STATE OF MINNESOTA

COUNTY OF HENNEPIN

Kroll Ontrack, LLC,

Appellant,

vs.

Commissioner of Revenue,

Appellee.

TAX COURT

REGULAR DIVISION

ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

Docket No. 8977-R

Filed: September 14, 2018

This matter came before The Honorable Joanne H. Turner, Judge of the Minnesota Tax

Court, on the parties' cross-motions for summary judgment.

Quentin (Doug) Sigel, Ryan Law Firm, LLP, Austin, Texas, represents appellant Kroll

Ontrack, LLC.

Kristine K. Nogosek, Assistant Minnesota Attorney General, represents appellee

Commissioner of Revenue.

At issue in this case is whether certain machinery and equipment purchased by appellant

Kroll Ontrack, LLC, is "used primarily to electronically transmit results retrieved by a customer

of an online computerized data retrieval system," and is therefore exempt from Minnesota sales

tax under Minn. Stat. § 297 A.68 (2016). Also at issue is whether electricity purchased by Kroll to

power that equipment was "used or consumed in industrial production of personal property" and

is therefore exempt under Minn. Stat.§ 297A.68, subd. 2(a)(3) (2012). We deny Kroll ' s motion

for summary judgment, grant the Commissioner' s motion for summary judgment, and affirm her

denial of Kroll ' s requests for refund.

1

Based upon all the files, records, and proceedings herein, the court now makes the

following:

ORDER

1. The motion for summary judgment of appellee Commissioner of Revenue 1s

granted.

2. The motion for summary judgment of appellant Kroll Ontrack, LLC, is denied.

IT IS SO ORDERED. THIS IS A FINAL ORDER. LET JUDGMENT BE ENTERED

ACCORDINGLY.

BY THE COURT:

dt~~~ ~ nne H. Turne~ INNESOTA TA OURT

DATED: September 14, 2018

MEMORANDUM

At issue in this case is the exemption from Minnesota sales tax for machinery and

equipment purchased for use in a taxpayer's business when such items are used "primarily to

electronically transmit results retrieved by a customer of an online computerized data retrieval

system." Minn. Stat. § 297 A.68, subd. 5(a) (2016). During the tax period at issue (March 1, 2011

to November 30, 2012), Kroll purchased equipment and machinery that it claims fall under this

sales tax exemption. Having originally paid sales tax on the equipment and machinery, Kroll now

seeks a refund of the sales tax. In addition, Kroll seeks a refund of sales tax paid on the electricity

used to power its equipment. See Minn. Stat.§ 297A.68, subd. 2(a)(3) (2012) (exempting from

2

sales tax "electricity ... used or consumed in the production process" of personal property). The

Commissioner denied Kroll' s refund claims and, on this appeal, we affirm the Commissioner's

denials.

We begin by reviewing the undisputed facts of the matter and its procedural history. We

then explain the Minnesota sales tax exemptions at issue. Finally, we apply the plain language of

the applicable statutes to the undisputed facts.

I. UNDISPUTED FACTS AND PROCEDURAL HISTORY

This matter is here on stipulated facts and the affidavit of Jeffrey Canfield, Kroll ' s Director

of Software Engineering. Appellant Kroll Ontrack provides technology-driven data recovery,

document review, and electronic discovery services primarily to law firms, corporate law

departments, and government entities.1 Kroll's e-discovery tools allow its clients to assemble and

maintain large bodies of litigation documents, and to manage, sort, and search those documents. 2

Kroll's electronic discovery and document review services rely on two programs­

Advanceview and Inview-that work in tandem to sort, search, and select relevant documents

from large databases of documents.3 Kroll ' s client first uploads a database of documents to

Advanceview, along with key words that may indicate that a document containing one or more

such words is of further interest. 4 For example, a client may instruct Advanceview to search for

Stip. Facts, 2 (filed May 9, 2018).

