Collingwood Grain, Inc., Matter of

Decision Date10 March 1995
Docket NumberNo. 71465,71465
Citation891 P.2d 422,257 Kan. 237
PartiesIn the Matter of the Appeal of COLLINGWOOD GRAIN, INC., Garvey Elevators, Inc., and Cairo Cooperative Equity Exchange.
CourtKansas Supreme Court

Syllabus by the Court

1. Board of Tax Appeals orders are subject to judicial review under the Act for Judicial Review and Civil Enforcement of Agency Actions, K.S.A. 77-601 et seq.

2. Substantial evidence is such legal and relevant evidence as a reasonable person might accept as being sufficient to support a conclusion.

3. Sales and use tax statutes should generally be construed together.

4. Tax exemption statutes must be construed strictly in favor of imposing the tax and against allowing the exemption for one who does not clearly qualify. The burden of proof is on the person asserting exemption to bring himself or herself within the exemption statute. The same rules apply to tax refund statutes.

5. A fundamental rule of statutory construction is that the purpose and intent of the legislature governs.

6. Electricity used by grain elevators in blending, cleaning, drying, and aerating 7. Where there is a possibility of relevancy in documents subpoenaed and there is no showing that a subpoena is unreasonable or oppressive, the statutes granting the power to subpoena should be liberally construed to permit inquiry.

grain is construed to be exempt from taxation under K.S.A. 79-3606(n) as property consumed in the "production, manufacture, processing, ... refining or compounding of tangible personal property."

8. The enforcement of a subpoena duces tecum is left to the discretion of the enforcing tribunal. A subpoena duces tecum is subject to K.S.A. 60-245(b) and it must be relevant and not unreasonable or oppressive.

John Michael Hale, of the Kansas Dept. of Revenue, argued the cause, and Vernon L. Jarboe, General Counsel, and Thomas E. Hatten, Topeka, of the same dept. were on the briefs for appellant.

Carol B. Bonebrake, of Cosgrove, Webb & Oman, Topeka, argued the cause and was on the brief for appellees.

ABBOTT, Justice:

This is an appeal by the Kansas Department of Revenue (KDR) from a final order of the Board of Tax Appeals (BOTA) which held that the sale of electricity consumed in grain elevator operations, such as for aeration, blending, cleaning, and drying of grain, is exempt from sales tax pursuant to K.S.A. 79-3602(m)(B) and K.S.A. 79-3606(n).

Collingwood Grain, Inc., Garvey Elevators, Inc., and Cairo Cooperative Equity Exchange (taxpayers) are grain elevators. In 1989, taxpayers each submitted claims seeking sales tax exemption on future utility bills and refunds of sales tax paid on previous billings pursuant to K.S.A. 79-3606(n). That statute provides for a sales tax exemption on:

"all sales of tangible personal property which is consumed in the production, manufacture, processing, mining, drilling, refining or compounding of tangible personal property, the providing of services or the irrigation of crops for ultimate sale at retail within or without the state of Kansas; and any purchaser of such property may obtain from the director of taxation and furnish to the supplier an exemption certificate number for tangible personal property for consumption in such production, manufacture, processing, mining, drilling, refining, compounding, irrigation and in providing such services."

It is undisputed that electricity is "tangible personal property" subject to the sales tax exemption. K.S.A. 79-3602(m)(B).

The taxpayers' claims were consolidated. The procedural history is of no real significance and will not be set forth in detail. The first hearing occurred in 1989, and subsequently there was a rehearing by BOTA, following remand by the Court of Appeals. BOTA issued its order on remand in February 1994. The order states in pertinent part:

"At harvest, grain is dumped into a pit and is then taken to a storage bin for holding. Following the completion of harvest, the grain elevators begin their compounding, processing, and refinement activities which include the process of blending/turning, fumigation, cleaning, aeration, grain drying, feed grinding and fertilizer blending. The functions and purposes of each process are often interrelated and are often completed in conjunction with the other processes. The processes available and performed at each elevator vary according to the individual property characteristics of the elevator.

