525 F. 2d 231 - State of Minnesota Spannaus v. United States

The State of Minnesota appeals from the denial of an injunction restraining the United States and certain of its officials from imposing the Federal Communications Tax, 26 U.S.C. § 4251 et seq., on the Minnesota sales tax portion of telephone service charges made by the Northwestern Bell Telephone Company and Continental Telephone Company. The district court, The Honorable Edward Devitt presiding, held that the Federal Anti-Injunction Act, 26 U.S.C. § 7421(a), precluded injunctive relief. The Act reads in part:

(N)o suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.

The district court, relying on Alexander v. "Americans United" Inc.,416 U.S. 752, 94 S.Ct. 2053, 40 L.Ed.2d 518 (1974); Bob Jones University v. Simon, 416 U.S. 725, 94 S.Ct. 2038, 40 L.Ed.2d 496 (1974), and Enochs v. Williams Packing & Navigation Co., 370 U.S. 1, 82 S.Ct. 1125, 8 L.Ed.2d 292 (1962), acknowledged that § 7421(a) bars an injunction except when the prerequisites to injunctive relief have been met, that is, the plaintiff has shown lack of an adequate remedy at law and irreparable harm1 if equitable relief is not granted, and in addition, plaintiff has demonstrated certainty of success on the merits. The district court ruled that although the prerequisites for equitable relief "may be satisfied here, it is clear that the second part of the test has not been met."2

We do not decide whether the state has shown the prerequisites for equitable relief.3 We hold only that the district court correctly found that it lacked jurisdiction under § 7421(a) to issue an injunction since the United States has asserted in good faith its right to tax the proceeds and it cannot be said that "under the most liberal view of the law and facts" the United States could not establish its claim.

The Supreme Court set out the applicable standards in the following discussion in Williams Packing:

The manifest purpose of § 7421(a) is to permit the United States to assess and collect taxes alleged to be due without judicial intervention, and to require that the legal right to the disputed sums be determined in a suit for refund. In this manner the United States is assured of prompt collection of its lawful revenue. Nevertheless, if it is clear that under no circumstances could the Government ultimately prevail, the central purpose of the Act is inapplicable and, under the Nut Margarine case, the attempted collection may be enjoined if equity jurisdiction otherwise exists. In such a situation the exaction is merely in "the guise of a tax." . . . .

We believe that the question of whether the Government has a chance of ultimately prevailing is to be determined on the basis of the information available to it at the time of suit. Only if it is then apparent that, under the most liberal view of the law and the facts, the United States cannot establish its claim, may the suit for an injunction be maintained. Otherwise, the District Court is without jurisdiction, and the complaint must be dismissed. To require more than good faith on the part of the Government would unduly interfere with a collateral objective of the Act protection of the collector from litigation pending a suit for refund. And to permit even the maintenance of a suit in which an injunction could issue only after the taxpayer's nonliability had been conclusively established might "in every practical sense operate to suspend collection of the . . . taxes until the litigation is ended."

370 U.S. at 7-8, 82 S.Ct. at 1129 (emphasis added).

The facts of the case are not in dispute. Thus the issue at this stage is a very limited one: whether, under the most liberal view of the law, the Federal Communications Tax could be held applicable to the Minnesota Retail Sales Tax portion of a telephone subscriber's bill. To determine the good faith of the government's position, we need only consider whether the government has adopted an arguable construction of the applicable statutes. We need not, and we do not, adopt any particular construction of the statutes on the merits or even suggest what the ultimate result should be.4 See Bob Jones University v. Simon, 416 U.S. 725, 745, 94 S.Ct. 2038, 40 L.Ed.2d 496 (1974); Cattle Feeders Tax Comm. v. Shultz, 504 F.2d 462, 465 (10th Cir. 1974); Trent v. United States, 442 F.2d 405, 406 (6th Cir. 1971).

The Federal Communications Tax imposes a tax on amounts paid for local and toll telephone service and teletypewriter exchange service. The tax is to be paid by the person paying for the services. 26 U.S.C. § 4251(a)(1). The method of computing this federal excise tax is set out in § 4254(a)(1):

(T)he amount on which the tax with respect to such services shall be based shall be the sum of all charges for such services included in the bill . . . .

Under 26 U.S.C. § 4291 the telephone companies providing the service are charged with the responsibility of collecting the Federal Communications Tax from their subscribers on behalf of the federal government.

The State of Minnesota imposes a tax on "the gross receipts from sales at retail." Minn.Stat.Ann. § 297A.02 (1972). The sale of telephone service is considered a "sale at retail" for the purposes of the Minnesota Sales Tax. A sale includes "the furnishing for a consideration of . . . local exchange telephone service and intrastate toll service . . . ." except coin operated phones. Minn.Stat.Ann. § 297A.01 subd. 3(f) (1972). The telephone companies providing such services are responsible for collecting the state sales tax, and the statute prohibits the telephone company from assuming or absorbing the tax themselves. Under Minnesota law the tax must be stated and charged separately on the customer's bill. Minn.Stat.Ann. § 297A.03 subds. 1 and 2 (1972).

Prior to September, 1973 the Federal Communication Tax was computed on a base amount of services charged to customers which did not include the Minnesota Sales Tax. In September, 1973 the IRS instructed the telephone companies to begin computing the Federal Communications Tax based on all charges for the services, including the Minnesota Sales Tax.

In the margin we set forth the government's argument that the tax in question falls on the vendor telephone company.5 Although the government's analysis may ultimately be found incorrect, we cannot say at this juncture that the argument is made in bad faith.6

The state argues that the Minnesota sales tax is a vendee tax, and that as such, is not properly includable in the base on which the Federal Communications Tax is computed. Both the state and the government acknowledge that the Minnesota Supreme Court has yet to interpret the sales tax as either a vendee or vendor tax. For us to decide the case in favor of the plaintiffs would require us to interpret the statutes of Minnesota. The mere possibility that the Minnesota Supreme Court would hold contrary to the state's position demonstrates that the government is asserting a legitimate position on an unanswered question and that this court's inquiry on the merits as required by Williams Packing has been fully discharged.

The order of dismissal by the district court for lack of jurisdiction is affirmed.