tax refund repayment
The only thing worse than owing sales tax is having to repay the same sales tax a second time. Several Minnesota electric cooperatives faced this scenario recently when the state’s Commissioner of Revenue said it “erroneously” provided a sales tax refund on taxes paid on their members’ monthly payments. The Minnesota Supreme Court ultimately sided with the commissioner’s re-interpretation of the law, although the justices said the change of heart may have come too late in some cases.
Connexus Energy v. Commissioner of Revenue
An electric cooperative is a membership association which purchases electricity from wholesale suppliers. Similar to a conventional utility, the cooperative bills each member monthly for their electric use. Where cooperatives differ is they distribute “capital credits” to members at the end of the year. These credits reflect any profits posted by the cooperative. The credits therefore represent the members’ equity in the cooperative.
Minnesota assesses sales tax on the purchase of electricity. The electric cooperatives in this case initially paid sales tax on the full amount billed to each member. But they later filed amended returns for the 2004, 2005 and 2006 tax years, claiming refunds for member payments later reclassified as capital credits.
At first, the commissioner agreed the cooperatives were entitled to refunds. But she later changed her mind and demanded the cooperatives return their refunds. The cooperatives appealed this action, first to Minnesota’s Tax Court and later the state’s supreme court. Both courts agreed the commissioner did not exceed her authority when she reassessed and rescinded the refunds.
Justice David Stras, writing for a unanimous Minnesota Supreme Court, said cooperative members’ monthly payments and their later receipt of any capital credits “were separate and distinct transactions.” In other words, when members paid their cooperative bill each month, that represented a single “retail sale of electricity” subject to sales tax. As Stras noted, the once-a-year allocation of capital credits “take place on different cycles and involve different subjects” than the monthly electricity usage bills.
That said, Stras added the commissioner waited too long before seeking repayment of some of the erroneous refunds. Under Minnesota law, “An assessment of a deficiency arising out of an erroneous refund may be made at any time within two years from the making of the refund.” Four of the cooperatives in this case said the commissioner waited until after this two-year period expired before making her assessment. In response, the commissioner noted state law also allows her to “assess additional taxes” within a 3 1/2-year period after a tax return is filed. Since she changed her mind within this time limit, she argued the four cooperatives still had to pay back the erroneous refunds.
On this point, the supreme court sided with the cooperatives. Stras explained while “either provision conceivably applies” here, the court must apply the “specific” rule over the “general” one. In this case, the 3 1/2-year limit is the general rule, as it applies to all tax assessments, while the two-year limit specifically applies to erroneous refunds.
S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog PrivyCouncil.info
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