IN THE SUPREME COURT OF THE STATE OF KANSAS
Nos. 90,663
90,664
90,665
90,666
90,667
In the Matter of the APPEAL OF SPRINT COMMUNICATIONS COMPANY,
L.P.,
from an Order of the Division of Taxation for a
Refund of Sales and Use Tax.
SYLLABUS BY THE COURT
1. The plain and unambiguous language of the Kansas Retailers' Sales Tax Act defines
telecommunications as a service and not tangible personal property. Equipment utilized
in engineering a telecommunication product or in the process of controlling or measuring
the telecommunication process is not exempt from sales taxation under the exemption
provision of K.S.A. 79-3606(kk), which applies to purchases of machinery and equipment
used in the manufacture of tangible personal property for resale.
2. Requiring telecommunications companies to pay sales tax on purchases of equipment
utilized in engineering a telecommunication product or in the process of controlling or
measuring the telecommunication process and determining that the exemption provision
of K.S.A. 79-3606(kk) does not apply to such purchases, does not violate the Equal
Protection Clauses of the United States and Kansas Constitutions by treating similarly
situated taxpayers differently.
3. It was not error for BOTA to rule as a matter of law that the taxpayers' machinery and
equipment did not qualify for the manufacturing exemption from sales tax under K.S.A.
79-3606(kk) because other provisions of the Kansas Retailers' Sales Tax Act define
telecommunications as a service.
Appeal from the Kansas Board of Tax Appeals. Opinion filed December 17, 2004.
Affirmed.
Mark A. Burghart, of Alderson, Alderson, Weiler, Conklin, Burghart, &
Crow, L.L.C., of Topeka, argued
the cause and was on the briefs for appellant.
David J. Dunlap, of Legal Services Bureau, Kansas Department of Revenue,
argued the cause and was on
the brief for appellee.
The opinion was delivered by
LUCKERT, J.: This case involves five consolidated telecommunication cases where the
Board of Tax Appeals (BOTA) upheld the Department of Revenue's (Department) denial of
refund claims. Five telecommunication companies seek a refund of the sales tax paid on
purchases of telecommunication equipment in Kansas during the time period of March 1994
through March 2000 of telecommunication equipment which "consists of, among other things,
switches, computers, and related peripheral equipment (including repair and replacement parts and
accessories)" which is "utilized either in engineering a finished telecommunications product or in
controlling or measuring the process of manufacturing such a product." The refund claims are
based on the manufacturing exemption contained in K.S.A. 79-3606(kk). The controversy
focuses on whether the equipment was machinery and equipment utilized to manufacture tangible
personal property for resale or to provide a service.
The taxpayers are Sprint Communications Company, L.P.; United Telephone Co. of
Kansas; United Telephone Co. of Missouri; United Telephone Co. of Arkansas; and United
Telephone Co. of Iowa (Taxpayers). It is undisputed that Taxpayers provide intrastate and
interstate telecommunication services in the state of Kansas which are subject to the Kansas
retailers' sales tax pursuant to K.S.A. 2003 Supp. 79-3603(b).
The designee of the Secretary of Revenue denied Taxpayers' claims for refunds of sales
and use tax, and Taxpayers timely appealed to BOTA. The Department filed a motion for
summary judgment with BOTA, arguing that, as a matter of law, Taxpayers' machinery and
equipment did not qualify for exemption under K.S.A. 79-3606(kk) because Taxpayers do not
manufacture tangible personal property for resale. Rather, Taxpayers' telecommunication product
is statutorily defined as a service under K.S.A. 79-3602(k) and 79-3603(b). Taxpayers filed a
response and cross-motion for summary judgment, arguing that their machinery and equipment
qualifies for exemption under K.S.A. 79-3606(kk) because it is used in the process of
manufacturing telecommunications, which are comprised entirely of tangible personal property
electricity.
In their response to the Department's motion for summary judgment and cross-motion for
summary judgment, Taxpayers asserted the following facts:
"1. A telecommunication is similar, if not identical, to electricity in its composition. . . .
