Case Title: In re Property Valuation Appeals of Various Applicants

Citation: 

Docket Number: 105785

State: kansas

Court: Kansas Supreme Court

Date: 2013-12-06T00:00:00Z

Document:
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IN THE SUPREME COURT OF THE STATE OF KANSAS 
 
 
No. 105,785 
 
In the Matter of the Appeals of Various Applicants from a Decision 
of the DIVISION OF PROPERTY VALUATION of the STATE OF KANSAS 
for Tax Year 2009 Pursuant to K.S.A. 74-2438 
 
and 
 
In the Matter of the Application of Various Applicants 
for Exemption from Property Taxation in the STATE OF KANSAS. 
 
 
SYLLABUS BY THE COURT 
 
1. 
Administrative agencies do not have authority to decide questions regarding the 
constitutionality of statutes. In judicial review of an agency action, courts consider such 
questions in the first instance; and the reviewing court must grant relief under K.S.A. 
2012 Supp. 77-621(c)(1) only if the agency action, or the statute or rule and regulation on 
which the agency action is based, is unconstitutional on its face or as applied.  
 
2. 
Kansas statutes are presumed constitutional, and all doubts must be resolved in 
favor of their validity. If there is any reasonable way to construe a statute as 
constitutionally valid, courts must do so. A statute must clearly violate the constitution 
before it may be struck down.  
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3. 
A legislative definition of a constitutional term must bear a reasonable and 
recognizable similarity to generally accepted definitions and the common understanding 
of the term by the people of Kansas.   
 
4. 
In interpreting and construing a constitutional amendment, the court must examine 
the language used and consider it in connection with the general surrounding facts and 
circumstances that caused the amendment to be submitted. 
 
Appeal from Court of Tax Appeals. Opinion filed  December 6, 2013. Affirmed in part, reversed 
and vacated in part, and remanded with directions.   
 
Robert W. Coykendall, of Morris, Laing, Evans, Brock & Kennedy, Chartered, of Wichita, argued 
the cause, and Will B. Wohlford, of the same firm, was with him on the briefs for appellants.   
 
William E. Waters, of Division of Property Valuation, Kansas Department of Revenue, argued the 
cause and was on the brief for appellee. 
 
The opinion of the court was delivered by 
 
BILES, J.:  This is a consolidated tax appeal disputing whether natural gas stored in 
facilities located in Kansas under contract with interstate companies is subject to ad 
valorem taxation. The Kansas Constitution, Article 11, § 1 (2012 Supp.) exempts 
merchants' inventory from such taxation, but that exemption does not include tangible 
personal property owned by a public utility. The taxpayers claim they are entitled to the 
exemption. They are 40 business entities that fall into three general categories: out-of-
state natural gas marketing companies, out-of-state local distribution companies certified 
as public utilities in their states, and out-of-state municipalities. Each buys natural gas 
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from producers or other marketers and then delivers it to the pipelines under contracts 
with the pipeline companies allowing the taxpayer to withdraw equivalent amounts of gas 
at a later time from out-of-state distribution points. 
 
The Kansas Court of Tax Appeals (COTA) determined this natural gas is not 
exempt because of a statute broadly defining what constitutes a "public utility" for these 
purposes. See K.S.A. 2012 Supp. 79-5a01. The taxpayers challenge COTA's decision 
arguing, in part, that it violates the Commerce Clause of the United States Constitution 
and the Due Process Clause of the Fourteenth Amendment to the United States 
Constitution, as well as Article 11, § 1(b) of the Kansas Constitution (2012 Supp.), which 
provides for the ad valorem tax exemption for merchants' inventory. 
 
We hold this taxation does not violate the Commerce Clause or Due Process 
Clause. And we hold further that K.S.A. 2012 Supp. 79-5a01 is constitutional as applied 
to the out-of-state local distribution companies. But we also hold that K.S.A. 2012 Supp. 
79-5a01 is unconstitutional as applied to the out-of-state natural gas marketing companies 
and those taxpayers that are out-of-state municipalities. These entities are not public 
utilities as that term was commonly understood when Kansas voters excluded public 
utility personal property from the merchants' and manufacturers' inventory exemption. 
 
