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105785
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IN THE SUPREME COURT OF THE STATE OF KANSAS
No. 105,785
In the Matter of the Appeals of Various Applicants from a Decision
of the DIVISION OF PROPERTY VALUATION of the STATE OF KANSAS
for Tax Year 2009 Pursuant to K.S.A. 74-2438
and
In the Matter of the Application of Various Applicants
for Exemption from Property Taxation in the STATE OF KANSAS.
SYLLABUS BY THE COURT
1.
Administrative agencies do not have authority to decide questions regarding the
constitutionality of statutes. In judicial review of an agency action, courts consider such
questions in the first instance; and the reviewing court must grant relief under K.S.A.
2012 Supp. 77-621(c)(1) only if 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.
2.
Kansas statutes are presumed constitutional, and all doubts must be resolved in
favor of their validity. If there is any reasonable way to construe a statute as
constitutionally valid, courts must do so. A statute must clearly violate the constitution
before it may be struck down.
2
3.
A legislative definition of a constitutional term must bear a reasonable and
recognizable similarity to generally accepted definitions and the common understanding
of the term by the people of Kansas.
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.
Appeal from Court of Tax Appeals. Opinion filed December 6, 2013. Affirmed in part, reversed
and vacated in part, and remanded with directions.
Robert W. Coykendall, of Morris, Laing, Evans, Brock & Kennedy, Chartered, of Wichita, argued
the cause, and Will B. Wohlford, of the same firm, was with him on the briefs for appellants.
William E. Waters, of Division of Property Valuation, Kansas Department of Revenue, argued the
cause and was on the brief for appellee.
The opinion of the court was delivered by
BILES, J.: This is a consolidated tax appeal disputing whether natural gas stored in
facilities located in Kansas under contract with interstate companies is subject to ad
valorem taxation. The Kansas Constitution, Article 11, § 1 (2012 Supp.) exempts
merchants' inventory from such taxation, but that exemption does not include tangible
personal property owned by a public utility. The taxpayers claim they are entitled to the
exemption. They are 40 business entities that fall into three general categories: out-of-
state natural gas marketing companies, out-of-state local distribution companies certified
as public utilities in their states, and out-of-state municipalities. Each buys natural gas
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from producers or other marketers and then delivers it to the pipelines under contracts
with the pipeline companies allowing the taxpayer to withdraw equivalent amounts of gas
at a later time from out-of-state distribution points.
The Kansas Court of Tax Appeals (COTA) determined this natural gas is not
exempt because of a statute broadly defining what constitutes a "public utility" for these
purposes. See K.S.A. 2012 Supp. 79-5a01. The taxpayers challenge COTA's decision
arguing, in part, that it violates the Commerce Clause of the United States Constitution
and the Due Process Clause of the Fourteenth Amendment to the United States
Constitution, as well as Article 11, § 1(b) of the Kansas Constitution (2012 Supp.), which
provides for the ad valorem tax exemption for merchants' inventory.
We hold this taxation does not violate the Commerce Clause or Due Process
Clause. And we hold further that K.S.A. 2012 Supp. 79-5a01 is constitutional as applied
to the out-of-state local distribution companies. But we also hold that K.S.A. 2012 Supp.
79-5a01 is unconstitutional as applied to the out-of-state natural gas marketing companies
and those taxpayers that are out-of-state municipalities. These entities are not public
utilities as that term was commonly understood when Kansas voters excluded public
utility personal property from the merchants' and manufacturers' inventory exemption.
The COTA order is affirmed in part and reversed and vacated in part. We remand
to COTA for further proceedings to decide where each taxpayer falls within the three
described categories because the record on appeal is inadequate for this court to make
these individual determinations.
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FACTUAL AND PROCEDURAL BACKGROUND
This is the fourth time this court has addressed taxation of natural gas stored in
interstate pipelines. And with each case, the governing laws have changed, presenting
different legal questions and possible outcomes. We refer to those previous cases as
necessary because they lay the groundwork for the principles guiding the present
controversy's resolution.
This particular litigation began in 2009, when the Kansas Division of Property
Valuation (PVD) determined the taxpayers were public utilities for property tax purposes
under a newly amended statute defining the term "public utility" in the Kansas tax
statutes. See L. 2009, ch. 97, sec. 5 (effective July 1, 2009) (now K.S.A. 2012 Supp. 79-
5a01[a]). PVD concluded the taxpayers were holding natural gas for resale in storage
facilities located in the state and appraised the gas and fixed assessed values thereto for
ad valorem tax purposes for the 2009 tax year. See K.S.A. 2012 Supp. 79-5a01(c). PVD
determined the quantity of gas each taxpayer owned in the Kansas storage facilities based
on an allocation formula, adopted from one of the Federal Energy Regulatory
Commission (FERC)-approved tariffs, stating:
"For purposes of reporting storage inventories for state ad valorem taxes, the total
inventories of Gas in Market Area Storage Facilities and Field Area Storage Facilities in
any particular state shall be determined. Inventories in Market Area Storage Facilities
shall be allocated to all Shippers with inventories under Rate Schedules PS, and if
provided from Market Areas Storage Facilities, WS, FS, and IWS, based on the ratio of
total inventories for the state divided by total Storage inventories for all states times the
Shipper's total Stored Volume under such Rate Schedules; inventories in Field Area
Storage facilities shall be allocated to all Shippers with inventories for the state divided
by total Storage inventories for all states times the Shipper's total Stored Volume under
such Rate Schedules." (Emphasis added.)
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Taxpayers do not challenge this allocation methodology, but they individually
appealed the appraisals and filed requests for ad valorem tax exemption. In doing so, they
advanced various arguments to shield themselves from the tax. They claimed the natural
gas at issue was exempt as: (1) personal property moving in interstate commerce under
K.S.A. 2012 Supp. 79-201f(a); (2) merchants' and manufacturers' inventory under K.S.A.
79-201m; and (3) merchants' and manufacturers' inventory under Article 11, § 1(b) of the
Kansas Constitution (2012 Supp.). They also argued taxation of this gas violates the
Commerce Clause, Due Process Clause, and Import Export Clause of the United States
Constitution.
PVD disagreed. It filed the exemption requests with COTA, but recommended
they be denied. PVD claimed these taxpayers were public utilities, as defined by K.S.A.
2012 Supp. 79-5a01, and noted public utility inventories are not exempt under K.S.A.
2012 Supp. 79-201f or Article 11, § 1 of the Kansas Constitution (2012 Supp.). COTA
consolidated the appeals and held an evidentiary hearing based in part on stipulated facts
applicable to each taxpayer.
The Taxpayers
COTA classified the taxpayers into three general groups: (1) out-of-state natural
gas marketing companies; (2) out-of-state local distribution companies that are certified
as public utilities in their respective states; and (3) out-of-state municipalities. And
although some of their characteristics will distinguish one group from another in a
substantive way, each taxpayer shares a common business model in that it purchases
natural gas from various producers or marketers and then designates when and where that
gas will be delivered to one of four interstate pipelines. The taxpayer then schedules with
the designated pipeline when and where an equivalent amount of gas will be redelivered
to an out-of-state location where the taxpayer will take possession of it. In the meantime,
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gas is stored for the taxpayer somewhere in the pipeline's storage or transportation
systems, which may be in Kansas or some other state. Storage is integral to the pipelines'
operations, and natural gas is continually deposited and removed to satisfy essential
pipeline pressure and balancing requirements, as well as to permit interstate
transportation such as the simultaneous delivery and redelivery of natural gas at distant
locations.
