Petition for Writ of Certiorari — Brainerd Area Civic Center v. Minnesota Commissioner of Revenue

—“\J @/ € Bipreme Coun, ag.

FILED

No.

Str 3 1993

Bn the

1Cé

Supreme Court of the United SStrtes ———

October Term, 1993

BRAINERD AREA CIVIC CENTER,

BRAINERD AMATEUR HOCKEY ASSOCIATION,

NATIONAL EXCHANGE CLUB OF LITTLE FALLS,

LITTLE FALLS YOUTH HOCKEY ASSOCIATION

SKI GULL, INC., MARCH OF DIMES, CLIMB, INC.,

CEDAR RIVERSIDE PEOPLE’S CENTER AND

EXCHANGE CLUB OF SOUTHWEST MINNEAPOLIS,

: Petitioners,

COMMISSIONER OF REVENUE,

STATE OF MINNESOTA,

Respondent.

MINNESOTA MULTIPLE SCLEROSIS SOCIETY AND

EPILEPSY FOUNDATION OF MINNESOTA, INC.,

Petitioners,

V.

COMMISSIONER OF REVENUE,

STATE OF MINNESOTA,

Respondent.

ON WRIT OF CERTIORARI FROM THE

MINNESOTA SUPREME COURT

PETITION FOR WRIT OF CERTIORARI AND APPENDIX

Daniel W. Schermer

Counsel of Record

1000 Northstar Center East

608 Second Avenue South

Minneapolis, Minnesota 55402

(612) 339-1400

7 September, 13, 1993 Attorney for Petitioners

: : 1993 — Bachman Legal Printing @ (612) 339-9518 @ FAX (612) 337-8053

‘

a +

Ay a

QUESTION PRESENTED FOR REVIEW

Whether the Minnesota Supreme Court, by upholding the

constitutionality of a Minnesota statute imposing a graduated

‘tax based upon the gross receipts of charitable gambling

operations, failed to follow the binding precedent of the

decision of the U.S. Supreme Court in Stewart Dry Goods Co.

v. Lewis, 294 U.S. 550, 55 S.Ct. 525, 79 L.Ed. 1054 (1934),

which held that a graduated tax based on gross receipts is

unconstitutional in that such a tax violates the Equal

Protection Clause of the Fourteenth Amendment of the U.S.

Constitution.

ee ee ae ae

TABLE OF CONTENTS

Questions presented for Review

Table of Contents il

Table of Authorities iil

Opinions Below | ee

Jurisdiction....... ae . eee

Constitutional and Statutory

Provisions involved .............. 2

Statement of Case eke

Reasons for Granting the Petition

[_ By upholding the constitutionality of a statute imposing a

graduated tax based on the gross receipts of charitable

gambling operations, the Minnesota Supreme Court

decided a federal question in a way that conflicts with an

applicable decision of this Court, namely Stewart Dry

Goods Co. v. Lewis, 294 U.S. 550 (1934), 0... 5

CONCLUSION te et

APPENDIX

Decision of Minnesota Supreme Court A-]

Judgment A-9

TABLE OF AUTHORITIES

CASES Page

Great Atlantic Pacific Tea Comm ay

v. Harvey, 107 Vt. 215, 177 A 423 (1935) 2000. 7

Lane Drug Stores v. Lee, 11 F Supp. 672 (D. Fla., 1935) ...... 7

Merit Oil of New York. Inc. v.

New York State Tax Commission,

111 Misc. 2d 118, 443 N.Y.S. 2d 604 (1981) 0000... 8

Rapid Transit Corp. v. New York,

303 U.S. 573, 58 S.Ct. 721, 82

Fe | __Leteoglae ia nn ec DE SDP N we eM DERI Fe 8 7,8

State v. Simpson, 122 Fla. 582,

166 So. 226 (1935), affd on rehearing,

122 Fis. 639, 166 So. 249 (1936) .......ccccccccccccoccccccesscsesseceecee 7

Stewart Dry Goods Co. v. Lewis, 294 U.S. 550,

55 S.Ct. 525, 79 L.Ed. 1054 (1934) ............ 1, 5, 6, 7, 8, 9, 10

Tolerton & Warfield Co. v. Iowa State

Board of Assessment and Revenue, 222

Iowa 908, 270 N.W. 427 (1936) o20000 00k vooooococcccccecees 7

Trump v. Chu, 65 N.Y. 2d 20, 489 N.Y‘S.

