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In re Appeal of BHCMC, L.L.C.

Supreme Court of Kansas

December 29, 2017

In the Matter of the Appeal of BHCMC, L.L.C., d/b/a Boot Hill Casino & Resort.

         SYLLABUS BY THE COURT

         1.

         Under K.S.A. 2016 Supp. 79-3702(c), to "use" property a taxpayer must "exercise within this state . . . any right or power over tangible personal property incident to the ownership of that property." This language is ambiguous. It may or may not require that the user or taxpayer be the owner. This ambiguity must be read to favor the taxpayer. In addition, the taxpayer must have exercised a right or power incident to ownership of the property, otherwise, the taxpayer has not used property, as "use" is defined in K.S.A. 2016 Supp. 79-3702(c), and is not subject to the Kansas compensating use tax under K.S.A. 2016 Supp. 79-3703.

         Review of the judgment of the Court of Appeals in 52 Kan.App.2d 232, 364 P.3d 1213 (2015). Appeal from Board of Tax Appeals. Opinion filed December 29, 2017. Judgment of the Court of Appeals affirming the Board of Tax Appeals is affirmed. Judgment of the Board of Tax Appeals is affirmed.

          John Michael Hale, of Kansas Department of Revenue, argued the cause, and Jennifer C. Bates, of the same agency, was on the brief for appellant.

          Matthew J. Limoli, of Edgar Law Firm LLC, of Kansas City, Missouri, argued the cause, and Michael D. Pospisil, of the same firm, and Clinton E. Patty, of Frieden, Unrein & Forbes LLP, of Topeka, were with him on the brief for appellee.

          BEIER, J.

         In this appeal from a Board of Tax Appeals summary decision granting a compensating use tax refund to BHCMC, L.L.C., doing business as Boot Hill Casino & Resort, we address whether such a tax can be imposed on Boot Hill for electronic gaming machines it does not-and, under the law and its management agreement with Kansas Lottery, cannot-own.

         We hold that Boot Hill did not exercise a right or power incident to ownership of personal property in order to be subject to a compensating use tax for that property. Because Boot Hill has not exercised such a power or right, we affirm BOTA's refund and the Court of Appeals panel decision that upheld it.

         Factual and Procedural Background

         Boot Hill challenges its payment of $801, 588.95 in compensating use tax for the years 2009 through 2011. The amount assessed was based on the sale price for electronic gaming machines (EGMs) that Boot Hill purchased out of state for use at the casino it manages in Dodge City.

         The casino/resort is divided into "Lottery Gaming" facilities and operations and "Ancillary Lottery Gaming" facilities and operations. The "Lottery Gaming" label applies to the gaming floor and its operations, whereas the "Ancillary Lottery Gaming" label applies to the rest of the property and its operations, including, for example, a restaurant. Boot Hill owns the Ancillary Lottery Gaming facilities and operations. The State of Kansas, through the Kansas Lottery, owns the Lottery Gaming facilities and operations. Boot Hill manages the Lottery Gaming facilities and operations for the State under a "Lottery Gaming Facility Management Agreement, " which provides in pertinent part:

"1. Certain Defined Terms. . . .
. . . .
"g) 'Electronic Gaming Machine' [EGM] means any electronic, electromechanical, video or computerized device, contrivance or machine authorized by the Kansas Lottery which . . . is available to play, operate or simulate the play of a game authorized by the Kansas Lottery pursuant to the Kansas Expanded Lottery Act. . . . Electronic Gaming Machines are one type of Lottery Facility Games.
. . . .
"j) 'Gray Machine' means any mechanical, electro-mechanical or electronic device, available to the public for play that is capable of being used for gambling, that is: (1) not authorized by the Kansas Lottery; (2) not linked to the lottery central computer system as required by the Kansas Expanded Lottery Act; or (3) capable of simulating a game played on an Electronic Gaming Machine or any similar gambling game authorized pursuant to the Kansas Expanded Lottery Act.
. . . .
"6. Manager's Representations and Warranties. . . .
. . . .
"l) Manager will comply with all applicable rules and regulations imposed now, or in the future, by Kansas Lottery.
. . . .
"n) Manager acknowledges and agrees the State of Kansas, acting through the Commission and the Kansas Lottery, pursuant to their statutory authority, has the sole right to own, lease and operate the Lottery Facility Games placed at the Lottery Gaming Facility and has the full, complete and ultimate ownership and operational control of the gaming operation of the Lottery Gaming Facility. Manager further acknowledges and agrees the Lottery explicitly retains the power to overrule any action of Manager affecting the gaming operation without prior notice and the Lottery retains full control over all decisions concerning Lottery Gaming Facility Games. No Gray Machines will be permitted at the Lottery Gaming Facility.
. . . .
"16. Exclusive Use of Lottery Gaming Facility. The Lottery Gaming Facility will be used exclusively for the playing of Lottery Facility Games owned and operated by the Kansas Lottery, and the ancillary management activities approved by the Executive Director, which may include beverage service, food service, and ATM facilities. Manager may not permit any other business activities within the Lottery Gaming Facility unless approved in writing by the Executive Director.
. . . .
"21. Lottery Facility Game Ownership. The Manager must purchase or lease, on behalf of the State of Kansas, for the Kansas Lottery all Lottery Facility Games, including all necessary equipment such as approved tables, felt, dice, cards, chips, layouts, or intellectual property rights as determined by the Executive Director. Manager has no authority under this Agreement to own, purchase or lease any Lottery Facility Games, except on behalf of the State of Kansas and through the Kansas Lottery. The Executive Director, in consultation with Manager, will select the Lottery Facility Games to be offered for play at the Lottery Gaming Facility and determine the Prizes to be awarded for the play of such games. The Executive ...

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