In re Garden City Medical Clinic, P.A.

• Decision Date: 14 July 2006
• Docket Number: No. 93,091.,93,091.
• Citation: 137 P.3d 1058
• Parties: In the Matter of the Appeal of GARDEN CITY MEDICAL CLINIC, P.A., for Exemption from Ad Valorem Taxation in Finney County, Kansas.
• Court: Kansas Court of Appeals

137 P.3d 1058

In the Matter of the Appeal of GARDEN CITY MEDICAL CLINIC, P.A., for Exemption from Ad Valorem Taxation in Finney County, Kansas.

No. 93,091.

Court of Appeals of Kansas.

July 14, 2006.

Janet Huck Ward, Thomas R. Docking, and Richard A. Kear, of Morris, Laing, Evans, Brock & Kennedy, Chartered, of Wichita, for appellant Garden City Medical Clinic, P.A.

Linda Terrill, of Neill, Terrill & Embree, of Leawood, for appellee Finney County Board of County Commissioners.

Before ELLIOTT, P.J., JOHNSON and McANANY, JJ.

McANANY, J.

This appeal arises from proceedings before the Board of Tax Appeals (BOTA) in which the Garden City Medical Clinic (Clinic) sought relief for Finney County's erroneous taxation of the Clinic's computer applications software during 1998, 1999, and 2000. The Clinic challenges BOTA limiting its tax refund to only the year immediately preceding the year in which it filed its refund application. While we are not persuaded by the Clinic's equal protection claim, its due process claim has merit. Accordingly, we reverse.

During 1995 and 1996 the Clinic purchased computer software for use in its business. It discovered in 2002 that it had been paying taxes to Finney County on this software when it was not subject to taxation. Consequently, in November 2002, the Clinic filed with BOTA an exemption application for the years 1996 and thereafter. It also sought a refund from Finney County of taxes paid for 1998, 1999, and 2000, in the amount of $9,161.08.

The computer applications software was specifically referred to in the Clinic's application. In its recommendations and comments, a procedure mandated by K.S.A.2003 Supp. 79-213(d), the county appraiser noted that "there is no exemption for applicational software. Applicational software has been determined by the courts to be intangible property." By this, the appraiser apparently was referring to In re Tax Protest of Strayer, 239 Kan. 136, 143, 716 P.2d 588 (1986), in which our Supreme Court determined that while operating system software is taxable tangible personal property, applications software is intangible and not subject to tax. In essence, the appraiser was asserting that the applications software, which is not subject to tax, is not the proper subject for an exemption application.

At the time the Clinic filed its application, K.S.A.2002 Supp. 79-213(k), which applied to the 1996 tax year and thereafter, provided:

"In conjunction with its authority to grant exemptions, the board shall have the authority to abate all unpaid taxes that have accrued from and since the effective date of the exemption. In the event that taxes have been paid during the period where the subject property has been determined to be exempt, the board shall have the authority to order a refund of taxes for a period not to exceed three years." (Emphasis added.)

Finney County requested a hearing which was scheduled for August 29, 2003. In the meantime, on July 1, 2003, the legislature amended K.S.A. 79-213(k) so as to limit tax refunds to the year immediately preceding the year in which the exemption application is filed. K.S.A.2003 Supp. 79-213(k); L.2003, ch. 156, sec. 3. The legislature declared that this amendment applied to all applications filed after 2001. K.S.A.2003 Supp. 79-213(n); L.2003, ch. 156, sec. 3. This would include the Clinic's application filed in November 2002.

Following the August 2003 hearing, which Finney County did not attend, BOTA issued its order in July 2004 in which, among other things, it found (as Finney County had earlier conceded) that the Clinic's applications software constituted intangible personal property and was, therefore, exempt from taxation. However, because of the July 2003 amendment to K.S.A. 79-213(k), BOTA limited the Clinic's tax refund to the year immediately preceding the year in which the application was filed and rejected its claim for refunds for taxes paid in 1998, 1999, and 2000.

The Clinic sought reconsideration by BOTA, arguing that its retroactive application of the amended K.S.A. 79-213(k) was unlawful. When BOTA denied the motion, this appeal followed.

The Clinic claims that BOTA's retroactive application of K.S.A.2003 Supp. 79-213(k) is an unconstitutional denial of due process and equal protection under both the Kansas and United States constitutions by eliminating its vested right to a remedy for wrongfully collected taxes and by creating an impermissible classification of taxpayers. Since BOTA did not have the authority to consider this constitutional challenge to the statute, that task now falls upon us. Since the issue is one of law, the scope of our review is unlimited. In re Tax Appeal of CIG Field Services Co., 279 Kan. 857, Syl. ¶ 3, 112 P.3d 138 (2005).