2d 455, 478 N.E.2d 971 (1985) ooo co ceeceeccescees cesses g

Valentine v. Great Atlantic and Pacific Tea.

299 U.S. 32, 57 S.Ct. 56, 81 L.Ed. 22 (1936) 20000000 oo. 7

iil

Volusia County Kennel Club, Inc. v. Haggard.

73 So. 2d 884 (Fla., 1954) &

United States Glue Co. v. Town of Oak Creek,

247 U.S. 321, 328, 38 S.Ct. 499.

62 L.Ed. 1135 (1918) 6

CONSTITUTION AND STATUTES

United States Constitution, Amendment 14 1,2,4

Minnesota Statutes, Section 349.212, Subd. 6 ‘me

OPINIONS BELOW

On October 20, 1992, the Minnesota Tax Court denied

Petitioners’ motion for summary judgment declaring that

Minnesota Statute § 349.232, subd. 6 is unconstitutional. The

decision of the Minnesota Tax Court is not reported.

On May 7, 1993, the Minnesota Supreme Court, on Writ

of Certiorari, affirmed the Minnesota Tax Court's decision.

The decision of the Minnesota Supreme Court is reported at

449 N.W.2d 468 (1993) and is shown at Appendix A-1.

JURISDICTION

Petitioners Brainerd Civic Center, ef al! petition for a

Wnit of Certiorari to review the judgment of the Minnesota

Supreme Court holding that a Minnesota statute imposing a

graduated tax based on gross receipts of charitable gambling

Operations is constitutional. Jt is the contention of the

petitioners that the decision of the Minnesota Supreme Court

is directly contrary to the holding by the this Court in Stewart

Dry Goods v. Lewis, 294 U.S. 550, 55 S.Ct. 525, 79 L.Ed.

1054 (1934). The Stewart Dry Goods case held that

graduated taxes based on gross receipts violate the Equal

Protection Clause of the Fourteenth Amendment.

The order and opinion of the Minnesota Tax Court in

favor of the respondent was entered on October 20, 1992.

The judgment of the Minnesota Supreme Court affirining the

Minnesota Tax Court's decision was entered on June 15, 1993.

Jurisdiction of this Court rests on 28 U.S.C. Section 1257(3)

'These cases were consolidated for all purposes

|

CONSTITUTIONAL AND STATUTORY PROVISIONS

l

INVOLVED

The Fourteenth Amendment to the United States

Constitution provides as follows:

Section 1. All persons born or naturalized in the

United States, and subject to the jurisdiction thereof,

are citizens of the United States and of the State

wherein they reside. No State shall make or enforce

any law which shall abridge the privileges or

immunities of citizens of the United States; nor shall

any State deprive any person of life, liberty, or

property, without due process of law, nor deny to

any person within its jurisdiction the equal protection

of the laws.

2. Minnesota Statutes, Section 349.212, subdivision 6

provides as follows:

Subd. 6. Combined receipts tax. In addition to the

taxes imposed under subdivisions | and 4, there is

imposed a tax on the combined receipts of the

organization. As used in this section, "combined

receipts" is the sum of the organization's gross

receipts from lawful gambling less gross receipts

directly derived from the conduct of bingo, raffles,

and paddlewheels, as defined in section 349.12,

subdivision 21, for the fiscal year. The combined

receipts of an organization are subject to a tax

computed according to the following schedule:

If tne combined receipts

for the fiscal year are:

Not over $500,000

Over $500,000, but not

over $700,000

| i

The tax 1s:

Zero

Two percent of the

amount over $500,000

but not over $700,000

Over $700,000, but not $4,000 plus four percent

over $900,000 of the amovnt over

$700,000 but not over

$900,000

Over $900,000 $12,000 plus six percent

of the amount over

$900,000

Minn. Stat. Section 349.212. Subd. 6.”

STATEMENT OF THE CASE

The petitioners are charities conducting lawful gaming

operations pursuant to Chapter 349 of the Minnesota Statutes.

In 1989, the Legislature enacted a "combined receipts" tax,

which is a graduated tax levied upon the gross receipts of

charitable gaming activities.