The pipelines that own the facilities in which the taxpayers' gas was stored for this
tax year are FERC-regulated and owned separately by Northern Natural Gas Company,
Panhandle Eastern Pipe Line Company, Colorado Interstate Gas Company, and Southern
Star Central Gas Pipeline. Each pipeline company commingles the gas one customer
deposits with gas deposited by other customers. No effort is made—nor could one
succeed—to ensure that the same gas initially brought into the system by a customer is
placed into storage and then redelivered to that same customer. The taxpayer's contractual
right is simply to withdraw an amount of natural gas equivalent to the amount it
deposited into the system. Each pipeline company possesses and controls the gas
deposited into its system. Under FERC-approved tariffs, the pipeline companies carry the
risk of loss during storage.
Each pipeline company owns and operates underground storage facilities in
multiple jurisdictions, including Kansas. And none of the taxpayers owns any facilities in
Kansas for the transmission, distribution, or storage of natural gas. None are certified or
regulated as Kansas natural gas public utilities or vested with eminent domain powers in
this state.
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COTA Proceedings
At the COTA hearing, Kent Miller, a Northern Natural Gas vice president,
testified that 70 percent of its pipeline customers injected at a delivery point in Ogden,
Iowa, and that half of its deliveries were made in Minnesota. This, he said, makes it
"highly likely" that a Northern customer will deliver gas in Iowa and then take redelivery
in Minnesota. Miller testified that under the PVD's allocation methodology natural gas
would be taxed in Kansas even though it never physically entered the state.
Jeff Balfort, an official with Panhandle Eastern Pipeline Company, testified that
Panhandle's pipelines cross eight or nine states and Panhandle sells various services
related to the transportation and storage of natural gas for shippers. Generally, he said,
Panhandle receives gas from Kansas, North Texas, and Oklahoma. And he said it
transmits gas to Ohio, Illinois, Indiana, and Michigan. He testified Panhandle has "field
zone" storage in Kansas and Oklahoma and has market zone storage in Michigan, Illinois,
Indiana, and Ohio. A field zone is a geographic area where natural gas is produced and
gathered for sale to gas distributors, while a market zone is the geographic area where gas
is sold to customers. See In re Assessment of Personal Property Taxes, 234 P.3d 938,
944, n.4-5 (Okla. 2008), cert. denied sub nom. Missouri Gas Energy v. Schmidt, 559 U.S.
970 (2010).
John Wine, a Kansas attorney who had previously served as Kansas Securities
Commissioner and chair of the Kansas Corporation Commission, submitted a report and
testified on the taxpayers' behalf. He expressed his opinion that public utilities share
certain common characteristics in that they: (1) enjoy natural monopolies; (2) provide
essential services; (3) possess restricted or protected service territories; (4) are subject to
regulations that restrict the rates they can charge for services; (5) are obligated to provide
a nondiscriminatory service to the public; and (6) are usually given eminent domain
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powers by the state. Wine also testified that the definition of public utility enacted by the
Kansas Legislature in K.S.A. 2012 Supp. 79-5a01 was not consistent with his view of
what constitutes a public utility, stating:
"[T]he fact that someone might be brokering or marketing a—a commodity, a natural gas
commodity, does not make it a public utility looking at those common characteristics
in—in any way. I mean, any more than a—a facility that held some coal that might
eventually be delivered to an electric utility to burn to make electricity, it wouldn't make
that—that marketer of coal a public utility."
Wine later limited this assertion to the taxpayers who are marketers and brokers of
natural gas, stating: "The Marketers, Brokers, or other entities that trade in gas, and
possess the right to take delivery of that gas from a federally regulated pipeline do not
possess any characteristics of a public utility except for the fact that they deal in natural
gas, a commodity that is highly regulated."
Regarding the other taxpayers, Wine testified that three local distribution
companies operated in their home states in a manner consistent with the general meaning
of a public utility, as did 13 public utilities. And when asked whether there was anything
"inconsistent with them being public utilities for [certain] purposes in one state and not
another," Wine responded, "There is nothing inconsistent about that at all." But when
PVD attempted to elicit similar testimony from Wine concerning five municipal utilities
PVD considered local distribution companies, Wine testified he did not know if it was
appropriate to call them local distribution companies if they were not a public utility,
even though the municipal utilities were providing analogous services. This statement
was not further clarified, and COTA factual finding No. 22, which summarizes Wine's
testimony, does not address the out-of-state municipal utilities. This factual anomaly
hampers our discussion of the issues related to these entities as discussed below.
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COTA denied the taxpayers' exemption requests. It held that all the taxpayers were
public utilities under K.S.A. 2012 Supp. 79-5a01 and, therefore, their gas did not qualify
for the merchants' inventory exemption as codified in K.S.A. 79-201m. It also held the
out-of-state municipalities' gas did not qualify for exemption under K.S.A. 2012 Supp.
79-201a Second because that statute's plain language applies only to property of
municipalities or political subdivisions of the state of Kansas. Finally, COTA refrained
from addressing whether the tax assessments violated the United States Constitution.
Taxpayers timely appealed. Both sides filed requests to transfer the appeal to this
court under K.S.A. 20-3017 and Kansas Supreme Court Rule 8.02 (2012 Kan. Ct. R.
Annot. 71), which we granted. On appeal, taxpayers argue: (1) taxing their gas violates
the Due Process and Commerce Clauses of the United States Constitution; (2) the gas is
exempt merchants' and manufacturers' inventory under K.S.A. 79-201m and Article 11, §
1(b) of the Kansas Constitution (2012 Supp.); (3) the gas is exempt under K.S.A. 2012
Supp. 79-201f(a) because it is moving in interstate commerce and not considered public
utility inventory under K.S.A. 2012 Supp. 79-5a01; and (4) the out-of-state municipal
utilities qualify for exemption under Article 11, § 1(b) of the Kansas Constitution (2012
Supp.) and K.S.A. 2012 Supp. 79-201f(a).
Our resolution permits us to reduce the issues further. We consider first the
arguments concerning the Commerce and Due Process Clauses, and then whether
taxpayers in any of the three groups (out-of-state natural gas marketing companies, out-
of-state local distribution companies certified as public utilities in their respective states,
and out-of-state municipalities) may be considered public utilities in Kansas.
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THE COMMERCE AND DUE PROCESS CLAUSES
Taxpayers argue these ad valorem tax assessments violate the United States
Constitution's Due Process and Commerce Clauses by taxing out-of-state corporations for
natural gas stored in Kansas. They claim this is unconstitutional because their gas is
under a common carrier's control and intermingled with other customers' gas so that there
is no evidence their gas was ever actually stored in Kansas. They also note the interstate
pipeline companies determine whether the gas in the pipeline's system will be stored in
Kansas.
The Commerce and Due Process Clauses are closely related, but each presents
distinct limits on a state's taxing power. A tax satisfying one clause does not necessarily
satisfy the other because the clauses "reflect different constitutional concerns." Quill
Corp. v. North Dakota, 504 U.S. 298, 305, 112 S. Ct. 1904, 119 L. Ed. 2d 91 (1992). The
Due Process Clause "centrally concerns the fundamental fairness of governmental
activity." 504 U.S. at 312. But the Commerce Clause and its nexus requirement "are
informed not so much by concerns about fairness for the individual defendant as by
structural concerns about the effects of state regulation on the national economy." 504
U.S. at 312. These clauses also are subject to different limits of congressional power
because Congress can authorize state action burdening interstate commerce, but it cannot
authorize due process violations. 504 U.S. at 305.
