In re Genesis Health Clubs, 99,772.

• Citation: 210 P.3d 663
• Decision Date: 02 July 2009
• Docket Number: No. 99,772.,99,772.
• Parties: In the Matter of the Appeals of GENESIS HEALTH CLUBS from Orders of the Division of Taxation for Sales Tax.
• Court: Court of Appeals of Kansas

210 P.3d 663

In the Matter of the Appeals of GENESIS HEALTH CLUBS from Orders of the Division of Taxation for Sales Tax.

No. 99,772.

Court of Appeals of Kansas.

July 2, 2009.

Gerald N. Capps, of Andover, for appellant.

James Bartle, general counsel, and David J. Dunlap, of Legal Services Bureau, Kansas Department of Revenue, for appellee.

Before GREENE, P.J., PIERRON and GREEN, JJ.

GREENE, J.

Genesis Health Clubs (Genesis) appeals a summary judgment entered against it by the Kansas Board of Tax Appeals (BOTA), holding that certain purchases of tangible personal property were not consumed in the providing of taxable services and therefore not exempt under K.S.A.2008 Supp. 79-3606(n) and that such purchases also did not become an ingredient or component part of taxable services and therefore not exempt under K.S.A.2008 Supp. 79-3606(m). We agree with BOTA and affirm the judgment against Genesis.

Factual and Procedural Background

Genesis is a private, for-profit health club with four locations in Wichita, Kansas. Genesis sells memberships that allow either all-inclusive or limited access to its various locations and services. A membership entitles the member to access Genesis' facilities and to take part in the services offered, depending on the membership class. Some services require an additional prepaid fee. Beyond these membership and prepaid fees, members are not charged for their actual use of specific facilities or any aspect thereof.

BOTA summarized, and there is no apparent challenge regarding, Genesis' purchase and use of property for which exemption has been sought:

"Genesis' facilities may include weight training equipment, exercise machines, one or more swimming pools, tennis courts, racquetball courts, volleyball courts, basketball courts, a dry sauna, a wet steam room, locker rooms with showers, tanning rooms with tanning beds, meeting rooms, a lounge, a concession stand, a kitchen, a laundry room, a daycare, group fitness rooms, staff offices, and off-limits storage or machinery areas. Genesis does not provide refunds if facilities are unavailable to members due to reasons such as mechanical failure. Access to exercise machines during heavy use periods is on a first-come, first served basis, and members may not have access to a machine during such periods.

"During business hours, most lights at the facilities are turned on. The owner and staff program the lighting control panels, and members cannot control the lighting. The pools are heated on a continual basis, and the saunas and steam rooms are kept at preset temperature. Some exercise machines, and televisions in front of exercise machines, require electric power. Members may manually turn on the whirlpool jets, the saunas lights, and the steam room lights. Genesis control the air temperature at each location, and members do not have access to the thermostats. Genesis is required to follow the City of Wichita's regulations regarding the pools and tanning beds.

"Genesis mails a quarterly newsletter to members, provided at no additional cost as part of their membership. If a member does not receive a copy, the member may receive a replacement copy. The newsletters are also set out in the lobby areas in at least 2 Genesis locations for members or their guests to pick up.

"Genesis uses several different chemicals to kill organisms in the pool water, to avoid foaming in the whirlpool, and to maintain the pH balance of the pool water. The large pools are only filled up with water annually. Genesis uses water primarily for the showers, as well as for laundry and water fountains. Genesis uses natural gas to heat the water for showers and to heat the facilities during cold weather, and such natural gas is used up instantaneously.

"Some members do not use Genesis' showers, and some do. Some members may not use Genesis' towels or may bring their own, while the majority of members do use the towels. Members may not take towels from Genesis' facilities, are not charged extra for excess towel usage, and do not receive a dues discount if they do not use the towels. The towels are discarded after six months. Genesis uses laundry detergent to wash the towels. Laundry detergent is used up instantaneously. Genesis also purchased a sprinkler inspection."

Genesis charged, collected, and remitted Kansas retailers sales tax on all monthly dues for services offered subject to Kansas sales tax. On December 2, 2002, Genesis filed refund claims with Kansas Department of Revenue (KDR) for taxes paid on certain items purchased by Genesis from November 1999 through August 2002, including: (1) electricity; (2) natural gas; (3) water; (4) pool chemicals; (5) laundry detergent; (6) hand and bath towels; (7) soap and shampoo; (8) a sprinkler inspection; and (9) printing costs for the quarterly newsletter Genesis mails to its members and provides in the lobby area of at least two of its locations. Genesis sought exemption pursuant to K.S.A. 2008 Supp. 79-3606(m) and (n) for these items. KDR denied the exemption, and the Secretary of Revenue's designee upheld KDR's decision.