The COTA order is affirmed in part and reversed and vacated in part. We remand 
to COTA for further proceedings to decide where each taxpayer falls within the three 
described categories because the record on appeal is inadequate for this court to make 
these individual determinations. 
 
 
 
 
4 
 
 
 
FACTUAL AND PROCEDURAL BACKGROUND 
 
This is the fourth time this court has addressed taxation of natural gas stored in 
interstate pipelines. And with each case, the governing laws have changed, presenting 
different legal questions and possible outcomes. We refer to those previous cases as 
necessary because they lay the groundwork for the principles guiding the present 
controversy's resolution. 
 
This particular litigation began in 2009, when the Kansas Division of Property 
Valuation (PVD) determined the taxpayers were public utilities for property tax purposes 
under a newly amended statute defining the term "public utility" in the Kansas tax 
statutes. See L. 2009, ch. 97, sec. 5 (effective July 1, 2009) (now K.S.A. 2012 Supp. 79-
5a01[a]). PVD concluded the taxpayers were holding natural gas for resale in storage 
facilities located in the state and appraised the gas and fixed assessed values thereto for 
ad valorem tax purposes for the 2009 tax year. See K.S.A. 2012 Supp. 79-5a01(c). PVD 
determined the quantity of gas each taxpayer owned in the Kansas storage facilities based 
on an allocation formula, adopted from one of the Federal Energy Regulatory 
Commission (FERC)-approved tariffs, stating: 
 
"For purposes of reporting storage inventories for state ad valorem taxes, the total 
inventories of Gas in Market Area Storage Facilities and Field Area Storage Facilities in 
any particular state shall be determined. Inventories in Market Area Storage Facilities 
shall be allocated to all Shippers with inventories under Rate Schedules PS, and if 
provided from Market Areas Storage Facilities, WS, FS, and IWS, based on the ratio of 
total inventories for the state divided by total Storage inventories for all states times the 
Shipper's total Stored Volume under such Rate Schedules; inventories in Field Area 
Storage facilities shall be allocated to all Shippers with inventories for the state divided 
by total Storage inventories for all states times the Shipper's total Stored Volume under 
such Rate Schedules." (Emphasis added.)  
 
5 
 
 
 
Taxpayers do not challenge this allocation methodology, but they individually 
appealed the appraisals and filed requests for ad valorem tax exemption. In doing so, they 
advanced various arguments to shield themselves from the tax. They claimed the natural 
gas at issue was exempt as:  (1) personal property moving in interstate commerce under 
K.S.A. 2012 Supp. 79-201f(a); (2) merchants' and manufacturers' inventory under K.S.A. 
79-201m; and (3) merchants' and manufacturers' inventory under Article 11, § 1(b) of the 
Kansas Constitution (2012 Supp.). They also argued taxation of this gas violates the 
Commerce Clause, Due Process Clause, and Import Export Clause of the United States 
Constitution.  
 
PVD disagreed. It filed the exemption requests with COTA, but recommended 
they be denied. PVD claimed these taxpayers were public utilities, as defined by K.S.A. 
2012 Supp. 79-5a01, and noted public utility inventories are not exempt under K.S.A. 
2012 Supp. 79-201f or Article 11, § 1 of the Kansas Constitution (2012 Supp.). COTA 
consolidated the appeals and held an evidentiary hearing based in part on stipulated facts 
applicable to each taxpayer. 
 
The Taxpayers 
 
COTA classified the taxpayers into three general groups:  (1) out-of-state natural 
gas marketing companies; (2) out-of-state local distribution companies that are certified 
as public utilities in their respective states; and (3) out-of-state municipalities. And 
although some of their characteristics will distinguish one group from another in a 
substantive way, each taxpayer shares a common business model in that it purchases 
natural gas from various producers or marketers and then designates when and where that 
gas will be delivered to one of four interstate pipelines. The taxpayer then schedules with 
the designated pipeline when and where an equivalent amount of gas will be redelivered 
to an out-of-state location where the taxpayer will take possession of it. In the meantime, 
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gas is stored for the taxpayer somewhere in the pipeline's storage or transportation 
systems, which may be in Kansas or some other state. Storage is integral to the pipelines' 
operations, and natural gas is continually deposited and removed to satisfy essential 
pipeline pressure and balancing requirements, as well as to permit interstate 
transportation such as the simultaneous delivery and redelivery of natural gas at distant 
locations. 
 