Minn. Stat. §349.212, Subd. 6 imposes a graduated tax

on the "combined receipts" of each organization engaged in

charitable gaming. The term "combined receipts" means "the

sum of the organization's gross receipts from lawful gambling

less gross receipts directly derived from the conduct of bingo,

"It is undisputed that the combined receipts tax is a graduated gross

receipts tax.

raffles, and paddlewheels." The tax is graduated as follows:

If the combined receipts The tax is:

for the fiscal year are

Not over $500,000 Zero

Over $500,000, but not Two percent of the

over $700,000 amount over $500,000

but not over $700,000

Over $700,000, but not $4,000 plus four percent

over $900,000 of the amount over

$700,000 but not over

$900,000

Over $900,000 $12,000 plus six percent

of the amount over

$900,000

Because graduated gross receipts taxes have been held by

this Court to be unconstitutional, the instant lawsuit followed.

In the Complaints that initiated these lawsuits, petitioners

first raised the federal question of the Equal Protection Clause

of the 14th Amendment. The Complaints state, "[t]he said

combined gross receipts tax is unconstitutional. Among other

things, it violates the Equal Protection Clause of the 14th

Amendment to the United States Constitution which provides

in pertinent part that, 'no state shall deny any person the equal

protection of the laws ... ."". This constitutional question was

raised again in petitioners’ motion for summary judgment in

the Minnesota Tax Court® and also in the appeal to the

Minnesota Supreme Court.

REASON FOR GRANTING THE PETITION

By upholding the constitutionality of Minnesota's graduated

gross receipts tax, the Minnesota Supreme Court decided a

federal question that directly conflicts with the United States

Supreme Court's decision in Stewart Dry Goods Co. v. Lewis.

294 U.S. 550, 55 $.Ct. 525, 79 L.Ed. 1054 (1934) holding

such taxes to be unconstitutional.

In March of 1930, the Kentucky Legislature enacted a

graduated gross receipts tax for all retail businesses in the

State of Kentucky. The tax was summarized by this Court as

follows:

The tax imposed upon the first $400,000 of the

annual gross sales on each additional $100,000 of

sales between $400,000 and $1,000,000, inclusive

being seventeen - twentieths of 1 percent in the last

bracket. On sales over $1,000,000, the rate is |

percent ... .

Stewart Dry Goods Co. v. Lewis, 294 U.S. 550, 553-554

(1934).4

‘Under the Minnesota Rules of Civil Procedure, the Tax Court was

free to award judgment to the non-moving party. Both sides urged the

Tax Court to rule definitively in favor of one party or the other

*This tax was virtually identical to the tax imposed by Minn. Stat. §

349.212, Subd. 6.

The Court in Stewart Dry Goods struck down the

Kentucky statute as an unconstitutional violation of the Equal

Protection Clause of the 14th Amendment. The Court

explained its reasoning as follows:

The difference in effect between a tax measured by

gross receipts and one measured by net income,

recognized by our decisions, is manifest and

substantial, and it affords a convenient and workable

basis of distinction between direct and immediate

burden upon the business affected and a charge that

is only indirect and incidental. A tax upon gross

receipts affects each transaction in proportion to its

magnitude and irrespective of whether it is profitable

or otherwise. Conceivably, it may be sufficient to

make the difference between profit and loss, or so to

diminish the profit as to impede or discourage the

conduct of the commerce. A tax upon net profits has

not the same deterrent effect, since it does not arise

at all unless a gain is shown over and above expenses

and losses, and the tax cannot be heavy unless the

profits are large.

Id. at 558 (quoting United States Glue Co. v. Town of Oak

Creek, 247 US. 321, 328, 38 S.Ct. 499, 62 L.Ed.

1135(1918).) The Court also reasoned:

Argument is not needed ... that the gross receipts of a

merchant do not bear a constant relation to his net profits, that

net profits vary from year to year in the same enterprise; that

diverse kinds of merchandise yield differing rates of profit; and

that gross and net profits vary with the character of the

business as well as its volume ... We think the graduated

rates imposed were not intended to bear any relation to net

profits.

See Stewart Dry Goods Co. v. Lewis, 294 U.S. at 558-559.

Following the Stewart Dry Goods decision, graduated

gross receipts taxes were either promptly repealed or were

struck down by the courts as being unconstitutional. See, for

example, Valentine v. Great Atlantic and Pacific Tea, 299 U.S.

32, 57 S.Ct. 56, 81 L.Ed. 22 (1936); Lane Drug Stores v. Lee,

11 F.Supp. 672 (D.Fla.1935); Great Atlantic Pacific Tea

Company v. Harvey, 107 Vt. 215, 177 A.423(1935); Tolerton

& Warfield Co. v. lowa State Board of Assessment and

Revenue, 222 lowa 908, 270 N.W. 427 (1936); and State v.