Standard of Review
The Kansas Judicial Review Act (KJRA), K.S.A. 77-601 et seq., typically
establishes the standard of review for appeals from COTA decisions. But COTA lacks
jurisdiction to address whether taxation of the taxpayers' gas violates our state or federal
Constitutions. See In re Tax Appeal of Weisgerber, 285 Kan. 98, 102, 169 P.3d 321
11
(2007); Zarda v. State, 250 Kan. 364, Syl. ¶ 3, 826 P.2d 1365, cert. denied 504 U.S. 973
(1992). Accordingly, COTA correctly refrained from addressing the constitutional
claims. But those questions remain in controversy, so this court reviews them in the first
instance. Weisgerber, 285 Kan. at 102. In the judicial review of an agency action, the
reviewing court must grant relief under K.S.A. 2012 Supp. 77-621(c)(1) only if 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.
An appellate court's review of a statute's constitutionality is unlimited. Miller v.
Johnson, 295 Kan. 636, 647, 289 P.3d 1098 (2012). But in addressing constitutional
issues, courts are only concerned with whether the legislature had the power to enact the
statute, not the wisdom behind it. A statute is presumed constitutional and all doubts must
be resolved in favor of its validity. This court has both the authority and duty to construe
the statute as constitutionally valid if there is any reasonable way to do so. 295 Kan. at
646-47; In re Tax Appeal of Barton-Dobenin, 269 Kan. 851, 855, 9 P.3d 9 (2000). A
statute must clearly violate the constitution before it may be struck down. 269 Kan. at
855.
Commerce Clause
The Commerce Clause of the United States Constitution expressly authorizes
Congress to "regulate Commerce with foreign Nations, and among the several States
. . . ." U.S. Const. art. I, § 8, cl. 3. This clause has long been recognized as having both an
affirmative and negative sweep. Quill, 504 U.S. at 309. The negative, or dormant,
Commerce Clause prohibits certain state taxation even when Congress has failed to
legislate on the subject. Oklahoma Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. 175,
179, 115 S. Ct. 1331, 131 L. Ed. 2d 261 (1995). The purpose of the negative powers is to
prevent "a State from retreating into economic isolation or jeopardizing the welfare of the
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Nation as a whole, as it would do if it were free to place burdens on the flow of
commerce across its borders that commerce wholly within those borders would not bear."
514 U.S. at 179-80.
The Court's Commerce Clause jurisprudence has evolved substantially over
time—particularly as to states' taxing powers. Quill, 504 U.S. at 309. The Court's earliest
cases broadly prohibited any form of state taxation on interstate commerce. 504 U.S. at
509 (quoting Leloup v. Port of Mobile, 127 U.S. 640, 648, 8 S. Ct. 1380, 32 L. Ed. 311
[1888]). But that wholesale prohibition has eroded. Under the Court's current
jurisprudence, interstate commerce may be required to pay its fair share of state taxes
within certain limitations. See Quill, 504 U.S. at 309-11.
In Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S. Ct. 1076, 51 L.
Ed. 2d 326 (1977), the Court retreated from formal, categorical prohibitions of state
taxation. It adopted instead a four-part test emphasizing the importance of the tax statute's
practical effect. See Quill, 504 U.S. at 310. It held that a state may tax an activity without
violating the Commerce Clause if that tax: (1) applies to an activity with a substantial
nexus to the taxing state; (2) is fairly apportioned; (3) does not discriminate against
interstate commerce; and (4) is fairly related to services or benefits provided by the
taxing state. Jefferson Lines, 514 U.S. at 183 (quoting Complete Auto, 430 U.S. at 279).
The taxpayers' threshold argument is that the four-prong Complete Auto analysis
does not govern their Commerce Clause claim because the tax here violates a bright-line
rule prohibiting states from assessing taxes if the assessees' only connection with the state
is through a common carrier. They rely on the United States Supreme Court's Quill
decision. The gravamen of their claim is that interstate pipelines are common carriers, the
pipelines establish the taxpayers' only connection with Kansas, and that connection is
insufficient for the purpose of assessing taxes.
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In Quill, a North Dakota statute required an out-of-state mail-order house with no
North Dakota outlets or sales representatives to collect and pay use tax on goods
purchased for use in North Dakota. The Court had previously declared a similar Illinois
statute unconstitutional under the Due Process and Commerce Clauses in Nat. Bellas
Hess v. Dept. of Revenue, 386 U.S. 753, 87 S. Ct. 1389, 18 L. Ed. 2d 505 (1967). The
mail-order house appealed on those grounds. But the North Dakota Supreme Court
declined to declare the tax unconstitutional under Bellas Hess, concluding that decision
was rendered obsolete by the Court's later jurisprudence.
A majority of the Quill Court reaffirmed Bellas Hess as establishing a bright-line
rule for sales and use taxes under the Commerce Clause: A state may not impose a use
tax on an out-of-state vendor whose only connection with the state is through a common
carrier. Quill, 504 U.S. at 314-15. And in declaring the North Dakota tax
unconstitutional, the majority noted that "contemporary Commerce Clause jurisprudence
might not dictate the same result were the issue to arise for the first time today," but
Bellas Hess was not "inconsistent" with Complete Auto and the Court's later cases. Quill,
504 U.S. at 311. The majority also noted the bright-line rule established in Bellas Hess
had "engendered substantial reliance and has become part of the basic framework of a
sizeable industry." Quill, 504 U.S. at 317. It affirmed its rule that "in the area of sales and
use taxes" a state may not impose a use tax collection on an out-of-state vendor whose
only connection with the state is through a common carrier. 504 U.S. at 314-15.
There is a split of authority in our sister states on whether the Court's holding in
Quill is limited to sales and use taxes. See Lanco, Inc. v. Director, Div. of Taxation, 188
N.J. 380, 382-83, 908 A.2d 176 (2006) (noting the split). In Lanco, the New Jersey
Supreme Court held that the better interpretation of Quill limits its application to sales
and use taxes as reflected by the Court's plain language limiting Quill's holding to that
14
context. It also held the Quill Court did not "attempt to equate the substantial-nexus
requirement with a universal physical-presence requirement." Lanco, 188 N.J. at 383.
We agree with the Lanco court. Quill is best restricted to sales and use taxes
because the Quill Court specifically limited the case's holding to that context and because
the Court largely relied upon stare decisis to reach its result. We reject the taxpayers'
reliance on Quill for these reasons. We consider next what test should apply.
The taxpayers' second Commerce Clause argument relates to the Complete Auto
test, which requires that the tax applies to an activity with a substantial nexus to the
taxing state, is fairly apportioned, does not discriminate against interstate commerce, and
is fairly related to the services provided by the state. See Jefferson Lines, 514 U.S. at 183
(quoting Complete Auto, 430 U.S. at 279). Taxpayers argue the tax violates the first and
fourth prongs of the Complete Auto test, i.e., the tax is neither fairly apportioned, nor
fairly related to services provided by the state.