2 Affidavit of Jeffrey Canfield, 4 (filed May 14, 2018) (Ex. 2 to Mem. Supp. Appellant's Mot. Summ. J.).

3 Stip. ,, 3-4.

4 Stip. , 5. Some client documents (for example, e-mails) may have to be converted to a format that the Kroll system can recognize. When a document's format is changed, its content remains the same. Stip., 15.

3

all e-mails containing certain key words in the subject line, or sent to or received from a particular

individual.5 Kroll ' s Advanceview program locates documents in the database that contain one or

more of the key words or otherwise satisfy the client's specified parameters.6 Among an initial

database of, say, 100,000 documents, the use of Advanceview might reduce the number of

potentially relevant documents to just 40,000. 7

The documents identified by Advanceview are then transferred to a second database,

accessible using Kroll ' s In view program, for further review. 8 The In view program works this way.

As an initial step, Kroll ' s Workflow Automation module may be instructed to automatically

distribute selected documents among reviewers for further processing. 9 For example, documents

in a foreign language may be automatically distributed to a translator fluent in that language. 10

Similarly, technical documents may be automatically distributed to a reviewer with the necessary

technical background. 11

Once distributed among reviewers, two components of Kroll ' s Inview program­

Intelligent Categorization and Intelligent Prioritization-are applied to the documents. 12 Clients

can initially establish categories in Inview by providing the platform with a small sample of

5 Canfield Aff. Attach. A, at Screenshot 11 .

6 Stip. ii 5.

7 Canfield Aff. iii! 5, 10.

8 Stip. ,i 6.

9 Stip. iJ 8.

JO Stip. iJ 8.

II Stip. iJ 8.

12 Canfield Aff. iJ 12.

4

documents, thereby "teaching" Inview which documents will likely be relevant. 13 Document

reviewers can also add other categories as the review progresses, into which Inview will sort

documents. 14 As reviewers categorize each document, Inview suggests appropriate

categorizations for other documents yet to be reviewed. 15 The reviewer can accept the suggested

categorizations or select different categories.16 Intelligent Prioritization then uses the assigned

categories to identify the documents most likely to be responsive to a particular query, and places

those documents at the top of the queue of documents to be individually reviewed.17

A Document Delivery Wizard allows the client to prepare the documents for production in

discovery. 18 Once the documents have been prepared for production, Kroll ' s system transfers the

selected documents back to the client, either in their original or "native" formats, or as .pdf

(Adobe's Portable Document Format) or .tif (Tagged Image Format) files .19 Clients can also view

responsive documents electronically on the Kroll system. 20

13 Canfield Aff. ,i 13 & Attach. A, at Screenshot 4.

14 Stip. ,i 9. For example, Inview may sort documents into "responsive" (to a particular document request), "non-responsive," or "privileged." Id. , see also Canfield Aff. Attach. A, at Screenshot 4.

15

16

17

18

19

20

Stip. ii 9.

Stip. ii 9.

Stip. ii 10.

Canfield Aff. Attach. A, at Screenshot 7.

Stip. ii 16.

Stip. ii 16.

5

Clients log onto Kroll's servers using secure credentials.21 Although all Kroll clients have

access to Kroll's intelligent review technology (including the Intelligent Categorization and

Intelligent Prioritization programs), clients cannot access other clients' documents.22 In other

words, a client can access only the database of documents it has uploaded to the Kroll system.

Between March 2011 and November 2012, Kroll purchased equipment to support and

expand its system. 23 Over the same time period, Kroll paid for electricity to power its equipment.

On October 20, 2014 and December 19, 2014, Kroll filed with the Commissioner two separate

refund claims, claiming sales tax refunds of $831,401.31 and $192,354.25, respectively, on

purchases eligible for the capital equipment sales tax exemption, and sales tax refunds

of$148,808.33 and $199,174.29, respectively, in connection with other claimed exemptions.24 In

March 2015, the Commissioner denied Kroll' s capital equipment refund requests in full, and

granted only a partial refund of$100,761.99 for the other exemptions.25

In May 2015, Kroll administratively appealed these determinations to the Commissioner.26

On June 9, 2016, the Commissioner issued her final Notice of Determination on Appeal affirming

21

22

23

Canfield Aff. iJ 7.

