Rotary Drilling Supply, Inc. v. Director of Revenue

• Decision Date: 20 December 1983
• Docket Number: No. 64651,64651
• Citation: 662 S.W.2d 496
• Parties: ROTARY DRILLING SUPPLY, INC., a Missouri corporation, Petitioner-Appellant, v. DIRECTOR OF REVENUE, State of Missouri, Defendant-Respondent.
• Court: Missouri Supreme Court

Page 496

662 S.W.2d 496

47 A.L.R.4th 1217

ROTARY DRILLING SUPPLY, INC., a Missouri corporation Petitioner-Appellant, v. DIRECTOR OF REVENUE, State of Missouri, Defendant-Respondent.

No. 64651.

Supreme Court of Missouri,

En Banc.

Dec. 20, 1983.

George E. Schaaf, Leigh H. Greenhaw, Clayton, for petitioner-appellant.

Richard L. Wieler, Asst. Atty. Gen., Jefferson City, for defendant-respondent.

WILLIAM E. TURNAGE, Special Judge.

In July of 1980, the Director of Revenue issued an assessment in the amount of $104,928.90 to Rotary Drilling Supply, Inc. for unpaid sales/use and conservation taxes for the period of March 1, 1978 to February 29, 1980. Rotary appealed the assessment to the Administrative Hearing Commission and, after conducting a hearing, the Commission entered findings of fact and conclusions of law which upheld the assessment.

On this appeal, ¹ Rotary contends that its sales of drilling rigs were exempt from sales tax under § 144.030.3(4) RSMo 1978. ² Affirmed, but remanded for further evidence on the use of certain drills.

Rotary sold 23 Schramm drilling rigs at retail in Missouri during the period in question. The 23 rigs were sold to 20 individual purchasers who use them on a contract basis to drill holes for a variety of purposes. The drilling rigs, manufactured in Pennsylvania, are designed to drill holes into the ground to depths ranging from 1,000 feet to 3,000 feet and usually from 8 to 12 inches in diameter. At the factory the rigs are mounted on specially built motor chassis which enable them to be rather easily moved between locations.

The rigs are primarily off-road drilling equipment and the chassis is not normally titled as a motor vehicle, although on occasion a mortgagee may insist that a title be issued. On practically all sales of the rigs, Rotary paid sales tax on a value assigned to the chassis. However, that value was small compared with the value of the total rig. The sale price of the rigs ranged from about $64,000 to $195,000. The chassis was valued generally in the $4,000 to $8,000 range and sales tax was paid on that amount. The department claims unpaid tax on the difference between the chassis value and the retail price of the rig.

Rotary claimed in the hearing before the Commission that its sales of rigs were tax exempt under § 144.030.3(4). In its report, the Commission made the following findings of fact from the evidence before it: that an officer of Rotary witnessed the rigs being used in Missouri to drill (1) mining test holes for barite, lead, zinc, and copper, and (2) residential, city, irrigation, industrial, and commercial water wells. Also it found that the rigs were used to drill for gas and oil in Oklahoma. Although the record contains evidence that rigs were used to drill blasting holes in quarries, the Commission failed to make findings of fact concerning the use of rigs in that capacity.

The Commission concluded first, that the mobility of the rigs was significant because some rigs were used out of state and were therefore not exempt. Secondly, the Commission stated that the rigs were capable of drilling for a variety of resources and in order for a rig to be exempt, the mining plant it establishes must produce a product that is intended to be sold at retail. Thus, it concluded that drilling an irrigation well, since it does not result in the production of a product that is ultimately intended to be sold, does not constitute the establishment of a mining plant. The Commission emphasized that when a property is capable of multiple uses only some of which are exempt, the taxpayer bears the burden of producing evidence of exempt use. Rotary, the Commission held, failed to carry its burden of proving that its customers purchased rigs for expanding or establishing mining plants in this state. Finally, the Commission sustained the assessment with the exception that the parties had agreed that part of the assessment on the sale of rigs to Langston and Hall Drilling Company and part of the assessment on the sale of a rig to R.L. Clark Company should be excluded. There is no indication as to the amount to be excluded.