"2. The conversion of electrical signals from analog to digital and back to analog results
in a physical
change to tangible personal property. . . .
"3. A telecommunication is comprised entirely of electricity."
In support of these statements of fact, Taxpayers attached the affidavit of Charles Bell, a
Senior Network Evolution Planner for Sprint, which stated:
"A telecommunication is comprised entirely of electricity. Sprint must convert
electricity provided by its supplier from AC current to DC current in order to be able to process a
call through the central office switch. The conversion from DC current to AC current takes place
via a battery bank maintained at the central office switch."
The affidavit also quoted the following passage from Southwestern Bell Tel. v.
Director of
Rev., 78 S.W.3d 763, 764-68 (Mo. 2002), as an accurate explanation of the creation of a
telecommunication:
"When a person picks up a telephone, a dial tone is produced by electrical currents flowing
between the telephone and the central office switch. [Footnote omitted.] Once the customer
inputs the desired number, the central switch analyzes the electrical pulses or tones to determine
the proper routing of the call. A separate system . . . sends out a data message, which is used by
the receiving switch to determine whether the line is free or busy. The caller then hears either the
familiar ring or busy signal. If the person on the receiving end picks up the telephone, a voice
connection is established. The vibrations of a person's voice are converted by the telephone into
an analog signal. Depending on the type of switching office, the signal remains analog as it is
transmitted or is converted into a digital signal.
"An analog signal travelling over a telephone wire loses strength because of the
resistance of the wires. The signal, along with any additional noises on the circuit, must be
amplified to travel over long distances. If the switching office is analog, the signal is transported
across the wire, amplified as necessary and then reconverted into a voice signal for the other
listener.
"If the switching office is digital, the analog signal is 'sampled' at a very high rate
into a
digital signal. [Footnote omitted.] This signal goes through the system and is converted into a
voice signal on the other end. Instead of being a sound wave, a digital signal is transported as a
package of data. Because it is digital data that can be regenerated, instead of being amplified,
there is no risk of other noises being amplified with the voice data."
. . . .
". . . The listener requires that the voice be 'manufactured' into electronic impulses
that
can be transmitted and reproduced into an understandable replica. The end 'product' is not the
same human voice, but a complete reproduction of it, with new value
to a listener who could not
otherwise hear or understand it. . . .
"Basic telephone service . . . [is] manufactured." 78 S.W.3d at 764-68.
The Department responded that the Taxpayers' three statements of fact were controverted
and irrelevant. The Department argued that the technicalities of the telecommunications process
were irrelevant to the question of law before BOTA because the Kansas Retailers' Sales Tax Act
defines telecommunications as a service. Nonetheless, the Department also contested Taxpayers'
factual allegations. As to Taxpayers' first and third statements that "[a] telecommunication is
similar, if not identical, to electricity in its composition" and "[a] telecommunication is comprised
entirely of electricity," the Department responded: "The term 'telecommunication is a generic
term describing one-way and two-way transmission of information by means of electromagnetic
and/or electro-optical systems. Electricity is used in telecommunication." According to the
Department, the information being conveyed and the entirety of the information transmission
system and its processes cannot be described as "similar, if not identical, to electricity in
composition," nor are they "comprised entirely of electricity" as alleged by Taxpayers. As to
Taxpayers' second statement that "[t]he conversion of electrical signals from analog to digital and
back to analog results in a physical change to tangible personal property," the Department
responded: "Converting a signal 'from analog to digital and back to analog' results in no change.
The signal is received as analog and is ultimately delivered as analog. And, the information
carried by the signal is preserved as closely to the original as possible."
The Department also asserted additional facts in opposition to Taxpayers' cross- motion
for summary judgment. The Department's additional facts related to the nature of
telecommunications, the use of electrical current in telecommunication services, the function of
telecommunication services users' equipment, and the telecommunication companies' delivery of
service.