The pipelines that own the facilities in which the taxpayers' gas was stored for this 
tax year are FERC-regulated and owned separately by Northern Natural Gas Company, 
Panhandle Eastern Pipe Line Company, Colorado Interstate Gas Company, and Southern 
Star Central Gas Pipeline. Each pipeline company commingles the gas one customer 
deposits with gas deposited by other customers. No effort is made—nor could one 
succeed—to ensure that the same gas initially brought into the system by a customer is 
placed into storage and then redelivered to that same customer. The taxpayer's contractual 
right is simply to withdraw an amount of natural gas equivalent to the amount it 
deposited into the system. Each pipeline company possesses and controls the gas 
deposited into its system. Under FERC-approved tariffs, the pipeline companies carry the 
risk of loss during storage. 
 
Each pipeline company owns and operates underground storage facilities in 
multiple jurisdictions, including Kansas. And none of the taxpayers owns any facilities in 
Kansas for the transmission, distribution, or storage of natural gas. None are certified or 
regulated as Kansas natural gas public utilities or vested with eminent domain powers in 
this state.  
 
 
 
 
7 
 
 
 
COTA Proceedings 
 
At the COTA hearing, Kent Miller, a Northern Natural Gas vice president, 
testified that 70 percent of its pipeline customers injected at a delivery point in Ogden, 
Iowa, and that half of its deliveries were made in Minnesota. This, he said, makes it 
"highly likely" that a Northern customer will deliver gas in Iowa and then take redelivery 
in Minnesota. Miller testified that under the PVD's allocation methodology natural gas 
would be taxed in Kansas even though it never physically entered the state.  
 
Jeff Balfort, an official with Panhandle Eastern Pipeline Company, testified that 
Panhandle's pipelines cross eight or nine states and Panhandle sells various services 
related to the transportation and storage of natural gas for shippers. Generally, he said, 
Panhandle receives gas from Kansas, North Texas, and Oklahoma. And he said it 
transmits gas to Ohio, Illinois, Indiana, and Michigan. He testified Panhandle has "field 
zone" storage in Kansas and Oklahoma and has market zone storage in Michigan, Illinois, 
Indiana, and Ohio. A field zone is a geographic area where natural gas is produced and 
gathered for sale to gas distributors, while a market zone is the geographic area where gas 
is sold to customers. See In re Assessment of Personal Property Taxes, 234 P.3d 938, 
944, n.4-5 (Okla. 2008), cert. denied sub nom. Missouri Gas Energy v. Schmidt, 559 U.S. 
970 (2010).   
 
 
John Wine, a Kansas attorney who had previously served as Kansas Securities 
Commissioner and chair of the Kansas Corporation Commission, submitted a report and 
testified on the taxpayers' behalf. He expressed his opinion that public utilities share 
certain common characteristics in that they:  (1) enjoy natural monopolies; (2) provide 
essential services; (3) possess restricted or protected service territories; (4) are subject to 
regulations that restrict the rates they can charge for services; (5) are obligated to provide 
a nondiscriminatory service to the public; and (6) are usually given eminent domain 
8 
 
 
 
powers by the state. Wine also testified that the definition of public utility enacted by the 
Kansas Legislature in K.S.A. 2012 Supp. 79-5a01 was not consistent with his view of 
what constitutes a public utility, stating: 
 
"[T]he fact that someone might be brokering or marketing a—a commodity, a natural gas 
commodity, does not make it a public utility looking at those common characteristics 
in—in any way. I mean, any more than a—a facility that held some coal that might 
eventually be delivered to an electric utility to burn to make electricity, it wouldn't make 
that—that marketer of coal a public utility."   
 
