In re Tax Appeal of City of Wichita, 85,953.

Decision Date06 December 2002
Docket NumberNo. 85,953.,85,953.
CourtKansas Supreme Court

Richard D. Greene, of Morris, Laing, Evans, Brock & Kennedy, Chartered, of Wichita, argued the cause, and Gary Rebenstorf and Brian K. McLeod, of Wichita, were with him on the briefs for appellant.

Richard L. Cram, of the Kansas Department of Revenue, argued the cause and was on the briefs for appellee.

The opinion of the court was delivered by


The controversy between the City of Wichita (City) and the Kansas Department of Revenue (Department) involving a retailers sales tax assessment for electricity consumed by the City in its delivery of water comes before this court upon our grant of the Department's petition for review. The Court of Appeals reversed the Board of Tax Appeals' (BOTA) decision that additional retailers sales tax upon the electricity was due on the basis that to do otherwise denied the City equal protection under the United States Constitution. We review that decision, which, if erroneous, requires us to determine the applicable law as well as the intent of the legislature with regard to the retailers sales tax.

The City is a political subdivision owning and operating a water treatment plant. The treatment plant provides water for the dual purpose of fire protection and furnishing water to others. The Department conducted an audit of the City's electricity purchases used to power the water treatment plant for the period of June 1, 1992, through May 31, 1995. Although requested to do so, the Department declined to segregate the electricity purchases according to the percentage of the water used for governmental purposes and the percentage of the water sold to consumers.

The electricity purchased during the audit period was used to pressurize water at the Hess Pump Station which is part of the Sim Park Water Works Complex located approximately 1,000 feet from the water treatment plant. The City's water system is an integrated system; the treatment plant and water distribution system are controlled from a central location. The Hess Pump Station is operated from a control room in the water treatment plant. The plant operator must take into account the City's demand for water, the amount of chemicals needed to treat the water, and the amount of pressure necessary to deliver the water, in addition to all other needs in order to deliver potable water to others.

City water is pressurized at the Hess Pump Station and pushed into the City's distribution system. The Environmental Protection Agency (EPA) and the Kansas Department of Health and Environment (KDHE) regulations require that the water be treated and pressurized at a minimum of 20 PSI (pounds per square inch) throughout the distribution process in order to be considered potable. In addition to pushing water through the distribution system and meeting KDHE regulations, pressurization also ensures proper volume for fire protection and prevents backflow contamination in the water distribution system. Pressurization is important to water quality because backflow presents a serious health hazard. The water's potability is first measured at the discharge side of the Hess Pump Station. This is just past the pump station, after pressure has been added and electricity has been consumed.

Max Smith, a Department auditor, was originally appointed to conduct the City's audit in September 1994. However, before he could complete the audit, Smith unexpectedly retired because of medical problems. In February 1995 the audit was assigned to Laurie Blaha, another Department auditor. Blaha began the audit in July 1995 and completed the audit within 6 months, which according to Robert Lewis, the audit manager for the Department, is typical for audits as involved as the City's. According to Blaha, other assignments kept her from beginning the City's audit until July 1995.

Blaha testified that she worked diligently on completing the audit. During the hearing before the administrative law judge (ALJ), the City's counsel admitted that "the six months from late July to early February, '96 is not an unreasonable time for this audit given its complexity."

The Department's audit for the period beginning June 1, 1992, and ending May 31, 1995, determined that the City owed $337,623 plus interest of $110,031 as additional sales tax for electricity used to pressurize and treat the water, which was assessed at a rate of 4.9%. The City appealed and on February 11, 1999, the ALJ issued a final determination upholding the tax assessment rate of 4.9% together with interest.

The City appealed the Department's tax assessment to BOTA on February 22, 1999. The City sent a letter to BOTA on March 1, 1999, asking BOTA to issue a quick decision so the City could join the appeal in In re Appeal of Water Dist. No. 1 of Johnson County, 26 Kan. App.2d 371, 988 P.2d 267 (1999), rev. denied 268 Kan. 886 (1999), which was then pending before the Court of Appeals. Both cases involved similar issues.