Canfield Aff. iJ 22.

Notice Appeal ,i,i 1, 8 (filed Sept. 6, 2016).

24 Notice Appeal ,i 13. We note a small discrepancy between Kroll and the Commissioner as to the amounts of the requested refund. For purposes of this decision, we rely on Kroll's figures.

25 Notice Appeal ,i 13.

26 Notice Appeal ,i 14; Answer Ex. 7. In addition to the issues raised in the parties' cross­motions for summary judgment, Kroll also appealed the Commissioner's denial ofKroll's request for refunds of sales tax paid on software and software licenses that it later transferred to various affiliates (the so-called "purchaser" claims). Notice Appeal ,i,i 40-45 . Kroll argued that the transfers of the software and software licenses amounted to "resales" exempt from the definition

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her denial of the capital equipment refund, stating "the items d[ o] not qualify as purchases of

equipment and machinery used for electronically transmitting results retrieved by a customer of

an online computerized data retrieval system," and that she "[ did] not agree that the system is a

cumulation of information which is equally available and accessible to all Kroll' s customers." 27

Kroll filed its notice of appeal with this court on September 6, 2016, contesting the June 9, 2016

order.28 In May 2018, the parties filed cross-motions for summary judgment,29 which we heard on

June 20, 2018.

II. APPLICABLE STATUTES

The first issue before us is whether Kroll' s purchases of certain machinery and equipment

between March 1, 2011, and November 30, 2012, are exempt from Minnesota sales tax as

purchases of "capital equipment" within the meaning of Minn. Stat. § 297 A.68, subd. 5(a). The

definition of "capital equipment" includes "machinery and equipment used primarily to

electronically transmit results retrieved by a customer of an online computerized data retrieval

system." Id. Minnesota law further defines "online data retrieval system" to "mean[] a system

whose cumulation of information is equally available and accessible to all its customers." Id.,

subd. 5(d)(8). The specific question before us is whether Kroll's Advanceview and Inview systems

constitute "an online computerized data retrieval system" "whose cumulation of information is

equally available and accessible to all its customers."

of"retail sale" under Minn. Stat.§ 297A.61, subd. 4(a) (2016). Kroll does not address this issue on summary judgment and, accordingly, we affirm the Commissioner's order on this point.

27

28

29

Notice Appeal, Notice Determination Appeal.

Notice Appeal.

Kroll's Notice Mot. & Mot. Summ. J. (filed May 14, 2018); Comm'r's Notice Mot. & Mot. Summ. J. (filed May 15, 2018).

7

The second issue is whether Kroll' s purchases of electricity to power its equipment are also

exempt from sales tax. Minnesota Statutes § 297 A.68, subd. 2(a) (2012), provides:

Subd. 2. Materials consumed in industrial production. (a) Materials stored, used, or consumed in industrial production of personal property intended to be sold ultimately at retail, are exempt, whether or not the item so used becomes an ingredient or constituent part of the property produced. Materials that qualify for this exemption include, but are not limited to, the following:

(3) fuels, electricity, gas, and steam used or consumed in the production process ....

The specific question before us is whether the electricity on which Kroll paid Minnesota sales tax

was "used or consumed in industrial production of personal property intended to be sold at retail."

We address each issue in tum.

III. ANALYSIS

Under Minnesota law, an order of the Commissioner is presumed correct and valid. Minn.

Stat. §§ 271.06, subd. 6 (2016); 270C.33, subd. 6 (2016) ("A return or assessment of tax made by

the commissioner is prima facie correct and valid."). A prima facie order is one that "prevails in

the absence of evidence invalidating it." Tousignant v. St. Louis Cty., 615 N.W.2d 53, 59

(Minn. 2000) (citation omitted). The taxpayer bears "the burden of going forward with evidence

to rebut or meet the presumption." Conga Corp. v. Comm 'r of Revenue, 868 N.W.2d 41, 53

(Minn. 2015) (citing S. Minn. Beet Sugar Coop v. Cty. of Renville, 737 N.W.2d 545, 558

(Minn. 2007)).

