In the case before the Kansas Court of Appeals, Dodge City Cooperative Exchange challenged the Gray County Board of County Commissioners' assessment of ad valorem taxes on equipment associated with grain storage bins for tax years 2013 and 2014. The County classified the equipment as taxable fixtures, while the Co-op argued it was personal property. Under K.S.A. 79-1606(c) and K.S.A. 79-1609, the county appraiser must demonstrate, by a preponderance of the evidence, that property is properly classified. The court emphasized that in a trial de novo, the burden of proof remains with the party that initially bore it.
Kansas law exempts commercial and industrial machinery from property taxes, but this exemption does not apply to real property, which includes land and buildings. Equipment qualifies as taxable fixtures if it is annexed to real property, serves its function, and is intended to be permanently affixed. The district court ultimately reversed the County's assessment, ordering a refund for the taxes collected based on the equipment's value for 2013 and 2014. The County appealed, disputing the burden of proof and the classification of the equipment, while the Co-op cross-appealed on unsupported findings. The appellate court affirmed the district court's decision that the equipment was not taxable property but vacated the district court's judgment regarding tax years beyond 2014, as it exceeded the scope of the Co-op's petition.
In 2009, the Co-op constructed two grain storage bins in Ensign and acquired various equipment for grain handling, including large conveyors and unloading systems, which were installed at the site. Fred Norwood, whose company installed the equipment, noted that it could be removed without significant difficulty, and CEO Jerald Kemmerer indicated past instances of relocating similar equipment without damaging the storage bins. For the 2011 tax year, the Gray County Appraiser classified this equipment as fixtures for ad valorem tax purposes, a classification the Co-op contested. This appeal concerns similar assessments for tax years 2013 and 2014, where the Appraiser again classified the equipment as fixtures. The Co-op appealed to the Board of Tax Appeals, but the administrative record for the proceedings is missing. However, the Board's final order indicates an evidentiary hearing in April 2015, where testimony was provided by Kemmerer, Norwood, and the Appraiser regarding the equipment's classification. The Board determined that the Co-op had the burden of proof to establish the equipment as personal property and applied a three-part test for fixture classification. Ultimately, the Board affirmed the County's classification of the equipment as taxable fixtures, except for the temperature-monitoring system. The Co-op subsequently filed for judicial review with a request for a trial de novo.
The Co-op's petition challenged all aspects of the Board's decision, except for its classification of the temperature-monitoring system as personal property and the overhead connecting bridges. Although K.S.A. 2016 Supp. 74-2426(c)(4)(B) allows for a "trial de novo" in district court, no new evidentiary hearing was held; instead, evidence was presented through affidavits and stipulations. Both parties agreed on the summary of evidence reviewed by the Board. Kemmerer's affidavit detailed that the assessed equipment could be easily removed without diminishing the bins' value, citing past instances of similar equipment being relocated.
In November 2018, the district court overturned the Board's decision, ruling that the County, not the taxpayer, held the burden of proving the equipment was taxable. The court referenced K.S.A. 79-223(b) regarding exemptions from taxation, concluding that the County needed to demonstrate that the otherwise-exempt equipment constituted taxable fixtures under K.S.A. 79-1609. The court found the County did not meet this burden, as the evidence suggested the equipment was not permanently affixed to the bins and could be moved. Consequently, the court ordered the County to refund ad valorem taxes collected based on the equipment's value for the 2013 and 2014 tax years, with the ruling applicable to subsequent years.
The County appealed, contesting the burden of proof, the fixture analysis, and the refund order, while the Co-op cross-appealed regarding the court's conclusions on the equipment's attachment and adaptation to the bins. Both parties' arguments hinge on the interpretation of Kansas taxation statutes, which courts review with the intent to reflect legislative purpose, beginning with the statutes' plain language. Unambiguous language is applied as written, while ambiguities prompt exploration of legislative history or canons of construction. The appellate court will review the statutory interpretation and burden of proof allocation de novo.
The district court determined that the County, rather than the Co-op, had the burden of proving that the equipment in question were taxable fixtures. The County argued that the Co-op should have been responsible for demonstrating that the equipment was exempt personal property, as previously concluded by the Board. Tax disputes require multiple review levels, beginning with an informal meeting with the county appraiser, followed by potential appeals to a hearing officer, the Board of Tax Appeals, and ultimately to the district court or Court of Appeals for judicial review governed by the Kansas Judicial Review Act (KJRA), with specific exceptions for district court reviews that necessitate a "trial de novo."