"A. Blending/Turning. The term 'blending' is often used interchangeably with 'turning'; however, for purposes of taxation, such processes are separate and distinct. Blending is the process which takes the grain received in various quality levels and refines, compounds, and processes the grain through cleaning, turning, and dehydration to achieve a more uniform product in terms of moisture level, test weight and protein level. Blending improves the value or marketability of the grain. In contrast, turning is the process by which grain is moved within the bin primarily to dissipate hot spots and prevent spoilage. Although turning will result in some dehydration, the primary purpose of turning is to preserve the grain rather "B. Fumigation. Typically, in September or October following harvest, grain is fumigated for the purpose of killing all bugs in the grain. Fumigation is the process whereby fumigants (either liquids or pellets) are added to the grain to kill [insects] and prevent further insect damage. One method of fumigation is to turn the grain and deposit phosphine pellets on the grain as it goes into the bin. Another method of fumigation is through the application of liquid [fumigants] through the aeration system. Aeration fans pull the fumigants through the grain mass. It would appear that the primary purpose of fumigation is to preserve the grain.

than to create an improved or more marketable product.

"C. Cleaning. Elevators remove foreign matter from the grain by several methods. Some elevators have aspirators whereby the grain passes through these machines and air suction pulls out the foreign matter. Other elevators use rotary cleaners which involve screens through which the grain will pass but the trash will not. Grain is delivered to the screens by means of a centralized elevator leg. It appears that the primary purpose of cleaning is to produce an improved or more valuable product which is more marketable to grain mills.

"D. Aeration. Aeration is used by grain elevators to lower the moisture content (drying) and to control insect infestation. Drying is essential to reduce moisture content so that the grain becomes a marketable product. Specifically, aeration is the process where cold air is pulled through the grain by large fans to lower the temperature of the grain below 50 degrees. Moisture is removed through evaporation. Furthermore, once the temperature of the grain has been lowered below 50 degrees, the insects become dormant. During aeration, the fans typically operate continuously all winter for a period of three to six months. Aeration is commonly used in conjunction with other processes. Aeration is used to produce an improved and more marketable product.

"E. Grain Drying. Grain drying occurs at an elevator when wet grain is received at the receiving pit. The wet grain is elevated by the elevator leg and taken over to a dryer, a piece of equipment that uses either natural gas or propane running a series of burners. As grain passes over the burners, the heat takes the moisture out. Corn and milo are typically the grains which are dried. Drying is essential for reducing moisture so that the grain becomes a marketable product."

Using the dictionary definitions of "process," "refining," and "compounding," BOTA stated:

"Grain elevators, through blending, mix and combine [ (compound) ] grains of various grades in order to achieve a high quality product which has a lower moisture level, a more marketable test weight, and a higher protein level and grade. Furthermore, the various cleaning processes, working singularly or in conjunction with other processes, help to reduce and eliminate foreign matter, insect infestation, and damaged grain [ (refining) ]. Furthermore, the various drying processes working singularly or in conjunction with other processes improve the grain quality, moisture content, test weight, and protein level."

BOTA rejected the KDR's argument that "production, manufacturing, processing, mining, drilling, refining, or compounding" is limited to those processes which result in the physical transformation of the product into an article or product of substantially different character. BOTA held that a transformation of tangible personal property into a product of substantially different character is not necessarily required in order to obtain the exemption; it is sufficient if the procedure transforms or converts the product into an improved marketable product. BOTA concluded:

"In this particular case, all of the processes except for turning and fumigation are used to treat, process, and improve the harvested grain into a more marketable and improved product in terms of test weight, protein level, moisture content and grade. Cleaning refines the grain by eliminating "... The Board, therefore, concludes that the purchases of electricity used in blending, aeration, drying, and cleaning should be exempt from the retailers' sales tax pursuant to K.S.A. 79-3606(n) and K.S.A. 79-3602(m).... The taxpayer's [sic ] request to exempt purchases of electricity used in grain turning and fumigation, however, should be denied."

foreign matter including damaged grain. Blending, drying and aeration will process and compound the grain into a more marketable product by improving the test weight, protein level, grade and moisture content of the final product. Grain turning and fumigation, however, is performed simply to preserve the grain in its present condition. By grain turning, the grain elevator prevents hot spots and insect...

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