Bayer Construction, Inc
Kansas Compensating Tax
BEFORE THE BOARD OF TAX APPEALS OF THE STATE OF KANSAS
IN THE MATTER OF THE APPEAL
OF BAYER CONSTRUCTION, INC.,
FROM AN ORDER OF THE DIRECTOR OF
TAXATION ON ASSESSMENT OF
COMPENSATING (USE) TAX.
Docket No. 91-44-DT
O R D E R
Now, on this 3rd day of February, 1992, the above captioned matter comes on for consideration and decision by the Board of Tax Appeals of the State of Kansas.
This Board conducted a hearing in this matter on November 19, 1991, and the Board finds that they have jurisdiction of the subject matter and of the parties, a proper and timely appeal have been filed, pursuant to K.S.A. 74-2438.
The appellant operates rock quarries in several Kansas counties. They crush limestone in various grades and sizes, then sell most of it at retail to various customers. The appellant argues that the quarry operation consists of an integrated process where each step is essential to the production of the crushed rock and occurs within the confines of the quarry operation. Therefore, the appellant argues that the diesel fuel consumed in the quarry operation meets the statutory and regulatory requirements for tax exemption.
The steps involved in the quarry operation are as follows:
#1. Expose the rock ledge by removing the soil and shale overburden from the rock ledge. Scrapers, bulldozers and front-end loaders are used, and all consume diesel fuel.
#2. Holes are then drilled into the rock ledge and the ledge is loaded with explosives. An air compressor and drill, together with a powder truck, are used in this phase. Diesel fuel is used in the powder truck.
#3. The rock is blasted. Here no fuel is used.
#4. After the rock is blown, it is sometimes necessary to use a crane and ball, shovel or front-end loader to further crush the boulders into smaller sizes. Diesel fuel is consumed by this equipment.
#5. A shovel and front-end loaders are used to load the rock onto trucks. This equipment also uses diesel fuel.
#6. The trucks haul the rocks off road to the rock crusher, which can be located from 200 feet to 2000 feet away. The trucks use diesel fuel.
#7. At the rock crusher, the rock is further reduced by an impactor. Afterward, the rock is screened for proper sizing. Secondary crushing also occurs by a hammermill or cone crusher. An electric generator uses diesel fuel to operate the crushers and the screens.
#8. After the rock is crushed to the finished size, it is transferred to a stockpile. Conveyors, stockpile trucks, front-end loaders and a scraper are used for this job. Once again, a diesel-powered electric generator is necessary to operate conveyors, and diesel fuel is used in the trucks, front-end loaders, and scraper.
#9. Material is loaded from the stockpile onto customer's trucks. Diesel fuel is consumed by a front-end loader.
Although not numbered as part of the process, the appellant also argued that the fuel consumed during reclamation of the land around the blasting and crushing sites should be exempt. Diesel powered earth-moving equipment is used for this project.
An evidentiary hearing was held before a hearing officer from the Director of Taxation's office, and the hearing officer issued an order that diesel fuel used in removing topsoil and exposing the rock ledge (process #1) and in drilling holes in the rock ledge (process #2) was consumed in the process of mining and exempt from use tax pursuant to K.S.A. 79-3606(n). The hearing officer also found that at processes #5 and #6, diesel fuel used in vehicles and equipment to load and haul boulder-sized rock that is smashed at the blasting site was exempt as property consumed in the production process. However, the hearing officer deemed that diesel fuel used in vehicles and equipment to load and haul rock that is not smashed at the blasting site was not exempt. Finally, the hearing officer held that diesel fuel used in vehicles and equipment to stockpile rock (process #9) and to reclaim the blasting and crushing sites was also not consumed in the production process and was not exempt from tax. After the hearing officer's order was sustained by the Director of Taxation, the appellant petitioned to this Board. In addition, the Department of Revenue (hereinafter known as the Department) argues that the Director's Order is flawed since the Director found that processes #1, #2, #5 and #6 are exempt.
The Department previously agreed that diesel fuel used in boulder smashing process (process #4) and in the crushing plant (process #7) should be exempt. Also, no diesel fuel is used during the blasting phase (process #3). Therefore, the processes at issue are #1, #2, #5, #6, #8 and #9.
The applicable statutes are K.S.A. 79-3606(n), which provides for tax exemption for sales of tangible personal property (in this case diesel fuel) which is consumed in the production, manufacture, processing, mining, drilling, refining or compounding of tangible personal property. . . for ultimate sale at retail within or without the State of Kansas. In addition, K.S.A. 79-3602(m) defines "property which is consumed" as tangible personal property which is essential or necessary to and which is used in the actual process of and immediately consumed or dissipated in the production, manufacture, processing, mining, drilling, refining, or compounding of tangible personal property for sale in the regular course of business and which is not reusable for such purposes.
The Department argued that processes #1 and #2 are actually mining, but the rock mined from the ledge is not immediately sold at retail as the Department interprets is required by K.S.A. 793606(n) and K.S.A. 79-3602(m). Instead, according to the Department, the rock is used as raw material in appellant's rock production activities.
The Department also argued that loading the rock at the ledge (process #5) and trucking it to the crushing site is also not exempt because of the language of K.A.R. 92-19-53( c)(2) and (3), which states that the tangible personal property (diesel fuel for our purposes) must be "used in the actual process" of production, and that the sue of property in question shall occur at the location where the production or processing activity is carried on and occur during the production activity.
