Tax Appeal of Atchison Cablevision L.P., Matter of

• Decision Date: 18 April 1997
• Docket Number: No. 77123,77123
• Citation: 936 P.2d 721,262 Kan. 223
• Parties: In the Matter of the TAX APPEAL OF ATCHISON CABLEVISION L.P.
• Court: Kansas Supreme Court

Page 721

936 P.2d 721

262 Kan. 223

In the Matter of the TAX APPEAL OF ATCHISON CABLEVISION L.P.

No. 77123.

Supreme Court of Kansas.

April 18, 1997.

Syllabus by the Court

Under the plain language of the Kansas Retailers' Sales Tax Act, K.S.A. 79-3601 et seq., sales tax is to be levied upon the gross receipts from cable television services. Gross receipts are defined as the total selling price, which means the total cost to the consumer. The total cost to the consumers of the cable operator includes the franchise fee. As such, franchise fees are part of the gross receipts received and are subject to sales tax.

David P. Troup, of Weary, Davis, Henry, Struebing & Troup, Junction City, argued the cause and was on the brief, for appellant Atchison Cablevision.

John Michael Hale, of Kansas Department of Revenue, argued the cause and was on the brief, for appellee.

LARSON, Justice:

This is a sales tax appeal. Atchison Cablevision L.P. (Cablevision) appeals a decision of the Kansas Board of Tax Appeals (BOTA) allowing the Kansas Department of Revenue (KDR) to impose sales tax upon cable television franchise fees collected from subscribers.

Factual background

Cablevision owns and operates a cable television system in the City of Atchison (City) under the authority of a franchise agreement pursuant to City Ordinance 5440, as permitted by K.S.A. 12-2006. The ordinance requires Cablevision to pay a franchise fee of 5% of its gross receipts semi-annually for the right to use public ways for the transmission of its cable service. The applicable provision of the ordinance is Section 11, titled Franchise Payments, which reads:

"In consideration for the rights, privileges and franchise hereby granted, and as compensation to the City for the use of its public ways and places by the franchisee and in lieu of all occupation and license taxes, the Franchisee shall, on or before the 31st day of January and the 31st day of July of each year in which this franchise is effective, pay to the City a sum equal to five percent (5%) of the gross receipts, subject to Federal Communications Commission approval, accompanied by a certified notarized statement, from the sale of community antennae and closed-circuit electronic service within the then existing corporate limits of the City for the preceding six (6) month period ending on the 31st day of December and the 30th day of June, respectively. Copyright tax, local and state sales tax, shall be an add-on to rates and shall be automatically passed through to subscriber. These costs shall be shown separately on billing to subscribers."

Cablevision is authorized by 47 U.S.C. § 542 (1994) to pass on the franchise fee charged by the City to its subscribers by adding a charge of 5% of the basic cable service cost to the bill and separately identifying the charge as the franchise fee. Cablevision excluded franchise fees when calculating the total amount subject to the sales tax on each customer bill. For example, on a typical billing statement, a customer would pay $11.95 for basic service, a 5% franchise fee of $.60, and 5.9% sales tax computed on the $11.95 basic service charge, amounting to $.71.

KDR audited Cablevision's revenues from June 1, 1990, to May 31, 1993, and assessed retailers' sales tax and penalties of $6,222 on unreported gross receipts derived from franchise fees collected from customers. KDR asserted that Cablevision should have been paying sales tax on the franchise fees collected from subscribers. This would convert the amount of sales tax due in the example above from $.71 to $.74.

The assessment was first appealed to the Director of Taxation (Director), who ruled the franchise fee payments are part of the "total cost to the consumer" under K.S.A.1996 Supp. 79-3602(g) and constitute taxable "gross receipts" under K.S.A.1996 Supp. 79-3602(h).

This order was appealed to BOTA and submitted on an agreed record with briefs. In a 3-2 decision, BOTA determined that franchise fees were not part of gross receipts and the failure to pay tax on these fees was reasonable.

After two BOTA members who had voted with the majority were replaced, a petition for reconsideration was granted. BOTA then issued its final order on reconsideration, a 4-1 decision, reversing its previous order and upholding the Director's assessment of the sales tax.

Cablevision appealed. The case was transferred to our court pursuant to K.S.A. 20-3017.

Standard of review.