Under Minn. R. Civ. P. 56.03, summary judgment is appropriate if "the pleadings,

depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,

show that there is no genuine issue as to any material fact and that either party is entitled to a

judgment as a matter of law." In ruling on a motion for summary judgment, we first determine

whether there is a genuine issue of fact to be tried. Anderson v. Twin City Rapid Transit Co., 250

8

Minn. 167, 186, 84 N.W.2d 593, 605 (1957). When parties file cross-motions for summary

judgment, they tacitly agree that there are no genuine issues of material fact. Am. Family Mut. Ins.

Co. v. Thiem, 503 N.W.2d 789, 790 (Minn. 1993). Thus, summary judgment is a suitable vehicle

for addressing the application of law to undisputed facts. See A.J Chromy Constr. Co. v.

Commercial Mech. Serv., Inc., 260 N.W.2d 579,581 (Minn. 1977).

A. Exemption for purchase of machinery and equipment

As we have explained, Minnesota law exempts from sales tax "machinery and equipment

used primarily to electronically transmit results retrieved by a customer of an online computerized

data retrieval system." Minn. Stat. § 297A.68, subd. 5(a). The parties dispute whether Kroll's

Advanceview and Inview programs constitute "an online computerized data retrieval system"

within the meaning of Minn. Stat. § 297 A.68, subd. 5(a). The resolution of their dispute is a matter

of statutory interpretation.

"The object of all interpretation and construction of laws is to ascertain and effectuate the

intention of the legislature." Minn. Stat. § 645 .16 (2016). We determine the intention of the

legislature "primarily from the language of the statute itself." Brayton v. Pawlenty, 781

N.W.2d 357, 363 (Minn. 2010) (quoting Gleason v. Geary, 214 Minn. 499, 516, 8

N.W.2d 808, 816 (1943)). Indeed, if the statute is unambiguous, resort to extrinsic sources to

interpret the statute is both unnecessary and improper. In re Welfare of R.S., 805 N.W.2d 44, 52

(Minn. 2011); Reiter v. Kiffmeyer, 721 N.W.2d 908, 911 (Minn. 2006); Feick v. State Farm Mut.

Auto Ins. Co., 307 N.W.2d 772, 775 (Minn. 1981). Accordingly, we look first to the plain language

of Minn. Stat. § 297 A.68. We construe words and phrases in the statute "according to the rules of

grammar and according to their common and approved usage." Minn. Stat. § 645.08(1) (2016).

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"[T]echnical words and phrases and such others as have acquired a special meaning," however,

"are construed according to such special meaning or their definition." Id.

Minnesota Statutes § 297 A.68, subd. 5(a), provides an exemption from sales tax for

purchases of machinery and equipment when such machinery and equipment is "used primarily to

electronically transmit results retrieved by a customer of an online computerized data retrieval

system." Under the plain language of subdivision 5(a), to qualify for the exemption the system of

which the purchased items are a part: (1) must be online; (2) must be computerized; and (3) must

retrieve data. In addition, the primary use of such equipment must be to "electronically transmit"

results from the system to the customer. On each of these points, the Kroll system appears to

qualify. It is an online system, it is computerized, and it retrieves data, specifically, documents

stored on the system by a particular customer. In addition, there appears to be no dispute that the

equipment satisfies the primary use test.

But subdivision 5( d)(8) further narrows the term "online [ computerized] data retrieval

system" to "mean[] a system whose cumulation of information is equally available and accessible

to all its customers." Subdivision 5( d)(8) thus provides two limitations on an "online

[ computerized] data retrieval system" that qualifies for the capital equipment exemption. First, it

must contain a "cumulation of information." Second, its "cumulation of information" must be

"equally available and accessible" to all customers of the system.

