Opinion
NO. 2015-CA-001415-MR
03-09-2018
CSX TRANSPORTATION, INC. APPELLANT v. FINANCE AND ADMINISTRATION CABINET, DEPARTMENT OF REVENUE, COMMONWEALTH OF KENTUCKY APPELLEE
BRIEFS FOR APPELLANT: Mark F. Sommer Daniel G. Mudd Louisville, Kentucky BRIEF FOR APPELLEE: Douglas M. Dowell, Sr. Bethany A. Rice Jennifer Stosberg Frankfort, Kentucky
NOT TO BE PUBLISHED APPEAL FROM GREENUP CIRCUIT COURT
HONORABLE ROBERT B. CONLEY, JUDGE
ACTION NO. 14-CI-00532 OPINION
AFFIRMING
** ** ** ** **
BEFORE: CLAYTON, JONES AND NICKELL, JUDGES. NICKELL, JUDGE: CSX Transportation, Inc., appeals from an order of the Greenup Circuit Court affirming an order of the Kentucky Board of Tax Appeal ("KBTA"). The trial court determined KBTA correctly found CSX was not entitled to a tax exemption. Discerning no error, we affirm.
CSX originally filed several refund claims for the tax period April 1, 2006, through May 31, 2010, totaling $7,304,470.44 plus interest, reflecting CSX's belief it had overpaid sales tax on purchase of track and signal items. At issue is KRS 139.480(1) which exempts from sales and use tax "[l]ocomotives or rolling stock, including materials for the construction, repair, or modification thereof, or fuel or supplies for the direct operation of locomotives and trains, used or to be used in interstate commerce[.]" The items alleged to be exempt from sales tax are: weed control chemicals, railroad track, ties, cross ties, tie plates, spikes, switches, ballast, piling, railroad crossing signs, and signal materials constructed along the track to advise the train crews. CSX argued these items were "supplies for the direct operation of locomotives and trains" and were therefore exempt from the sales taxes paid.
Kentucky Revised Statutes.
The Finance and Administrative Cabinet, Department of Revenue ("Department") conducted an audit of CSX to investigate the refund claims. The Department found not only were the items not exempt from sales tax, but CSX owed the Department an additional tax of $372,407.24, plus applicable penalties and interest. CSX appealed this decision to the KBTA arguing the Department had erred and the railroad items were exempt from sales tax. The KBTA upheld the Department's decision, finding all items, except the weed killer, were materials and not supplies. The KBTA relied on case law and other statutes to hold supplies are items consumed by their use in the work being done; materials are longer lasting items, replaceable as they wear down. As for the weed killer, it held this item was not used for the direct operation of a locomotive or train, but instead used solely on the train tracks.
CSX appealed to the Greenup Circuit Court which echoed the KBTA's findings. It also held none of the disputed items were used in the direct operation of locomotives and trains, finding instead they were "part or component parts of CSX's railroad track structure or system, and therefore, materials." This appeal followed.
At issue is the proper interpretation of KRS 139.480(1). To be exempt from sales tax, the items at issue need to be "supplies" used for the "direct operation of locomotives and trains." CSX argues all the items at issue fit this definition. The Department disagrees, arguing the items are materials, not supplies, and are used on train tracks, not the locomotive or train.
As the interpretation of a statute is purely a legal issue, our review is de novo. Commonwealth v. Long, 118 S.W.3d 178, 181 (Ky. App. 2003) (citations omitted). "All words and phrases in a statute shall be construed according to the common and approved usage of language such as found in a common dictionary. KRS 446.080(4)." Louisville & N. R. Co. v. Dep't of Revenue, 551 S.W.2d 259, 261 (Ky. App. 1977).
[O]ur goal in construing a statute is to give effect to the intent of the General Assembly, and we derive that intent, if at all possible, from the plain meaning of the language the General Assembly chose. We presume, of course, that the General Assembly intended for the statute to be construed as a whole and for all of its parts to have meaning.King Drugs, Inc. v. Commonwealth, 250 S.W.3d 643, 645 (Ky. 2008) (citations omitted).
