Epsilon Trading Co., Inc. v. Revenue Cabinet, 88-CA-1212-MR

Citation775 S.W.2d 937
Decision Date30 June 1989
Docket NumberNo. 88-CA-1212-MR,88-CA-1212-MR
PartiesEPSILON TRADING COMPANY, INC., Appellant, v. REVENUE CABINET, Commonwealth of Kentucky, Appellee.
CourtCourt of Appeals of Kentucky

Thomas A. Brown, Greenebaum, Doll & McDonald, Louisville, Helene Z. Cohen, Alston & Bird, and D. Michael Keen, and Kelly S. Jennings, Delta Air Lines, Inc., Atlanta, Ga., for appellant.

Douglas M. Dowell, Revenue Cabinet, Frankfort, for appellee.

Before HOWERTON, C.J., and CLAYTON and REYNOLDS, JJ.

REYNOLDS, Judge.

Franklin Circuit Court, by judgment, reversed the Kentucky Board of Tax Appeals' decision which held certain sales of aviation jet fuel by appellant were exempt from the Kentucky state sales tax. Taxpayer appeals.

Appellant, Epsilon Trading Company, Inc. (Epsilon), is a Delaware corporation qualified to do business in Kentucky and is a wholly owned subsidiary of Delta Air Lines, Inc. (Delta). The company is engaged in the purchase and sale of aviation jet fuel and related products and services to Delta and other airlines.

Following an audit for the period from December 1, 1983 through June 30, 1984, the Revenue Cabinet (Cabinet) assessed Epsilon a sales tax deficiency in the amount of $432,319.55 for certain sales of aviation fuel made by it to Delta via bills of lading. Epsilon appealed this assessment to the Kentucky Board of Tax Appeals and contended that the sales were exempt under KRS 139.470(5) which grants an exemption from sales tax for property sold to a common carrier which is shipped by a bill of lading and is used by the carrier in the operation of its business outside of Kentucky. The Board held Epsilon was entitled to an exemption under KRS 139.470(5).

Appellant first contends that the circuit court erred by exceeding the proper standard of review of the Board of Tax Appeals' decision and by improperly substituting its own factual findings for those of the Board and that the findings and conclusions of the Board were based on substantial evidence and were in conformity with the law. We do not agree.

The power of review of this appeal is clearly defined by KRS 131.370(3):

No new or additional evidence may be introduced in the circuit court except as to the fraud or misconduct of some person engaged in the administration of the revenue laws and affecting the order, ruling or award, but the court shall otherwise hear the cause upon the record as certified by the board and shall dispose of the cause in summary manner, its review being limited to determining whether or not:

(a) The board acted without or in excess of its powers;

(b) The order, decision, or award was procured by fraud;

(c) The order, decision, or award is not in conformity to the law; and

(d) If findings of fact are in issue, whether such findings of fact support the order, decision or award.

Subsection (d) of the statute limits review of the board's action to the question: Whether such "findings of fact support the order, decision, or award?" Under this provision, the legislature intended to limit review of orders of the board of tax appeals on findings of fact, as in most appeals from orders of administrative agencies, to determining whether the findings of fact are supported by substantial evidence. CR 52.01. Trimble County Board of Supervisors v. Mullikin, Ky., 438 S.W.2d 524 (1969). It is well settled that a reviewing court may not substitute its judgment for that of an administrative board as a finder of fact. Paramount Foods, Inc. v. Burkhardt, Ky., 695 S.W.2d 418 (1985). However, the substantial evidence test pertains only to questions of fact, not to questions of law. Brown v. Y.W.C.A., Ky.App., 729 S.W.2d 190 (1987).

An erroneous application of the law by an administrative board or by the circuit court is clearly reviewable by this Court. Also, where an administrative body has misapplied the legal effect of the facts, courts are not bound to accept the legal conclusions of the administrative body. Commonwealth, Department of Highways v. Cardwell, Ky., 409 S.W.2d 304 (1966). Therefore, the role of judicial review of a decision by the Kentucky Board of Tax Appeals is that of determining the propriety of "questions of law." Revenue Cabinet v. Moors Resort, Inc., Ky.App., 675 S.W.2d 859 (1984). Whether a decision or action of the Board is unreasonable, arbitrary and capricious, for the reason it is not based upon substantial evidence, is one of law. See Board of Education v. Chattin, Ky., 376 S.W.2d 693 (1964).

Herein the parties disagree on the applicable standard of review to be followed by the circuit court. The appellant asserts that the trial court should have examined the findings and conclusions of the Board merely to determine whether they were supported by substantial evidence. Appellee meanwhile, argues that since the evidentiary facts of this case were undisputed and the question or issue presented concerned an interpretation and application of the law, the Board's decision was fully reviewable on appeal to the circuit court and thus, was not subject to the clearly erroneous or substantial evidence rule.

We agree with appellee's argument and conclude that the resolution of this appeal centered around the construction and application to be given to KRS 139.470(5) in light of the undisputed factual circumstances presented in this case. We hold that the appeal to the circuit court involved a question of law and as such, the Board's order was fully reviewable and was not subject to the substantial evidence rule. The circuit court was not bound to accept the legal conclusions of the Board and it did not err in the standard of review.

Next, appellant contends that both it and Delta have fully complied with the requirements of KRS 139.470(5) and therefore, are entitled to the statutory sales tax exemption. We do not agree.

KRS 139.470(5), which allows for certain exemptions from Kentucky sales tax, provides as follows:

There are excluded from the computation of the amount of taxes imposed by this chapter:

(5) Gross receipts from sales of tangible personal property to a common carrier, shipped by the seller via the purchasing carrier under ...

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