On March 18, 2003, BOTA issued a 3-2 opinion in favor of the Department, ruling that
Taxpayers' machinery and equipment did not qualify for the manufacturing exemption from sales
tax under K.S.A. 79-3606(kk) because other provisions of the Kansas Retailers' Sales Tax Act
define telecommunications as a service. BOTA also ruled that the Department's application of
K.S.A. 79-3606(kk) to exclude telecommunications companies did not violate the Equal
Protection Clauses of the United States and Kansas Constitutions. The two dissenting members
of BOTA believed that there remained "genuine controverted mixed issues of law and fact"
relating to whether telecommunications is a service or whether it involves the manufacturing of
tangible personal property. The dissenters would have denied both motions for summary
judgment and allowed the case to proceed to a full evidentiary hearing.
BOTA denied a timely motion for reconsideration, and Taxpayers timely appealed.
Taxpayers' appeals were consolidated by the Court of Appeals, and the case was transferred to
this court on its own motion pursuant to K.S.A. 20-3018(c).
Did BOTA Err in Determining That Appellants Were Not
Eligible for the Sales Tax Exemption Under K.S.A. 79-3606(kk)?
BOTA orders are subject to review under the Act for Judicial Review and Civil
Enforcement of Agency Actions, K.S.A. 77-601 et seq. K.S.A. 77-621 sets out the
scope and
standard of review. The provisions relevant to our review of the issues raised in this case restrict
our granting of relief except where: "(1) The agency action, or the statute or rule and regulation
on which the agency action is based, is unconstitutional on its face or as applied" or "(4) the
agency has erroneously interpreted or applied the law." K.S.A. 77-621(c).
This court recently restated some of the principles governing appellate review of a BOTA
decision, In re Tax Appeal of Colorado Interstate Gas Co., 276 Kan. 672, 682-83, 79
P.3d 770
(2003):
"BOTA is a specialized agency and is considered to be the paramount taxing authority in
this
state. [Citation omitted.] BOTA is a specialized agency that exists to decide taxation issues.
[Citation omitted.] Its decisions are given great weight and deference when it is acting in its area
of expertise. [Citation omitted.] The party challenging BOTA's decisions has the burden to prove
that the action taken was erroneous. [Citation omitted.] However, if BOTA's interpretation of
law is erroneous as a matter of law, appellate courts will take corrective steps. [Citation
omitted.]"
In resolving Taxpayers' claim for exemption from taxes, we must also consider special
principles applicable to judicial construction of tax statutes. "When construing tax statutes,
statutes that impose the tax are to be construed strictly in favor of the taxpayer. Tax exemption
statutes, however, are to be construed strictly in favor of imposing the tax and against allowing
the exemption for one who does not clearly qualify. [Citation omitted.]" In re Tax
Exemption
Application of Central Illinois Public Services Co., 276 Kan. 612, 616, 78 P.3d 419 (2003).
Taxpayers claim the exemption under K.S.A. 79-3606(kk), seeking refund for the time
period from March 1994 through March 2000. Although the provision has been amended since
1997, the parties agree that the amendments are inapplicable. In relevant part, K.S.A.
79-3606(kk) provides:
"The following shall be exempt from the tax imposed by this act:
. . . .
"(kk) on or after January 1, 1989, all sales of machinery and equipment used
directly
and primarily for the purposes of manufacturing, assembling, processing, finishing, storing,
warehousing or distributing articles of tangible personal property in this state intended for resale
by a manufacturing or processing plant or facility or a storage, warehousing or distribution
facility:
. . . .
"(2) For purposes of this subsection 'machinery and equipment used directly and
primarily' shall include, but not be limited to:
. . . .
"(D) computers and related peripheral equipment that directly control or measure
the
manufacturing process or which are utilized for engineering of the finished product."
Taxpayers argue that their machinery and equipment are exempt from taxation under this
provision because they are used primarily and directly to produce telecommunications, which
should be considered tangible personal property. Taxpayers argue that, since telecommunications
are comprised entirely of electricity, they should be treated as tangible personal property in the
same way as electricity. See In re Tax Appeal of Collingwood Grain, Inc., 257 Kan.
