                                        No. 120,167

             IN THE COURT OF APPEALS OF THE STATE OF KANSAS

                              In the Matter of the Appeal of
                      SOUTHWESTERN BELL TELEPHONE CO., L.L.C.,
                  from an Order of the Division of Taxation on Assessment
                              of Kansas Retailers' Sales Tax.


                               SYLLABUS BY THE COURT

1.
       Kansas courts give no deference to administrative agencies' interpretation of
statutory language. Instead, the interpretation of a statute is a legal question over which
courts' review is unlimited.


2.
       The primary aim of statutory interpretation is to give effect to the legislature's
intent, expressed through the plain language of the statute. Courts therefore do not add or
delete statutory requirements, and courts give ordinary words their ordinary meanings.


3.
       Questions of public policy are for legislative and not judicial determination, and
where the legislature declares a policy, and there is no constitutional impediment, the
question of the wisdom, justice, or expediency of the legislation is for that body and not
for the courts.


4.
       The dedicated HVAC units at issue make it possible for the appellee
telecommunications company's transmission and switching equipment to provide a
continuous signal. The electricity used to power these dedicated HVAC units is "essential
or necessary to" and "used in the actual process of" providing telecommunication services


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under K.S.A. 2018 Supp. 79-3602(dd)(2) and is therefore exempt from sales tax under
K.S.A. 2018 Supp. 79-3606(n).


        Appeal from Board of Tax Appeals. Opinion filed January 24, 2020. Affirmed.


        Nathan D. Hoeppner, of Legal Services Bureau, Kansas Department of Revenue, for appellant.


        W. Robert Alderson, of Alderson, Alderson, Conklin, Crow & Slinkard, L.L.C., of Topeka, for
appellee.


Before MALONE, P.J., STANDRIDGE and WARNER, JJ.


        WARNER, J.: Southwestern Bell provides telecommunication services by operating
transmission and switching equipment to produce a communication signal. If this
equipment overheats, it will stop transmitting signals. To prevent transmission loss,
Southwestern Bell has installed dedicated HVAC units to maintain a constant
temperature in areas where the transmission and switching equipment operates, allowing
the equipment to operate continuously.


        Kansas tax statutes allow companies like Southwestern Bell an exemption from
sales tax on electricity essential to and actually used in providing telecommunication
services. The question before us is whether the electricity used to power these dedicated
HVAC units meets these statutory criteria. We conclude it does, and therefore affirm the
Board of Tax Appeals' ruling refunding the sales tax Southwestern Bell paid on
electricity to power the system's HVAC units.


                                     FACTUAL BACKGROUND

        Southwestern Bell operates transmission and switching equipment to create
telecommunication signals. This equipment runs continuously, generating significant



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heat. At the same time, excessive heat renders the equipment inoperable, resulting in a
complete system failure in as little as two hours. To avoid system failure, Southwestern
Bell must regulate the temperature, humidity, and air quality in areas where the
equipment is installed—ensuring the temperature does not deviate 4 degrees from the
ideal temperature, the humidity does not deviate more than 40% from the ideal humidity
level, and the air quality remains satisfactory.


       Southwestern Bell has taken several steps to ensure this equipment remains
operational. The equipment is kept in self-contained areas where employees do not work.
Lights remain off to reduce heat, the air is recirculated to maintain air quality, and
sensors alert employees if the temperature or humidity rises above maximum levels.
These areas also contain dedicated heating, ventilation, and air conditioning (HVAC)
units. Ductwork is positioned over the equipment to directly cool it.


       Kansas tax statutes exempt from sales tax electricity "that is consumed in"
providing telecommunication services. See K.S.A. 2018 Supp. 79-3606(n). Southwestern
Bell sought $1,059,266 in tax refunds under this statute for the sales tax it paid on
electricity purchased from December 2012 to March 2016 to power its transmission
equipment and dedicated HVAC units. The Kansas Department of Revenue approved the
sales tax refund for the electricity used to power the equipment but denied the $376,037
request relating to the HVAC units. The Department found the HVAC units merely
maintained the switching and transmission equipment, and the Department's regulations
distinguished maintenance functions from essential functions giving rise to the sales-tax
exemption. The Office of Administrative Appeals upheld the Department's denial.


       The Kansas Board of Tax Appeals disagreed, finding the electricity powering the
dedicated HVAC units was "'essential or necessary' and . . . 'used in the actual process of
and consumed' in the providing of services as contemplated by K.S.A. 78-3602(dd)." In



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particular, BOTA observed that without the dedicated HVAC units, Southwestern Bell
would not be able to continuously transmit telecommunication signals:


               "The electricity at issue is essential and necessary to the process of providing
       telecommunication services. The HVAC system it powers does more than maintain the
       switching and transmission equipment. Without the heat, humidity, and dust control
       provided by the HVAC system engineered to operate in the self-contained area where the
       switching and transmission equipment is located, the equipment would fail and signal
       transmission would cease."