Simpson, 122 Fia. 582, 166 So. 226 (1935), affd on rehearing,

122 Fla. 639, 166 So. 249 (1936).

In 1938, this Court again addressed the issue of the

constitutionality of graduated gross receipts taxes. Rapid

Transit Corp. v. New York, 303 U.S. 573, 58 S.Ct. 721, 82

L.Ed. 1024 (1938). In Rapid Transit, the Court was faced

with a claim that all gross receipts taxes are unconstitutional.

The Court rejected this claim. At the same time, it reaffirmed

its holdings in Stewart Dry Goods, and made it clear that only

graduated gross receipts taxes are prohibited. As the Court

explained:

[T]he tax on retailers held invalid in [Stewart Dry

Goods] increased in rate with increasing volume.

The Court said that the excise was laid upon the

making of a sale, and the statute "exacts from two

persons different amounts for the privilege of doing

exactly similar acts because the one has performed

the act oftener than the other" (p. 566) ... The

Court did not condemn a fixed-rate gross receipts

tax, such as 1s involved in the present case. Indeed it

suggested that the "desired end" might have been

secured by the widely adopted "flat tax on sales" (p.

563), and indicated by way of contrast that though

such a tax “would impose a heavier burden on the

7

taxpayer having the greater volume of sales" the

graduated tax under consideration exacted not only a

larger gross amount but one "larger in proportion to

sales" (p. 564).

Rapid Transit Corp. v. New York, supra, 303 U.S. at 583-584

(1938).

Since 1934, there have been very few attempts to enact

graduated gross receipts taxes and the few such laws which

were enacted having been uniformly held to be

unconstitutional. In 1954, the Florida Supreme Court struck

down a graduated gross receipts tax on the daily gross receipts

of dog tracks on the authority of Stewart Dry Goods. See

Volusia County Kennel Club, Inc. v. Haggard, 73 So. 2d 884

(Fla.1954). Similarly, in 1981, a New York court invalidated

a graduated gross receipts tax on petroleum retailers who sold

more than 60,000,000 gallons of petroleum in the preceding

year, but not on those who sold less. See Merit Oil of New

York, Inc. v. New York State Tax Commission, 111 Misc. 2d

118, 443 N.Y.S. 2d 604 (1981).°

In Trump v. Chu, 65 N.Y. 2d 20, 489 N.Y.S. 2d 455, 478

N.E.2d 971 (1985), the New York Court of Appeals

explained:

Stewart Dry Goods and Merit Oil stand for the

proposition that gross receipts taxes that treat

similarly situated taxpayers differently based on sales

volume violated equal protections because they are

imposed without regard to profits. Stated differently,

Stewart holds that the Legislature may not classify

‘The New York Court of Appeals has pointed out that although the

tax in Merit Oil was labeled a gross profits tax, it was actually a

graduated gross receipts tax. See Trump v. Chu, 65 N.Y.2d 20, 489

N.Y .S.2d 455, 478 N_E 2d 971 (1985)

8

taxpayers on the basis of gross receipts or sales

volume for the purpose of imposing different tax

rates and then utilize the amount of gross receipts to

determine the amount of tax due as well

Id. In short, after 1934, it became a settled principle of law

that graduated gross taxes are per se unconstitutional

In this case, the Minnesota Supreme Court circumvented

these settled constitutional principles. While acknowledging

that the decision in Stewart, "has remained intact all these

years ...", it departed from Stewart because, "the graduated

gross receipts tax is being applied to a class of taxpayer and to

a type of transaction easily distinguishable from those present

in Stewart ... .". The Court in Stewart, however, did not limit

itself to the retail sales arena as the Minnesota Supreme Court

suggests. Instead, it took into account a broad range of

classes of taxpayers and types of transactions. The Stewart

court focused on the unequal treatment of taxpayers in the

same classification as the basis of its decision

the operation of the statute is unjustifiably

unequal, whimsical, and arbitrary, as much so as

would be a tax on tangible personal property, say

cattle, stepped up in rate on each additional animal

owned by the taxpayer, or a tax on land similarly

graduated according to the number of parcels

owned."

