ZIP SORT, INC., Rеlator, v. COMMISSIONER OF REVENUE, Respondent.
No. C0-96-1938.
Supreme Court of Minnesota.
July 24, 1997.
567 N.W.2d 34
Reversed and remanded for calculation of Weber‘s liability for contribution.
Barry R. Greller, Assistant Attorney General, Hubert H. Humphrey, III, Minn. Atty. General, Tax Litigation Division, St. Paul, for Respondent.
OPINION
TOMLJANOVICH, Justice.
The relator, Zip Sort, Inc., filed claims for a refund of sales taxes imposed upon its purchase of two multi-line optical character readers (“character readers“) and a bar code sorter. Minnesota law allows taxpayers to receive a refund of state and local sales taxes paid pursuant to the purchase of “capital equipment,” which is defined in part as equipment that manufactures or fabricates tangible personal property for sale at retail. The Department of Revenue (“DOR“) concluded that Zip Sort uses the character readers and the bar code sorter to provide a service and denied Zip Sort‘s claim. The appeals office of the DOR affirmed that decision and concluded that Zip Sort did not use either the character readers or the bar code sorter for the manufacture or fаbrication of tangible personal property for retail sale and affirmed the denial of Zip Sort‘s claim. Zip Sort appealed to the tax court, which also denied both claims, but on more specific grounds. The tax court concluded that the
The case was tried on stipulated facts, which are as follows:
Zip Sort is a Minneapolis based corporation that is engaged in the business of receiving mail from third parties, reading addresses on the mail, applying scanable bar codes to the mail, and sorting the mail by zip code into bundles for which Zip Sort receives value-added refunds from the USPS. Between October 1, 1990 and December 31, 1992, Zip Sort purchased equipment and machinery for the expansion of its mail-related businesses. Zip Sort specifically purchased two character readers and one bar code sorter. Zip Sort paid $52,589.50 in Minnesota sales tax and $4,213.71 in Minneapolis sales tax on the two character readers. It also paid $10,387.47 in Minnesota sales tax and $817.61 in Minneapolis sales tax on the bar code sorter.
Zip Sort filed claims pursuant to
Zip Sort operates its mail-related business as follows:
Zip Sort receives mail from persons who take advantage of its bar coding and sorting facility. It then places the mail on one of the two character readers. The character readers then scan the addresses on each piece of mail, and utilize information contained in software procured from the USPS to access the appropriate 11-digit code for each address. The character readers apply a bar code that contains the 11-digit number to each piece of mail and then scan the mail again for accuracy. Zip Sort then places the bar-coded mail on the bar code sorter for the purpose of sorting the mail to either the fifth or seventh digit.1 After the bar code sorter sorts the mail, Zip Sort bundles the mail and delivers it to the USPS facility located on its premises. Upon receiving the envelopes or other mail containing the bar codes, the USPS can use machines to scan the bar codes and sort the individual pieces of mail to the 11th digit.2 Without the bar codes, the USPS would have to sort the mail by hand.
Under USPS regulations, a person who provides mail with a proper bar code is eligible to receive value-added refunds payable by the USPS. The USPS has authorized Zip Sort to apply for and receive such refunds, which are payable in amounts of one cent or more per eligible piece of bar-coded mail. Zip Sort argues that it uses the two character readers and the one bar code sorter for fabricating or manufacturing bar codes for retail sale to the USPS. The Commissioner, on the other hand, argues that Zip Sort uses both types of еquipment to provide a mailing service for those customers who pay to have their mail presorted.
This court reviews a grant of summary judgment de novo and will affirm only if the record shows that there is no genuine issue of material fact and the court below has not erred in its application of law. Offerdahl v. University of Minn. Hosps. and Clinics, 426 N.W.2d 425, 427 (Minn. 1988). In reviewing questions of law posed by the tax court, this court has plenary power. Morton Bldgs., Inc. v. Commissioner of Revenue, 488 N.W.2d 254, 257 (Minn. 1992). The application of law by the tax court to stipulated facts is a question of law and is, thus, reviewed de novo. Id.
