Apache Corp. v. State ex rel. Oklahoma Tax Commission

• Decision Date: 15 June 2004
• Docket Number: No. 97907,97907
• Parties: APACHE CORPORATION, Protestant/Appellant, v. STATE OF OKLAHOMA, ex rel. OKLAHOMA TAX COMMISSION, Respondent/Appellee.
• Court: Oklahoma Supreme Court

2004 OK 48

98 P.3d 1061

APACHE CORPORATION, Protestant/Appellant, v. STATE OF OKLAHOMA, ex rel. OKLAHOMA TAX COMMISSION, Respondent/Appellee.

No. 97907

Supreme Court of Oklahoma

June 15, 2004

Philip D. Hart, James Dudley Hyde, Jennifer Henderson Callahan, McAfee & Taft, Oklahoma City, Oklahoma, for Petitioner/Appellant.

Douglas B. Allen, General Counsel, Marjorie L. Welch, First Deputy General Counsel, Oklahoma Tax Commission, Oklahoma City, Oklahoma, for Respondent/ Appellee.

EDMONDSON, J.

¶1 Apache Corporation, a producer of oil and gas, purchased equipment and other items that it used at its wells to produce oil, gas, and related hydrocarbons. Apache Corporation (Apache) claims that: (1) It paid sales taxes on these purchases; (2) A sales tax exemption is provided to manufacturers; and (3) Apache is a manufacturer and entitled to a refund from the Tax Commission for the these purchases. Specifically, Apache claims that gas compression, dehydration, and other processes occurring at the wellhead amount to a manufacturing process, and any expenditures made as a manufacturing process are entitled to be exempt from a sales tax. The Tax Commission claims that field processing is not "processing" in a manufacturing sense, and that Apache is not entitled to any refund.

¶2 Apache's request for refund relates to purchases made between March 1, 1997 and February 29, 2000. The refund was divided into two amounts, $439,506.77 attributable to purchases made before November 1, 1998, and $329,269.63 attributable to purchases made on or after November 1, 1998. The relevant statutes were amended effective November 1, 1998. They were also amended in 2003.

¶3 In Dolese Bros. v. State ex rel. Oklahoma Tax Commission, 2003 OK 4, 64 P.3d 1093, we explained that, "[a]s a general rule, statutes and statutory amendments will be construed as operating prospectively unless by express declaration or necessary implication from the language used the Legislature clearly demonstrates a contrary intent." Id. 2003 OK 4 at ¶ 8, 64 P.3d at 1097. Nothing before us suggests that the 1998 and 2003 amendments apply to all of Apache's sales taxes paid between 1997 and 2000. We must therefore examine Apache's refund in light of the 1997 and 1998 versions of the Oklahoma Sales Tax Code as they apply to taxes paid when each version was in effect.¹ We first apply the 1998 statutes.

¶4 Apache claimed the sales tax exemption provided for the "[s]ales of goods, wares, merchandise, tangible personal property, machinery and equipment to a manufacturer for use in a manufacturing operation." 68 O.S.Supp.1998 § 1359 (1). Apache sought an exemption based upon its alleged status as a manufacturer. The Tax Commission first claimed that Apache did not follow the proper procedure for obtaining this exemption.

¶5 In 1998 a new statute was created, 68 O.S.Supp.1998 § 1359.2, and it requires a manufacturer to obtain a "manufacturer exemption permit" to "qualify for the exemption authorized in paragraph 1 of section 1359 . . . ."

A. In order to qualify for the exemption authorized in paragraph 1 of Section 1359 of Title 68 of the Oklahoma Statutes, at the time of sale, the person to whom the sale is made, provided the purchaser is a resident of this state, shall be required to furnish the vendor proof of eligibility for the exemption as required by this section. All vendors shall honor the proof of eligibility for sales tax exemption as authorized under this section, and sales to a person providing such proof shall be exempt from the tax levied by Section 1350 et seq. of Title 68 of the Oklahoma Statutes.

B. Each resident manufacturer wishing to claim the exemption authorized in paragraph 1 of Section 1359 of Title 68 of the Oklahoma Statutes shall be required to secure from the Oklahoma Tax Commission a manufacturer exemption permit, the size and design of which shall be prescribed by the Tax Commission. This permit shall constitute proof of eligibility for the exemption provided in paragraph 1 of Section 1359 of Title 68 of the Oklahoma Statutes. Each such manufacturer shall file with the Tax Commission an application for an exemption permit, setting forth such information as the Tax Commission may require. The application shall be signed by the owner of the business or representative of the business entity and as a natural person, and, in the case of a corporation, as a legally constituted officer thereof.

68 O.S.Supp.1998 § 1359.2 (A) & (B), (emphasis added).

¶6 Apache argues that it should not be required to obtain a permit because it learned during this litigation that even if it had timely sought a permit, the Tax Commission would have denied its application. Apache did apply for an exemption permit on April 13, 2000, several days after the period for which it seeks a refund. The record clearly shows that Apache's application for a permit would have been denied. Apache's argument assumes that the permit is part of an administrative remedy to obtain the manufacturer's exemption. The Tax Commission asserts that Apache's failure to obtain, or least attempt to obtain, the permit bars the exemption for a refund of taxes paid on or after November 1, 1998.

