Appeal of K-Mart Corp., K-MART

Decision Date06 December 1985
Docket NumberK-MART,No. 57992,57992
Citation238 Kan. 393,710 P.2d 1304
Parties, 12 Media L. Rep. 1579 In the Matter of the Appeal ofCORPORATION From an Order of the Director of Taxation.
CourtKansas Supreme Court

Syllabus by the Court

1. The retailers' sales tax act (K.S.A. 79-3601 et seq.) and the compensating tax act (K.S.A. 79-3701 et seq.) complement each other and are to be construed together.

2. The statutes cited in syllabus p 1 contemplate that the Kansas sales tax and the compensating tax will be paid by the ultimate consumer.

3. The doctrine of stare decisis is not generally applicable to decisions of administrative tribunals.

4. The purchase of preprinted advertising supplements by a newspaper advertiser for insertion in and delivery by the newspaper does not constitute a "sale at retail" under our statutes which would subject the purchase to the sales or compensating tax.

5. Advertising, whether run of the press, preprinted supplements provided by the newspaper or preprinted supplements provided by the advertiser, is a component part of the newspaper.

Cleo G. Murphy, of the Kansas Dept. of Revenue, Topeka, argued the cause and William L. Edds, Gen. Counsel, and Nancy E. Freund, of the same agency, were with her on brief for appellant.

Benjamin J. Neill, of Perry & Hamill, Overland Park, argued the cause and was on brief for appellee, K-Mart Corp.

Mark V. Beshears, of Colmery, McClure, Letourneau, Entz & Merriam, P.A., Topeka, was on amicus curiae brief for The Kansas Press Ass'n.

HOLMES, Justice.

The Kansas Department of Revenue (KDR or Department) appeals from an order of the State Board of Tax Appeals (BOTA) holding that advertising supplements of K-Mart Corporation (K-Mart) distributed in local newspapers across the state are not subject to the Kansas compensating or use tax set forth at K.S.A. 79-3701 et seq.

K-Mart contested the KDR assessment of $25,198.00 tax and $9,165.00 interest for the period January 1, 1980, through December 31, 1982. Upon appeal that assessment was abated by the BOTA. The KDR appealed that decision to the Court of Appeals pursuant to K.S.A. 1984 Supp. 74-2426(b)(2). The appeal was subsequently transferred to this court as provided by K.S.A. 20-3018(c). An identical factual situation was previously before this court in In re K-Mart Corp., 232 Kan. 387, 654 P.2d 470 (1982), hereinafter K-Mart I.

The facts stated in K-Mart I were:

"The dispute concerns the purchase, by K-Mart, of certain advertising circulars for distribution in Kansas. K-Mart, for reasons of economy, high-quality impact, and national uniformity of style, purchases the circulars from a print source in Michigan. The printer, pursuant to its contract with K-Mart, then drop-ships the circulars to various newspaper companies throughout the nation as designated by K-Mart. The newspaper companies then, pursuant to a separate agreement with K-Mart, insert the advertising supplements into certain editions of their papers for distribution to their subscribers and other consumers. No sales tax on the supplements is paid by K-Mart to the State of Michigan."

In K-Mart I the BOTA had upheld the order of the KDR assessing the compensating tax and that order was upheld upon appeal to the district court. K-Mart's appeal from the district court was dismissed due to a lack of jurisdiction based upon procedural deficiencies. It is noted that the statute which provided for appeals to the district court has been amended and that step in the appeal process has been eliminated for certain types of orders of the BOTA. See K.S.A. 1984 Supp. 74-2426(b)(2). Additional facts necessary for the resolution of the various issues on appeal will be set forth as they become necessary.

K.S.A. 79-3703, which provides for the imposition of the compensating tax, provides:

"There is hereby levied and there shall be collected from every person in this state a tax or excise for the privilege of using, storing, or consuming within this state any article of tangible personal property. Such tax shall be levied and collected in an amount equal to the consideration paid by the taxpayer multiplied by the rate of three percent (3%). All property purchased or leased within or without this state and subsequently used, stored or consumed in this state shall be subject to the compensating tax if the same property or transaction would have been subject to the Kansas retailers' sales tax had the transaction been wholly within this state."

