In re Tax Exemption Application of Central Illinois Public Services Co.

Decision Date31 October 2003
Docket NumberNo. 89,432.,89,432.
Citation78 P.3d 419,276 Kan. 612
PartiesIn the Matter of the APPLICATION OF CENTRAL ILLINOIS PUBLIC SERVICES COMPANY, et al., for Exemption from Ad Valorem Taxation in Meade County, Kansas.
CourtKansas Supreme Court

Linda A. Terrill, of Neill, Terrill & Embree, of Overland Park, argued the cause, and Benjamin J. Neill, of the same firm, was on the brief for appellant.

S. Lucky DeFries, of Coffman, DeFries & Nothern, of Topeka, argued the cause, and Jeffrey A. Wietharn, of the same firm, was with him on the brief for appellee Village of Morton.

C. Michael Lennen, of Morris, Laing, Evans, Brock & Kennedy, of Wichita, argued the cause, and Richard D. Greene, of the same firm, was on the brief for appellees Central Illinois Public Service Company, Union Electric Company, and Missouri Gas Energy.

William E. Waters, of the Kansas Department of Revenue, argued the cause and was on the brief for appellee Kansas Department of Revenue.

The opinion of the court was delivered by


Appellees, who are in the business of selling and distributing natural gas in states other than Kansas, own natural gas which is stored by a contractor in an underground facility in Meade County, Kansas. Appellees sought an exemption under Article 11, § 1 of the Kansas Constitution (2002 Supp.), which exempts merchants' and manufacturers' inventories from Kansas property tax. The State Board of Tax Appeals (BOTA) granted the exemption, ruling that the appellees' natural gas inventory stored in Kansas was merchants' inventory and that the appellees were not subject to the constitutional provision which denies public utilities the merchants' inventory exemption. BOTA applied the definition of "public utilities" found in K.S.A. 2002 Supp. 79-5a01, finding that appellees did not meet the definition because they do not transport, distribute, sell, trade, or otherwise dispose of natural gas within Kansas nor are they in the business of storing gas in Kansas. Meade County appeals.

We affirm BOTA.

The parties stipulated to many of the facts, which were accepted by BOTA and set out at length in its order. Highly summarized, the stipulated facts were as follows:

Appellees Central Illinois Public Service Company, Union Electric Company, and Missouri Gas Energy are public utilities operating in Illinois and/or Missouri where they are engaged in the business of selling and/or distributing natural gas. Appellee Village of Morton is an Illinois municipal corporation which operates a gas system for the benefit of its residents. Appellee Municipal Gas Commission of Missouri is a political subdivision of the state of Missouri which purchases and distributes needed natural gas supplies on behalf of its member cities, towns, and villages.

None of the appellees deliver, sell, trade, or otherwise dispose of natural gas within the state of Kansas; therefore, they are not state-assessed public utilities under K.S.A. 2002 Supp. 79-5a01. All of the appellees purchase natural gas from various producers and marketers and take title to the gas upon delivery to the interstate gas system owned and operated by Panhandle Eastern Pipe Line Company (Panhandle). Pursuant to contract, some of the gas purchased by the appellees is placed in storage in Meade County by Panhandle for withdrawal on a seasonal and scheduled basis. Under federal regulations, the appellees cannot designate the storage location and have no specific knowledge of the location.

When Meade County assessed and taxed appellees' stored natural gas inventories for the tax year 2000, appellees filed tax exemption applications and tax grievances with BOTA. The Director of Property Valuation (PVD) was joined in the actions as a necessary party. After a hearing, BOTA ruled that because appellees are not public utilities as defined by K.S.A. 2002 Supp. 79-5a01 their natural gas inventories are exempt from taxation under K.S.A. 79-201m as merchants' inventory. BOTA did not address the appellees' alternative arguments that their natural gas inventories were eligible for the "freeport" exemption pursuant to K.S.A. 79-201f or the municipalities' exemption pursuant to Article 11, § 1(b) of the Kansas Constitution (2002 Supp.).

BOTA denied Meade County's petition for reconsideration, and Meade County timely appealed. The appeal was transferred to this court on its own motion pursuant to K.S.A. 20-3018(c).

Did BOTA Err in Determining that Appellees Were Not Public Utilities and Therefore the Public Utility Exception to the Merchants' Inventory Exemption Did Not Apply?