¶7 Exhaustion of administrative remedies is not required when those remedies are inadequate, ineffective or unavailable. Dewey v. State ex rel. Oklahoma Firefighters Pension and Retirement System, 2001 OK 40, ¶ 14, 28 P.3d 539, 546; McCarthy v. Madigan, 503 U.S. 140, 146-149, 112 S.Ct. 1081, 117 L.Ed.2d 291 (1992). We have explained the inadequacy, insufficiency, or futility of an administrative remedy when that remedy did not provide the parties with an opportunity to fairly present all claims and have them adjudicated. Lone Star Helicopters, Inc. v. State, 1990 OK 111, 800 P.2d 235, 237 (agency had no authority to adjudicate breach-of-contract claim); Walker v. Group Health Services, Inc., 2001 OK 2, ¶ 39, 37 P.3d 749, 762 (Board could not award damages for bad faith breach of an insurance contract). Cf. Montana National Bank of Billings v. Yellowstone County, 276 U.S. 499, 505, 48 S.Ct. 331, 333, 72 L.Ed. 673 (1928),

(taxpayer seeking refund was not required to exhaust where tax entity was powerless to grant any appropriate relief).

¶8 Apache asks that our definition of an "ineffective remedy" include circumstances where a party would have been unsuccessful in an administrative proceeding. Some courts have stated that certainty of an adverse administrative decision may make exhaustion futile. UDC Chairs Chapter, American Ass'n of University Professors v. Board of Trustees of University of District of Columbia, 56 F.3d 1469, 1475 (D.C. Cir. 1995); Randolph-Sheppard Vendors of America v. Weinberger, 795 F.2d 90, 105, (D.C.Cir. 1986). However, the mere likelihood of an adverse decision is not sufficient to excuse a failure to exhaust. Marine Mammal Conservancy, Inc. v. Department of Agriculture, 134 F.3d 409, 413 (D.C.Cir. 1998).

¶9 We applied this exception to the exhaustion doctrine in Bankoff v. Board of Adjustment of Wagoner County, 1994 OK 58, 875 P.2d 1138, where we said that a party was not required to seek a zoning variance when it had previously been denied a conditional use permit. We explained that the law does not require one to do a vain or useless thing or to perform an unnecessary act to obtain relief. Id. 1994 OK 58, at n. 9, 875 P.2d at 1143. Cf. Orion Corp. v. State, 103 Wash.2d 441, 693 P.2d 1369, 1379 (1985),

(the futility exception to the exhaustion doctrine is premised upon the rationale that courts will not require vain and useless acts). However, Apache's argument fails because the requirement to obtain a manufacturer's permit is required by statute.

¶10 The requirement to exhaust administrative remedies is a prudential rule when exhaustion is not required by statute. Waste Connections, Inc. v. Oklahoma Dept. of Environmental Quality, 2002 OK 94, ¶ 8, 61 P.3d 219. The doctrine of exhaustion of administrative remedies, as a prudential rule judicially created, does not apply when the Legislature requires exhaustion of a remedy for obtaining a tax refund. When examining a statutory remedy to recover tax payments, we have said that "[g]enerally, when a statute creates both a right and a remedy for its enforcement the statutory remedy is exclusive. R.R. Tway, Inc. v. Oklahoma Tax Commission, 1995 OK 129, 910 P.2d 972, 978. Tax exemptions and deductions are matters of legislative grace. Id. In our case today, the right Apache seeks to enforce is a statutory tax exemption for certain manufacturers, and it must thus follow available statutory procedures to obtain that exemption.

¶11 Section 1359.2 provides a procedure "in order to qualify for the exemption," and a manufacturer desiring the exemption "shall be required to secure from the Oklahoma Tax Commission a manufacturer exemption permit." The term "shall" is often used in a statute as part of a command or a mandatory duty. Tulsa County Budget Bd. v. Tulsa County Excise Bd., 2003 OK 103, n. 25, 81 P.3d 662, 671; State ex rel. Independent School Dist. No. 1 of Oklahoma County v. Barnes, 1988 OK 70, 762 P.2d 921, 924. While it is true that law and equity will not require the performance of a vain or useless act, Dewey v. State ex rel. Oklahoma Firefighters Pension and Retirement System, 2001 OK 40, n. 26, 28 P.3d 539, 546, Apache's assertion of futility in the result of an administrative remedy is, in essence, an equitable defense to the application of a mandatory procedural statute used to obtain a tax exemption.² This Court has previously declined to interpose equity to block the requirements of mandatory procedural tax statutes. R.R. Tway, Inc. v. Oklahoma Tax Commission, 1995 OK 129, 910 P.2d 972, 978; Whig Syndicate, Inc. v. Keyes, 1992 OK 95, 836 P.2d 1283, 1288.³ We thus agree with the Commission that Apache's claim for a refund for taxes paid between November 1, 1998 and February 29, 2000, is barred by Apache's failure to...