Stewart, 294 US. at 557

The Minnesota Supreme Court also attempted to

distinguish Stewart because it claimed that unlike in Stewart, a

reasonable relationship exists between the tax and its purpose

in this case, namely, the state's interest in tight administrative

controls over gambling generally The Minnesota Court also

9

noted that another rational basis for the tax, "was to put a

damper on commercialization of charitable gambling, to avoid

the problems of integrity which may accompany ever-

increasing gambling receipts, and to level the playing field

between large and small operations." The "level the playing

field" argument was presented to and rejected by this Court in

Stewart. The Court noted:

The suggestion is made that the ad valorem property

tax heretofore laid on Kentucky merchants bears

more heavily upon the little dealer than upon his

bigger competitor, as the real estate and stock of

merchandise of the former is greater in proportion to

the business done than is the case with the latter.

This fact may indeed be a proper reason for adjusting

the tax burden so as better to reflect the fruits of the

enterprise; but it can afford no excuse for an arbitrary

and unequal imposition as between persons similarly

circumstanced. The record fails to show that an

income tax or a flat tax on sales would not

accomplish the desired end. The adoption of laws of

the latter description by many of the states is a

practical confirmation of the view that they are

effective measures.

Id. at 563.

Thus, the Minnesota Supreme Court not only failed to

follow binding precedent of this Court, it attempted to justify

its decision with arguments that were rejected by this Court in

Stewart.

The question presented here is one of great practical

importance. In 1934, this Court concluded that graduated

gross receipts taxes were so inherently unfair as to be

10

unconstitutional. If the doctrine espoused by the Minnesota

Supreme Court were to remain undisturbed, the states could

enact graduated gross receipts taxes merely by excluding a

portion of the taxpaying public. Thus, the prohibition against

graduated gross receipts taxes would be effectively

demolished.

The abuse inherent in graduated gross receipts taxes was

apparent to this Court in 1934. The petition should be granted

and this Court should send a clear message that attempts to

introduce graduated gross receipts taxes through the back

door will not be tolerated.

CONCLUSION

Petitioners respectfully submit that the Minnesota

Supreme Court, by allowing a graduated gross receipts tax,

has plainly failed to foliow controlling authority and nearly

sixty years of settled constitutional law. Petitioners

respectfully request that this Court grant their petition for

certiorari.

Daniel W. Schermer

1000 Northstar Center East

608 Second Avenue South

Minneapolis, Minnesota 55402

Telephone (612) 339-1400

Aitorney I.D. No. 96556

Attorney for Petitioners

Dated: September 13, 1993

1]

State of Minnesota

In Supreme Court

C1-92-2474

Tax Court Simonett, J.

Brainerd Area Civic Center, et al.,

Relators,

VS. Filed May 7, 1993

Office of Appellate Courts

Commissioner of Revenue,

Respondent.

SYLLABUS

The graduated tax on gross receipts from pull-tabs

and tipboards operated under the charitable gambling

law does not violate the constitutional requirements of

uniformity and equal protection.

Affirmed.

Heard, considered, and decided by the court en banc.

OPINION

SIMONETT, Justice.

We uphold the constitutionality of a graduated

“combined receipts” tax on certain kinds of charitable

gambling and affirm the tax court.

Minn. Stat. § 349.212, subd. 6 was enacted in 1989.

This statute applies to organizations engaged in legal

charitable gambling and imposes a graduated tax on

“combined receipts” derived from tipboard and pull-tab

games in a given year.’ There is no tax levied on an

‘ “Combined receipts” are defined in the statute as “the sum

of the organization's gress receipts from lawful gambling less

A-]

organization’s first $500,000 in gross income or receipts;

thereafter, a 2-percent tax is levied on gross receipts

from $500,000 to $700,000. From $700,000 to $900,000

the tax is $4,000 plus 4 percent of the amount over

$700,000 but not over $900,000, and above $900,000 the

tax is $12,000 plus 6 percent of the amount over

$900,000.

Relators are charitable organizations operating pull-

tab and tipboard games.? Having paid the “combined

receipts” tax for the years in question, relators now seek

a refund, claiming the tax is unconstitutional. The tax

court ruled to the contrary, and the charitable organiz-

ations now bring the matter here on certiorari.

Relators’ claim is that the combined receipts tax is

unconstitutional “because it is a graduated gross

receipts tax.” They rely on a 1935 United States

Supreme Court decision, Stewart Dry Gouds Co. v.

