IN THE MATTER OF THE APPLICATION OF MCPHERSON DRILLING FOR EXEMPTION FROM AD VALOREM TAXATION IN MONTGOMERY COUNTY, KANSAS
Now the above-captioned matter comes on for consideration and decision by the Court of Tax Appeals of the State of Kansas. An evidentiary hearing was conducted July 15, 2009. The taxpayer, McPherson Drilling, appeared by Ronald and Nancy McPherson. The county appeared by its attorney of record, Paul Kritz. Appearing as witnesses for the county were Kathy Craig of the Montgomery County Appraiser's office and Lynn Kent of the Department of Revenue, Property Valuation Division (PVD).
This court has jurisdiction of the subject matter and the parties pursuant to K.S.A. 2008 Supp. 79-213.
The subject matter of this tax exemption application is described as follows:
Certain tangible personal property described as three 2006 Gefco drilling rigs and one 2007 Schramm drilling rig located as of January 1, 2007, in Cherryvale, Montgomery County, Kansas.
The applicant requests exemption from ad valorem taxation pursuant to K.S.A. 2008 Supp. 79-223 First. That statute exempts certain "commercial and industrial machinery and equipment" acquired after June 30, 2006.
The applicant originally requested exemption for all four drilling rigs listed in the written application; however, at the hearing the applicant acknowledged that two of the four rigs described in the written application were purchased before June 30, 2006. The applicant therefore abandoned its exemption request in respect to the two rigs acquired before the effective date of the exemption statute.
The applicant states in its written submission that the subject drUling rigs are used for "drilling oil and gas wells." The applicant contends the two rigs acquired after the effective date of K.S.A. 2008 Supp. 79-223 should be exempt under that statute because the rigs fall within the common definition of the term "commercial and industrial machinery and equipment." The applicant offers no additional arguments or legal authorities to support the exemption.
The county appraiser states in its written submission that it does not dispute the facts as stated by the applicant. Still, based on the undisputed facts, the county recommends that the exemption be denied.
At the hearing, county witness Kathy Craig testified that drilling rigs are not exempted by the county appraiser, explaining that such equipment has a long history of being rendered as "schedule 2 itemized equipment." County witness Lynn Kent, who specializes in oil and gas valuation for PVD, testified that drilling rigs have, since 1965, been classified and taxed in Kansas as part of the mineral leasehold. The county offered no legal authority or argument to support its denial of the exemption.
From the outset we note that all property in this state that is not expressly exempt is taxable. See K.S.A. 79-101. The fundamental rule in Kansas is that tax exemption statutes shall be construed strictly in favor of taxation and against exemption and the burden of establishing exemption from taxation rests with the applicant. See In re Application of Central Kansas E.N.T. Associates, P.A., 275 Kan. 893, 897, 69 P.3d 595 (2003); Director of Taxation u. Kansas Krude Oil Reclaiming Co., 236 Kan. 450, 454, 691 P.2d 1303 (1984); see also Manhattan Masonic Temple Ass'n v. Rhodes, 132 Kan. 646, 296 P. 734 (1931). Uniformity and fairness in property taxation depends just as much on uniform application of exemption law as uniformity in taxation. See Topeka Cemetary Ass'n v. Schnellbacher, 218 Kan. 39, 43, 542 P.2d 278 (1975).
Upon review of the record evidence, including the verified written submissions and oral testimony, this court finds no material factual dispute. The dispute in this case is solely a question of law: Does the term "commercial and industrial machinery and equipment" as used in K.S.A. 2008 Supp. 79-223(d)(2) extend exemption status to the subject drilling rigs?
K.S.A. 2008 Supp. 79-223(d)(2) defines "commercial and industrial machinery and equipment" as "property classified for property tax purposes within subclass (5) of class 2 of section 1 of article 11 of the constitution of the state of Kansas." Thus, in order to determine whether the subject drilling rigs are exempt, we must look to the classifications identified in article 11 of our state's constitution.
Article 11, section 1(a) provides in pertinent part as follows:
Class 2 shall consist of tangible personal property. Such tangible personal property shall be further classified into six subclasses, shall be defined by law for the purpose of subclassification and assessed ...