STATE OF MINNESOTA TAX COURT

COUNTY OF ANOKA REGULAR DIVISION

This matter was submitted to the Honorable Kathleen H. Sanberg, Judge of the Minnesota Tax Court, on August 30, 2010, in writing. The parties submitted a Stipulation of Facts and waived oral argument.

Patrick W. LeDray, Attorney at Law, represented the Appellant.

Patrick A. Shrake, Assistant Attorney General, represented the Appellee.

The Court, based upon all of the files, records and proceedings herein, now makes the following:

FINDINGS OF FACT

1. Appellant Veterinary Radiation Therapy Clinic treats domestic cats suffering from feline hyperthyroidism by administering radioactive Iodine 131 (“Iodine 131”) that it purchases from Cardinal Health, and purchased from its predecessor, in St. Paul, Minnesota. (Stipulation of Facts (“Stip.”), para. 1.)

2. Cardinal Health is a manufacturer and distributor of medical and surgical supplies and technologies and distributes radioactive materials for the treatment of human beings and animals through its nuclear pharmacy. (Stip. para. 1.)

3. During the tax years at issue, 1999 – 2004, Cardinal Health did not collect sales tax on Appellant’s purchase of Iodine 131, and Appellant did not pay use tax on its purchases. (Stip. para. 2.)

4. Currently, the only other entity using Iodine 131 to treat feline hypothyroidism in this region is the University of Minnesota Veterinary Medical Center (“UMVMC”). (Stip. para. 6.)

5. UMVMC is located in St. Paul, Minnesota. It is a veterinary teaching clinic/hospital operated through the College of Veterinary Medicine (“CVM”). The UMVMC and CVM are collegiate units within the University of Minnesota. (Affidavit of Kelly Farmer, para 2.) The UMVMC serves as the primary site for the CVM’s residency program, as well as a center for clinic research activities. (Farmer Aff. para 2.)

6. The University of Minnesota does not pay sales or use tax on its purchases pursuant to Minn. Stat. § 297A.70, subd. 2 (a) (2). (Farmer Aff. para. 3.)

7. In 2004, the Minnesota Department of Revenue audited Appellant for the tax period January 1, 1999, to December 31, 2004.

8. On June 6, 2005, the Department of Revenue issued a Notice of Change in Sales and Use Tax, determining that Appellant is liable for use tax on its purchases of the Iodine 131. The assessed total of $12,933.47 includes $9,072.76 in tax, $1,814.54 in penalties, and $2,046.17 in interest.

9. Appellant administratively appealed the Notice, which the Commissioner of Revenue denied in a Notice of Determination dated December 18, 2006 (“Order”). The total amount due, as stated in the Order, was $12,933.47.

10. On February 13, 2006, Appellant filed a timely appeal with the Tax Court.

11. Because Appellant alleged constitutional violations, an Erie Transfer was completed on November 26, 2007.¹

12. On October 16, 2008, Appellant and the Commissioner of Revenue submitted a Stipulation of Facts, which is incorporated herein by reference. This was filed with the Court along with Cross Motions for Summary Judgment. The Court heard the Motions on November 6, 2008, and in an Order dated December 23, 2008, the Court denied the request for summary judgment because a material fact was in dispute.

13. On November 2 and 24, 2009, the parties filed Supplemental Briefs renewing their Motions for Summary Judgment. The Court denied these Motions in an Order dated February 17, 2010. This matter was submitted for judgment based upon the papers filed on August 24, 2010, and the Kelly Farmer Affidavit filed on August 30, 2010.

CONCLUSIONS OF LAW

1. Appellant’s rights under the Minnesota Constitution and the U.S. Constitution are not violated by the grant of a tax exemption to the University of Minnesota.

2. The Commissioner of Revenue’s Order dated December 18, 2006, is hereby affirmed.

IT IS SO ORDERED. LET JUDGMENT BE ENTERED ACCORDINGLY. A STAY OF FIFTEEN DAYS IS HEREBY ORDERED. THIS IS A FINAL ORDER.

DATED: November 29, 2010

Memorandum

Background

This case concerns a use tax on radioactive iodine capsules purchased by Appellant Veterinary Radiation Therapy Clinic for treatment of feline hyperthyroidism. Appellant claims that imposing this tax on it, but not on the University of Minnesota Veterinary Medical Center (“UMVMC”), is a violation of equal protection under the U.S. Constitution and the Uniformity Clause of the Minnesota Constitution. Appellee Commissioner of Revenue maintains that the UMVMC, as part of the University of Minnesota, is exempt under the Minnesota Constitution and Minnesota Statutes.

The parties filed Cross Motions for Summary Judgment in October of 2008. The Court denied the Motions in an Order dated December 23, 2008. The parties renewed their Motions, which the Court denied in an Order dated February 17, 2010. The matter was submitted for judgment based upon the briefs filed on August 24 and the Kelly Farmer Affidavit filed August 30, 2010. Kelly Farmer is the Tax Director for the University of Minnesota. The parties have waived the right to trial and submitted a Stipulation of Facts. The relevant stipulated facts are set forth below.

