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Court of Appeals of Kentucky.

department of revenue, finance and administration cabinet, commonwealth of kentucky APPELLANT v. BAVARIAN TRUCKING COMPANY, INC.;  WASTE IN PLACE TRUST;  AND WASTE ON WHEELS TRUST APPELLEES

NO. 2011–CA–002198–mr

Decided: May 24, 2013

BEFORE:  caperton, stumbo and thompson, JUDGES. BRIEFS FOR APPELLANT:  Laura M. Ferguson Frankfort, Kentucky BRIEF FOR APPELLEE:  Michael A. Grim Mark F. Sommer Jennifer Y. Barber Louisville, Kentucky



The Department of Revenue appeals the determination that Bavarian Trucking Company, Inc., Waste in Place Trust and Waste on Wheels Trust (collectively BTC) were entitled to the recycling or composting equipment tax credit under KRS 141.390 for the purchase of equipment used in collecting landfill methane gas generated by their landfill operation.

BTC collects garbage and transports it to its landfill for disposal.   Methane is produced by BTC's landfill operation because BTC maintains its landfill in a sealed condition, which forces organic material to decompose anaerobically and generates large quantities of methane gas.   This landfill methane gas is collected by BTC and transferred to an electrical plant operated by East Kentucky Power Cooperative where it is burned to generate electricity.   BTC's landfill methane gas is the exclusive fuel used to generate electricity at that plant.

From January 1, 2003 through December 31, 2006, BTC made a number of equipment purchases and installations for use in its landfill operation:  curbside garbage trucks and trash containers (collection equipment);  bulldozers, tractors, excavators and other equipment for use at its landfill (landfill equipment);  piping for general landfill use and to collect and transport the methane;  and a flare to burn off methane as needed.   BTC claims that these purchases entitle it to a tax credit for recycling or composting equipment under KRS 141.390 because the collection equipment, landfill equipment, piping and flare were necessary to begin and maintain its methane collection process.

The equipment's use relates to BTC's landfill methane gas generation as follows:  The collection equipment is used to collect and transport trash to the landfill, where it will be used to eventually generate methane.   The landfill equipment is used to dig space for the trash, cover it up and maintain the landfill in a sealed condition.   The piping in the landfill is used to collect the methane and leachate and for other landfill purposes.   The flare at the landfill is used as a back up safety system to burn off methane gas if it is not being piped to the power plant;  it prevents an excess build up of methane which would risk an explosion.

In total, BTC applied for a tax credit of approximately $3,000,000 for the three tax years in which it purchased the equipment.   In a final ruling, the Department of Revenue denied the tax credit.

BTC appealed to the Kentucky Board of Tax Appeals (the Board), which denied it credit for the collection equipment and granted it credit for the landfill equipment necessary for the methane generating process, the piping and the flare.   Both parties appealed portions of the order adverse to their positions.   After the appeals were consolidated, the circuit court affirmed a portion of the Board's decision and remanded the case back to the Board for clarification on whether all of the landfill equipment was eligible for the credit as necessary for the methane generation process.   After the Board clarified through its amended order that all the landfill equipment was eligible for the credit, the circuit court affirmed the Board's amended order.

The Department of Revenue challenges the Board's determinations that the landfill equipment, piping and flare properly qualified for the tax credit. Double BTC has not filed a cross appeal as to the denial of its tax credit for the collection equipment.

On review, we defer to agency findings of fact that are supported by substantial evidence and review issues of law de novo.  Monumental Life Ins. Co. v. Dep't of Revenue, 294 S.W.3d 10, 15–16 (Ky.App.2008).   We strictly construe exemptions from taxation, tax credits and deductions:

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․  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) (internal citations omitted).   Similarly, tax credits and deductions are disfavored and, therefore, taxpayers also bear the burden of establishing their entitlement to them.  Crooks v. C.I.R., 453 F.3d 653, 655 (6th Cir.2006).

In construing the KRS 141.390 tax credit for recycling or composting equipment, our “principal goal is to implement the intent of the General Assembly.”  LWD Equip., Inc., 136 S.W.3d at 476.  “[A]n intention of the Legislature to grant an exemption from taxation will not be presumed or implied, since taxation of all is the rule and exemption is the exception.”   George v. Scent, 346 S.W.2d 784, 789 (Ky.1961).

To the extent that words in the definitions are not defined, we will give them their common and literal meanings unless to do so would lead to an absurd result.  Kentucky Unemployment Ins. Co. v. Jones, 809 S.W.2d 715, 716–717 (Ky.App.1991).  “[T]he courts cannot ignore the plain meaning of a statute simply because another meaning might be considered to be a better policy.”   Id. at 717.

BTC can qualify for the tax credit if it purchased recycling or composting equipment.   Recycling equipment is defined as “any machinery or apparatus used exclusively to process postconsumer waste material and manufacturing machinery used exclusively to produce finished products composed of substantial postconsumer waste materials[.]”  KRS 141.390(1)(b).  Postconsumer waste is a “product ․ which has served its intended end use, and which has been separated from solid waste for purposes of collection, recycling, composting and disposition ․ [.]” KRS 141.390(1)(a).

BTC's landfill equipment, piping and flare cannot qualify as recycling equipment because BTC cannot show that landfill methane gas is postconsumer waste, removing methane gas qualifies as recycling or that its equipment is used exclusively to process postconsumer waste.