237, 238,
891 P.2d 422 (1995) (finding it was undisputed that electricity is "tangible personal property"
subject to the sales tax exemption pursuant to K.S.A. 79-3602[m][B]). Taxpayers seek a judicial
determination that the manufacturing of telecommunications constitutes manufacturing of tangible
personal property for resale as a matter of law.
The Department responds that the legislature has conclusively defined telecommunications
as a service, not tangible personal property, for purposes of the Kansas Retailers' Sales Tax Act;
therefore, Taxpayers' machinery and equipment cannot meet the requirements of the K.S.A.
79-3606(kk) manufacturing exemption as a matter of law. Thus, the Department contends that
Taxpayers' explanation of the technicalities of the telecommunication process is immaterial and
irrelevant.
K.S.A. 79-3602(k) provides that "service" means those services described in and taxed
under K.S.A. 79-3603. K.S.A. 79-3603 imposes a tax "for the privilege of engaging in the
business of selling tangible personal property at retail in this state or rendering or
furnishing any of
the services taxable under this act." (Emphasis added.) Subsection (b) imposes the tax on "(1) the
gross receipts from intrastate telephone or telegraph services and (2) the gross
receipts received
from the sale of interstate telephone or telegraph services." (Emphasis added.)
BOTA relied upon these provisions in ruling that the Taxpayers did not qualify for the
exemption in K.S.A. 79-3606(kk). We agree with BOTA's conclusion that the language of the
Kansas Retailers' Sales Tax Act is plain and unambiguous in that it defines telecommunication
services to be a service and not tangible personal property.
Further, the legislature did not reference telecommunication services in K.S.A.
79-3606(kk). Many of the various tax exemptions contained in K.S.A. 79-3606 do use the term
"services." For example, K.S.A. 79-3606(m) provides an exemption for "all sales of tangible
personal property which become an ingredient or component part of tangible personal property or
services produced, manufactured or compounded for ultimate sale at retail within or
without the
state of Kansas." (Emphasis added.) K.S.A. 79-3606(n) provides an exemption for "all sales of
tangible personal property which is consumed in the production, manufacture, processing, mining,
drilling, refining or compounding of tangible personal property, . . . [or] the providing of
services
. . . for ultimate sale at retail within or without the state of Kansas." (Emphasis added.) Clearly,
the legislature knows how to draft an exemption which applies to the providing of services when
it so intends.
Nonetheless, Taxpayers urged BOTA and now this court to look beyond legislative
definitions to the actual process used in the creation of telecommunications. According to
Taxpayers, it is undisputed that disturbances in an electric current are what form a communication
signal. Because electricity is tangible personal property for sales tax purposes,
telecommunications must also be tangible personal property.
The first problem with this argument is that the facts regarding the actual
telecommunications process and the role of electricity were controverted; the Department
believed the technicalities of the telecommunications process were irrelevant but it contested the
Taxpayers' factual allegations as to how a telecommunication was created.
The second problem with Taxpayers' argument is that electricity is tangible personal
property because the legislature defined it as such for purposes of the Kansas Retailers' Sales Tax
Act. In Collingwood Grain, the case relied upon by Taxpayers, the issue was whether
the sale of
electricity consumed in grain elevator operations for the aeration, blending, cleaning, and drying
of grain was exempt from sales tax pursuant to K.S.A. 79-3602(m)(B) and 79-3606(n). The
latter provision provides for a sales tax exemption on "all sales of tangible personal property
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." K.S.A. 79-3606(n). K.S.A. 79-3602(m) defines "[p]roperty which is
consumed" as:
"[T]angible personal property which is essential or necessary to and which is used in the
actual
process of and immediately consumed or dissipated in (1) 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 following
items of tangible personal property are hereby declared to be 'consumed' . . . (B) electricity, gas
and water."
It was not disputed that electricity was "tangible personal property" under this provision.
257 Kan. at 238. Rather, the issue was whether the aeration, blending, cleaning, and drying of
grain constituted production, manufacturing, processing, refining, or compounding for purposes
of the tax exemption statute. BOTA held that to qualify for the exemption, the product need not
be transformed into a substantially different product; rather, transformation into an improved
marketable product was sufficient. 257 Kan. at 244. This court agreed, finding that the grain was
of a different quality after the processes were performed and holding that the electricity used by
the taxpayers in performing those processes was exempt from sales tax. 257 Kan. at 251-52.