Facts

Appellant treats domestic cats suffering from feline hyperthyroidism by administering radioactive Iodine 131 (“Iodine 131”) that it purchases from Cardinal Health, and that it purchased from its predecessor, in St. Paul, Minnesota. Cardinal Health is a manufacturer and distributor of medical and surgical supplies and technologies and distributes radioactive materials for the treatment of human beings and animals through its nuclear pharmacy. During the tax years at issue, 1999–2004, Cardinal Health did not collect sales tax on Appellant’s purchase of Iodine 131, and Appellant did not pay use tax on its purchases. The only other entity using Iodine 131 to treat feline hypothyroidism in this region is the University of Minnesota Veterinary Medical Center (“UMVMC”).

The UMVMC is located in St. Paul, Minnesota. The UMVMC is a veterinary teaching clinic/hospital operated through the University of Minnesota College of Veterinary Medicine (“CVM”). The UMVMC and CVM are collegiate units within the University of Minnesota. The UMVMC serves as the primary site for the CVM’s veterinary medicine residency program, as well as a center for clinic research activities. The University of Minnesota does not pay sales or use tax on its purchases pursuant to Minn. Stat. § 297A.70, subd. 2 (a)(2).

In 2004, the Minnesota Department of Revenue audited Appellant for the tax period January 1, 1999, to December 31, 2004. On June 6, 2005, the Department of Revenue issued a Notice of Change in Sales and Use Tax, determining that Appellant is liable for use tax on its purchases of the Iodine 131. The assessed total of $12,933.47 includes $9,072.76 in tax, $1,814.54 in penalties, and $2,046.17 in interest. Appellant administratively appealed and Appellee denied the appeal in a Notice of Determination dated December 18, 2006 (“Order”).

Appellant filed a timely appeal with the Tax Court on February 13, 2006. Because Appellant alleged constitutional violations, an Erie Transfer was completed on November 26, 2007.² On October 14, 2008, Appellant and Appellee filed a Stipulation of Facts along with Cross Motions for Summary Judgment. The Court heard the Motions on November 6, 2008, and in an Order dated December 23, 2008, the Court denied the request for Summary Judgment because a material fact was in dispute. The matter was set for trial to be held on September 29, 2009, but on November 2 and 24, 2009, the parties filed Supplemental Briefs renewing their Motions for Summary Judgment. The Court denied these Motions in an Order dated February 17, 2010. The matter was submitted for judgment based upon the briefs filed on August 24, 2010, and the Farmer Affidavit filed on August 30, 2010.

Arguments

Appellant argues that the imposition of sales or use tax on it and not on the University of Minnesota violates the Equal Protection Clause of the Minnesota Constitution and the U.S. Constitution, or violates the Uniformity Clause of the Minnesota Constitution. Appellant asserts that the Minnesota Legislature never intended to give a tax break to the University of Minnesota Veterinary Hospital for services that compete with a private sector veterinary clinic.

Appellee argues that the exemption granted to the University of Minnesota, as applied to its collegiate units, under the Minnesota Constitution and Minnesota Statutes does not violate either the Minnesota Constitution or the U.S. Constitution. Because UMVMC is a veterinary teaching clinic/hospital operated through CVM, the exemption is rationally related to the purpose of the exemption: to support the state’s interests in education and research.

We first turn to the statutes at issue.

Sales and Use Tax Statutes

Minnesota imposes sales tax on the sale of tangible personal property.³ Unless exempt, all gross receipts are presumed to be subject to tax.⁴ A use tax is imposed on the price of tangible personal property for the “…using, storing, distributing, or consuming” the tangible personal property unless sales tax was paid or an exemption applies.⁵

Next, we turn to exemptions under the Minnesota Constitution and Minnesota statutes.

Exemptions under the Minnesota Constitution and Statutes

The Minnesota Constitution states:

Section 1. POWER OF TAXATION; EXEMPTIONS; LEGISLATIVE POWERS. The power of taxation shall never be surrendered, suspended or contracted away. Taxes shall be uniform upon the same class of subjects and shall be levied and collected for public purposes, but … colleges, [and] universities, … shall be exempt from taxation…. The legislature by law may define or limit the property exempt under this section other than churches, houses of worship, and property solely used for educational purposes by academies, colleges, universities and seminaries of learning. (Emphasis added.)

The legislature has also exempted governmental entities from sales and use

taxes, specifically including the University of Minnesota as provided by Minn. Stat.

§ 297A.70.⁶ We turn to the legal standard.

Legal Standard

Orders of the Commissioner of Revenue are presumed valid and correct, and the

taxpayer bears the burden of demonstrating that the challenged order is incorrect.⁷

States have wide latitude to establish taxation schemes, and taxpayers challenging the

constitutionality of a state tax statute bear a heavy burden.⁸ “The presumption is that a

statute is constitutional, and we are required to place a construction on the statute that

will find it so if at all possible.” ⁹

Analysis

First, we note that there are no factual disputes here. There is no dispute that the UMVMC is a veterinary teaching clinic/hospital operated as part of the CVM. There are no allegations that the UMVMC is operated outside of the University of Minnesota. In addition, while Appellant implies that the UMVMC gave no certificates of exemption to Cardinal Health, it presented no evidence to support this contention. (See discussion below.)