Landfill methane gas cannot qualify as postconsumer waste because it is not a product that has served its intended end use.   By its very nature, it does not exist until generated in the landfill by anaerobic decomposition.   Therefore, landfill methane gas cannot be separated from the solid waste stream before it enters the landfill.

BTC's landfill equipment, piping and flare cannot be “recycling equipment” because collecting the methane gas for combustion purposes is excluded from the definition of recycling.  “ ‘Recycling’ ․ does not include the incineration or combustion of materials for the recovery of energy.”  KRS 224.01–010(22). Double The landfill methane gas is collected solely for the purpose that it be combusted for the recovery of energy.

Even if landfill methane gas were to qualify as postconsumer waste, BTC could not qualify for the credit on its landfill equipment because it is not used exclusively to process the methane.   BTC uses its landfill equipment to prepare and maintain its landfill.   The landfill equipment continues to be used in the same manner it was before BTC began collecting methane to sell.   The only modifications made to the landfill to collect methane were the installation of some piping to collect methane and the installation of the flare as a safety measure.   Therefore, if the methane were to qualify as postconsumer waste, only the portion of the piping used to collect methane and the flare could qualify for the credit.

BTC advances the theory that all of its landfill equipment, piping and flare should be eligible for the credit even if not used exclusively for processing the methane gas under the integrated plant theory.   The integrated plant theory defines the manufacturing or processing production process as beginning when “a raw material ․ starts moving in a chain of unbroken, integrated sequence into the plant or mill and ends with a generally accepted saleable product.”  Double Revenue Cabinet v. Kentucky American Water Co., 997 S.W.2d 2, 4–6 (Ky.1999) (quoting Ross v. Greene & Webb Lumber Co., Inc., 567 S.W.2d 302, 304 (Ky.1978)).   We are not persuaded that methane production is comparable to an unbroken integrated manufacturing sequence in which a raw product is transformed into a finished product.   See Ross v. Greene & Webb Lumber Co., Inc., 567 S.W.2d 302, 303–304 (Ky.1978).   BTC is in the business of disposing of garbage, not of manufacturing methane.   Methane is, at best, a lucrative byproduct of BTC's garbage disposal business.   We are not persuaded that the KRS 141.390(1)(b) language “used exclusively” should be interpreted the same as the KRS 139.170 language “used directly,” which allowed the application of the integrated plant theory.   See Revenue Cabinet, Com. v. Amax Coal Co., 718 S.W.2d 947, 949–950 (Ky.1986).   Contained landfill owners are required to provide all the landfill equipment required to maintain their methane gas systems.  401 KAR 48.070 § 6(3)(d).  It would not be logical to interpret the statute to give them a tax credit for every aspect of landfill maintenance, rather than for just alterations needed to convert a methane system to energy collection.

BTC also argues that its landfill equipment, piping and flare qualify as composting equipment.   Composting equipment is defined as “equipment used in a process by which biological decomposition of organic solid waste is carried out under controlled aerobic conditions, and which stabilizes the organic fraction into a material which can easily and safely be stored, handled, and used in a environmentally acceptable manner[.]”  KRS 141.390(1)(c).

The landfill equipment, piping and flare fail to qualify for the composting equipment tax credit because the methane is not produced under controlled aerobic conditions through composting and this process does not produce compost.   The landfill equipment, piping and flare cannot be considered composting equipment under the statute's definitional terms because the landfill methane gas is not produced under controlled aerobic conditions.   A wholly anaerobic process cannot constitute composting.  KRS 224.01–010(7)(a).

The landfill decomposition and methane generation process does not produce “compost.”   Methane is not “potentially beneficial to plant growth” or “approved for use or sale as a soil amendment, artificial topsoil, growing medium amendment or other similar uses[.]”  KRS 224.01–010(6).   It is also debatable whether landfill methane gas stabilizes “into a material which can easily and safely be stored, handled and used in an environmentally acceptable manner[.]”  Double KRS 141.390(1)(c).

Finally, if we had any doubt as to the application of the tax credit to the factual situation here, the subsequent legislative action makes it appear that the General Assembly did not believe KRS 141.390 allows tax credits for the production of landfill methane gas for energy.   In 2007, the General Assembly enacted the Energy Policies New Resources Development Act in order to, among other things, provide encouragement for the development of renewable sources of energy.   2007 Kentucky Laws 2nd Ex.Sess. Ch. 1 (HB 1).   This act created the Incentives for Energy Independence Act, and the Alternative Fuel and Renewable Energy Fund Program.   Id. at § 2, § 48;  KRS 154.27–020;  KRS 154.20–415(1).   These new programs provide incentives including tax credits to develop renewable energy and construct renewable energy facilities.  KRS 154.27–020(1), (3)(d), (4)(e), (5);  KRS 154.20–415(1).  “Landfill methane gas” is specifically included in the definitions for renewable energy and renewable energy facilities.  KRS 154.27–010(26)(a);  KRS 154.20–400(5).

While we applaud BTC's laudable efforts to collect and profit from the renewable energy that its landfill generates, we determine that no portion of BTC's equipment is eligible for a tax credit under KRS 141.390.   We reverse and remand the portion of the Boone Circuit Court's judgment, which granted tax credit for the landfill equipment, piping and flare, and affirm the unchallenged portion of the judgment.