While the City's case was pending before BOTA, the Court of Appeals decided In re Appeal of Water Dist. No. 1 of Johnson County on August 13, 1999. The Court of Appeals held that electricity purchased to pressurize water by Johnson County was exempt from sales tax. The court did not consider whether the Johnson County water district's electricity purchases should have been taxed at the 2.5% rate, K.S.A. 1992 Supp. 79-3603(u), but instead decided the case under the "consumed in production" exception of K.S.A. 79-3606(n). See 26 Kan. App.2d at 373-74, 376-77.

Both parties notified BOTA of the decision in Water Dist. No. 1. In their respective letters, both parties changed their position before BOTA. The City changed its initial position that the 2.5% tax rate applied to its purchase of electricity and argued before BOTA and this court that the City is exempt from any tax. The Department also changed its initial position that a 4.9% rate of tax, K.S.A. 1992 Supp. 79-3603(c), applied, asked BOTA not to jump to conclusions before the petition for review had been determined in Water Dist. No. 1., and argued before BOTA and this court that the 2.5% rate applies. This court declined to grant the petition for review in Water Dist. No. 1.

BOTA concluded the 2.5% rate of taxation under the provisions of K.S.A. 1992 Supp. 79-3603(u) applied, found that the City's electricity purchases for the period of time in question did not qualify for partial exemption under K.S.A. 1992 Supp. 79-3606(b)(2) and, unlike the court in Water Dist. No. 1, concluded that the tax exemption in K.S.A. 1992 Supp. 79-3606(n) did not apply.


The City appealed BOTA's order to the Court of Appeals on September 28, 2000. The Court of Appeals in an unpublished opinion, In re Appeal of the City of Wichita, No. 85,953, filed November 2, 2001, noted that the audit of the City of Wichita covered "roughly the same time period and essentially the same issues" as those in Water Dist. No. 1, in which the court concluded that Johnson County owed no tax because of an exemption under K.S.A. 79-3606(n). The City of Wichita claimed that Water Dist. No. 1 controlled. However, the Court of Appeals noted in hindsight that Water Dist. No. 1 "was probably wrongly decided." At the same time, the Court of Appeals reversed BOTA's decision on the basis of equal protection; that is, granting tax exemption to Johnson County and taxing the City of Wichita treats similarly situated taxpayers differently, resulting in a denial of equal protection to the City of Wichita.

The Court of Appeals commented on the extreme difficulty involved in attempting to resolve this case on the merits of the tax exemption claimed: "During a single legislative session, applicable statutes were amended three times. The parties in Water Dist. No. 1 did not argue this point and we did not decide it." The court set forth each of the 1992 amendments to K.S.A. 79-3602, concluding that it "need not decide which 1992 amendment was effective at various times, as it is not central to our ultimate holding in the present case." The court stated that "even when a taxpayer is taxed according to the law, that taxpayer may still suffer actionable discrimination if similarly situated taxpayers are granted more favorable treatment." While the court determined that the City did not prove it suffered any intentional discrimination, the court explained that the City had been treated significantly different from the taxpayer in Water Dist. No. 1 and that justice required that the City be treated the same as the taxpayer in Water Dist. No. 1. Accordingly, the court reversed BOTA's decision and remanded the case with directions to "grant Taxpayer the same treatment ordered for the taxpayer in Water Dist. No. 1."

The Fourteenth Amendment to the United States Constitution provides that states cannot "deny to any person within its jurisdiction the equal protection of the laws." U.S. Const. amend XIV, § 1. The Kansas Constitution provides virtually identical protection. Kan. Const. art. 11, § 1; see Colorado Interstate Gas Co. v. Beshears, 271 Kan. 596, 609, 24 P.3d 113 (2001). If similarly situated taxpayers receive disparate treatment, the one receiving the less favorable treatment may have been denied equal protection of the law even if the taxpayer receiving the less favorable tax is taxed according to the law. 271 Kan. at 609. However, the taxpayer seeking to establish a violation of the Equal Protection Clause must demonstrate that his or her treatment is the result of a "deliberately adopted system" which results in intentional systematic unequal treatment. 271 Kan. at 612.

While the Court of Appeals in the present case found there was no intentional discriminatory treatment, the court, citing Allegheny...

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