When the statute to be interpreted is one involving an exemption from taxation, the burden is on the taxpayer to demonstrate that it is entitled to an exemption. Exemptions from taxation are generally disfavored and all doubts are resolved against the exemption. Clearly, the law has always favored equality, uniformity and impartiality in taxation. Exemptions from taxation must not be presumed or implied, but rather must be clearly stated.LWD Equip., Inc. v. Revenue Cabinet, 136 S.W.3d 472, 475 (Ky. 2004) (citations omitted).
In the instant matter, we agree with the trial court's conclusion. The railroad items alleged to be exempt from taxation do not fit within the exemption statute. "Direct" can be defined as "natural, straightforward" and "marked by absence of an intervening agency, instrumentality, or influence." Merriam-Webster's Collegiate Dictionary 327 (10th ed. 2002). "Operation" is defined as "an exertion of power or influence," "the quality or state of being functional or operative," and "a method or manner of functioning." Id. at 813. The trial court correctly determined the railroad items at issue are not used for "direct operation of locomotives and trains," but are used for the railway system or tracks. All the items are used on or around the railroad tracks, not on or for the use of the locomotive or train cars. We believe the phrase "direct operation" means items for which exemption from tax is sought must be used directly on or in the locomotive or train cars.
While railroad tracks and other components owned by CSX may be necessary for a train to move, they are not what was contemplated by the General Assembly in enacting exemptions in this statute. Reading the entirety of KRS 139.480(1), as a whole, supports this conclusion. The statute begins by exempting locomotives and rolling stock. It then exempts materials used to construct, repair, or modify locomotives and rolling stock. In addition, fuel used in the locomotive is exempted. All exemptions listed prior to "supplies for the direct operation of locomotives and trains" revolve around the train itself; therefore, the items for which CSX claims exemption must also revolve around the train, not the railway track system.
"Rolling stock" refers to any vehicle that moves on the railway. --------
We affirm the trial court on this issue because the items for which CSX is claiming exemption are not used for the direct operation of the locomotive or train. Therefore, the taxes at issue were properly paid. We decline to examine whether these items are materials or supplies. Applicability of the claimed exemption is resolved by our holding because of our finding the items are not used for the direct operation of the locomotive or train.
CSX also argues the trial court erred by merely adopting the Department's tendered proposed opinion and order rather than making its own independent findings of fact or conclusions of law. While this practice is frowned upon by appellate courts in Kentucky, Callahan v. Callahan, 579 S.W.2d 385, 387 (Ky. App. 1979), it is only error if the trial court abdicates "its fact-finding and decision-making responsibility under [Kentucky Rule of Civil Procedure (CR)] 52.01." Bingham v. Bingham, 628 S.W.2d 628, 629 (Ky. 1982). "The delegation of the clerical task of drafting proposed findings of fact and conclusions of law under the proper circumstances does not violate the trial court's responsibility." Id.
Here, there is no indication the trial court abdicated its independent role as fact-finder and decision-maker by adopting the Department's tendered opinion and order. The record in this case is large and the issues were thoroughly argued before the KBTA and trial court. At the suggestion of CSX, the court allowed each party to submit a proposed opinion and order. The trial court also altered the Department's proposed opinion and order, indicating it conducted an examination of the proposal before adopting it.
Finally, CSX contends the trial court failed to find the Department wrongfully assessed interest and penalties. This argument assumes the exemption denial will be reversed, thereby vitiating the additional sums owed to the Department. Since we hold the Department correctly denied the exemption application, the interest and penalties were properly imposed under KRS 139.650 and KRS 131.180(2).
Based on the foregoing, the judgment of the Greenup Circuit Court is affirmed.
ALL CONCUR. BRIEFS FOR APPELLANT: Mark F. Sommer
Daniel G. Mudd
Louisville, Kentucky BRIEF FOR APPELLEE: Douglas M. Dowell, Sr.
Bethany A. Rice
Jennifer Stosberg
Frankfort, Kentucky