The standard appropriate to this court's review of the Commission's decision is stated in § 161.338. The decision of the Administrative Hearing Commission "shall be upheld when authorized by law and supported by competent and substantial evidence upon the whole record ... and if the approval or disapproval of the exercise of authority in question by the administrative hearing commission does not create a result or results clearly contrary to that which the court concludes were the reasonable expectations of the general assembly at the time such authority was delegated to the agency." See Overland Steel, Inc. v. Director of Revenue, 647 S.W.2d 535 (Mo. banc 1983). The Commission's findings with regard to use of the rigs in water well drilling will be discussed first, followed by a review of its general conclusion that Rotary failed to carry its burden of proving exempt use. The Commission's finding that the use of the rigs outside Missouri is not an exempt use was not contested and is affirmed.

The evidence introduced in the hearing revealed that the rigs were used predominantly for drilling water wells for residences, farms, water districts and cities. Thus, the Commission perceived the principal question before it to be whether or not the predominant use of the rigs in drilling water wells brings the sales of these rigs within the exemption provided by § 144.030.3(4). That section reads as follows:

Machinery and equipment, and the materials and supplies solely required for the installation or construction of such machinery and equipment, purchased and used to establish new or to expand existing manufacturing, mining or fabricating plants in the state if such machinery and equipment is used directly in manufacturing, mining or fabricating a product which is intended to be sold ultimately for final use or consumption;

Rotary contends that its sales of rigs used to drill water wells were exempt since the rigs were used to establish new or to expand existing mining plants in the state. Rotary failed, however, to retain exemption certificates from the purchasers of the rigs as required by § 144.210. This court held in Overland Steel, Inc. v. Director of Revenue, supra, at 538, that the burden of proving a sale of tangible personal property is not a sale subject to the sales/use and conservation tax is on the party making the sale. This court further stated in that case that the furnishing of the exemption certificate to a seller by a buyer constitutes a claim by the buyer that the sale is exempt from the tax.

Since Rotary did not obtain exemption certificates from its buyers, it sought to supply evidence to show the exemptions by entering into a stipulation with the department, and by introducing the testimony of an officer of Rotary and testimony of the purchaser of one rig. The stipulation provided that Rotary is a Missouri corporation with its principal place of business in Jefferson County, and that it had filed a timely appeal from the assessment made by the director. The stipulation further provided that Rotary is in the business of making retail sales of Schramm drilling rigs, and that Rotary did not require that its purchasers supply exemption certificates. The stipulation contained the names of the purchasers of each of the 23 rigs sold during the time involved, the amount paid for each rig, and in most cases that portion of the purchase price on which tax was paid. The stipulation stated that the rigs were purchased for the drilling of water wells, but that they can also be used for drilling in connection with zinc, copper, and lead mining, for drilling gas and oil wells, as well as for test drilling to determine the quantity and quality of mineral resources available in a given area. The drilling rigs in question are Schramm models T66H, T685H, T985HA, and T64HB.

The question of whether or not the drilling rigs used to drill water wells come under the mining exemption of § 144.030.3(4) is a question which has not arisen in Missouri, nor in any other state on the language used in the Missouri exemption. Although this court is not aware of any similar case involving water wells, a useful analogy may be drawn between water wells and oil and gas wells. Oil and gas, like water, are extracted by being pumped from subterranean depths through deep, cylindrical openings drilled in the earth. One of the few cases to address the question of whether a mining tax exemption was available for the drilling of oil and gas wells is J.M. Guffey Petroleum Co. v. Murrel, 127 La. 466, 53 So. 705 (1910). In Guffey the court quoted the definition of mining as given in the Century Dictionary. The court stated:

A reading of the entire definition fixes indelibly upon the mind the idea that a "mine" is: First, a large opening into the ground like a pit or quarry; second, that only such openings are mines as are made for the purpose of getting metal, ores, or coal. We submit that the definition above quoted is an absolutely faithful and accurate statement of what constitutes a "mine" in the most usual signification of the word. 53 So. at 711.

Guffey held that oil and gas wells were not mines under the commonly understood definition of "mine."

There is no cause to believe that the commonly understood definition of "mine" has changed in the years since Guffey. It is stated generally in 58 C.J.S. Mines and Minerals, § 1, (1948), p. 16, that since oil and gas are minerals in the broader sense of the term, as used in some instruments and statutes oil and gas wells may be included in the term "mine." The source continues: "Ordinarily, however, an oil or gas well is not a mine in its primary and restricted sense." In 54 Am.Jr.2d Mines and Minerals, § 4, (1971), p. 188, it is said that "the word mine does not comprehend every possible excavation by which...