Wine later limited this assertion to the taxpayers who are marketers and brokers of 
natural gas, stating:  "The Marketers, Brokers, or other entities that trade in gas, and 
possess the right to take delivery of that gas from a federally regulated pipeline do not 
possess any characteristics of a public utility except for the fact that they deal in natural 
gas, a commodity that is highly regulated."   
 
Regarding the other taxpayers, Wine testified that three local distribution 
companies operated in their home states in a manner consistent with the general meaning 
of a public utility, as did 13 public utilities. And when asked whether there was anything 
"inconsistent with them being public utilities for [certain] purposes in one state and not 
another," Wine responded, "There is nothing inconsistent about that at all." But when 
PVD attempted to elicit similar testimony from Wine concerning five municipal utilities 
PVD considered local distribution companies, Wine testified he did not know if it was 
appropriate to call them local distribution companies if they were not a public utility, 
even though the municipal utilities were providing analogous services. This statement 
was not further clarified, and COTA factual finding No. 22, which summarizes Wine's 
testimony, does not address the out-of-state municipal utilities. This factual anomaly 
hampers our discussion of the issues related to these entities as discussed below.  
 
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COTA denied the taxpayers' exemption requests. It held that all the taxpayers were 
public utilities under K.S.A. 2012 Supp. 79-5a01 and, therefore, their gas did not qualify 
for the merchants' inventory exemption as codified in K.S.A. 79-201m. It also held the 
out-of-state municipalities' gas did not qualify for exemption under K.S.A. 2012 Supp. 
79-201a Second because that statute's plain language applies only to property of 
municipalities or political subdivisions of the state of Kansas. Finally, COTA refrained 
from addressing whether the tax assessments violated the United States Constitution. 
 
Taxpayers timely appealed. Both sides filed requests to transfer the appeal to this 
court under K.S.A. 20-3017 and Kansas Supreme Court Rule 8.02 (2012 Kan. Ct. R. 
Annot. 71), which we granted. On appeal, taxpayers argue:  (1) taxing their gas violates 
the Due Process and Commerce Clauses of the United States Constitution; (2) the gas is 
exempt merchants' and manufacturers' inventory under K.S.A. 79-201m and Article 11, § 
1(b) of the Kansas Constitution (2012 Supp.); (3) the gas is exempt under K.S.A. 2012 
Supp. 79-201f(a) because it is moving in interstate commerce and not considered public 
utility inventory under K.S.A. 2012 Supp. 79-5a01; and (4) the out-of-state municipal 
utilities qualify for exemption under Article 11, § 1(b) of the Kansas Constitution (2012 
Supp.) and K.S.A. 2012 Supp. 79-201f(a). 
 
Our resolution permits us to reduce the issues further. We consider first the 
arguments concerning the Commerce and Due Process Clauses, and then whether 
taxpayers in any of the three groups (out-of-state natural gas marketing companies, out-
of-state local distribution companies certified as public utilities in their respective states, 
and out-of-state municipalities) may be considered public utilities in Kansas.   
 
 
 
 
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THE COMMERCE AND DUE PROCESS CLAUSES 
 
Taxpayers argue these ad valorem tax assessments violate the United States 
Constitution's Due Process and Commerce Clauses by taxing out-of-state corporations for 
natural gas stored in Kansas. They claim this is unconstitutional because their gas is 
under a common carrier's control and intermingled with other customers' gas so that there 
is no evidence their gas was ever actually stored in Kansas. They also note the interstate 
pipeline companies determine whether the gas in the pipeline's system will be stored in 
Kansas. 
 
The Commerce and Due Process Clauses are closely related, but each presents 
distinct limits on a state's taxing power. A tax satisfying one clause does not necessarily 
satisfy the other because the clauses "reflect different constitutional concerns." Quill 
Corp. v. North Dakota, 504 U.S. 298, 305, 112 S. Ct. 1904, 119 L. Ed. 2d 91 (1992). The 
Due Process Clause "centrally concerns the fundamental fairness of governmental 
activity." 504 U.S. at 312. But the Commerce Clause and its nexus requirement "are 
informed not so much by concerns about fairness for the individual defendant as by 
structural concerns about the effects of state regulation on the national economy." 504 
U.S. at 312. These clauses also are subject to different limits of congressional power 
because Congress can authorize state action burdening interstate commerce, but it cannot 
authorize due process violations. 504 U.S. at 305. 
 