On this latter point, the Kroll system does not qualify: the "cumulation of information" on

the Kroll system is not equally available and accessible to all customers. To the contrary, a

customer of the Kroll system can access only the database of documents it has uploaded to and

stored on the Kroll system and cannot access the database of documents uploaded and stored by

other customers. Because there is information on the Kroll system-documents uploaded to the

10

system by individual customers-that is not "equally available and accessible to all [ of Kroll' s]

customers," the Kroll system is not "an online computerized data retrieval system" within the plain

meaning of Minn. Stat.§ 297A.68, subd. 5(a).

In support of its motion (and in opposition to the Commissioner's motion), Kroll asserts

that the "cumulation of information . . . equally available and accessible to all [] customers" of a

qualifying online data retrieval system need not be the information itself. Rather, according to

Kroll, it is enough that the tools used to search the system and retrieve information from it-in

this case, Kroll's Advanceview and Inview programs-are "equally available and accessible."

For a "cumulation of information" to be "equally available and accessible to all . . . its customers, every customer must have access to the protocols, algorithms, and formulas [that] make up the "cumulation." But, not every customer must have access to other customers' searches or the specific documents those other customers retrieve from the system. 30

We disagree. Because the statute provides an exemption from a tax, we must construe it

narrowly. Ameripride Servs., Inc. v. Comm 'r of Revenue, Docket No. 7971-R, 2008 WL 4472392,

at *4 (Minn. T.C. Oct. 3, 2008) (citing TCF Bank Savings FSB v. C.I.R., 486 N.W.2d 756, 757

(Minn. 1992)). Kroll's interpretation of the statute would allow an exemption from sales tax even

though customers can access only some of the information in the online computerized data retrieval

system. Nothing in the definition of "capital equipment" or of "online [ computerized] data

retrieval system" contemplates such a result. To the contrary, subdivision 5 plainly requires that

all information on the system be "equally available and accessible to all [ ] customers." Kroll

customers cannot access documents stored in the system by other customers and, as a result, the

data stored in the Kroll system is not "equally available and accessible to all its customers."

Because the data stored in the Kroll system is not "equally available and accessible to all []

30 Mem. Supp. Appellant ' s Mot. Summ. J. 9-10 (internal citations omitted).

11

customers," Kroll's Advanceview and Inview programs may constitute an "online computerized

data retrieval system," but not one that qualifies for the sales tax exemption under subdivision 5.

In making its argument on this point, Kroll relies not on the plain language of the statute,

but on our decision in Dexma, Inc. v. Commissioner of Revenue, Docket No. 7656-R, 2005

WL 626620 (Minn. T.C. Mar. 8, 2005). According to Kroll, Dexma teaches that "the statute does

not require a database." 31 Although Dexma is the first (and, until now, only) decision interpreting

the capital equipment exemption for online computerized data retrieval systems, we find Dexma

largely uninformative in this dispute. To the extent Dexma is instructive, it supports our

decision here.

The issue in Dexma ( as in this case) was whether machinery and equipment purchased for

Dexma's online internet-based computer system was exempt from sales tax as capital equipment.

Id. at * 1. The Dexma system compiled and interpreted information about borrowers seeking home

mortgages from one of Dexma's customers (typically a mortgage company or credit union) and

transmitted that information to secondary lenders such as Fannie Mae, Freddie Mac, and GMAC

Residential Funding Corporation (GMAC-RFC). Id. The secondary lender used "formulas and

algorithms developed by actuaries, accountants and third party consultants ... to determine what

criteria a Borrower must meet to be considered a good risk for a mortgage loan." Id. at *2. Once

the secondary lender determined whether the borrower qualified and on what terms, the Dexma

system transmitted that decision back to its customer bank. Id. This court determined that the

equipment purchased by Dexma to expand its system was "capital equipment" within the meaning

of Minn. Stat.§ 297A.68, subd. 5:

31

[W]e find that the Dexma's hardware, software and relevant equipment were used by Dexma to electronically transmit results retrieved by a customer of

Mem. Supp. Appellant's Mot. Summ. J. 12.

12

an online computerized data retrieval system accessible to all customers and are, therefore, capital equipment and exempt from sales tax.

Dexma, 2005 WL 626620, at *4.

