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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1993
- **Citation:** 510 U.S. 964

## Text

—“\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:

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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

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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).

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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.

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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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386009_0399%3A1. Public record. Not legal advice.