Hence, all that Collingwood Grain instructs us is that the legislature included
electricity in
its definition of tangible personal property for purposes of determining what constitutes exempt
"property which is consumed" under K.S.A. 79-3606(n). However, the legislature did not include
telecommunications within its definition of "property which is consumed" at K.S.A.
79-3602(m)(B), nor within its definition of "tangible personal property" at K.S.A. 79-3602(f).
Rather, the legislature has defined telecommunications as a service pursuant to K.S.A. 79-3602(k)
and 79-3603(b).
Taxpayers urge this court to apply the same analysis as did the Minnesota Supreme Court
in Sprint v. Commissioner of Revenue, 676 N.W.2d 656 (Minn. 2004). In
Sprint, several
telecommunication companies claimed refunds of sales taxes paid on capital equipment purchases.
The companies argued that equipment used for their local exchange, wireless, and long distance
services qualified for an exemption as capital equipment "used to manufacture 'tangible personal
property . . . to be sold ultimately at retail.' See Minn. Stat. § 297A.01, subd. 16(a) (2000);
Minn.
Stat. § 297A.01, subd. 16(d)(4) (2000)." 676 N.W.2d at 657. The relevant Minnesota
statute
defined "tangible personal property" as "corporeal personal property of any kind whatsoever."
676 N.W.2d at 657. See Minn. Stat. § 297A.01, subd. 11 (2000).
The Minnesota Supreme Court found that the telecommunications companies were eligible
for the exemption because
"[their] telecommunications equipment manufactures a product by converting voice and
other
raw data into a form that can be conveyed, measured, sold, and is perceived by the senses. The
matter is transformed, processed, refined, amplified, 'packetized,' routed, reconstructed,
regenerated, and delivered into digital and optical forms in order to send sound waves, analog
signals, and light pulses to the receiver. The form produced can be heard, seen, felt, and received
by human senses under certain circumstances and can be precisely measured. As with electricity,
telecommunications is corporeal personal property 'of any kind whatsoever' [footnote omitted]
and includes all things which may be perceived by any of the bodily senses, including, but not
limited to, touch, sight, hearing and, in this case, can be precisely measured, directed and
delivered for use by a retail customer. Our traditional analysis and precedent would categorize
this telecommunications equipment as refining or manufacturing a product 'to be sold ultimately
at retail.' [Citation omitted.]" 676 N.W.2d at 663-64.
Like Minnesota, Kansas defines "tangible personal property" as "corporeal personal
property." K.S.A. 79-3602(f).
While Sprint does support Taxpayers' argument that the creation of
telecommunications
constitutes the manufacturing of tangible personal property for resale, it is not binding precedent
and is distinguishable because of the unique language of the Kansas Act which defines
telecommunications as services.
The parties have also cited cases from other jurisdictions, including Southwestern
Bell Tel.
v. Director of Rev., 78 S.W.3d 763, 768 (Mo. 2002) (telecommunications are intangible
products
that are manufactured and not tangible personal property), and Bell Atlantic Mobile
Systems, Inc.,
v. Com., 799 A.2d 902 (Pa. Commw. 2002), aff'd 577 Pa. 328, 845 A.2d 762
(2004)
(telecommunications are tangible personal property but are not manufactured). These cases are
also dependent on the language of the state tax statutes at issue and those statutes are even less
comparable to the Kansas statutes than are the Minnesota statutes at issue in Sprint.
Our conclusion is governed by the plain and unambiguous language of the Kansas
Retailers' Sales Tax Act, which defines telecommunications as a service and not tangible personal
property. Therefore, we conclude that equipment utilized in engineering a telecommunication
product or in the process of controlling or measuring the telecommunication process is not
exempt from sales taxation under the exemption provision of K.S.A. 79-3606(kk), which applies,
in relevant part, to purchases of machinery and equipment used in the manufacture of tangible
personal property.