We note those prongs are related and require a "substantial nexus and a
relationship between the tax and state-provided services, limit[ing] the reach of state
taxing authority so as to ensure that state taxation does not unduly burden interstate
commerce." Quill, 504 U.S. at 313. The taxpayers argue the tax here violates the
Commerce Clause because their business is conducted primarily outside Kansas, none of
them have Kansas facilities or employees, and none "own property or facilities in Kansas
for the transmission, distribution or storage of natural gas." They contend the natural gas
stored in Kansas does not establish the required nexus because the taxpayers do not
control or possess the gas; the gas is intermingled with gas owned by others; and they do
not direct their business activities to Kansas—the pipeline companies determine where
the gas is stored.
15
We are not the first court to address this question. The Oklahoma Supreme Court
and Texas Court of Appeals have split on whether similar ad valorem taxes on natural gas
stored in an interstate pipeline violated the Commerce Clause. See In re Assessment, 234
P.3d at 952-59 (Oklahoma tax assessments did not violate Commerce Clause); Peoples
Gas, Light v. Harrison Cent. App., 270 S.W.3d 208, 217-19 (Tex. App. 2008) (Texas tax
assessments violated Commerce Clause). These cases demonstrate this is a difficult
question. But after reviewing both, we agree with the Oklahoma Supreme Court and hold
these taxes do not violate the Commerce Clause.
In Peoples, a Texas taxing jurisdiction assessed ad valorem taxes against a natural
gas distribution company's gas stored in an interstate pipeline company's storage facility.
The pipeline company's method of allocating stored gas to the distribution company was
not disputed. The Texas court first held that Peoples owned the natural gas at issue, even
though the pipeline company had full custody and control of the gas. The court noted that
FERC regulations did not permit ownership rights to the gas to be transferred to the
pipeline company, so it held "legal title must lie with Peoples." 270 S.W.3d at 213-14.
Nevertheless, the court struck down the Texas assessment under the Commerce Clause
after holding it failed to meet the first and fourth prongs of the Complete Auto test.
Peoples, 270 S.W.3d at 217-19.
As to the first prong's substantial nexus requirement, the court held there was not a
substantial nexus between the taxing entity and the taxpayer, property, or transaction
subject to the tax. It reached this result, even though the natural gas distributor owned
tangible personal property located in Texas, because Peoples did not have any employees,
representatives, or physical facilities in the state. It also found persuasive the argument
that the pipeline company controlled whether the natural gas was stored in Texas; and it
held Peoples' only connection to Texas was the pipeline company's decision to store
16
natural gas there. The court concluded that "such a connection is too tenuous to subject
Peoples to ad valorem taxation in Texas." 270 S.W.3d at 218.
The Peoples court also held that the fourth prong, requiring the tax be fairly
related to the services provided by the state, was not met. In particular, Peoples was not
the beneficiary of Texas services. The court explained that, in its view, the pipeline
company was the only beneficiary, stating:
"[S]ervices such as law enforcement and the fire department would serve the [Texas]
facility itself, and the facility undoubtedly belongs to Pipeline, which does pay ad
valorem taxes on both the 'cushion' gas it maintains in the facility and the physical plant
of the facility itself." 270 S.W.3d at 219.
In contrast, the Oklahoma Supreme Court upheld the taxation of a Missouri
natural gas distributor's gas, which was similarly stored in an interstate pipeline
company's storage facility. In re Assessment, 234 P.3d at 952-59. The distribution
company (MGE) did not sell natural gas in Oklahoma, employ anyone in Oklahoma, or
maintain any Oklahoma facilities. But it purchased gas from suppliers in other states and
used a pipeline company with Oklahoma storage facilities to transport and store the
natural gas. Like the taxpayers in this case, the gas distribution company argued the
assessment violated the Due Process and Commerce Clauses.
Regarding the Commerce Clause, a majority of the Oklahoma court held that
Complete Auto's substantial nexus requirement was satisfied, even though the distributor
had no control over where the gas was stored and the pipeline company benefited from its
ability to store it. The court said the "storage of gas [was] not only anticipated by MGE
[the distributor], but intended." In re Assessment, 234 P.3d at 955. It went on to explain:
17
"While MGE cannot direct the pipeline to use the Woods County facility, it contracts for
storage knowing that the Woods County facility is one of two Field Zone storage
facilities. If gas is stored there, and it is, MGE cannot claim it does not intend for that to
happen. Were the court making the old 'in transit' or 'at rest' determination, this record
would make that determination very difficult. Inasmuch as the subjective factors are
inconclusive, the nexus issue is better decided on the basis of the objective fact that
Panhandle stored gas on behalf of MGE and that a certain amount of it was held at
North Hopeton at all times during the tax years in question." (Emphasis added.) 234 P.3d
at 955.
The court also held the tax was reasonably related to services provided by the
state. In reaching this holding, the court determined the controlling question was
"'whether the state has given anything for which it can ask return.'" 234 P.3d at 959. The
court concluded MGE was simply shouldering its fair share of the taxes "for the support
of government-provided services and the receipt of 'the advantages of a civilized
society.'" 234 P.3d at 959. It noted the tax was assessed against personal property located
in the taxing jurisdiction and MGE's gas was taxed to the same extent as other personal
property in the jurisdiction. 234 P.3d at 959.
But there is one distinction between In re Assessment and this case because MGE's
natural gas was not just stored in Oklahoma—it also was produced there. And this could
arguably impact the substantial nexus analysis. But the In re Assessment court did not
indicate production of the gas within the state was significant to its analysis of the first
and fourth Complete Auto prongs. And we see no distinction of merit, principally because
this is an ad valorem tax on stored natural gas, not a severance tax. Cf. Commonwealth
Edison Co. v. Montana, 453 U.S. 609, 101 S. Ct. 2946, 69 L. Ed. 2d 884 (1981)
(upholding severance tax on coal mined in Montana and noting substantial nexus between
activity of coal mining and state in which the activity occurs). We agree with the
Oklahoma Supreme Court that the most important factor in determining whether a
18
substantial nexus exists to tax the taxpayers' gas is that this is a personal property tax on
stored natural gas that was located in Kansas on the assessment date.
We reject the taxpayers' arguments that ad valorem taxation of their stored natural
gas fails to satisfy the first and fourth prongs of the Complete Auto test. There is
axiomatically a substantial nexus between Kansas and the gas stored in this state. And ad
valorem taxes, which are levied upon property situated in Kansas, are fairly related to the
taxpayers' contact with Kansas, i.e., their storage of gas in this state. All property in
Kansas is subject to ad valorem taxation, unless otherwise exempt. K.S.A. 79-101. For
the purposes of this Commerce Clause analysis, ad valorem taxes will be levied upon the
assessed value of the taxpayers' gas at the same rate as ad valorem taxes levied upon the
other assessed property in the applicable taxing jurisdictions. See K.S.A. 79-5a25
(assessed value of public utility property to be apportioned among taxing jurisdictions in
which property is located); K.S.A. 2012 Supp. 79-1803 (tax levy rate to apply equally to
all real and personal property subject to the same tax); accord In re Assessment, 234 P.3d
at 959. We hold that the challenged ad valorem tax does not violate the Commerce
Clause.
Due Process
The United States Supreme Court has held that due process "'requires some
definite link, some minimum connection, between a state and the person, property or
transaction it seeks to tax,'" as well as some rational relationship between the tax and the
"'"values connected with the taxing State."'" Quill, 504 U.S. at 306; accord
MeadWestvaco Corp. v. Illinois Dept. of Revenue, 553 U.S. 16, 24, 128 S. Ct. 1498, 170
L. Ed. 2d 404 (2008). The taxpayers argue they lack the necessary minimum contacts
with Kansas to permit ad valorem taxation of their gas and that the pipeline companies'
independent decisions to store the gas in Kansas cannot establish the necessary contacts.
