation of statutes are reviewed de novo. YAM Special Holdings, Inc. v. Comm‘r of Revenue, 947 N.W.2d 438, 441 (Minn. 2020).
The Wholesale Drug Distributor tax is an aggregate tax based on the wholesaler‘s “gross revenues,” rather than a transactional tax based on individual purchases of wholesale drugs.
A.
We begin by interpreting the plain meaning of “gross revenues,” defined in
The parties put forth conflicting interpretations of the phrase “total amounts received in money or otherwise.” Dakota Drug argues that rebate amounts paid to customers are never actually “received,” because Dakota Drug is contractually obligated to return the amounts to the customer. When rebates are paid via account credits, Dakota Drug reduces the customer‘s account balance by eliminating its own payment obligation to the customer. When rebates are paid via check, Dakota Drug essentially refunds the customer the applicable “overpayment” after the customer pays the full invoice balance. In the Commissioner‘s view, Dakota Drug‘s interpretation effectively changes the plain statutory language from “gross revenues” to “net revenues” by allowing deduction of the rebate amounts from the amounts invoiced to its customers. According to the Commissioner, Dakota Drug “receives” the full invoiced amounts when (1) the customer pays the full invoiced amount for rebates paid via check, and (2) the customer uses the rebate credit to purchase more legend drugs later for rebates paid via account credit.
Our analysis begins with the plain meaning of the words “total amounts received in money or otherwise.” See
Next, “received” ordinarily means “to come into possession of” or “acquire.” Received, Merriam Webster‘s Collegiate Dictionary 1038 (11th ed. 2014). It is also defined as “to get from some outside source.” Receive, Black‘s Law Dictionary 1460 (10th ed. 2014). Therefore, under the ordinary meaning of
Finally, “otherwise” means “something or anything else” or “something to the contrary.” Otherwise, Merriam Webster‘s Collegiate Dictionary 879 (11th ed. 2014); see also Otherwise, Black‘s Law Dictionary 1276 (10th ed. 2014) (defining “otherwise” as “[i]n a different way; in another manner“). It then follows that “otherwise,” read in the context of its antecedent, “total amounts received in money or,” refers to non-monetary benefits or tangible goods that a wholesale drug distributor receives from a third party, perhaps as a part of a bartered transaction.
Taking these definitions together, we conclude that the plain meaning of “gross revenues,” defined as “total amounts received in money or otherwise,” is the entire amount that a taxpayer comes into possession of either through money or non-monetary benefits and goods. Furthermore, for something to be included in a taxpayer‘s “gross revenues,” the taxpayer must have come into possession of an amount from a third-party.
B.
We next apply the proper definition of “total amounts received in money or otherwise” to the facts here. Specifically, we consider whether the rebate amounts Dakota Drug paid to its customers constitute part of the “total amounts received in money or otherwise” that must be included in “gross revenues” for purposes of the Wholesale Drug Distributor Tax.3
The parties agree that Dakota Drug does not have discretion in paying the rebate amounts to customers once earned; there is a contractual obligation to credit customers’ accounts or send them a check. As a result, Dakota Drug cannot reasonably “come into possession of” or “get from some outside source” the rebate amounts that it is contractually obligated to pay out to customers. And therefore, the rebate amounts that Dakota Drug is contractually obligated to pay cannot constitute part of the “total amounts received in money or otherwise.” Functionally, for rebates paid via check, Dakota Drug returned overpaid invoice amounts to customers via check. And for rebates paid via account credit, Dakota Drug functionally offered discounted prices through account credits. In neither circumstance were the
We reject the Commissioner‘s contention that “gross revenues” should be interpreted as “the full amounts invoiced” to Dakota Drug‘s customers. By defining “gross revenues” as “total amounts received in money or otherwise,” the Legislature did not indicate a clear intention to require drug wholesalers to report the full invoiced amounts. See Wayzata Nissan, LLC v. Nissan N. Am., 875 N.W.2d 279, 286 (Minn. 2016) (“When a word is defined in a statute, we are guided by the definition provided by the Legislature.“). And by the Commissioner‘s own admissions, their interpretation of “gross revenues” as “the full invoiced amounts” has notable exceptions.