Lewis, 294 U.S. 550 (1935), which held that a Kentucky

graduated gross receipts tax was unconstitutiona!

because it violated the federal equal protection clause.

In 1939, this court followed Stewart in National Tea

Co. v. State, 205 Minn. 443, 286 N.W. 360 (1939),

vacated and remanded, 309 U.S. 551, affd on remand,

208 Minn. 607, 294 N.W. 230 (1940), by striking down a

similar tax. The question before us, then, is whether

Stewart is controlling, e., whether the graduated gross

receipts tax for pull-tabs and tipboards is the same kind

of tax that was deemed constitutionally flawed in

Stewart and National Tea.

In Stewart, the State of Kentucky had imposed a

graduated gross receipts tax on all retailers, regardless

gross receipts directly derived from the conduct of bingo, raffles,

and paddlewheels***.” This definition effectively subjects only

gross receipts from pull-tabs and tipboards to the tax.

2 Only an “organization” recognized under the charitable

gaming law may operate pull-tabs, tipboards, paddlewheels, and

bingo. An “organization” is defined as “any fraternal, religious,

veterans, or other nonprofit organization.” Minn. Stat. § 349.12,

subd. 28 (1992).

A-2

of the type of merchandise they sold, their profit

margin, or any other considerations. A levy of 1/20th of

a percent was imposed on the first $400,000 in gross

sales, and progressively higher levies on each additional

$100,000 in sales, up to a full 1 percent on amounts over

$1,000,000. The Court stressed that the tax was

essentially a revenue measure based on the premise

that the higher gross receipts of a business, the greater

the likelihood of increased profits, and, consequently, an

increased ability to pay more taxes. The Court conclud-

ed, however, that higher sales did not necessarily result

in higher profits, certainly not on any uniformly

progressive basis.*

While the Stewart holding has been criticized’ and

has engendered somewhat checkered progeny, the

' The court observed that “the gross sales of a merchant do

not bear a constant relation to his net profits; that net profits

vary from year to year in the same enterprise; that diverse kinds

of merchandise yield differing ratios of profit; and that gross and

net profits vary with the character of the business as well as its

volume.” Stewart, 294 U.S. at 558-59.

‘ Justice Cardozo wrote a dissent in Stewart, which has

received favorable comment, arguing that it is reasonable to

believe that capacity to pay increases with an increase in receipts,

Stewart, 294 U.S. at 570. See, eg., R. C. Brown, Constitutional!

Limitations oa Progressive Taxation of Gross Income, 22 lowa L.

Rev. 246, 264-67 (1937).

> Cases following Stewart and invalidating a graduated gross

receipts tax include Volusia County Kennel Club v. Haggard, 73

So.2d 884 (Fla. 1954) (tax on dog racetrack receipts) and Merit Oji/

of New York, Inc. v. New York State Tax Commission, 111 Misc.

2d 118, 443 N.Y.S.2d 604-(1981) (tax on oil retailers imposed for

sales of all products, including gas, gum, soda, cigarettes, etc.).

On the other hand, Stewart has been distinguished and not

applied in cases where the tax has many of the attributes of a

graduated gross receipts tax. See, eg., California Co. v. State, 141

Colo. 288, 348 P.2d 382 (1959) (graduated tax rates on the

extraction and sale of crude oi! held constitutional); We/ch v.

Henry, 305 U.S. 134 (1938) (allowing a graduated gross income

tax less an arbitrary deduction of $750); Paducah Automotive

Trades Ass'n v. City of Paducah, 307 Ky. 524, 211 S.W.2d 660

A-3

decision itself has remained intact all these years. In

National Tea Co. v. State, supra, this court pointed out

that Minnesota’s graduated gross receipts tax on chain

stores divided chain store merchants into 11 different

classes based upon their volume of gross sales and

imposed a different rate on each class. Jd., 205 Minn. at

445, 286 N.W. at 361. Concluding the tax was a levy on

the privilege of doing business, our court found that the

amount of the tax bore no reasonable relation to the

value of the privilege. /d., 205 Minn. at 448, 286 N.W. at

362. The tax, we said, was practically identical to the

tax in Stewart and was, therefore, unconstitutional. /d.,

205 Minn. at 450, 286 N.W. at 363.

Historically, courts have begun their constitutional

analysis of a particular tax by defining it as either an

income tax, an occupation or excise tax, a sales tax, or

property tax. A progressive income tax, with both the

amount and the rate of the tax increasing with income,

is permissible because based on ability to pay. A

property tax, on the other hand, tends to be based on

the value of the property taxed. A tax on gross receipts

can be difficult to label, especially if graduated.