19
PVD argues minimum contacts exist because the taxpayers "have some
expectation that some of the natural gas that they consign to the pipelines will be stored
in Kansas." It then characterizes the pipeline companies as independent contractors and
argues their activities are enough to establish the necessary contact. PVD further argues
that "it is not the taxpayers' activities that are taxed, but tangible personal property—
natural gas—that is owned by the taxpayers and physically located in the state."
The Oklahoma Supreme Court in In re Assessment of Personal Property Taxes,
234 P.3d 938 (Okla. 2008), cert. denied 559 U.S. 970 (2010), also addressed a similar,
but differently framed due process issue. In that case, the taxpayer argued the assessment
violated due process because its gas was moving in interstate commerce and therefore did
not have a tax situs in Oklahoma. The court noted due process requires a nexus between
the taxed property and the taxing state, but that this nexus requirement is minimal under
the Due Process Clause. 234 P.3d at 950. It held the gas' "sojourn in storage in Oklahoma
gives it at least a minimal nexus . . . sufficient to establish tax situs and to survive the due
process attack," even if the parties intended that the natural gas would ultimately be
delivered to Missouri. 234 P.3d at 950.
We agree with the In re Assessment court and hold there are sufficient contacts
between the taxpayers' gas and the State of Kansas to eliminate any due process concerns.
Specifically, the taxpayers own tangible personal property stored in Kansas. And the
property is stored in this state under the taxpayers' contracts with pipeline companies that
own storage facilities in Kansas. Accordingly, there is a sufficient nexus between the
taxpayers' gas and the State of Kansas to establish the minimum contacts necessary to
satisfy due process.
20
TAXPAYERS' STATUS AS PUBLIC UTILITIES
The Kansas Constitution, Article 11, § 1(b) (2012 Supp.) exempts merchants' and
manufacturers' inventory from property taxation, except inventory owned by a public
utility. The legislature has defined what will constitute this subclass of public utility
tangible personal property. See Kan. Const. art. 11, § 1(a) (2012 Supp.) ("Class 2—
tangible personal property . . . shall be defined by law for the purpose of
subclassification"—i.e., subclass [3]). The statutory definition of "public utility" subject
to this appeal appears in K.S.A. 2012 Supp. 79-5a01[a], which states in pertinent part:
"[T]he terms 'public utility' or 'public utilities' means every individual, company,
corporation, association of persons, brokers, marketers, lessees or receivers that now or
hereafter own, broker or market natural gas inventories stored for resale in an
underground formation in this state, or now or hereafter are in control, manage or operate
a business of:
. . . .
(4) transporting or distributing to, from, through or in this state natural
gas, oil or other commodities in pipes or pipelines, or engaging primarily
in the business of storing natural gas in an underground formation."
K.S.A. 2012 Supp. 79-5a01(a)(4).
PVD argues the taxpayers' Kansas-stored gas is taxable public utility tangible
personal property under the Kansas Constitution, Article 11, § 1 (2012 Supp.) and K.S.A.
2012 Supp. 79-5a01. The taxpayers admit they fit within the statutory definition but
argue the definition's expansive scope is inconsistent with the common meaning of
"public utility" when Kansas voters ratified the constitutional amendment excepting
public utility tangible personal property from the merchants' and manufacturers'
inventory exemption. See L. 1992, ch. 342, sec. 1 (now Kan. Const. art. 11, § 1 [2012
21
Supp.]). This, the taxpayers contend, renders the statute unconstitutional. We begin by
summarizing the history underlying the constitutional provision and its statutory progeny.
Article 11 and Our Cases Involving Taxing Stored Natural Gas
A constitutional amendment exempting merchants' and manufacturers' inventory
from ad valorem taxation was first adopted by voters in 1986. It read: "[M]erchant[s'] and
manufacturer[s'] inventories . . . . shall be exempted from property taxation." L. 1985, ch.
364, sec. 1; Kan. Const. art. 11, § 1(b)(2). At that time, public utility tangible personal
property was not exempt from ad valorem taxation. See Kan. Const. art. 11, § 1(b)(1—
Class 2, subclass (C). In 1988, the legislature statutorily enacted the merchants' and
manufacturers' inventory exemption. See L. 1988, ch. 375, sec. 2 (now K.S.A. 79-201m).
It defined the terms "merchant" and "inventory" as follows:
"'(a) "Merchant" means and includes every person, company or corporation who
shall own or hold, subject to their control, any tangible personal property within this state
which shall have been purchased for resale without modification or change in form or
substance, and without any intervening use;
. . . .
"'(c) "inventory" means and includes those items of tangible personal property
that: (1) Are held for sale in the ordinary course of business (finished goods); (2) are in
process of production for such sale (work in process); or (3) are to be consumed either
directly or indirectly in the production of finished goods (raw materials and supplies).
Assets subject to depreciation or cost recovery accounting for federal income tax
purposes shall not be classified as inventory. A depreciable asset that is retired from
regular use and held for sale or as standby or as surplus equipment shall not be classified
as inventory.'" Colorado Interstate Gas Co. v. Board of Morton County Comm'rs, 247
Kan. 654, 656-57, 802 P.2d 584 (1990) (quoting K.S.A. 1988 Supp. 79-201m[a], [c]).
22
Litigation quickly arose over whether natural gas stored in pipelines located within
the state was exempt merchants' inventory under these definitions. See Colorado
Interstate Gas, 247 Kan. at 655.
In Colorado Interstate Gas, the taxpayers were interstate pipeline companies that
owned the natural gas at issue. They argued their stored gas was exempt merchants' and
manufacturers' inventory, and PVD agreed based on the plain language of the then-
existing statute, K.S.A. 1988 Supp. 79-201m. But the Board of Tax Appeals (BOTA),
which was the predecessor to COTA, reversed PVD's determination. BOTA accepted that
the stored natural gas was "inventory," but BOTA concluded the pipeline companies
were not "merchants" or "manufacturers." Colorado Interstate Gas, 247 Kan. at 658. In
support, BOTA cited the legislative development of the constitutional provision; the fact
that public utilities were taxed under a different statute before the provision was adopted;
and various affidavits from legislators claiming the provision was not intended to alter
the assessment and taxation of public utility inventories. See 247 Kan. at 661-62. The
pipeline companies appealed.
The Colorado Interstate Gas court held the pipeline companies were "merchants"
as defined by K.S.A. 1988 Supp. 79-201m. The court reached that conclusion after
finding the relevant portions of Article 11, § 1 of the Kansas Constitution exempting
merchants' and manufacturers' inventory were self-executing, which meant the
exemptions were granted by the amendment itself. 247 Kan. at 659. The court then
summarized the legislature's limited authority in this area, stating:
"'The rule is that a self-executing provision of the constitution does not
necessarily exhaust legislative power on the subject, but any legislation must be in
harmony with the constitution and further the exercise of [the] constitutional right to
make it more available. Thus, even in the case of a constitutional provision which is self-
23
executing, the legislature may enact legislation to facilitate the exercise of the powers
directly granted by the constitution; legislation may be enacted to facilitate the operation
of such a provision, prescribe a practice to be used for its enforcement, provide a
convenient remedy for the protection of the rights secured or the determination thereof, or
place reasonable safeguards around the exercise of the right. And, even though a
provision states that it is self-executing, some legislative action may be necessary to
effectuate its purposes. But legislative authority to provide the method of exercising a
constitutional power exists only where the constitutional provisions themselves do not
provide the manner and means and methods for executing the powers therein conferred.