The Commissioner concedes that if a customer is given a refund for returned products—even if those products are invoiced and fully paid—the refund is not included in gross revenues. If Dakota Drug invoiced a customer, but the customer refused to pay the invoice, that amount would not be included in gross revenues. And if a product was sold at a specific discount listed on the invoice, only the discounted price would be included in gross revenues. But the Commissioner disputes that Dakota Drug did not “receive” rebate amounts that it paid to its customers in the month following a purchase pursuant to a rebate agreement.
The Commissioner‘s interpretation of
Notwithstanding the statutory language, the Commissioner also asserts that the tax court‘s decision in HealthPartners, Inc. v. Commissioner of Revenue, No. 6925, 1999 WL 123289, at *6–7 (Minn. T.C. Mar. 4, 1999), is apposite to the facts presented here. In that case, HealthPartners functioned as both a health care provider and health plan insurer that provided insurance to its own employees. Id. at *6. HealthPartners was subject to a tax based on its gross revenues as a health plan company—i.e., the amounts received as insurance premiums, copayments, deductibles, coinsurance, and fees for patient services. Id. at *2. In calculating its gross revenues, HealthPartners estimated the costs it would have paid an arm‘s length health care provider for insurance for its employees and deducted amounts those employees would have paid as contributions for that estimated cost. Id. at *6–7. HealthPartners then included that amount in its gross revenues. Id.
The tax court determined that HealthPartners, acting as both an insurer and a health care provider, correctly included the value of the health insurance provided to employees in its gross revenues. Id. at *7. The tax court explained:
If the two functions were two separate arm‘s length companies, HealthPartners,
the health care provider, would have been paid by HealthPartners, the insurer for the services provided to the employees. That amount would have been taxable gross revenue to HealthPartners, the provider. Since they are one and the same entity, that cash transaction was forgone but the amount was nevertheless a benefit received.
Id. In other words, HealthPartners was receiving the benefits of a competitive health plan in recruiting and retaining employees, who then provided services for the company. Id. As a result, the value of the benefit was correctly characterized as “money or otherwise” and properly included in gross revenues for tax purposes. Id. The tax court concluded that HealthPartners’ subsequent deduction of this amount on its tax returns was improper because such a deduction was not available under
The Commissioner argues that HealthPartners is analogous to the facts here because Dakota Drug receives a benefit—customer loyalty—through the primary supply provisions in the rebate agreements. In the Commissioner‘s view, the value of the customer‘s loyalty is equal to the amount Dakota Drug pays out as rebates, and accordingly, the rebate amounts are “money or otherwise” that is received by Dakota Drug and included in its gross revenues. We disagree.
Even if the HealthPartners decision were binding on our court, which it is not, it is not factually apposite here. Although it is true that to receive a rebate, a customer must be using Dakota Drug as its primary supplier at the time the rebate is issued, the rebate agreements do not constitute a “customer loyalty program” as the Commissioner contends. Rather, Dakota Drug‘s rebate agreements entitle its customers to a rebate if they meet certain historical purchasing requirements, with no provision in the rebate agreements obligating customers to continue making purchases from Dakota Drug in the future. Dakota Drug therefore does not “receive” anything in exchange for the rebates in the same manner that HealthPartners received employee labor in exchange for the health care plan its corporate structure enabled it to provide. See HealthPartners, 1999 WL 123289, at *6–7. We therefore agree with the tax court that the HealthPartners case is not persuasive here.
For the reasons stated above, we hold that under
CONCLUSION
For the foregoing reasons, we affirm the decision of the tax court.
Affirmed.
HUDSON, C.J., took no part in the consideration or decision of this case.
GAÏTAS, J., not having been a member of this court at the time of submission, took no part in the consideration or decision of this case.