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In re Protests of Compressor Systems, Inc.

Tax Court of Kansas

September 11, 2013

IN THE MATTER OF THE PROTESTS OF COMPRESSOR SYSTEMS, INC. FOR THE YEAR 2008 IN WILSON COUNTY, KANSAS AND IN THE MATTER OF THE APPLICATION OF COMPRESSOR SYSTEMS, INC. FOR EXEMPTION FROM AD VALOREM TAXATION IN WILSON COUNTY, KANSAS

ORDER ON MOTION AND ORDER

Now the above-captioned matters come on for consideration and decision by the Court of Tax Appeals of the State of Kansas. The Court conducted a hearing in this matter on September 9, 2010. The Taxpayer, Compressor Systems, Inc. ("CSI"), appeared by Will Wohlford, Attorney. The County appeared by Jill Chard, Attorney. These matters have been consolidated for purposes of hearing and consideration. The Court admitted Taxpayer Exhibits #1 through #17 and County Exhibits #1 through #5 and #7.

On May 24, 2010, the Taxpayer filed a Motion for Partial Summary Judgment. The County filed its Response on July 16, 2010. A Joint Stipulation of the Parties was filed September 1, 2010. A Joint Stipulation of the Parties Regarding Retail Cost When New Valuation Under K.S.A. 79-1439(b)(2)(E) was filed September 7, 2010, and a Joint Stipulation of the Parties Regarding Fair Market Value was filed September 8, 2010. On September 17, 2010, the Taxpayer filed its Post-Hearing Brief and the County filed its Suggested Findings of Fact and Conclusions of Law.

After considering all of the evidence and arguments presented, the Court finds and concludes as follows:

The Court has jurisdiction of the subject matter and the parties, as tax protests have been filed pursuant to K.S.A. 2009 Supp. 79-2005 and an exemption application has been filed pursuant to K.S.A. 2009 Supp. 79-213. The subject property consists of twelve (12) natural gas compressor units. See Exhibit A.

I.

Summary judgment is appropriate where the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." K.S.A. 60-256(c). The purpose of summary judgment is to eliminate delay in legal disposition where there is no real issue of material fact. Timi v. Prescott State Bank, 220 Kan. 377, 386, 553 P.2d 315 (1976). "The trial court is required to resolve all facts and inferences which may reasonably be drawn from the evidence in favor of the party against whom the ruling is sought. (Citations omitted.)" State ex rel. Stovall v. Reliance Ins. Co., 278 Kan. 777, 788, 107 P.3d 1219 (2005).

The Taxpayer filed a motion for partial summary judgment regarding two issues presented in these matters: (1) classification and (2) exemption. The motion did not address the valuation issues. The County agreed with the Taxpayer's statement of uncontroverted fact and sought to add facts as uncontroverted. The parties filed a joint stipulation of fact September 1, 2010 which incorporated the County's additional uncontroverted facts. The Court proceeded to hearing allowing each party to make oral argument regarding the motion. The parties presented witness testimony and exhibits at the hearing. In addition, both parties attached the same two additional exhibits to their post-hearing briefs which will be admitted to the record.

The primary issue is whether the subject compressors should be classified as commercial and industrial machinery and equipment pursuant to class 2(5) of Article 11, § 1(a) of the Kansas Constitution and K.S.A. 79-1439(b)(2)(E) or class 2(6) of Article 11, § 1(a) of the Kansas Constitution and K.S.A. 79-1439(b)(2)(F). Further, asserting that the property should be classified as commercial and industrial machinery and equipment, Taxpayer seeks exemption for three (3) of the twelve (12) compressors pursuant to K.S.A. 79-223. The parties have agreed to the appraised valuation of the subject compressors whether they are valued at retail cost when new less depreciation (commercial and industrial machinery and equipment) or at fair market value (oil and gas property). Upon review, the Court concludes that there is no genuine issue as to the material facts.

II.

CSI is in the business of selling and leasing natural gas compressors for use by third parties in their natural gas production and transportation activities. CSI manufactures new compressor units for sale and to be leased, and it also sells and leases used compressor units and equipment. The new and used compressor units are CSFs inventory which it uses in the course of its business of buying, selling, and leasing natural gas compressor units to third parties for their use in natural gas production and transportation.

All of the new compressors and equipment manufactured by CSI are manufactured outside the state of Kansas. Any units that are sold or leased by CSI to third parties are transported into the state of Kansas to the location requested by the purchaser/lessee. CSI does not own any real property within the state of Kansas, nor does it own the mineral interests or minerals in place with respect to any land within the state of Kansas. CSI does not operate any mineral or oil and gas leases as to any land in the state of Kansas. CSI is not a lessee under any mineral or oil and gas lease as to any land in the state of Kansas, nor does CSI have a working interest, overriding royalty interest, royalty interest, or any other interest or right in any mineral or oil and gas leases or wells in the state of Kansas.

CSI leased twelve (12) natural gas compressors for use by third parties in their natural gas production and transportation activities, which were located within Wilson County, Kansas on January 1, 2008. The twelve compressor units can be identified by the following unit numbers: 404066, 404674, 404426, 410126, 410461, 410169, 410486, 411089, 411090, 410863, 411272, and 411187. CSI does not itself use any of the twelve compressor units in the production, storage or transportation of natural gas. The compressor units are CSFs inventory located within Wilson County, Kansas on January 1, 2008. The compressor units are attached to or are being used on oil and gas leases and oil and gas wells operated by parties other than CSI. The twelve (12) compressors leased to third parties in Wilson County are large field compressors. The twelve (12) compressors leased to third parties in Wilson County are larger horsepower compressors used in the production of coalbed methane gas.

Unit 411090 was constructed in 2006. It was acquired after June 30, 2006, leased by CSI to a third party, and transported into this state after June 30, 2006 for use in the third party's natural gas production and transportation business. Units 411272 and 411187 were both constructed in 2007. Both units were acquired after June 30, 2006, leased by CSI to a third party, and transported into this state after June 30, 2006 for use in the third party's natural gas production and transportation business.

III.

CSI asserts that its compressors located in Wilson County on January 1, 2008 should be classified as commercial and industrial machinery and equipment, and therefore should be valued at retail cost when new less straight-line depreciation and assessed accordingly pursuant to K.S.A. 79-1439(b)(2)(E). Further, CSI contends that its compressor unit numbers 411090, 411272, and 411187 were leased and/or transported into the state of Kansas after June 30, 2006, and pursuant to K.S.A. 79-223(b), these units should be completely exempt from ad valorem taxation. CSI requests that the exemption begin January 1, 2008.

The County asserts that compressors are listed as oil and gas equipment in the Kansas Department of Revenue Division of Property Valuation, 2010 Year Oil and Gas Appraisal Guide with instructions regarding how to value them. Relying upon K.S.A. 79-329, the County contends that any and all equipment used in the operation of a gas well is to be taxed as oil and gas property and assessed pursuant to K.S.A. 79-1439(b)(2)(F). Further, the County recommends that the request for exemption be denied as the property is not commercial and industrial machinery and equipment.

Article 11, § 1(a) of the Kansas Constitution 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 uniformly as ...

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