But there are significant differences between the Dexma system and Kroll's system­

differences that render the Dexma case unhelpful, even by analogy, in deciding this matter. In

Dexma, "[a]ll Customers have access to the Dexma System and information contained therein."

Id. at *2, *4 ("[A]ll Customers have access to the same information .... [A]ll data, algorithms,

formulas, etc. that are on the Dexma System may be accessed by any Customer."). In contrast, the

documents on Kroll's system are not equally available and accessible to all Kroll customers. To

the contrary, the only data accessed in response to a query posed by a Kroll customer is that

customer's own documents. 32

In addition, as the Dexma court emphasized, the same query submitted to the Dexma

system received the same answer from the secondary lenders, no matter which of Dexma's

customers submitted it: "Any search which has the same criterion will achieve the same results."

Id. at *4. In contrast, unlike the Dexma system, the same query submitted to the Kroll system

necessarily generates a different answer for every customer, because each customer is querying a

different "cumulation" of information.

Where the relevant "cumulation of information" includes both "formulas and algorithms"

and documents, the plain language of subdivision 5( d)(8) requires that it all be "equally available

32 To be sure, we said in Dexma that "the statute does not require that the taxpayer maintain a database." Id. at *5. In saying so, however, we meant only to respond to the Commissioner's argument that to qualify for the exemption, the "storehouse of information" or "database" had to be maintained by the taxpayer itself, rather than by a third party ( in Dexma' s case, by the secondary lenders). Id. That the exemption in subdivision 5 is limited to an "online computerized data retrieval system" would seem to require, in the first instance, a database from which data is retrieved.

13

and accessible to all [] customers." Although Dexma is distinguishable because its "cumulation

of information" did not include documents, its application of the statutory requirement of equal

availability and accessibility supports our own here.33

In summary, then, the Kroll system does not qualify for the exemption from sales tax for

capital equipment because, although an "online computerized data retrieval system," the

information on the system is not "equally available and accessible to all its customers" within the

meaning of Minn. Stat. § 297A.68, subd. 5(a). We therefore deny this aspect of Kroll's motion

for summary judgment, grant this aspect of the Commissioner's motion for summary judgment,

and affirm the Commissioner's denial of Kroll' s requested refund of sales tax paid on purchases

of machinery and equipment.

B. Exemption for purchase of electricity

For the tax period at issue, Minnesota law allowed an exemption from sales tax for

materials, including electricity, "used or consumed in industrial production of personal property."

Minn. Stat.§ 297A.68, subd. 2(a) & 2(a)(3) (2012). Kroll seeks a refund of sales tax it paid on

electricity to power its computers and peripheral equipment. To qualify for the exemption, the

electricity must have been used in the industrial production of personal property. We agree with

the Commissioner that Kroll is not involved in any such activity.

Minnesota law defined "personal property" as "tangible personal property," or "personal

property that can be seen, weighed, measured, felt, or touched." Minn. Stat. § 297 A.61, subd. 1 0(a)

(2012). Kroll describes itself here as in the business of providing "technology-driven services." 34

33 Were we to decide Dexma today, some 13 years later and with a better understanding of the technology involved, we cannot say we would necessarily reach the same result.

34 Stip. iJ 2.

14

Kroll makes no mention of providing its client with products, or anything resembling personal

property as defined in Minn. Stat.§ 297A.61 , subd. l0(a). In fact, Kroll admittedly did not collect

or remit sales tax for the sale of its services. 35 Had Kroll engaged in the sale of personal property,

it would have been required to do so. See Minn. Stat. § 297 A.62 (2016). Sales tax exemptions are

narrowly construed, and the statute makes clear that for the purchase of electricity to be tax exempt,

it must be consumed in the production of personal property, not services. Kroll is not entitled to

a refund of sales tax paid on its purchase of electricity. We therefore grant the Commissioner' s

motion for summary judgment, and deny Kroll ' s motion for summary judgment, on this point.

For all of the foregoing reasons, we grant the Commissioner' s motion for summary

judgment and deny Kroll ' s motion in their entirety.

J.H.T.

35 Stip. 120.

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