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Issue Date: Vol. 43, No. 9, September 2003, Posted On: 9/23/2003

MAMC Votes To Appeal Adverse Tax Relief Ruling

Emily Jed

EDEN PRAIRIE, MN - The Minnesota Automatic Merchandising Council's board of directors has voted to continue its legal efforts to overturn inequitable provisions of the state's sales tax law, in the wake of an adverse ruling by the Minnesota Court of Appeals last month. MAMC has filed a "petition for review," asking the Minnesota Supreme Court to hear the case on appeal.

Under the existing law, Minnesota consumers pay sales tax on many consumable items bought through vending machines, but not when they buy the same items elsewhere. Even such things as milk and fruit juice are subject to sales tax when vended, but not when sold by other retailers.

Two years ago, the legislature passed a revenue measure conforming with the "streamlined sales tax" model, designed to bring a degree of uniformity to state tax policies in order to facilitate merchant remittance of sales taxes on mail order and Internet transactions. The law's different treatment of an item sold through a vending machine and the same item sold over the counter thus may have implications beyond Minnesota, as other states enact "streamlined sales tax" laws.

For this reason, the National Automatic Merchandising Association has supported MAMC, which is an affiliated state council, with legal staffwork and financial assistance. NAMA director, government affairs and counsel Brian B. Allen pledged that this support will continue through the appellate process.

The recent defeat in the battle for tax equity was the outcome of a suit filed early last year by MAMC and Apple Automatic Food Service (Minneapolis) against the State of Minnesota. The plaintiffs claimed that the statute taxing products sold through vending machines while exempting identical items sold in any other manner violates the Equal Protection Clause of the U.S. Constitution, and the Uniformity Clause of the Minnesota Constitution. The case was heard in Ramsey County District Court.

A summary judgment motion was brought by MAMC and Apple Automatic Food Services. The Ramsey County District Court ruled that the current sales tax law is not discriminatory to products sold through vending machines. In the judge's opinion, vending machines are more like restaurants than grocery stores and, therefore, are legitimately subject to sales tax. The judge also stated that the legislature has the prerogative to enact tax statutes and set tax policies, and that such policies will not be set aside lightly.

This district court ruling was appealed to the Minnesota Court of Appeals, which upheld the district court's denial of the summary judgment motion. The Court of Appeals relied on several factors in making its decision. First, the court stated that it is very reluctant to overturn a tax law adopted by the legislature. The judge said that a court must use "extreme caution" when deciding whether to declare a tax law unconstitutional.

Second, the court cited the 1974 Associated Food Services v. Commissioner of Taxation case, during which Minnesota's Supreme Court ruled that vending machines are more like restaurants than grocery stores. By this reasoning, all products sold through vending machines are subject to sales tax. The Supreme Court also emphasized the distinction between "luxury"and "necessity."

Third, the court said that an employee of a restaurant, convenience store or lunch counter is able to determine, upon customer checkout, whether an item purchased is subject to sales tax, and whether napkins, utensils, straws, and the like are available to the customer. A machine cannot make such a decision, the judge stated.

Fourth, tax statutes are supposed to raise revenue, and raising revenue is a legitimate government purpose. At times, the application of a tax statute will create inequities, the judge contended, but those inequities are a cost that must be borne in a democratic form of government.

Finally, the court stated that ease of administration for the Revenue Department is a factor, and it is easier to tax all products in a machine rather than exempt some products and tax others.

At neither the district court nor the Court of Appeals level was the argument made that vending machines are more like convenience stores than restaurants. "In today's marketplace, convenience stores are the major competitors of a vending machine, not restaurants," said Tom Briant, legal counsel and executive director, MAMC.

"However, when a convenience store sells milk, bottled water and prepackaged snack foods, none of these items is taxable under the Streamlined Sales Tax adopted in 2001 by the Minnesota legislature. Even a restaurant that sells just a bottle of water or a bag of potato chips is not obligated to pay sales tax on the products, but they are taxed if sold through a vending machine."

During the 2001 state legislative session, the Minnesota legislature adopted the "streamlined sales tax" law, which exempted milk, bottled water and many kinds of prepackaged foods (potato chips, cookies, pretzels, granola bars, etc.) from sales tax ,  except when these items are sold in vending machines. The legislature let stand the then current Minnesota law which taxed all products sold through vending machines.

In 2000 and 2001, the Minnesota Automatic Merchandising Council sponsored legislation that would have exempted milk, fruit juice, vegetables, breakfast bars, yogurt and cheese from sales tax if sold through vending machines. The legislation was heard by the Senate and House Tax Committees, but was not included in the final version of the omnibus tax bill.

The Minnesota Automatic Merchandising Council, in 1999, sponsored legislation that would have exempted milk and fruit juice from sales tax if sold through vending machines. The legislation passed the Senate Tax Committee and was inserted into the Senate Omnibus Tax bill, but was removed from the bill in conference committee, along with numerous other sales tax exemptions.

In 1993, the Minnesota Automatic Merchandising Council sponsored legislation to adopt an annual decal fee for each vending machine that dispenses products in lieu of sales tax to ensure that sales tax is paid on products sold through every vending machine. That legislation did not pass.

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