Minnesota law allows a taxpayer to seek a refund of sales taxes paid upon the retail purchase of capital equipment.
The tax court did not specifically address whether Zip Sort uses the equipment for the manufacturing, fabricating, mining, quarrying or refining of tangible personal property, but instead denied the claim on the grounds that Zip Sort did not effect a “retail sale.” The statutory definition of “sale” relied upon by the tax court is:
[t]he production, fabrication, printing, or processing of tangible personal property for a consideration for consumers who furnish either directly or indirectly the materials used in the production, fabrication, printing, or procеssing.
the legislature, in making the sales tax applicable to consideration paid by a third party for processing, was concerned with taxing the enhancement in value resulting from an operation or series of operations
upon tangible personal propеrty. [The taxpayer] received valuable consideration from its customer * * * for its cable cutting activity because this activity enhanced the commercial value of the cable.
Zip Sort is correct in asserting that the placement of a bar code on mail makes it more suitable for a particular commercial use (namely machine sorting).6 Zip Sort is mistaken to assert, however, that this fact alone qualifies the process of attaching a bar code to mail as a sale under section 297A.01, subdivision 3(b). The remainder of subdivision 3(b) requires that the process be perfоrmed for “consumers who furnish either directly or indirectly the materials used in the production, fabrication, printing or processing” of the tangible personal property to be sold.
If instead of paying [the taxpayer] to cut cable segments, [the consumer] had opted to buy cable segments cut to its specifications directly from the cable manufacturer, the cable‘s original selling price would undoubtedly have been higher, and the added consideration paid for the cable by [the consumer] would have been subject to sales taxation. We do not believe this added cоnsideration should be exempt from sales tax simply because [the consumer] chose a third-party, rather than the manufacturer, to cut the cable.
U.S. West, 511 N.W.2d at 20 (emphasis added). In other words, the legislature passed subdivision 3(b) for the purpose of taxing “the added consideration” paid by a consumer who furnishes the tangible personal property either directly or indirectly. In Emil Olson, we held that a consumer directly furnished tangible personal property by itself purchasing and receiving the property before transferring it to a third party for improvement. 293 N.W.2d at 834 (stating that contractors who furnish third parties with material to be processed are consumers). In the same case, we held that a consumer indirectly provided tangible personal property by “compensating the owner of the virgin material” simultaneous with the transfer of the material to a third party for improvement. Id. at 833-34. In one case, the consumer buys the tangible personal property and then personally transfers it to a third party for improvement. In the other case, the consumer effects a transfer by paying the original owner to deliver the tangible personal property to a third party for improvement. In both сases, the consumer must pay sales tax based upon the final price of the improved tangible personal property.
In the case at bar, the consumer is the USPS7 and the improved tangible personal property is the mail with the bar code attached. Assuming arguendo that the process of placing the bar code on the mail qualifies as “fabrication,” the fact remains that the consumer did not “furnish” the mail either directly or indirectly. Unlike the consumer in U.S. West, who indirectly furnished the unimproved cable to the relator by compensating the supplier of the cable without taking possession, and unlike the consumer in Emil Olson, who furnished the unimproved gravel to the relator both directly (by compensating the supplier of the unimproved gravel, taking possession and then delivering it directly to the relator for improvements) and indirectly (by compensating the supplier of the unimproved gravel without taking possession), the USPS never compensated the original “suppliers” of the mail. Instead, unrelated persons brought their mail to Zip Sort for the purpose of delivery. Zip Sort then “fabricated” the mail by placing a bar code on it. The tax court, therefore, correctly concluded that the USPS‘s ultimate receipt of the imprоved mail did not qualify as a sale under section 297A.01, subdivision 3(b).