California Ce. v. State, 141 Colo. 288, 298-300, 348 P.2d

382, 388-89 (1959). It looks like an excise tax (a tax on

the privilege of engaging in a particular occupation), yet

the progressive gradations of the tax suggest that

income generated by the gross receipts is also a factor.

Our search, then, is not for a label, but rather to

understand the distinctions created by the graduated

classification scheme and to consider the genuineness

and relevance of those distinctions. We might add that

in tax legislation, when lines are drawn to classify

taxpayers, it is enough if the lines are based on any

reasonable, albeit approximate, measurement. Hegenes

(1948) (graduated tax on volume of gross receipts of trade or

occupation upheld); and Homestake Mining Co. v. Johnson, 374

N.W.2d 357 (S.D. 1985) (holding constitutional what was

effectively a graduated tax on extraction and sale of minerals).

A-4

’

v. State, 328 N.W.2d 719, 722 (Minn. 1983).

Here, plaintiffs assert that any graduated gross

receipts tax is per se unconstitutional. Presumably,

plaintiffs have in mind Justice Cardozo’s dissent in

Stewart wherein he characterized the Court’s majority

as “holding that a tax upon gross sales, if laid upon a

graduated basis, is always and inevitably a denial of

the equal protection of the laws, no matter how slight

the gradient or moderate the tax.” Stewart, 294 U'S. at

566. Subsequent cases seem to have treated this

Cardozo characterization as containing some hyperbole.

Thus some state courts have concluded that in certain

situations a graduated gross receipts tax does not run

afoul of Stewart. See, footnote 5, supra. In any event,

we do not concern ourselves with the continued vitality

of Stewart; it is enough for our purposes here that this

case is clearly distinguishable from Stewart.

Here the graduated gross receipts tax is being applied

to a class of taxpayer and to a type of transaction

easily distinguishable from those present in Stewart

and National Tea. What we have here are charitable

organizations engaged in legalized gambling, two areas

where the state has traditionally paid particularly close

attention. These nonprofits do not exist to compete in

the same sense as do profit-seeking businesses. To put it

another way, although sometimes lost sight of,

nonprofit charitable organizations do not exist to sell

pull-tabs and tipboards; rather, legalized gaming is

simply one of many fundraising options, an option

which has been specially sanctioned by the state to

allow nonprofits an additional opportunity to raise

money for their primary function of service to their

communities. The state does more than just license the

sale of a chance to win on a pull-tab; it also takes a

direct regulatory role in the relationship of gross

receipts to profitability, as well as in specifying the

appropriate uses for the proceeds. Thus, ‘“{a]n

organization’s net profits from gambling (gross receipts

minus prizes) can be used only for three things:

A-5

payment of expenses, payment of gambling taxes and

contributions for ‘lawful purposes.’’”’ Minn. House of

Rep. Research Dept., Charitable Gambling in

Minnesota 5 (rev. ed. Oct. 1989). The expenses that may

be deducted are defined by the Gambling Control

Board; and, by law, no more than 50 percent of gross

profit from pull-tabs and tipboards may be expended for

allowable expenses. Minn. Stat. § 349.15 (1992). The

“lawful purposes” for which net profits may be spent

are also defined. Minn. Stat._§ 349.12, subd. 25 (1992).

In light of the charitable nature of the gambling

organizations here and the state’s interest in tight

administrative controls over gambling generally, there

is a reasonable relationship between the gross receipts

and tax rates applied to each subclass defined by this

tax, unlike Stewart. There, the tax was levied on for-

profit, heterogeneous retailers selling a wide assortment

of products at varying prices in classic business

competition differing significantly from the “combined

receipts” tax challenged here.

In Stewart, the Court worried that the graduated

gross receipts tax impeded commerce. In this case,

however, one of the announced purposes of the

graduated gross receipts tax is precisely “to prevent

commercialization.” Significantly, the opening section of

the charitable gambling chapter states that the purpose

of sections 349.11 to 349.22 is “to regulate lawful

gambling to prevent its commercialization, to insure

integrity of operations, and to provide for the use of net

profits only for lawful purposes.” Minn. Stat. § 349.11

(1992).

