Minnesota - Sales tax refunds denied for capital credits to electric cooperatives patrons 

June 23:  The Minnesota Tax Court held that certain electric cooperatives were not entitled to refunds of sales taxes remitted on certain amounts that were billed and collected as payments for electricity service but that were later allocated to customers as capital contribution credits. Connexus Energy v. Commissioner of Revenue, No. 8290-R (Minn. T.C. June 11, 2014)

Read the Minnesota Tax Court decision [PDF 242 KB]


Electric cooperatives are required to raise equity capital from electricity customers. The taxpayers—electric cooperatives—did so by incorporating certain “target margin” amounts into various charges reflected on their customers’ bills. At the end of an operating year, any excess margin was allocated to customers as capital credits that were reflected on the taxpayers’ balance sheets as “patron equity” until the equity was “retired” (i.e., paid back to the customer).

The cooperatives computed sales tax on the total amount billed each month, including the amount of target margin incorporated into various itemized items on customer bills. After the capital credits were allocated to customers at the close of the year, the cooperatives filed amended sales tax returns seeking refunds of sales taxes paid on amounts later determined to be excess margin.

The Department of Revenue initially granted the refund claims, but subsequently assessed the cooperatives for amounts previously refunded. After administratively appealing the assessment order, the cooperatives timely appealed to the Minnesota Tax Court.

Minnesota Tax Court

Before the court, the key issue was whether the target margin amounts incorporated into monthly bills that were later allocated to customers as capital credits were part of the sales price of the electricity.

In a lengthy opinion, the court concluded that the capital credits did not constitute “discounts” excluded from the sales price but were part of the consideration received for the provision of electricity. Notably, the capital credits did not reduce the amount received from customers for electricity services, were never guaranteed, and were not allocated back to customers until several months after the bill had been paid.

Having determined that the target margin amounts were part of the sales price paid for electricity, the Minnesota Tax Court proceeded to find additional support for its holding in a departmental rule and two earlier Minnesota cases.

The court did not separately address the Department of Revenue’s assessment to recover previously granted refunds. The court simply allowed the recovery.

Read a June 2014 report prepared by KPMG LLP: Minnesota: Sales Tax Refunds Denied for Capital Credits to Electric Cooperatives Patrons

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David Antoni, in Philadelphia

(267) 256-1627

Or Associate National Director of KPMG’s Cooperative Tax Services

Brett Huston, in Sacramento

(916) 554-1654

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