Did the Department of Revenue's Application of K.S.A. 79-3606(kk)
to Deny Refunds Violate the Equal Protection Clauses of the
Kansas and United States Constitutions?
Next, Taxpayers argue that the Department's interpretation of K.S.A. 79-3606(kk) to deny
them the exemption violates the Equal Protection Clauses of the United States and Kansas
Constitutions because it treats similarly situated taxpayers differently. Specifically, Taxpayers
complain that the Department allows the exemption for machinery and equipment used by electric
companies to manufacture electricity. The Department denies this, claiming it allows the
exemption for machinery and equipment which generates electricity but not for machinery and
equipment which transmits or distributes electricity.
With regard to the Taxpayers' equal protection argument, BOTA determined that while it
did not have authority to declare a statute unconstitutional, it did have authority to determine
whether the Department's application of a statute was unconstitutional. However, BOTA found
the Taxpayers' argument to be without merit. BOTA stated:
"The Act is clear that telecommunication services are not included in K.S.A. 79-3606(kk).
Further, as the Department points out, electricity companies and telecommunication providers
are treated equally. Specifically, the machinery used by electric companies in the service of
delivering electricity is not exempt. See K.S.A. 79-3603(c). Consistently, the machinery used by
telecommunication providers in the service of delivering information is also not exempt. As
such, all delivery service machinery is taxed. Therefore, the Department's interpretation and
application of K.S.A. 79-3606(kk) has not violated the constitutional rights of the Taxpayers."
The Fourteenth Amendment to the United States Constitution guarantees equal protection
of the laws, and the Kansas Constitution provides virtually the same protection. See
Colorado
Interstate Gas Co. v. Beshears, 271 Kan. 596, 609, 24 P.3d 113 (2001).
"If similarly situated taxpayers receive disparate treatment, the one receiving the less
favorable
treatment may have been denied equal protection of the law even if the taxpayer receiving the
less favorable tax is taxed according to the law. [Citation omitted.] However, the taxpayer
seeking to establish a violation of the Equal Protection Clause must demonstrate that his or her
treatment is the result of a 'deliberately adopted system' which results in intentional systematic
unequal treatment. [Citation omitted.]" In re Tax Appeal of City of Wichita, 274 Kan.
915, 920,
59 P.3d 336 (2002).
This court has stated the following rules with regard to its consideration of a claim that a
tax statute violates equal protection:
"'A statute is presumed constitutional and all doubts must be resolved in favor of
its
validity. If there is any reasonable way to construe a statute as constitutionally valid, the court
must do so. A statute must clearly violate the constitution before it may be struck down. This
court not only has the authority, but also the duty, to construe a statute in such a manner that it is
constitutional if the same can be done within the apparent intent of the legislature in passing the
statute.' Syl. ¶ 2.
"'Equal protection is implicated when a statute treats "arguably indistinguishable"
classes of people differently. . . . ' Syl. ¶ 3.
"'The rational basis standard (sometimes referred to as the reasonable basis test)
applies
to laws which result in some economic inequality. Under this standard, a law is constitutional,
despite some unequal classification of citizens, if the classification bears a reasonable relationship
to a valid legislative objective.' Syl. ¶ 4.
"'The reasonable basis test is violated only if the statutory classification rests on
grounds
wholly irrelevant to the achievement of the State's legitimate objective. The state legislature is
presumed to have acted within its constitutional power, even if the statute results in some
inequality. Under the reasonable basis test, a statutory discrimination will not be set aside if any
state of facts reasonably may be conceived to justify it.' Syl. ¶ 5.
"'A plaintiff asserting the unconstitutionality of a statute under the rational basis
standard has the burden to negate every conceivable basis which might support the classification.'
Syl. ¶ 6.
"'In taxation, even more than in other fields, legislatures possess the greatest
freedom in
classification.' Syl. ¶ 7." In re Tax Appeal of Alsop Sand Co., Inc., 265 Kan.