It has long been recognized that the retailers' sales tax act (K.S.A. 79-3601 et seq.) and the compensating tax act (K.S.A. 79-3701 et seq.) complement each other and are to be construed together. See J.G. Masonry, Inc. v. Department of Revenue, 235 Kan. 497, 680 P.2d 291 (1984), and cases cited therein. The compensating tax was enacted to assure that purchases outside of Kansas of tangible personal property, which is brought into and used in Kansas, are subjected to the same rate of tax as if the purchase were made within the state. As with the sales tax, the consumer or use tax is to be paid by the ultimate consumer of the product. K.S.A. 79-3705a; Southwestern Bell Tel. Co. v. State Commission of Revenue and Taxation, 168 Kan. 227, 233, 212 P.2d 363 (1949). K.S.A. 79-3702(b) provides that words and phrases defined in K.S.A. 79-3602 shall, when applicable, have the same meaning under the compensating tax act.

K.S.A. 79-3602 provides, in pertinent part:

"(e) 'Retail sale' or 'sale at retail' means all sales made within the state of tangible personal property or electrical energy, gas, water, services or entertainment for use or consumption and not for resale.

.... "(1) 'Ingredient or component part' means tangible personal property which is necessary or essential to, and which is actually used in and becomes an integral and material part of tangible personal property or services produced, manufactured or compounded for sale by the producer, manufacturer or compounder in its regular course of business. The following items of tangible personal property are hereby declared to be ingredients or component parts, but the listing of such property shall not be deemed to be exclusive nor shall such listing be construed to be a restriction upon, or an indication of, the type or types of property to be included within the definition of 'ingredient or component part' as herein set forth:

....

(4) Paper and ink used in the publication of newspapers."

K.S.A. 79-3606 specifies certain exemptions from the tax and provides in part:

"The following shall be exempt from the tax imposed by this act:

....

"(m) all sales of tangible personal property which become an ingredient or component part of tangible personal property or services produced, manufactured or compounded for ultimate sale at retail within or without the state of Kansas; and any such producer, manufacturer or compounder may obtain from the director of taxation and furnish to the supplier an exemption certificate number for tangible personal property for use as an ingredient or component part of the property or services produced, manufactured or compounded."

The BOTA, in determining that the K-Mart advertising supplements were not subject to the compensating tax, concluded that the purchase of the supplements was not a "sale at retail" and, in addition, that the supplements are a component part of the newspaper. We now turn to the issues on appeal.

Appellant asserts that the action of the BOTA was arbitrary because it failed to follow the earlier ruling in K-Mart I and did not articulate its reasons for not following the earlier ruling. The rule in Kansas, which is acknowledged by the appellant in its brief, is that the doctrine of stare decisis is inapplicable to decisions of administrative tribunals. Warburton v. Warkentin, 185 Kan. 468, 345 P.2d 992 (1959); Ryan, Kansas Administrative Law with Federal References p. 18-3 (2d ed.1985). There is no rule in Kansas that an administrative agency must explain its actions in refusing to follow a ruling of a predecessor board in a different case or that it must articulate in detail why the earlier ruling is not being followed. The order in K-Mart I consisted of only three pages, completely lacked any authority to support either party's position and concluded by summarily stating the supplements were not obtained for purposes of later resale nor were they an integral part of the newspaper. In comparison, the order in this case is comprehensive, examines cases and authorities from other jurisdictions and ultimately determines the issues in favor of K-Mart. We find no merit in appellant's first issue.

The next issue asserted by the KDR is that K-Mart's contracting with the printers for the advertising supplements, and their later delivery to the newspapers for distribution, is a sale of tangible personal property at retail. K.S.A. 79-3704(b) exempts transactions "other than at retail; as defined in K.S.A. 79-3602" from the compensating tax. Appellant contends that K-Mart purchases the advertising supplements out of state and does not resell them to the newspaper. While this is true, it does not take into consideration the true nature of the advertising contracts between K-Mart and the newspapers. Generally, a newspaper contains three types of advertising supplements: supplements printed by printers and sold to advertisers; supplements printed by printers and sold to the newspapers; and supplements printed by the newspaper. Newspapers also contain run of the press (ROP) advertising which is the advertising appearing on the same pages as the news articles and other features making up the main body of the newspaper. In addition to the three types of advertising supplements, there are other supplements which are not printed by the newspaper, such as the Sunday comics, Sunday magazine and weekly television schedules, which are also delivered as a part of the newspaper. All of the advertising, whether ROP or...

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