       BOTA therefore reversed the Department's decision regarding the sales-tax
exemption on the electricity used to power the dedicated HVAC units and granted
Southwestern Bell's requested sales-tax refund of $376,037, plus interest. The
Department appeals.


                                             DISCUSSION

       K.S.A. 2018 Supp. 79-3606(n) exempts from taxation "all sales of tangible
personal property that is consumed in . . . the providing of services . . . for ultimate sale at
retail within or without the state of Kansas." Kansas tax statutes define "[p]roperty which
is consumed" as "tangible personal property which is essential or necessary to and which
is used in the actual process of and consumed, depleted or dissipated within one year in . .
. the providing of services . . . and which is not reusable for such purpose." K.S.A. 2018
Supp. 79-3602(dd)(2). See also K.A.R. 92-19-53(c) (interpreting "used in the actual
process" as meaning something "integral and essential to the production or processing
activity" that "occur[s] at the location where the production or processing activity is
carried on" and "during the production activity").


       The central question before us is one of statutory interpretation—whether
electricity consumed by Southwestern Bell's dedicated HVAC units constitutes "property



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that is consumed in . . . the providing of services" under K.S.A. 2018 Supp. 79-3606(n)
and thus is exempt from sales tax. There is no question that electricity is "tangible
personal property" within the meaning of these provisions. K.S.A. 2018 Supp. 79-
3602(pp). Nor is there a dispute that electricity is "consumed," in that it is used to power
Southwestern Bell's equipment (whether transmission and switching equipment or HVAC
units) and is not reusable. See K.S.A. 2018 Supp. 79-3602(dd)(B). Instead, the parties
dispute the function of the temperature-controlling units—whether the dedicated HVAC
units are part and parcel of providing Southwestern Bell's telecommunication services or
distinct operations that merely maintain the transmission and switching equipment.


       As a starting point, we note that although BOTA and the Department have
interpreted K.S.A. 2018 Supp. 79-3606(n) differently, we are not bound by either of these
diverging interpretations. Kansas courts give no deference to administrative agencies'
interpretation of statutory language. See Douglas v. Ad Astra Information Systems, 296
Kan. 552, 559, 293 P.3d 723 (2013) (no deference given to agencies' interpretation of
statutes); see also May v. Cline, 304 Kan. 671, 675, 372 P.3d 1242 (2016) (no deference
given to agencies' interpretation of their own regulations). Rather, the interpretation of a
statute is a legal question over which our review is unlimited. In re Tax Appeals of
Genesis Health Clubs, 42 Kan. App. 2d 239, 242, 210 P.3d 663 (2009), rev. denied 290
Kan. 1094 (2010).


       The primary aim of statutory interpretation is to give effect to the legislature's
intent, expressed through the plain language of the statute. State v. Spencer Gifts, 304
Kan. 755, Syl. ¶ 2, 374 P.3d 680 (2016). We therefore do not add or ignore statutory
requirements, and we give ordinary words their ordinary meanings. See 304 Kan. 755,
Syl. ¶ 3; Director of Taxation v. Kansas Krude Oil Reclaiming Co., 236 Kan. 450, 455,
691 P.2d 1303 (1984).




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       The Department argues the electricity used to power Southwestern Bell's dedicated
HVAC units is neither "essential or necessary to" nor "used in the actual process of"
operating the company's transmission and switching equipment. But while the
Department presents these as separate points on appeal, both turn on arguments relating
to the equipment's operation. The Department contends the electricity is taxable because
the HVAC units are distinct and separate from the equipment creating the
telecommunication signals. The Department points out that these machines run on
different types of electrical current: The HVAC units use AC power, while the electricity
must be converted to DC power to run the transmission and switching equipment.
Southwestern Bell argues—and BOTA found—that the electricity powering the HVAC
units is essential to the transmission and switching equipment's function because the
equipment would be inoperable without those units.


       Although the HVAC units and the transmission and switching equipment are
different apparatuses, they form a system that makes Southwestern Bell's
telecommunication services possible. The fact that the units and equipment use different
types of current is irrelevant to our interpretation of the statute, which makes no mention
of the type of electric current employed; even the Department's own regulations
recognize that the sales-tax exemption turns on "how the [electricity] is used in the
production or processing activity," not whether it runs on AC power, DC power, or both.
See K.A.R. 92-19-53(a)(5). Without the HVAC units' climate-controlling function, the
transmission and switching equipment can operate only two hours before failing, making
it impossible to generate a continuous and reliable telecommunication signal. The
equipment depends on the units to produce an uninterrupted signal. In other words, under
the plain language of K.S.A. 2018 Supp. 79-3602(dd)(2), the electricity used to power
these dedicated units is "essential or necessary to" and "used in the actual process of"
providing Southwestern Bell's telecommunication services. Thus, this electricity is
exempt from sales tax under K.S.A. 2018 Supp. 79-3606(n).