This regulatory feature of the “combined receipts” tax

is another important distinction. In none of the cases

invalidating a graduated gross receipts tax called to our

attention were any nonrevenue based policy interests

advanced as a rationale for their imposition. Here,

however, in addition to raising revenue, it appears

another purpose of the combined receipts tax -- as

important as raising revenue, if not more so -- was to

A-6

———————

put a damper on commercialization of charitable

gambling, to avoid the problems of “integrity” which

may accompany ever-increasing gambling receipts, and

to level the playing field between large and small

operations. Large operators, benefiting by economies of

scale, are able to offer larger prize pay-outs and to

secure better locations for their booths, thereby gaining

a competitive advantage over the smaller operators. The

progressive feature of the “combined receipts” tax tends

to reduce the competitive advantage of the large

operators.° No one disputes this is a legitimate state

purpose; indeed, it appears even more legitimate in light

of the fact that the gambling in question is allowed in

order to create an additional resource for a variety of

charitable organizations, both large and small.

Volusia County Kennel Club vy. Haggard, 73 So.2d

884 (Fla. 1954), deserves a comment because it

highlights the distinguishing features of our state’s

gambling tax. There, the Florida Supreme Court struck

down as unconstitutional a graduated tax on the daily

gross receipts of dog-racing tracks. As relators point out,

the Florida tax was on receipts of a regulated gambling

activity, as in our case here. In Vol/usia, however, the

dog tracks were operated as for-profit businesses, not as

a means of charitable fundraising, and the tax, fur-

thermore, was said to have only a revenue-producing

purpose.

We should also mention another issue raised by

relators. The trial court received an affidavit from the

° “There are over 2,500 organizations licensed in the state to

conduct charitable gambling. They vary in—size from an

organization with over $27 million in gross sales in 1988 to

several hundred with under $25,000 in sales. The figures are

dominated by a relatively small number of organizations with

substantial sales. 159 organizations reported sales of over $1

million and these groups accounted for over one-third of the year’s

gross receipts even though they represented less than one-tenth of

the total licenses issued.” Minn. House of Rep. Research Dept.,

Charitable Gambling in Minnesota 9 (rev. ed. Oct. | 989).

A-7

Supervisor of Revenue Planning and Research for the

Department of Revenue, in which the supervisor stated

one of the legislative reasons for enacting the

“combined receipts” tax was to level the playing field

for large and small operators. Relators say it was error

to receive this affidavit. Not so. The affidavit was not

offered as evidence of legislative intent to construe a

statute's ambiguity (for there is none), but rather to

inform the court of some possible conceivable state

interests which may have motivated the legislation. In

equal protection analysis, a conceivable and legitimate

reason for the legislative classification may provide the

rational basis to satisfy the constitutional requirement

of equality and uniformity for tax legislation; the

affidavit was relevant on that constitutional issue. See,

e.g., Rio Vista Non-Profit Housing Corp. v. Ramsey

County, 335 N.W.2d 242, 245-46 (Minn. 1983), appea/

dismissed, 464 U.S. 1033 (1984).

If the “combined receipts” tax survives Stewart and

National Tea, as we so hold, we need carry our equal

protection analysis no further. If the tax passes muster

under Stewart and Nationa/ Tea, it also passes muster

under our rational basis test because, as the foregoing

discussion demonstrates, the same test is involved. See,

e.g., Guilliams v. Commissioner of Revenue, 299 N.W.2d

138 (Minn. 1980); Aio Vista Non-Profit Housing Corp. v.

Ramsey County, supra.

The decision of the tax court upholding the constitu-

tionality of the Minnesota Combined Receipts Tax is

affirmed.

Affirmed.

A-8

STATE OF MINNESOTA (‘K Supreme Court

C) Court of Appeais

Brainerd Area Civic Center, et al.,

Relators JUUGMENT

VS. C1-92-2474

Appeliate Court Case Number

6146

Trial Court Case Number

Commissioner of Revenue,

Respondent.

Pursuant to an order of Court heretofore duly made and entered in

this cause it is determined and adjudged that the decision of the

Minnesota Tax Court dated October 20, 1992

be and the same hereby is

affirmed

and that judgment be entered accordingly. A certified copy of the

entry of judgment and the Court's decision is herein transmitted and made

part of the remittitur.

Dated and Signed: ;

FOR THE COURT _June 15, 1993 By Ss is

Date Assistant Clerk

tom an men A-9