Procedure prescribed in a self-executing provision must be followed to the exclusion of
that prescribed by statute, and failure to comply with the provisions of a statute which
differ from those in the constitutional provision is not a defect.
"'It is clear that legislation which would defeat or even restrict a self-executing
mandate of the constitution is beyond the power of the legislature. Also, the legislature is
neither required nor permitted to enact laws purporting to confer rights in excess of and
different from those contemplated by the constitution. A liability imposed by a self-
executing provision is absolute and not subject to legislative enlargement or lessening or
restriction as to manner of enforcement.'" 247 Kan. at 659-60 (quoting 16 Am. Jur. 2d,
Constitutional Law § 139).
To determine whether the pipeline companies were merchants or manufacturers
within the constitution's meaning, the court recited several rules of constitutional
construction, one of which was that "[a] constitution . . . should be held to mean what the
words imply to the common understanding of men." 247 Kan. at 660. It noted this test is
"what meaning people of common understanding would give to the words in question."
247 Kan. at 660. The court observed that the K.S.A. 1988 Supp. 79-201m definition of
"merchant" was consistent with definitions of "merchant" used in prior Kansas caselaw
and found in a dictionary. It then held the pipeline companies were merchants because
they "are clearly and undisputedly in the business of buying and selling natural gas." 247
24
Kan. at 661. The court discredited BOTA's analysis to determine that public utilities
cannot be merchants or manufacturers, stating:
"The problem here is that in enacting the proposed constitutional amendment the
legislature determined the size of the mesh in the net and the requisite number of voters
approved the mesh size. The mesh size is thus fixed in the constitution. The fact that
unintended varieties of fish may pass through the mesh has little bearing on anything."
247 Kan. at 662.
In other words, the Colorado Interstate Gas court applied what it determined to be
the constitution's plain language to hold that the pipeline companies were included within
the merchants' inventory exemption, regardless of any contrary legislative intent. 247
Kan. at 662 ("Under the circumstances, this court can only apply the clear language of the
[constitutional] amendment.").
In 1992, Article 11, § 1 of the Kansas Constitution was amended to accomplish
what the previous amendment establishing the merchants' and manufacturers' inventory
exemption had not: it expressly excluded property falling within the public utility
tangible personal property subclass from the exemption. Kan. Const. art. 11, § 1(b) (2012
Supp.); L. 1992, ch. 42, sec. 1. Article 11, § 1 retained its clear grant of authority to the
legislature to define the public utility tangible personal property subclass. See Kan.
Const. art. 11, § 1(a) (2012 Supp.).
At the time the 1992 constitutional amendment was adopted, K.S.A. 79-5a01(a)
(Ensley 1989) defined the term "public utility" in part as:
"every individual, company, corporation, association of persons, lessees or receivers that
now or hereafter are in control, manage or operate a business of:
. . . .
25
(4) transporting or distributing to, from, through or in this state natural
gas, oil or other commodities in pipes or pipelines, or engaging primarily
in the business of storing natural gas in an underground formation."
(Emphasis added.) L. 1986, ch. 371, sec. 1.
The statutory provisions defining public utility to include the natural gas pipelines
remained unchanged when litigation arose again regarding taxation of natural gas stored
in Kansas pipelines. See K.S.A. 2002 Supp. 79-5a01; In re Tax Exemption Application of
Central Illinois Public Services Co., 276 Kan. 612, 78 P.3d 419 (2003). But in Central
Illinois, the taxpayers were no longer pipeline companies because by this time FERC had
issued a federal regulatory order divesting pipeline companies of their ownership interest
in the gas, so the property tax was levied against the pipeline companies' customers.
In Central Illinois, the taxpayers were three out-of-state public utilities, one out-
of-state municipal corporation, and one out-of-state political subdivision. Each owned gas
stored in an interstate pipeline system's Kansas storage facility. The taxpayers sought ad
valorem tax exemptions for their gas pursuant to the merchants' inventory exemption. All
five taxpayers engaged in the business of selling or distributing natural gas, and all
owned gas stored in a Kansas pipeline—but none delivered, sold, traded, or otherwise
disposed of natural gas within Kansas. BOTA granted the exemption requests, holding
the taxpayers were not public utilities, as defined in K.S.A. 2002 Supp. 79-5a01, and the
taxpayers' gas therefore constituted exempt merchants' inventory. This court agreed. 276
Kan. at 621-22.
The Central Illinois court began its decision by affirming the previous rationale
from Colorado Interstate Gas that the Article 11 merchants' inventory exemption was
self-executing. But it also noted the 1992 constitutional amendment gave the legislature
some authority to define what would constitute the public utility tangible personal
26
property subject to the amendment's exemption. But that authority, the court held, was
not limitless because "as we stated in Colorado Interstate Gas, the legislature's definition
must conform to the commonly understood meaning of the term." (Emphasis added.) 276
Kan. at 619. Citing State ex rel. Stephan v. Parrish, 256 Kan. 746, 762, 887 P.2d 127
(1994), this court explained that the legislative definition "must bear a reasonable and
recognizable similarity to generally accepted definitions and the common understanding
of the term by the people of Kansas." Central Illinois, 276 Kan. at 620.
The Central Illinois court held that the statutory definition of "public utility" in
K.S.A. 2002 Supp. 79-5a01 conformed to the common understanding of the term at the
time of the constitutional amendment's adoption, despite the fact that the statute defined
public utilities to include only those entities doing business in Kansas. The court
explained that it approved this statutory definition because the legislature did not limit it
to "avoid a constitutional provision by defining a constitutional term in a manner
different from the common understanding." 276 Kan. at 620. The court also cited a rule
of construction requiring that "'[a] statute and pertinent constitutional provisions must be
construed together with a view to make effective the legislative intent rather than defeat
it.'" 276 Kan. at 621. And it held the only way to determine legislative intent was to look
at the statutes in existence at the time the constitutional amendment was proposed and
adopted. The court then applied the definition of public utility in K.S.A. 2002 Supp. 79-
5a01 and held the taxpayers qualified for the merchants' inventory exemption because
they were not public utilities operating in Kansas. See 276 Kan. at 622. The court made
no effort to provide its own definition for the term "public utility."
In 2004, the year following the Central Illinois decision, the legislature once again
redefined public utility to include entities that "own, control and hold for resale stored
natural gas in an underground formation in this state . . . ." (Emphasis added.) L. 2004,
ch. 171, sec. 4. And in response to that statutory change, PVD assessed natural gas stored
27
by 44 out-of-state municipal utilities, marketing companies, and public utilities, which
led to another round of litigation. See In re Appeal of Director of Property Valuation, 284
Kan. 592, 593, 161 P.3d 755 (2007) (citing K.S.A. 2006 Supp. 79-5a01).
In that appeal, the taxpayers argued they were not public utilities within the plain
language of K.S.A. 2006 Supp. 79-5a01 because they did not control the natural gas
while it was in the pipelines. BOTA agreed, ruling that K.S.A. 2006 Supp. 79-5a01
imposed three requirements—that the public utility own, control, and hold for resale the
natural gas in underground storage. It held all three requirements were not met. The PVD
appealed, arguing in part that BOTA "ignored legislative intent." PVD also argued the
"and" in K.S.A. 2006 Supp. 79-5a01 should be construed as "or." And as an alternative
claim, PVD argued the taxpayers had satisfied all three requirements. See 284 Kan. at
596-601.