Due Process

The constitutionality of K.S.A. 79-213(k) is presumed, and we must resolve all doubts in favor of its validity. "[I]t is the court's duty to uphold a statute under attack, if possible, rather than defeat it, and if there is any reasonable way to construe the statute as constitutionally valid, that should be done." State ex rel. Stephan v. Lane, 228 Kan. 379, Syl. ¶ 1, 614 P.2d 987 (1980).

In considering this claim, we start with the fundamental rule that a statute cannot be applied retroactively to take away vested rights. Our Supreme Court has considered this issue in the context of a number of claimed rights. See Owen Lumber Co. v. Chartrand, 276 Kan. 218, 73 P.3d 753 (2003) (involved the claimed right to rely on the current statutory notice requirements in foreclosing a mechanic's lien); Resolution Trust Corp. v. Fleischer, 257 Kan. 360, 892 P.2d 497 (1995) (involved the claimed right to a cause of action in tort for breach of fiduciary duty by officers and directors of savings and loan associations); Rios v. Board of Public Utilities of Kansas City, 256 Kan. 184, 883 P.2d 1177 (1994) (involved the claimed right to have a worker's compensation appeal heard by the district court rather than the Board of Workers Compensation); Smith v. Printup, 254 Kan. 315, 866 P.2d 985 (1993) (involved the claimed right to punitive damages); Harding v. K.C. Wall Products, Inc., 250 Kan. 655, 831 P.2d 958 (1992) (involved the claimed right to assert the defense that a claim is barred by the statute of repose); Board of Greenwood County Comm'rs v. Nadel, 228 Kan. 469, 618 P.2d 778 (1980) (involved the claimed right in a judgment still subject to review); State ex rel. Schneider v. Liggett, 223 Kan. 610, 576 P.2d 221 (1978) (involved the claimed right to practice medicine without malpractice coverage); State ex rel. Miller v. School District, 163 Kan. 650, 185 P.2d 677 (1947) (involved the claimed right to existing school district boundaries); Brown v. City of Topeka, 146 Kan. 974, 74 P.2d 142 (1937) (involved the claimed right to an existing street name); Bowen v. Wilson, 93 Kan. 351, 144 P. 251 (1914) (involved the claimed right to an appeal); Wheelock v. Myers, 64 Kan. 47, 67 P. 632 (1902) (involved the claimed right to an existing rule of evidence).

While these and other Kansas cases have considered the possible impact of retroactive legislation on vested rights in a multitude of settings, none directly involves a taxpayer's claim of a vested right to a tax refund. There have been, however, Kansas cases involving retroactive tax legislation. In the area of property tax law, a legislative change during the pendency of property tax litigation was given retroactive effect in In re Tax Appeal of American Restaurant Operations, 264 Kan. 518, Syl. ¶ 7, 957 P.2d 473 (1998). However, in American Restaurant the taxing authority was the aggrieved party rather than the taxpayer, and the court was not called upon to consider the constitutional due process issue whether the legislation affected vested rights.

In another tax case, Board of Greenwood County Comm'rs v. Nadel, the court considered whether legislation, which retroactively gave the County the right to appeal an adverse decision, impaired the rights of the taxpayer who prevailed at trial. The Nadel court found that the legislative change was procedural rather than substantive and, therefore, did not affect the taxpayer's vested rights. 228 Kan. at 475, 618 P.2d 778.

While the cases routinely speak in terms of substantive versus procedural legislation and vested versus nonvested rights, the court in Fleischer instructs us to look beyond these labels and consider the following factors: "(1) the nature of the rights at stake (e.g., procedural, substantive, remedial), (2) how the rights were affected (e.g., were the rights partially or completely abolished by the legislation; was any substitute remedy provided), and (3) the nature and strength of the public interest furthered by the legislation. [Citation omitted.]" Fleischer, 257 Kan. at 369, 892 P.2d 497.

In Chartrand, the court noted the following by one commentator:

"`[T]he relevant factor in determining the weight to be given to the extent to which a preexisting right is abrogated is not whether the statute abolishes rights or remedies, but rather the degree to which the statute alters the legal incidents of a claim arising from a preenactment transaction; the greater the alteration of these legal incidents, the weaker is the case for the constitutionality of the statute.' Hochman, The Supreme Court and the Constitutionality of Retroactive Legislation, 73 Harv. L.Rev. 692, 711-12 (1960)." Chartrand, 276 Kan. at 223, 73 P.3d 753.

The Chartrand court further observed:

"[W]ithout specifically articulating so, even in the situation of remedial or procedural statutes, Kansas appellate courts have looked beyond the nature of the statute (procedural, remedial, or substantive) and examined how the rights were affected, whether there was a substitute remedy, and the public interest furthered by the legislation.

. . . .

"In each of these cases, without articulating the considerations, we have balanced the factors articulated...