Appeal from the Court of Tax Appeals.
SYLLABUS BY THE COURT 1. Issues involving constitutional or statutory interpretation are questions of law over which an appellate court has unlimited review. 2. To determine legislative intent, an appellate court must begin by examining the language the legislature used in the statute. Only if the language is ambiguous does a court rely on any revealing legislative history or background considerations that speak to legislative purpose, as well as the effects of application of canons of statutory construction. 3. As a general rule, statutes imposing a tax must be interpreted strictly in favor of the taxpayer, but tax exemption statutes are interpreted strictly in favor of imposing the tax and against allowing an exemption for one that does not clearly qualify.
4. In interpreting and construing a constitutional amendment, the court must examine the language used and consider it in connection with the general surrounding facts and circumstances that caused the amendment to be submitted. 5. Under the current constitutional and statutory scheme in Kansas, wireline equipment is properly classified as commercial and industrial machinery and equipment, thereby making the property exempt from ad valorem taxation pursuant to K.S.A. 2012 Supp. 79-223(b).
The opinion of the court was delivered by: Malone, C.J.:
Before MALONE, C.J., GREEN and STANDRIDGE, JJ.
Ellis County (the County) appeals the order of the Court of Tax Appeals (COTA) granting an application for exemption from ad valorem taxation filed by Wedge Log-Tech, L.L.C./Pioneer Wireline Services (the taxpayer). COTA granted the exemption based upon its finding that the taxpayer's wireline equipment is included in the category of commercial and industrial machinery and equipment as defined under subclass 5 of class 2 of § 1(a) of Article 11 of the Kansas Constitution. Personal property in this subclass is exempt from ad valorem taxation pursuant to K.S.A. 2012 Supp. 79-223(b). The County argues on appeal that the taxpayer's wireline equipment is properly classified with mineral leasehold interests under subclass 2 of the constitutional provision because wireline equipment is intrinsically related to the oil and gas industry.
Commercial and industrial machinery and equipment, as defined by the Division of Property Valuation (PVD) of the Kansas Department of Revenue, is "any taxable, tangible personal property [except for state assessed property and motor vehicles] that is used to produce income or is depreciated or expensed for IRS purposes." 2008 Personal Property Valuation Guide, § 2.05 at 58. At the hearing before COTA, the taxpayer showed, by a preponderance of the evidence, that the wireline equipment met these criteria. The County asked COTA to classify the taxpayer's wireline equipment as part of a mineral leasehold interest, but the County's reasons for doing so have no supporting legal authority and are contrary to the PVD's historical position on wireline equipment, which has been to classify it as commercial and industrial machinery and equipment. For these reasons, we affirm COTA's order granting the taxpayer's application for exemption from ad valorem taxation.
FACTUAL AND PROCEDURAL BACKGROUND
The taxpayer operates a wireline data logging business. Most of the taxpayer's customers are oil and gas producers, but the taxpayer also provides services in relation to water wells, salt mines, and commercial disposal wells. Wireline equipment generally consists of data logging tools that are lowered on a truck-mounted wire into well holes to take various readings. The wireline tools are never attached to the well, and the equipment is not owned by the well operator. Wireline equipment includes logging tools that test porosity, resistivity, and permeability of rock in order to analyze the presence of certain rock formations that may indicate the presence of oil or gas. Also included in wireline equipment are tools used to perform perforation operations, which penetrate a well's casing to obtain maximum reservoir productivity. In order to use wireline equipment, production from a well must be stopped and the production equipment removed.
For tax year 2008 and all prior years, the taxpayer reported its wireline equipment, along with other personal property assets, for tax purposes as schedule 5 property---- commercial and industrial machinery and equipment----which falls under subclass 5 of class 2 of § 1(a) of Article 11 of the Kansas Constitution. The County listed the assessed value of the taxpayer's commercial and industrial machinery and equipment at $1,216,248. In 2008, the taxpayer asserted that its commercial and industrial machinery and equipment, including the wireline equipment, was exempt under K.S.A. 2012 Supp. 79-223(b), which exempts certain commercial and industrial machinery and equipment purchased after June 30, 2006, from ad valorem taxation.
Prior to 2008, the County had listed, classified, valued, assessed, and taxed the subject property as commercial and industrial machinery and equipment. But after the taxpayer applied for the exemption, the County notified the taxpayer that it had reclassified the subject property as schedule 2 property under subclass 2 of the constitutional provision, which covers mineral leasehold interests. The County disagreed with the taxpayer's request for an exemption and, after an informal hearing, the County appraiser found that the property was not exempt under K.S.A. 2012 Supp. 79-223(b).
On July 14, 2008, the taxpayer filed a notice of equalization appeal with the regular division of COTA, claiming improper valuation of exempt commercial and industrial machinery and equipment for tax year 2008. Additionally, in August 2009, the taxpayer filed an application for tax exemption for tax years 2007 through 2009, arguing again that the property was statutorily exempt. COTA consolidated the equalization appeal and the exemption application, but the equalization appeal was dismissed during the hearing by agreement of the parties. Accordingly, the only matter remaining is the exemption application.
COTA held a hearing on February 9, 2010, at which both the taxpayer and the County presented witnesses and evidence. First, the taxpayer called Dean Denning, the county appraiser. Denning testified regarding the process by which the County initially assessed the subject property as schedule 5 property and certified it as such to the county clerk. Denning further admitted that all of the property the taxpayer claimed as exempt was either purchased after June 30, 2006, cost less than $1,500, or both.
On cross-examination, Denning testified that whether to classify property as schedule 2 or schedule 5 was not important to the appraiser's office until the legislature enacted the exemption for certain schedule 5 property. Denning testified that he believed the legislature did not intend to exempt property related to the oil industry; therefore, he believed that such property should be moved to schedule 2 "to keep [the property] from being exempt." Regarding the taxpayer's wireline equipment, Denning determined that the property was oil equipment schedule 2 property because the property "would have never been bought by the taxpayer if there was not an oil industry to ...