BOTA orders are subject to our review under the Act for Judicial Review and Civil Enforcement of Agency Actions, K.S.A. 77-601 et seq. We have authority to grant relief when we conclude "the agency has erroneously interpreted or applied the law." K.S.A. 77-621(c)(4). Where our decisions are based on stipulated facts, we exercise de novo review, and where the issue is one of statutory construction, it is subject to unlimited review. Steele v. City of Wichita, 250 Kan. 524, 527, 826 P.2d 1380 (1992). However, we also must consider the special rules applicable to review of an agency's actions. In In re Appeal of Harbour Brothers Constr. Co., 256 Kan. 216, 221-22, 883 P.2d 1194 (1994), we stated:

" 'The interpretation of a statute by an administrative agency charged with the responsibility of enforcing that statute is entitled to judicial deference. This deference is sometimes called the doctrine of operative construction.... [I]f there is a rational basis for the agency's interpretation, it should be upheld on judicial review.... [However,] [t]he determination of an administrative body as to questions of law is not conclusive and, while persuasive, is not binding on the courts.' State Dept. of SRS v. Public Employee Relations Board, 249 Kan. 163, 166, 815 P.2d 66 (1991).

"Deference to an agency's interpretation is especially appropriate when 'the agency is one of special competence and experience.' Boatright v. Kansas Racing Comm'n, 251 Kan. 240, 246, 834 P.2d 368 (1992). However, the final construction of a statute always rests with the courts. In re Application of City of Wichita, 255 Kan. 838, 842, 877 P.2d 437 (1994)."

Cablevision asserts that BOTA's final order should be afforded minimal deference due to the fact that a different panel reached an opposite conclusion and the earlier order was reversed solely as a result of the change in the composition of the board. We make our required review cognizant of the above authorities and arguments.

Arguments and authorities.

We first set forth the statutory provisions and administrative regulations involved in this controversy. The obligation for payment of sales tax by Cablevision was set forth in K.S.A.1996 Supp. 79-3603, which provides:

"For the privilege of engaging in the business of selling tangible personal property at retail in this state or rendering or furnishing any of the services taxable under this act, there is hereby levied and there shall be collected and paid a tax at the rate of 4.9%:

....

"(k) the gross receipts from cable, community antennae and other subscriber radio and television services."

The statutory definition of gross receipts is set forth in K.S.A.1996 Supp. 79-3602(h), which reads:

" 'Gross receipts' means the total selling price or the amount received as defined in this act, in money, credits, property or other consideration valued in money from sales at retail within this state; and embraced within the provisions of this act."

"Selling price" as set forth above is defined in K.S.A.1996 Supp. 79-3602(g) as:

"the total cost to the consumer exclusive of discounts allowed and credited, but including freight and transportation charges from retailer to consumer."

The administrative regulations slightly expand upon but largely mirror the statutory provisions. Those applicable are as follows:

K.A.R. 92-19-71 states:

"(a) Sales tax shall be imposed on the gross receipts received from cable, community antennae, subscriber radio and television services....

"(b) Sales tax shall be imposed on the total cost to the consumer without any deduction or exclusion for:

(1) The cost of the property or service sold;

(2) services used or expended;

(3) materials used;

(4) losses, overhead or any other cost of expense; or

(5) profit, regardless of how any contract, invoice or other evidence of the transaction is stated or computed, and whether separately billed or segregated on the same bill."

K.A.R. 92-19-46 relates to selling price and provides:

"(a) Selling price is the total consideration given in each transaction, whether in the form of money, rights, property, promise or anything of value, or by exchange or barter. The key element in imposing sales tax on a transaction is not based on what a transaction may be called or termed, but on the operation of the transaction. The term selling price includes the following:

"(1) The total monetary value of the consideration of all those things which in fact are, or are promised to be paid by the consumer to a seller in the consummation and complete performance of a retail sale, whether or not the seller receives any benefit from the consideration;

"(2) the total cost to the consumer without any deduction or exclusion for the cost of the property or service sold, labor or service used or expended, materials used, losses, overhead or any other costs or expenses, or profit, regardless of how any contract, invoice, or other evidence of the transaction is stated or computed, and whether separately billed or segregated on the same bill; and

"(3) all transactions in which a person secures for a consideration, the use of tangible personal property or services and includes transactions which may be termed royalties or licenses."

Cablevision contends that because tax statutes are penal in nature, those imposing a tax are to be strictly construed in favor of the taxpayer, citing J.G. Masonry, Inc. v. Department of Revenue, 235 Kan. 497, 680 P.2d 291 (1984), and National Cooperative Refinery Ass'n v. Board of...