510, 522, 962 P.2d
435 (1998) (quoting Peden v. Kansas Dept. of Revenue, 261 Kan. 239, 930 P.2d 1
[1996], cert.
denied 520 U.S. 1229 [1997]).
Applying these principles, we conclude that Taxpayers have failed to establish an equal
protection violation. First, as the Department points out, beyond comparing electricity and
telecommunications, Taxpayers have failed to demonstrate that they are similarly situated to
electric companies or that they have been the victim of any "deliberately adopted system" resulting
in intentional unequal treatment. Nor have Taxpayers negated every conceivable basis which
might support the classification differentiating between telecommunications companies and
electric companies.
The Department contends the legislative intent is clear that the tax exemption contained in
K.S.A. 79-3606(kk) was intended to benefit manufacturers of goods rather than service providers.
In Alsop Sand, this court discussed the legislative history of K.S.A. 79-3606(kk) and
stated that
its purpose was "to make the expense of expansion or modernization of a Kansas manufacturing
plant competitive with the expense in neighboring states and . . . to assist in attracting new
manufacturing plants to this state." 265 Kan. at 520. As noted by the Department,
telecommunications companies are simply not the equivalent of manufacturing plants and have
never been viewed as such.
Taxpayers counter that electric companies provide both the product of electricity and the
service of delivery and transmission of electricity, just as telecommunications
companies provide both the product of telecommunications and the service of delivery and
transmission of telecommunications. However, the Department points out that these industries
are, in fact, different because electric companies sell electricity to their customers for consumption
whereas telecommunication companies only use electricity to deliver telecommunication services
to their customers.
In conclusion, Taxpayers have failed to meet their burden of establishing an equal
protection violation.
Did BOTA Properly Apply the Rules Applicable to
Summary Judgment When it Rendered its Decision?
As an alternative argument, Taxpayers point out that two dissenting BOTA members
concluded there was insufficient evidence in the record to decide the issues in the case and that
summary judgment was not appropriate. The dissenting opinion stated:
"In our opinion, neither party has provided expert testimony vis-a-vis their
respective
affidavits that unequivocally refutes the other parties' expert testimony on the key issues before
the Board in these matters. In fact, there appear to be genuine controverted mixed issues of law
and fact that preclude either party from satisfying the standards for summary judgment under
K.S.A. 60-256(c), and amendments thereto. Such issues include: (1) whether
telecommunications is purely a service or whether it involves the processing of tangible personal
property, in whole or part; (2) whether the delivery of information via a telecommunications
signal constitutes 'manufacturing' or 'processing' under K.S.A. 79-3606(kk); (3) an identification
of all processes that occur during a telecommunications call and the relevance of those processes
to exemption availability under K.S.A. 79-3606(kk); and, (4) the intent of the Legislature in
enacting K.S.A. 79-3606(kk)."
The dissenters noted the Department's argument that telecommunications are defined as
services as a matter of law, but they apparently also found persuasive the Taxpayers' electricity
argument. The dissenters concluded that the issue should be resolved in a full evidentiary hearing.
Taxpayers contend that this court could reach the same conclusion and reverse and remand the
case to BOTA for a full evidentiary hearing.
The Department points out that, in oral argument before BOTA, both sides agreed that the
dispositive issue could be determined by BOTA as a matter of law. Furthermore, Taxpayers filed
a motion to stay discovery, which asserts that none of the discovery responses are needed to
decide the legal issue before BOTA. The Department also contends that BOTA applied the
correct standard of review in determining that telecommunications are services as a matter of law.
BOTA ruled that Taxpayers' machinery and equipment did not qualify for the
manufacturing exemption from sales tax under K.S.A. 79-3606(kk) because other provisions of
the Kansas Retailers' Sales Tax Act define telecommunications as a service. Because the issue
before BOTA was framed as a question of law, and BOTA ruled only on that question of law,
there was no need for BOTA to delve into the actual telecommunications process. Although the
facts regarding the telecommunications process were controverted, those facts were irrelevant
given the way BOTA resolved the legal issue. Accordingly, BOTA did not err in its application of
summary judgment rules.
Affirmed.
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