The court agreed with the taxpayers and held they fell outside the K.S.A. 2006
Supp. 79-5a01(a) definition of public utility because the pipeline companies, rather than
the taxpayers, controlled the natural gas at all times it was in the pipeline system. With
this rationale, the natural gas was exempt as merchants' inventory. 284 Kan. at 606.
In 2009, the legislature amended the definition of public utility in K.S.A. 79-5a01
again. L. 2009, ch. 97, sec. 5; see K.S.A. 2012 Supp. 79-5a01. That amendment led to the
controversy underlying this appeal.
Current Law
K.S.A. 2012 Supp. 79-5a01(a) now defines public utility to include "every
individual, company, corporation, association of persons, brokers, marketers, lessees or
receivers that now or hereafter own, broker or market natural gas inventories stored for
28
resale in an underground formation in this state . . . ." (Emphasis added.) The taxpayers
admit they fit within that definition, but they argue K.S.A. 2012 Supp. 79-5a01 is
unconstitutional because it is inconsistent with the commonly understood meaning people
of Kansas would have given the words "public utility tangible personal property" at the
time they voted for the constitutional amendment in 1992. They also claim "the meaning
of the term 'public utility' as used in [the] constitutional amendment passed in 1992 is the
statutory definition of 'public utility' for ad valorem tax purposes that was in existence at
the time of the passage of the amendment," citing this court's Central Illinois decision.
PVD disagrees and argues the definition of public utility adopted in K.S.A. 2012
Supp. 79-5a01 is consistent with people's common understanding of the term and is a
valid exercise of the legislature's authority to define property for subclassification under
Article 11, § 1 of the Kansas Constitution (2012 Supp.).
We begin with the taxpayers' argument that under the Central Illinois decision the
constitutional definition of public utility is frozen in time and the statutory definition in
existence in 1992 has become the constitutional definition. The taxpayers urge this court
to interpret Central Illinois as establishing the one and only definition of public utility
applicable to Article 11, § 1 of the Kansas Constitution (2012 Supp.). Support for their
argument principally arises from the court's application of the rule that legislative intent
must be determined by the statutes that existed at the time the constitutional amendment
was proposed and adopted. 276 Kan. at 621-22. But, if that is true, the statute in effect at
the time the amendment was adopted would always control; and that runs afoul of the
legislature's continuing (but limited) constitutional authority to define the subclasses,
including public utility tangible personal property.
In Central Illinois, the court simply upheld the statutory definition of public utility
in K.S.A. 2002 Supp. 79-5a01(a), even though it was not the only definition that could
29
conform to the common understanding of the term. And unlike the Colorado Interstate
Gas court, which examined prior caselaw and the dictionary in an attempt to ascertain the
common meaning of merchants' inventory, the Central Illinois court simply looked at the
statute and determined it was close enough—without defining more generally the term's
common meaning. Otherwise, Article 11's grant of legislative authority to define the
subclasses would be meaningless. See 276 Kan. at 621-22.
This view of Central Illinois is consistent with how the court treated the
legislature's failed attempt to modify K.S.A. 2006 Supp. 79-5a01(a) in the more recent
decision of In re Appeal of Director of Property Valuation, 284 Kan. at 604. There this
court held the legislature was unsuccessful in its first attempt to redefine public utility
because the taxpayers were not included within the unambiguous statutory language
defining public utility in K.S.A. 2006 Supp. 79-5a01(a). 284 Kan. at 606. Notably, the
court did not hold the legislature was limited to the definition of public utility in K.S.A.
2002 Supp. 79-5a01(a). We held the legislature was—and is—free to amend the
definition of public utility. We address next whether the legislature's definition of public
utility under K.S.A. 2012 Supp. 79-5a01 is unconstitutional.
To be constitutional, the legislative definition must bear a reasonable and
recognizable similarity to generally accepted definitions and the common understanding
of the term by the people of Kansas. See Central Illinois, 276 Kan. at 620. The parties
present two sources for identifying the common meaning of the term "public utilities":
the common characteristics recognized by the taxpayers' expert witness and a dictionary
definition.
John Wine, the former Kansas Corporation Commission chair, was the only
witness to testify about the characteristics commonly associated with public utilities. He
identified these as: (1) enjoying natural monopolies; (2) providing essential services; (3)
30
possessing restricted or protected service territories; (4) subjection to regulation that
restricts the rates that can be charged for services; (5) obligations to provide non-
discriminatory services to the public; and (6) usually enjoying eminent domain powers.
The taxpayers advocate for this court to adopt Wine's definition of public utility.
PVD urges this court to use the dictionary definition from Webster's II New
College Dictionary 952 (1st ed. 1984), which describes a public utility as "'[a] private
business organization, subject to governmental regulation, that provides an essential
commodity or service, such as water, electricity, or communication, to the public." Cf.
Merriam-Webster's Collegiate Dictionary 1006 (11th ed. 2003) ("a business organization
[as an electric company] performing a public service and subject to special governmental
regulation").
PVD interprets the dictionary definition as having three elements: (1) an essential
commodity; (2) private business organizations; and (3) subject to regulation. PVD argues
the first element is satisfied because natural gas is an essential commodity. It reaches that
conclusion by ignoring the surrounding words which require that a public utility
"provides an essential commodity . . . to the public." PVD then argues the second
element is met because the taxpayers are private business organizations. But this is not
accurate as to all the taxpayers because some are publicly held out-of-state municipal
utilities, some are out-of-state public utilities, and some are out-of-state marketers and
brokers. Finally, PVD argues the marketers and brokers are subject to regulation by the
federal Energy Policy Act of 2005, which regulates the purchase and sale of natural gas.
PVD's deconstruction saps the dictionary definition of all meaning and reaches an absurd
result.
But despite both parties' attempts to lump the taxpayers into one group and
conclude that either all or none of them are public utilities, we must address each group
31
individually because they have different business purposes and structures. See Cities
Service Gas Co. v. State Corporation Commission, 222 Kan. 598, 609, 567 P.2d 1343
(1977) ("[W]hether a business is a public utility must, of necessity, be determined by the
character of its operations.").
Marketers and Brokers of Natural Gas
Wine concluded that none of the taxpayers met his definition of a public utility,
although on a closer examination of his testimony it appears different reasoning applied
to particular groups. As to the marketers and brokers, he said they did not meet the
common characteristics he established. But as to the other two groups, his conclusion
appears to have been based on the prior language of K.S.A. 79-5a01 defining public
utility to exclude entities not doing business in Kansas.
In his report, Wine stated: "The Marketers, Brokers, or other entities that trade in
gas, and possess the right to take delivery of that gas from a federally regulated pipeline
do not possess any characteristics of a public utility except for the fact that they deal in
natural gas, a commodity that is highly regulated." But at the hearing, Wine testified the
current definition of public utility adopted by the Kansas Legislature in K.S.A. 2012
Supp. 79-5a01 was inconsistent with his view of what a public utility is, stating:
"[T]he fact that someone might be brokering or marketing a—a commodity, a natural gas
commodity, does not make it a public utility looking at those common characteristics
in—in any way. I mean, any more than a—a facility that held some coal that might
eventually be delivered to an electric utility to burn to make electricity, it wouldn't make
that—that marketer of coal a public utility."