Appellant’s legal argument is that it is unconstitutional to impose sales or use tax on it for its purchases of Iodine 131 when the UMVMC does not pay such a tax. The UMVMC is Appellant’s only current competitor that treats feline hypothyroidism using Iodine 131. Appellant argues that the Iodine 131 is not used for the UMVMC, but for its feline patients. The exemption given to the UMVMC, according to Appellant, violates the right to Equal Protection under the Minnesota Constitution or the U.S. Constitution; it also violates the Uniformity Clause under the Minnesota Constitution because the state of Minnesota taxes Appellant but exempts the UMVMC.

The scope of protection afforded under the Equal Protection Clause of the Fourteenth Amendment to the U.S. Constitution and the Uniformity Clause, art. X, § 1, of the Minnesota Constitution is identical. 

The test to determine the constitutionality of statutory classifications, includes three main elements:

(1)The distinctions which separate those included within the

classification from those excluded must not be manifestly arbitrary

or fanciful but must be genuine and substantial, thereby providing

a natural and reasonable basis to justify legislation adapted to

peculiar conditions and needs;

(2) The classification must be genuine or relevant to the purpose

of the law; that is, there must be an evident connection between

the distinctive needs peculiar to the class and the prescribed remedy;

(3) The purpose of the statute must be one that the state can legitimately

attempt to achieve.¹⁰

Appellant argues that taxing it and not the UMVMC is unfair as its services to the community in treating cats are the same as the UMVMC’s services. Appellant alleges that the tax as applied to it is based on an arbitrary classification: veterinary hospitals that use Iodine 131 for the treatment of cats. Taxing one member of the class and not the other, according to Appellant, is unfair and stifles competition.

Appellee argues that the UMVMC is a teaching hospital and that while the end result, the treatment of cats, may be the same, there are major differences between Appellant and the UMVMC related to the purposes of the exemption statute and the constitutional exemption. Students are being taught how to treat cats. Research is being conducted. Appellant is a for profit veterinary clinic.There are important differences between the members of the class. We agree with Appellee’s position.

The Uniformity Clause of the Minnesota Constitution, art. X, § 1, requires that taxes be “uniform upon the same class of subjects,” but allows taxes to differ between subject classes. The Equal Protection Clause does not forbid classifications; it simply keeps governmental decision makers from treating differently persons who are in all relevant respects alike.¹¹ Here the two entities in the class, as defined by Appellant, are different. Appellant is a for profit entity. The UMVMC is a teaching hospital, part of a public university. It is a governmental entity. Students are being taught by CVM professional staff in the treatment of cats at the UMVMC. Research is performed at the UMVMC. The differences in the tax treatment between the UMVMC and a private veterinary clinic are not arbitrary.

The tax exemption of the Iodine 131 is rationally related to the purposes of the exemption, i.e. to support the state’s interests in higher education and academic research at the state’s public universities. The purposes of the exemption are ones that the state can legitimately attempt to achieve; they are set out in the Minnesota Constitution.

Appellant argues that competition is stifled by giving the UMVMC a tax advantage, but does not support its arguments. First, Appellant presents no evidence that there is competition or that it is being stifled. Second, competition between governmental entities and private business is not per se unconstitutional.¹² “[I]n contrast to laws favoring in-state business over out-of-state competition, which are often the product of economic protectionism, laws favoring local government may be directed toward any number of legitimate goals unrelated to protectionism.” ¹³

Finally, according to Appellant, the “legislature never intended to give a tax break to a University of Minnesota Veterinary Hospital for services in direct competition with a hospital in the private sector.” Appellant presents no facts and cites no law to support this argument. Rather, the Minnesota Supreme Court has held that an entity under the University of Minnesota’s control is exempt from sales and use tax even when it sells items that would otherwise be available at private stores.¹⁴

The exemption granted to the University of Minnesota is rationally related to its purposes as an education and research public school, and is therefore constitutional. Appellant has produced no facts and cited no case law that would support its contention that the tax against it, and not against the UMVMC, is unconstitutional under the Minnesota Constitution or the U.S. Constitution.

Exemption Certificates

Finally, Appellant appears to argue that the UMVMC is not entitled to an exemption as it failed to give exemption certificates to Cardinal Health. Appellant provided no evidence to support this claim. The only evidence provided is that the UMVMC does not keep copies of certificates. (Farmer Aff. at para. 4.) While the Stipulation of Facts alleges that no exemption certificates were in Cardinal Health’s files and asks that the Court draw the inference that no certificates were given to Cardinal Health, we will not do so. There are no substantiated facts supporting the inference.

We caution the parties against stipulations asserting facts about third parties where there is no evidence presented to the Court from the third parties or where the stipulation states that it is based upon “information and belief.” Testimony or documentation should be obtained from the third parties and presented for consideration by the Court where facts are critical to the case.

Conclusion

Appellant’s rights under the Minnesota Constitution and the U.S. Constitution are not violated by the grant of a tax exemption to the University of Minnesota. We affirm the Order.

K. H. S.