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Kerford Limestone Co. v. Nebraska Department of Revenue

Supreme Court of Nebraska

March 14, 2014

KERFORD LIMESTONE CO., APPELLEE AND CROSS-APPELLANT,
v.
NEBRASKA DEPARTMENT OF REVENUE, A NEBRASKA ADMINISTRATIVE AGENCY, AND DOUGLAS EWALD, IN HIS CAPACITY AS THE STATE TAX COMMISSIONER FOR THE STATE OF NEBRASKA, APPELLANTS AND CROSS-APPELLEES

Page 277

Appeal from the District Court for Lancaster County: STEPHANIE F. STACY, Judge.

Jon Bruning, Attorney General, and L. Jay Bartel for appellants.

Shannon L. Doering and Luke F. Vavricek for appellee.

HEAVICAN, C.J., CONNOLLY, STEPHAN, MCCORMACK, MILLER-LERMAN, and CASSEL, JJ. WRIGHT, J., participating on briefs.

OPINION

Page 278

[287 Neb. 654] Per Curiam.

INTRODUCTION

The Nebraska Department of Revenue (Department) and Douglas Ewald, in his capacity as the State Tax Commissioner (collectively the State), appeal, and Kerford Limestone Co. (Kerford) cross-appeals from the district court's order in these tax protest proceedings. Kerford purchased a motor grader for use in its manufacturing business and claimed an exemption from sales and use tax on the purchase under Neb. Rev. Stat. § 77-2704.22 (Reissue 2009). The commissioner found that Kerford had failed to prove that the motor grader was exempt manufacturing machinery and equipment, as defined in Neb. Rev. Stat. § 77-2701.47 (Supp. 2005).

On appeal, the district court reversed the commissioner's determination that to qualify for an exemption, Kerford needed to establish that more than 50 percent of the motor grader's total use was in manufacturing. The court affirmed the [287 Neb. 655] commissioner's determination that Kerford's use of the motor grader to maintain " haul roads" was not a use that qualified the motor grader as exempt under § 77-2701.47. The court remanded the proceedings for a determination whether use of the motor grader to maintain inventory stockpile areas qualified it for an exemption. We affirm in part, and in part reverse and remand with direction.

FACTS

In January 2006, Kerford purchased a CAT 160H motor grader for use in its limestone mining and manufacturing business. Claiming that the motor grader was

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exempt from taxation as manufacturing machinery and equipment under § § 77-2701.47 and 77-2704.22, Kerford did not pay sales or use tax on the purchase. Per stipulation of the parties, Kerford uses the motor grader in its business " to maintain haul roads in and outside of the mine" and to maintain " inventory stockpile areas."

In December 2006, Kerford received a notice of deficiency determination from the Department, reflecting that Kerford owed $24,614 in sales and use taxes, interest, and penalties for various purchases between June 1, 2003, and May 31, 2006, including the motor grader. The parties reached an agreement on all deficiencies except that of use tax on the motor grader, which totaled $14,190, not including interest or penalties. Kerford filed a written protest as to that amount.

Prior to Kerford's protest, the commissioner had issued a revenue ruling interpreting the definition of manufacturing machinery and equipment in § 77-2701.47 for purposes of an exemption under § 77-2704.22. See Nebraska Department of Revenue Ruling 1-05-1 (Oct. 12, 2005). This revenue ruling provided in part: " If machinery and equipment has uses in addition to its manufacturing use, the manufacturing use must be greater than 50% of total use to qualify for the exemption." Id. (emphasis in original). After the Department sent the notice of deficiency determination but while Kerford's protest was pending, the Department's regulations were amended to include the content of Revenue Ruling 1-05-1. See 316 Neb. Admin. Code, ch. 1, § 107.07 (2011).

[287 Neb. 656] At a hearing on Kerford's protest, Kerford challenged the Department's interpretation that § 77-2701.47 restricted application of the manufacturing machinery and equipment exemption to machinery and equipment used for manufacturing more than 50 percent of the time. Kerford argued that the Department's interpretation was contrary to the Legislature's intent to provide a broad exemption, as shown by the plain language of the statute. Kerford also argued that both of the motor grader's uses--to maintain haul roads and to maintain inventory stockpile areas--were related to " 'transporting, conveying, . . . or storing' raw materials in manufacturing" (ellipsis in original) and thus qualified the motor grader as manufacturing machinery and equipment under § 77-2701.47(1)(b). According to Kerford, using the motor grader to maintain inventory stockpile areas also qualified as a use in manufacturing under § 77-2701.47(1)(d).

After the hearing, the commissioner upheld the imposition of use tax on the motor grader. The commissioner defended the Department's interpretation of § 77-2701.47 as " a reasonable construction in light of case law on other exemptions to taxation." He determined that under the Department's interpretation, Kerford was not entitled to an exemption for the motor grader's use to maintain inventory stockpile areas, because Kerford had not met its burden of proving " how much the motor grader is used to maintain such inventory piles." Because Kerford did not establish what percentage of the motor grader's total use was devoted to maintaining inventory stockpile areas, the commissioner did not explicitly discuss whether such use was a use in manufacturing under § 77-2701.47. However, the commissioner determined that the motor grader's use to maintain haul roads was not a use in manufacturing. He reasoned that such use was " more in line with the support services that are included in the non-exempt list of assets" in § 77-2701.47(2).

Kerford appealed by filing a petition on appeal and complaint for reversal with the district court. After a hearing, the court reversed the commissioner's order in part,

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affirmed in part, and remanded for further proceedings. It reversed the [287 Neb. 657] commissioner's determination that Kerford was required to show that the motor grader was used in manufacturing at least 50 percent of the time. Because § 77-2701.47 " includes no language whatsoever specifying--in mathematical terms or otherwise--the amount of time which equipment or machinery must be used in manufacturing to qualify for the exemption," the court found Revenue Ruling 1-05-1 to be " arbitrary" and " wholly unsupported by a plain reading of . . . § 77-2701.47(1)" and declared Revenue Ruling 1-05-1 to be " invalid."

The district court next considered the motor grader's use to maintain haul roads. It affirmed the commissioner's determination that maintaining haul roads was not an exempt use within the plain meaning of ยง 77-2701.47. The court reasoned that when used to maintain haul roads, the motor grader " neither has direct contact with raw materials, components, or finished ...


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