Genesis appealed KDR's decision to BOTA. An officer of BOTA's small claims division denied Genesis' refund request, and Genesis appealed to the full board. KDR filed a motion for summary judgment, and Genesis filed a cross-motion for summary judgment. Ultimately, BOTA issued an order granting KDR's motion for summary judgment and denying Genesis' cross-motion for summary judgment. Genesis filed a motion for reconsideration, which was also denied. Genesis timely appeals.

Standards of Review

BOTA orders are subject to appellate review under the Act for Judicial Review and Civil Enforcement of Agency Actions, K.S.A. 77-601 et seq. This court's review of statutory interpretation in tax appeal matters is unlimited, and an appellate court applies the same general rules that are applied in other contexts. See Winnebago Tribe of Nebraska v. Kline, 283 Kan. 64, 77-78, 150 P.3d 892 (2007). Interpretation of a statute is a question of law over which appellate courts have unlimited review. 283 Kan. at 77, 150 P.3d 892.

"The fundamental rule of statutory construction is that the intent of the legislature governs if that intent can be ascertained. The legislature is presumed to have expressed its intent through the language of the statutory scheme. Ordinary words are given their ordinary meanings. When a statute is plain and unambiguous, the court must give effect to the intention of the legislature as expressed, rather than determine what the law should or should not be. [Citation omitted.]" 283 Kan. at 77, 150 P.3d 892.

An administrative agency's determination as to a question of law is not conclusive and, while persuasive, is not binding on the courts. 283 Kan. at 70, 150 P.3d 892. Although BOTA's decisions in its area of expertise are given deference, this court will take corrective steps if BOTA's actions are erroneous as a matter of law. Board of Saline County Comm'rs v. Jensen, 32 Kan. App.2d 730, 733-34, 88 P.3d 242, rev. denied 278 Kan. 843 (2004).

"`When construing tax statutes, statutes that impose the tax are to be construed strictly in favor of the taxpayer. Tax exemption statutes, however, are to be construed strictly in favor of imposing the tax and against allowing the exemption for one who does not clearly qualify.' [Citations omitted.]" In re Tax Appeal of Graceland College Center, 40 Kan.App.2d 665, 668, 195 P.3d 245 (2008). Nevertheless, strict construction does not warrant unreasonable construction. 40 Kan.App.2d at 668, 195 P.3d 245.

Did BOTA Err in Construing and Applying K.S.A.2008 Supp. 79-3606(n) so as to Deny an Exemption to Genesis?

Genesis first argues BOTA erred in its determination that Genesis failed to prove its purchases were exempt under K.S.A.2008 Supp. 79-3606(n), which exempts property which is consumed in the providing of services for ultimate sale at retail. K.S.A.2008 Supp. 79-3602(dd) defines "`[p]roperty which is consumed'" as "tangible personal property which is essential or necessary to and which is used in the actual process of and consumed, depleted or dissipated within one year in ... (2) the providing of services...." This statute then lists items that qualify as "property which is consumed," including electricity, gas, and water. K.S.A.2008 Supp. 79-3602(dd)(B).

The exemption statute at issue, K.S.A.2008 Supp. 79-3606(n), provides as follows:

"(n) all sales of tangible personal property which is consumed in the production, manufacture, processing, mining, drilling, refining or compounding of tangible personal property, the treating of by-products or wastes derived from any such production process, 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, treating, irrigation and in providing such services."

In denying Genesis' claim for exemption under this statute, BOTA relied heavily on K.A.R. 92-19-22b(d)(1), which provides:

"An exemption for gas, fuel, or electricity shall not be allowed if the gas, fuel, or electricity is utilized for heating, cooling, or lighting a building or business premises where sports, games, or recreational activities are conducted. An exemption shall not be allowed for water, cleaning supplies, toilet supplies, sanitary supplies, and other consumables and supplies used to furnish and maintain a building or business premises so that the business premises or building is fit for public occupancy as a place where sports, games, or recreational activities are conducted."

In response to what appears to be a clearly applicable administrative regulation, Genesis argues that the regulation is...