Although much discussion in the tax court‘s opinion addressed the issue of whether the application of bar codes to pieces of mail constituted “fabrication” within the definition of sale included in section 297A.01, subdivision 3(b), the tax court did not address whether the equipment “manufactures” or “fabricates”9 the bar codes themselves so as to fit within the definition of capital equiрment included in
Zip Sort feeds mail, without a bar code, one envelope at a time, into [a character reader]. The [character reader] then reads the address on the envelope, reviews it for accuracy and attaches a bar code to the envelope.
It also seems apparent from the facts that the bar code sorter, which reads the newly attached bar codes and then “sorts” the mail, does not “manufacture” or “fabricate” the bar codes. If anything, the bar code sorter “uses” the bar codes to sort the mail. Consequently, the bar code sorter is not capital equipment, and neither the Commissioner nor the tax court erred in denying Zip Sort‘s claim for a refund of the sales taxes paid for the bar code sorter. Because we conclude that the character readers do in fact manufacture the bar codes, however, we cannot determine the correctness of the Commissioner‘s denial of Zip Sort‘s claim for a refund of the sales taxes paid for the two character readers until we determine whether the bar codes are tangible personal property that is sold at retail.
Appellate courts generally will not consider those issues raised for the first time on appeal. Fingerhut Prod. Co. v. Commissioner of Revenue, 258 N.W.2d 606, 608, n. 4 (Minn. 1977) (refusing to decide issues not previously brought before the tax court). An exception to the general rule is that an appellate court may base its decision on a theory not presented to nor considered by the trial court where the question raised for the first time on appeal is plainly decisive of the entire controversy on its merits and where there is no рossible advantage or disadvantage to either party in not having had a prior ruling on the question by the trial court. Holen v. Minneapolis-St. Paul Metro. Airports Comm‘n, 250 Minn. 130, 135, 84 N.W.2d 282, 286 (1957). This court also has held that there is no disadvantage to a party when the facts are undisputed. Harms v. Independent Sch. Dist. No. 300, LaCrescent, 450 N.W.2d 571, 577 (Minn. 1990). A conclusion by this court that the bar codes are in fact tangible personal property that are manufactured by the relator and subsequently sold at retail to the USPS would be decisive of the entire controversy on its merits. Furthermore, the facts are undisputed. A decision by this court, therefore, will not place either party at an advantage or disadvantage. Harms, 450 N.W.2d at 577.
The statutе defines tangible personal property as “corporeal personal property of any kind.”
As the above discussion makes clear, the statutory language is not all that helpful in determining whether the bar codes are tangible personal property. Thankfully, our determination of tangible personal property in Fingerhut Prod. Co. v. Commissioner of Revenue, 258 N.W.2d 606 (Minn. 1977) provides a bit more help. In Fingerhut, we held that a list of addresses, in and of itself, was not tаngible personal property. Id. at 609-10. Contrarily, we also held that addresses included on Cheshire tapes, gummed labels, and heat transfers were tangible personal property. Id. The difference between the two, we said, was that while the consumers used the information contained on the typed lists, the consumers did not use the typed lists themselves. In the case of the Cheshire tapes, gummed labels, and heat transfers, meanwhile, we concluded just the opposite. Whereas the consumer in Fingerhut never actually used the typed lists, the consumer in Fingerhut actually used the Cheshire Tapes, gummed labels, and heat transfers. As we wrote, “the physical manifestation of the property is itself used[,] not merely the intangible information.” Id. at 610.
In the case at bar, the Commissioner argues that the bar codes are more like the typed lists because they do not have an independent existence and physical presence apart from the envelopes to which they are applied. Zip Sort, on the other hand, argues that the bar codes are more like the Cheshire tapes, gummed labels and heat transfers because the bar code is a clearly visible and permanent physical manifestation of information that may be reаd by USPS‘s sorting machine. We conclude that Zip Sort‘s argument is more persuasive. A close reading of Fingerhut reveals that this court distinguished between mere information (the typed lists) and information contained on a medium that is itself used by the consumer. Id. at 610. In other words, if the medium in which the information resides is merely incidental to the reason for the purchase, the transferred information is intangible property. But if the medium in which the information resides is essential or necessary to the reason for purchase, then the transferred information is tangible property.