PVD urges this court to find the marketers and brokers are nevertheless public
utilities, analogizing the marketers and brokers to resellers of telecommunication
32
services. PVD cites In re Appeal of United Teleservices, Inc., 267 Kan. 570, 983 P.2d 250
(1999). In that case, United Telephone Long Distance Company (UTLD) claimed it could
not be taxed under K.S.A. 79-5a01(a)(3), which defined a public utility as a company
operating a business of "'transmitting to, from, through, or in this state telephonic
messages.'" 267 Kan. at 573. UTLD was a reseller of long distance services, which its
expert described as:
"'[W]hat resellers do is resell the services of the interexchange companies. And so in
effect they don't own fiber, they don't own switches, they don't own what we call POPs,
points of presence. They're simply a marketing entity that tries to find a market and sell
what they have purchased from the interexchange carriers.'" 267 Kan. at 573.
The question before the United Teleservices court was "whether the State has
authority to assess UTLD as a business transmitting telephonic messages, i.e., a public
utility." 267 Kan. at 573. The parties' arguments concerned the interpretation of K.S.A.
79-5a01(a)(3). But the parties did not argue the statutory language was inconsistent with
the meaning of the term "public utility" in Article 11, § 1. See Kan. Const. art. 11, § 1
(2012 Supp.). In other words, the court was asked whether UTLD fit the definition of
public utility established by the legislature in K.S.A. 79-5a01(a)(3)—not whether that
definition was consistent with people's common understanding of the term. The court
held UTLD met the statutory definition because it purchased access for long distance
service from Sprint and then sold that service to consumers. Thus, "UTLD operates a
business of transmitting telephonic messages by contracting for the service." 267 Kan. at
581-82.
PVD is correct that both UTLD and the marketers and brokers of natural gas in
this appeal are resellers of a commodity. But United Teleservices is distinguishable
because a different question was asked and answered. The United Teleservices court did
33
not decide whether the legislature's definition of public utility was consistent with the
Kansas Constitution. It simply determined whether UTLD fit within a statutory definition
the legislature had established. Therefore, this case does not support PVD's claim that
these marketers and brokers are public utilities under the common meaning of the term as
constitutionally adopted in Kansas.
We hold that the natural gas marketers and brokers in this appeal are not public
utilities as that term is used in Article 11, § 1 of the Kansas Constitution (2012 Supp.).
This is because they are not obligated to provide nondiscriminatory services to the public,
do not have eminent domain powers, and do not enjoy natural monopolies. These entities
do not possess Wine's common public utility characteristics, and they do not fall within
the dictionary definition of "public utility." Accordingly, we conclude they are not public
utilities under that term's common meaning as used in Article 11, § 1. See Colorado
Interstate Gas Co. v. Board of Morton County Comm'rs, 247 Kan. 654, 660-61, 802 P.2d
584 (1990). K.S.A. 2012 Supp. 79-5a01 is unconstitutional as applied to the natural gas
brokers and marketers.
Local Distribution Companies Certified as Public Utilities in Other States
At the COTA hearing, Wine conceded the public utilities operating in other states
and the local distribution companies met his definition of "public utilities," i.e., including
them within the K.S.A. 2012 Supp. 79-5a01 definition was consistent with the term's
common meaning. The taxpayers' argument for why these entities are exempt is not
entirely clear. But it appears to be premised on the contention, rejected above, that this
court must define "public utility" for the purposes of Article 11, § 1 of the Kansas
Constitution (2012 Supp.), as the term was defined in K.S.A. 2002 Supp. 79-5a01 at the
time of the Central Illinois decision. And absent the previous statutory language in
K.S.A. 2002 Supp. 79-5a01 limiting public utilities to utilities operating in this state,
34
there is no basis for concluding these entities are not public utilities for the purposes of
Article 11, § 1 of the Kansas Constitution (2012 Supp.) or K.S.A. 2012 Supp. 79-5a01.
We hold the statute is constitutional as applied to these taxpayers, and we affirm
the denial of their tax exemption claims. See State v. Limon, 280 Kan. 275, 302-03, 122
P.3d 22 (2005) (constitutional part of statute may stand while the unconstitutional part is
rejected); State ex rel. Tomasic v. Unified Gov. of Wyandotte Co./Kansas City, 264 Kan.
293, 316, 955 P.2d 1136 (1998) (same).
Out-of-state Municipal Utilities
PVD also attempted to elicit testimony from Wine concerning the municipal
utilities it considered local distribution companies, but Wine testified he did not know if
it was appropriate to call them local distribution companies if they were not public
utilities, even though the municipal utilities were providing analogous services. This
statement was not further clarified, and COTA did not make a finding relevant to this
taxpayer group.
Notably, the dictionary definition of "public utility" PVD cites to this court limits
public utilities to "private business organization[s]." Webster's II New College Dictionary
952 (1st ed. 1984). But see Merriam-Webster's Collegiate Dictionary 1006 (11th ed.
2003) (defining "public utility" as "a business organization . . . performing a public
service and subject to special governmental regulation"). We hold that people's common
understanding of the term "public utility" would not bring within its grasp municipally
owned entities providing utility services to a municipality's citizens.
PVD's favored definition of "public utility" includes within the term only private
business organizations, and Wine could not say whether municipal utilities could be
35
considered public utilities under the common characteristics to which he testified.
Moreover, both PVD's and Wine's understanding of the term included a regulatory
component. And at the time Kansas voters added the "public utility" subclass to the
constitution in 1985—and in the decades prior—Kansas treated municipal utilities and
public utilities differently for regulatory purposes. Specifically, municipal utilities
enjoyed a degree of self-regulation not available to other public utilities. See L. 1978, ch.
263, secs. 1, 2 (now codified at K.S.A. 2012 Supp. 66-104) ("public utility" subject to
Kansas Corporation Commission's regulatory jurisdiction do not include municipally
owned or operated utility located in municipality's corporate boundaries, but such entities
"deemed" public utilities for certain purposes); see also Kansas Public Service Co. v.
State Corporation Commission, 199 Kan. 736, 746, 433 P.2d 572 (1967) (power to
control and regulate "'one-city' public utilities" belongs exclusively to city); Holton
Creamery Co. v. Brown, 137 Kan. 418, 421, 20 P.2d 503 (1933) (state utilities act
provided that no category applied to any public utility owned and operated by
municipality in this state was "'plain and unambiguous exclusion from the definition of
"public utilities" of public utilities owned and operated by municipalities.'" [quoting
Humphrey v. City of Pratt, 93 Kan. 413, 417, 144 P. 197 (1914)]).
The definition PVD advances, which restricts public utilities to private business
organizations, is consistent with the common meaning of public utility—particularly in
light of Kansas' regulatory discernment between true public utilities on one hand and
municipal utilities on the other. It is also consistent to exclude municipal utilities as
governmental entities from a provision intended to impose a tax burden. And it is
unrealistic to believe voters would understand the amendment to impose an ad valorem
tax on a governmental body. Out-of-state municipal utilities are exempt under Article 11,
§ 1(b) of the Kansas Constitution (2012 Supp.).
36
In light of this holding, the remaining issues raised on appeal are moot. We
remand to COTA to determine which taxpayers fall within each of the three generally
described categories identified previously by COTA. The record on appeal provided to
this court does not give sufficient detail to complete that analysis.
The COTA decision is affirmed in part and reversed and vacated in part, and the
matter is remanded to COTA with directions.