Meade County argues that BOTA erroneously interpreted the public utility exception provided for in the merchants' and manufacturers' inventory property tax exemption provision of Article 11, § 1 (2002 Supp.). Specifically, Meade County argues that by applying statutory definitions of "public utility" to Article 11 of the Kansas Constitution (2002 Supp.) BOTA impermissibly limited the scope of the constitutional provision that denies the merchants' inventory exemption to public utilities. Instead of relying upon the statutory definition of "public utility," Meade County contends that a common understanding of "public utility" should be applied and that under this standard appellees would be viewed as public utilities since they distribute, sell, or trade natural gas in their home states. Further, Meade County argues that the legislators and voters intended for public utility inventory to be taxed, and BOTA's ruling contravenes this intent.

The standard of review this court must apply in considering these arguments is defined by the Kansas Act for Judicial Review and Civil Enforcement of Agency Actions. K.S.A. 74-2426(c); see In re Tax Application of Lietz Constr. Co., 273 Kan. 890, 896, 47 P.3d 1275 (2002). As applicable to this case, the KJRA provides that this court may grant relief from an order of BOTA only if it determines that BOTA has erroneously interpreted or applied the law, or that BOTA's action, or the statute upon which its action is based, is unconstitutional. K.S.A. 77-621(c)(1), (4). This court has further stated: "BOTA is a specialized agency that exists to decide taxation issues, and its decisions are given great weight and deference when it is acting in its area of expertise. However, if BOTA's interpretation is erroneous as a matter of law, appellate courts will take corrective steps. [Citation omitted.]" In re Appeal of Intercard, Inc., 270 Kan. 346, 349, 14 P.3d 1111 (2000).

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. Presbyterian Manors, Inc. v. Douglas County, 268 Kan. 488, 492, 998 P.2d 88 (2000).

The provision construed by BOTA and at issue in this case is Article 11, § 1 of the Kansas Constitution (2002 Supp.). Article 11, § 1 was amended in 1986 to create a new exemption from property taxation for merchants' and manufacturers' inventory. L. 1985, ch. 364, sec. 1. In 1988, the legislature enacted K.S.A. 1988 Supp. 79-201m to implement the exemption. At that time, the statute reiterated that merchants' and manufacturers' inventory was exempt from all property or ad valorem taxes and defined the terms "merchant," "manufacturer," and "inventory." There was no mention of public utilities. L. 1988, ch. 375, sec. 2.

The issue of whether the exemption applied to the inventory of public utilities reached this court in 1990 when we determined that natural gas owned by public utilities and stored for resale came within the exemption for merchants' inventory. Colorado Interstate Gas Co. v. Board of Morton County Comm'rs, 247 Kan. 654, 802 P.2d 584 (1990). This court found that the appellant public utilities were merchants under K.S.A. 79-201m because they were in the business of buying and selling natural gas and severed natural gas was tangible personal property. 247 Kan. at 661. Although we recognized that the 1986 constitutional amendment was not intended to exempt public utility inventories from taxation, we nonetheless found that the clear language of the amendment had that effect.

"The problem here is that in enacting the proposed constitutional amendment the legislature determined the size of the mesh in the net and the requisite number of voters approved the mesh size. The mesh size is thus fixed in the constitution. The fact that unintended varieties of fish may pass through the mesh has little bearing on anything.
"Under the circumstances, this court can only apply the clear language of the amendment. . . .
"In the case before us, we are primarily concerned with the amendment itself and what persons of common understanding would imply from the words used therein." 247 Kan. at 662.

During the pendency of the Colorado Interstate Gas proceedings, the legislature amended K.S.A. 1988 Supp. 79-201m, effective December 8, 1989, to make the merchants' and manufacturers' inventory exemption inapplicable to the tangible personal property of a public utility as defined by K.S.A. 79-5a01. We noted the amendment in reaching our decision in the Colorado Interstate Gas case, but because the case involved BOTA decisions which predated the statutory amendment, we did not address the validity or effect of the amendment. 247 Kan. at 658-59.

In 1992, Kansas voters approved another amendment to Article 11, § 1 of the Kansas Constitution (2002 Supp.). The amendment denied public utilities the merchants' and manufacturers' inventory exemption and, thus, made the constitution consistent with the previously adopted statute, K.S.A. 1988 Supp. 79-201m. The 1992 amendment read as follows:

"(b) All property used exclusively for state, county, municipal, literary, educational, scientific, religious, benevolent and charitable purposes, farm machinery and equipment,

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