In this case, the Board initially placed the burden on the Co-op to prove its claims were tax exemptions, citing K.S.A. 79-223(b) regarding tax-exempt commercial equipment. However, the County's argument overlooked the primary issue of whether the equipment was taxable or nontaxable personal property. Kansas law clearly assigns the burden of proof to the County as the taxing authority to demonstrate the taxability of the equipment in administrative proceedings. This requirement is supported by K.S.A. 79-1606(c) and K.S.A. 79-1609, which mandate that the county appraiser must provide evidence to substantiate the proper classification of the property as taxable. The County's interpretation that these provisions relate only to evidentiary production rather than the burden of proof misreads the statute's requirements, which explicitly state the need for the appraiser to demonstrate correct classification by a preponderance of the evidence.
The provision establishes that the standard of proof in proceedings is "preponderance of the evidence," placing the burden of proof on the county appraiser to demonstrate the correctness of land classification for tax purposes, particularly whether land should be classified as commercial rather than agricultural. This was affirmed in relevant case law, such as In re Camp Timberlake, LLC, and Kansas Star Casino, which highlighted the county’s responsibility to prove the classification. The Board incorrectly shifted the burden to the Co-op regarding the classification of equipment. Although K.S.A. 79-1606(c) and K.S.A. 79-1609 clarify the burden of proof for classification proceedings, the statutes did not explicitly address the burden for judicial reviews at the time of the district court hearing.
In 2021, legislative amendments clarified that the burden lies with the appraiser, but earlier statutes did not define this for district court trials, which are described as "trial de novo." Under the Kansas Judicial Review Act (KJRA), the party challenging an agency decision typically bears the burden of proof to invalidate that decision. Courts have consistently upheld that this burden remains with the challenger throughout the appeal process. However, the legislature can assign the burden differently. The district court determined that in this case, the burden remained with the County, as it had in the initial proceedings before the Board. Kansas courts have established that in a trial de novo, the burden of proof aligns with the party who held it in the original process, further supporting the district court's conclusion that the County must prove the correct classification of the equipment.
The County must prove the invalidity of its Board decision concerning the taxation of equipment, as it bears the initial burden of proof throughout the proceedings, including in the trial de novo in district court. The court correctly identified that the burden remained with the County, not the Co-op, to demonstrate that the equipment in question was taxable real estate. Kansas law generally exempts commercial and industrial machinery from property taxes, but this exemption does not apply to real property, which includes fixtures. The case centers on whether the Co-op's bolted equipment is personal property exempt from taxation or taxable as fixtures. Kansas law employs a three-part test to determine if an item is a fixture, requiring that it be (1) annexed to real property, (2) adapted for and serving the real property, and (3) intended to be permanently affixed. All three elements must be satisfied, with the first focusing on the permanence of attachment and the second on the item’s purpose concerning the real property. Evidence of how an item enhances the real property is pertinent to its classification as a fixture.
The determination of whether an item is a fixture involves evaluating if it is adapted to and benefits real property, while also analyzing the intent of the party at the time of affixation. Courts consider factors such as the nature of the equipment, its annexation method, the purpose of annexation, and the relationship of the parties involved. Legal conclusions are drawn from factual findings, with deference given to the district court's findings if supported by substantial evidence. In this case, the district court found that although the equipment was annexed and adapted for grain processing, the Co-op did not intend for it to be permanently affixed to the storage bins. The equipment, though bolted, was designed to be removable, and its use was not unique to the bins. Consequently, the court ruled that the County incorrectly classified the equipment as taxable fixtures. Both parties challenged the district court's analysis of the fixture elements: the Co-op argued that the equipment was not sufficiently attached or adapted, while the County contended that the Co-op intended for the equipment to remain until it was no longer functional. Ultimately, the court agreed with the Co-op that the equipment was not fixtures due to insufficient annexation, emphasizing that the degree of permanence and the ease of removal are critical considerations in such evaluations.
A billboard was deemed not a fixture by the Supreme Court of Kansas, despite being attached to a concrete foundation for 20 years, due to overwhelming evidence indicating it was intended to be removable. In a similar analysis, the equipment in question was found to be more like removable property than permanently annexed fixtures. Although the equipment was large and bolted to storage bins, evidence showed it could be easily removed without damaging the bins, and removal was not complicated or costly. The district court's conclusion that the equipment was not permanently annexed was persuasive, aligning with previous rulings that determined intent based on installation circumstances.
The district court properly reversed the Board's decision, which classified the equipment as fixtures, and ordered the County to refund ad valorem taxes for the 2013 and 2014 tax years. However, the district court erred by including tax years beyond 2014 in its refund order, as the Co-op only challenged those two years and did not take steps to challenge taxes from subsequent years. Taxpayers must exhaust administrative remedies before contesting tax assessments, and the Co-op had not done so for later years. Consequently, that part of the district court's order was vacated, affirming the decision in part and vacating it in part.