In the instant case, the consumer (or USPS) is paying for more than mere information when it gives Zip Sort a rebate for mail containing a bar code. This much becomes clear when one considers that the USPS would have access to the information upon which the bar codes are based by merely reading the addresses on the individual pieces of mail. The consumer, therefore, is paying for more than the information contained in the bar code, it is paying for a particular “form” of this information. Like the consumer in Fingerhut, who acquired more than mere addresses when it purchased the Cheshire tapes, gummed labels and heat transfers, the USPS аcquires more than mere address information when it purchases the bar codes. Consequently, we hold that the bar codes are tangible personal property under the test employed in Fingerhut.
Having found that the character readers manufacture bar codes, which are tangible personal property, the final question before us is whether the transfer of those bar codes from Zip Sort to the USPS is a sale at retail. The statute defines sale to include “[a]ny transfer of title or possession, or both, of tangible personal property * * * for a consideration in money or by еxchange or barter.”
Affirmed in part, reversed in part.
STRINGER, Justice, concurring in part and dissenting in part.
I do not believe that Zip Sort is entitled to recоver the sales tax paid on the bar code sorter or the two character readers and I therefore dissent from the majority‘s holding that Zip Sort is entitled to a refund of the sales tax paid on the character readers used to print the bar codes.
Whether a transaction constitutes a sale of personal property for sales tax purposes is determined by objectively examining the essence of the arrangement. Questar Data Systems, Inc. v. Commissioner of Revenue, 549 N.W.2d 925, 928 (Minn. 1996). The essence here was clearly not the manufacture of tangible property for retail sale, but the providing of a service: the рre-mailing preparation and sorting of mass mailed items.
Taxability turns on the applicability of
Zip Sort, bearing the burden of proof as to the tax exempt status of the transaction, argued to the tax court that the character readers were acquired for the рurpose of fabricating mail “for sale” at retail to the postal service—a dubious notion the tax court quite appropriately rejected with the observation that the mail is not “for sale” to the postal service. On appeal here, citing Fingerhut Prod. Co. v. Commissioner of Revenue, 258 N.W.2d 606 (Minn. 1977), Zip Sort presented a new theory—that it was not the mail that was being fabricated but rather the “scanable bar codes,” and that these, in turn, were being sold at retail to the postal service. While the shifting theories of tax exempt status might themselves suggest that the only fabrication here is Zip Sort‘s novel arguments, it is clear that there is no person-
In Fingerhut we stated that “[t]he line of demarcation between the use of intangible property and the use of its intangible manifestation is not a clear one” and held that, while typed mailing lists do not constitute tangible personal property because only the information contained on the lists is of value, adhesive address labels were tangible personal property because they represented the information in a useable physical form. 258 N.W.2d at 610. But here the bar codеs do not exist independent of the customer‘s envelopes on which they are imprinted—they have no separate value whatsoever, for they simply provide a mechanism for transferring the address of the mail recipient to a machine scanable form. The physical properties of the bar codes—the ink printed on the envelopes—“were merely incidental to the services performed,” Id. at 609,—the labeling and bundling of mail for easier processing by the postal service. Thus, the essence of the transaction is starkly before us: the postal service was reducing its postage rate not to acquire some interest in the physical printing of ink on paper, but rather to reflect the labor saving service of having the mail pre-labeled and sorted. This obviously is the rendering of a service, not the sale of personal property.
Finally, even assuming that the bar codes created by the character readers were tangible personal property, I fail to see how there was a “retail sale” conducted here. The postal service gives Zip Sort a value-added refund on mail that has been properly bar coded. If this is a retail sale, to what has the postal service taken title or possession? The answer is clear—nothing. I would affirm the lower courts’ holdings that Zip Sort is not entitled to a refund on the sales tax paid on the purchase of its character readers as well as on the purchase of its bar code sorters.
GARDEBRING, Justice (dissenting in part, concurring in part).
I join in the dissent in part and concurrence in part of Justice Stringer.