The Board finds that the Department's very narrow interpretation of these statutes and regulations is not entirely meritorious. For one thing, K.S.A. 79-3606(n) includes the words "ultimate sale", which connotes to the Board that it is not required that the blasted rock be sold at retail from the spot of the blast and before it can be further crushed. The Board also finds that the language in K.A.R. 92-19-53( c)(2) and (3) which requires that the diesel be used at the location where the production activity is carried on does not mean that the rock cannot be moved over to the crushing machines. The Board finds that the off-road movement of the rock from 200 to 2000 feet is not necessarily outside the location of the production activities. Further the Board finds that the "actual process" of producing the rock is more than immediate crushing done at process #7.
The Board fins that this case is similar to
R.L. Polk 7 Co. v. Arnold
215 Kan. 653 (1974), where the Board also finds the Department's argument strikingly familiar. In Arnold, the corporation operated a printing plant, where it printed city directories for retail sale. Id. at 653. In the printing process it used film lithoplates, developer, and other supplies. Id. at 654. The film was used for photographing lithographic material in order to make a lithoplate. The lithoplate was composed of aluminum, which was processed by the use of two chemicals, a desensitizer and a lacquer. Id. at 654. Also a gum was used on the lithoplate to keep it from oxidizing. Id. at 654. These materials as well as certain type of tape became a part of the lithoplate. Id. at 654. The lithoplate was transferred to a rubber blanket, inked, and used to transfer an image to paper for use in the directories. Id. at 654. While the Department conceded that these items were essential and necessary to the corporation's operation, the Department contended that the film, lithoplates, and certain other items were not used in the actual manufacturing process but were used in preparatory processes preliminary to it. The Kansas Supreme Court struck this argument down stating that:
"We think the narrow construction first urged by [the Department] (that the processes wherein the materials are consumed are primarily to the manufacturing) is unwarranted under the facts here presented. The plant manager's testimony clearly indicated an integrated manufacturing operation beginning with the photographing of typed lists of the names and addresses of residents within a particular city which eventually go into the finished product of the city directory. In effect [the Department] is asserting the manufacturing process does not being until a permanent image is actually transferred to paper for binding into t he books. We cannot perceive legislative intent of any such restricted or impractical interpretation as that for which [the Department] contends, especially in view of the inclusion of the words "essential and necessary" in the statutory definition of property which is consumed. Had legislative intent been that which [the Department] contends such words are unnecessary. In our opinion the film lithoplates, developer and other items are, as a practical matter, used in the actual process of manufacturing. . ." Id. at 656.
Likewise, it is the Board's opinion that process #1 through #7, as previously described in this Order, are a part of the integrated production of the rock. The Board finds that process #8 and #9, plus the reclamation phase, are not essential and necessary to the integrated production, and that the diesel fuel used in those activities should not be exempt.
IT IS, THEREFORE, BY THE BOARD OF TAX APPEALS OF THE STATE OF KANSAS, CONSIDERED AND ORDERED that the Director's Order is affirmed in part and reversed in part; and the diesel fuel consumed in process #1 through #7* is exempt from taxation.
If any party to this appeal feels aggrieved by this decision, they may file a written request for rehearing with this Board. The written request for rehearing shall set forth specifically and in adequate detail the particular and specific respects in which it is alleged that the Board's order is unlawful, unreasonable, capricious, improper or unfair. A copy of the request, together with all documents submitted therewith, shall be mailed to the opposing party at the same time the request is mailed to the Board. Failure to notify the opposing party shall render any subsequent order voidable. The written request must be received by the Board within fifteen (15) days of the certification date of this order. If, at the end of the fifteen days the Board has not received a written request for rehearing, this order will become a final order from which no further appeal is available.
IT IS SO ORDERED
JACK SHRIVER, CHAIRMAN
CHARLES F. LAIRD, MEMBER
JAMES P. DAVIDSON, MAYBELLE MERTZ, MEMBER
JUDITH A. MESSENGER, ATTORNEY JAYNE ANNE AYLWARD, MEMBER
MYRA B. GROSS, MEMBER
I., James P. Davidson, Secretary of the Board of Tax Appeals of the State of Kansas, do hereby certify that a true and correct copy of the order in Docket No. 91-44-DT was placed in the United States Mail, on this 3rd day of February, 1992, addressed to:
Charles D. Green, Attorney at Law Chief of Use Tax
201-203 Union National Bank DSOB, 913 S. Harrison, 3rd Floor
P.O. Box 248 Topeka, KS 66612
Manhattan, KS 66502
Director of Taxation General Counsel, Dept. of Revenue
DSOB, 915 S. Harrison, 3rd Floor DSOB, 915 S. Harrison, 2nd Floor
Topeka, KS 66612 Topeka, KS 66612
Ron Grant, Atty James Bartle, Atty
Department of Revenue Department of Revenue
Tax Policy Group DSOB, 915 S. Harrison, 2nd Fl
DSOB, 915 S. Harrison, 2nd Floor Topeka, KS 66612
Topeka, KS 66612
IN TESTIMONY WHEREOF, I have hereunto subscribed my name at Topeka, Kansas.
James P. Davidson, Secretary
* An Order Nunc Pro Tunc was issued 7/27/92 which changed the #8 to #7.
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