Minnesota Supreme Court Determines Telecommunications Network Equipment is Exempt Capital Equipment

The Minnesota Supreme Court ("Supreme Court") reversed the appellate court's denial of refund claims in Sprint Spectrum LP, et al., v. Minnesota Commissioner of Revenue, April 1, 2004. In this decision, the Supreme Court determined that purchases of network equipment that transformed sound into an electronic form for transmission and then reconstructed for delivery to a recipient were capital equipment and eligible for the manufacturing exemption.

Sprint Communications Company LP, Sprint Spectrum LP, and United Telephone Company of Minnesota (collectively "Relators") applied for a refund of sales and use taxes paid on equipment used in providing telecommunications services to customers. The refund was denied by the Minnesota Department of Revenue, and Relators appealed to the Tax Court, which affirmed the denial determining that the equipment did not process tangible personal property. The Tax Court ruled that the definition of corporeal did not include things that can only be heard and not touched or seen.

In a 1993 amendment to Minnesota Statutes, section 297A.01, the legislature substituted tangible personal property for product in the definition of the requirements for capital equipment qualifying for the exemption. The Tax Court determined that this change narrowed the exemption and after the amendment the equipment in question would not qualify for the exemption as capital equipment.

The Supreme Court utilized legislative history to determine the legislative intent of the 1993 amendment. The purpose of this amendment was to "confirm and clarify the original intent of the legislature in enacting the exemption for capital equipment ... . [It] does not create a new category of items that are subject to sales and use tax, nor does it exclude from exemption machinery, equipment, or other items which were intended to be exempted as capital equipment, as defined in Minnesota Statutes, section 297A.01, subdivision 16." The Supreme Court also reviewed several cases to determine that telecommunication service providers did deliver products.

The Supreme Court ruled that the claimants did meet the burden of proof entitling them to a tax exemption. The equipment purchased in providing telecommunication services to customers did produce telecommunications products that were tangible personal property that were sold at retail, and as such, they were exempt as capital equipment.