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       The Department argues that this interpretation is contrary to the conclusions
reached by this court in Genesis Health Clubs and the Kansas Supreme Court in Warren
v. Fink, 146 Kan. 716, 717-18, 72 P.2d 968 (1937). We disagree.


       In Genesis, we denied a health club's exemption request under K.S.A. 79-3606(n)
for electricity, water, and gas purchased to power the lights, HVAC units, and exercise
equipment in its gyms. 42 Kan. App. 2d at 240-41. The Genesis court relied on two
subsections of a regulation; the first denied an exemption for electricity used to heat,
cool, or light a building in which recreational activities occur, while the second permitted
an exemption for electricity which powers recreational machines that "'directly interact[]
with the person who pays for the time-limited, interactive service.'" 42 Kan. App. 2d at
243-44 (first citing K.A.R. 92-19-22b[d][1]; then quoting K.A.R. 92-19-22b[d][2]).
Relying on a prior case, the court noted that "purchases of property such as electricity are
not consumed in the purchaser's business if that property merely serves to create the
environment for the business activity rather than to become a part of the product or
service itself." 42 Kan. App. 2d 239, Syl. ¶ 5.


       In Warren, a grocer sought an exemption for electricity used to power a
refrigerator that stored perishable goods. At the time, the Kansas tax statutes exempted
from sales tax electricity used in "'processing'" a service or commodity. 146 Kan. at 718
(quoting L. 1937, ch. 374, § 2[i], [l]). The Warren court rejected the grocer's argument
that he was a processor, emphasizing that the food stored in the refrigerator remained "in
substantially the same condition" until it was sold to customers. 146 Kan. at 718. Since
the electricity did not contribute to making a new product (such as turning milk into ice
cream), the grocer never resold the electricity; he used it in his business "just as he might
consume electric energy for lights in his store." 146 Kan. at 718.


       These cases are distinguishable. Unlike the grocer in Warren, there is no question
that Southwestern Bell produces telecommunication services. The question before us is


                                              7
whether the electricity used to power the dedicated HVAC units is "essential or necessary
to" and "used in the actual process of" providing those services. K.S.A. 2018 Supp. 79-
3602(dd)(2). And unlike the health clubs in Genesis, which were seeking exemptions for
electricity used to power their entire gyms—lights, sales offices, locker rooms, and
fitness equipment—the sole purpose of Southwestern Bell's dedicated HVAC units is to
provide a climate-controlled environment where the transmission and switching
equipment can continuously operate.


       Finally, the Department argues that Kansas tax policy requires the ultimate
consumer to pay the sales tax exempted to the provider, and the charges for the electricity
to power the HVAC units are not passed along to the consumer. But this argument is
belied by the Kansas Supreme Court's decision in In re Tax Appeal of Collingwood
Grain, Inc., 257 Kan. 237, 246-47, 250-51, 891 P.2d 422 (1995) (holding electricity used
by a grain elevator in blending, cleaning, drying, and aerating grain was exempt from
sales tax because the electricity improved the grain quality—a benefit passed to the
consumer). And the Department's policy argument contradicts the plain language of
Kansas tax statutes, which specifically recognize electricity as "tangible personal
property" that may be exempted under K.S.A. 2018 Supp. 79-3606(n). See K.S.A. 2018
Supp. 79-3602(pp). If the Department believes that this classification should be amended,
it must present its rationale to the legislature, not the courts. Accord Spencer Gifts, 304
Kan. 755, Syl. ¶ 4 ("Questions of public policy are for legislative and not judicial
determination, and where the legislature declares a policy, and there is no constitutional
impediment, the question of the wisdom, justice, or expediency of the legislation is for
that body and not for the courts.").


       To provide telecommunication services, Southwestern Bell operates transmission
and switching equipment to generate a signal. To ensure the signal is available
continuously, Southwestern Bell must regulate the equipment's temperature through the
HVAC units at issue. Without this system—the transmission and switching equipment


                                              8
and the dedicated HVAC units, working together—the signal would terminate; the
system is essential and necessary to providing uninterrupted service. The electricity
powering that system—including the dedicated HVAC units—is used in the actual
process of providing Southwestern Bell's telecommunication services. See K.S.A. 2018
Supp. 79-3602(dd)(2). BOTA correctly found this electricity to be exempted from sales
tax under K.S.A. 2018 Supp. 79-3606(n).


       Affirmed.




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