Standard of Review 
 
The Kansas Judicial Review Act (KJRA), K.S.A. 77-601 et seq., typically 
establishes the standard of review for appeals from COTA decisions. But COTA lacks 
jurisdiction to address whether taxation of the taxpayers' gas violates our state or federal 
Constitutions. See In re Tax Appeal of Weisgerber, 285 Kan. 98, 102, 169 P.3d 321 
11 
 
 
 
(2007); Zarda v. State, 250 Kan. 364, Syl. ¶ 3, 826 P.2d 1365, cert. denied 504 U.S. 973 
(1992). Accordingly, COTA correctly refrained from addressing the constitutional 
claims. But those questions remain in controversy, so this court reviews them in the first 
instance. Weisgerber, 285 Kan. at 102. In the judicial review of an agency action, the 
reviewing court must grant relief under K.S.A. 2012 Supp. 77-621(c)(1) only if the 
agency action, or the statute or rule and regulation on which the agency action is based, is 
unconstitutional on its face or as applied.  
 
An appellate court's review of a statute's constitutionality is unlimited. Miller v. 
Johnson, 295 Kan. 636, 647, 289 P.3d 1098 (2012). But in addressing constitutional 
issues, courts are only concerned with whether the legislature had the power to enact the 
statute, not the wisdom behind it. A statute is presumed constitutional and all doubts must 
be resolved in favor of its validity. This court has both the authority and duty to construe 
the statute as constitutionally valid if there is any reasonable way to do so. 295 Kan. at 
646-47; In re Tax Appeal of Barton-Dobenin, 269 Kan. 851, 855, 9 P.3d 9 (2000). A 
statute must clearly violate the constitution before it may be struck down. 269 Kan. at 
855.   
 
Commerce Clause 
 
The Commerce Clause of the United States Constitution expressly authorizes 
Congress to "regulate Commerce with foreign Nations, and among the several States 
. . . ." U.S. Const. art. I, § 8, cl. 3. This clause has long been recognized as having both an 
affirmative and negative sweep. Quill, 504 U.S. at 309. The negative, or dormant, 
Commerce Clause prohibits certain state taxation even when Congress has failed to 
legislate on the subject. Oklahoma Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. 175, 
179, 115 S. Ct. 1331, 131 L. Ed. 2d 261 (1995). The purpose of the negative powers is to 
prevent "a State from retreating into economic isolation or jeopardizing the welfare of the 
12 
 
 
 
Nation as a whole, as it would do if it were free to place burdens on the flow of 
commerce across its borders that commerce wholly within those borders would not bear." 
514 U.S. at 179-80.  
 
The Court's Commerce Clause jurisprudence has evolved substantially over 
time—particularly as to states' taxing powers. Quill, 504 U.S. at 309. The Court's earliest 
cases broadly prohibited any form of state taxation on interstate commerce. 504 U.S. at 
509 (quoting Leloup v. Port of Mobile, 127 U.S. 640, 648, 8 S. Ct. 1380, 32 L. Ed. 311 
[1888]). But that wholesale prohibition has eroded. Under the Court's current 
jurisprudence, interstate commerce may be required to pay its fair share of state taxes 
within certain limitations. See Quill, 504 U.S. at 309-11.  
 
In Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S. Ct. 1076, 51 L. 
Ed. 2d 326 (1977), the Court retreated from formal, categorical prohibitions of state 
taxation. It adopted instead a four-part test emphasizing the importance of the tax statute's 
practical effect. See Quill, 504 U.S. at 310. It held that a state may tax an activity without 
violating the Commerce Clause if that tax:  (1) applies to an activity with a substantial 
nexus to the taxing state; (2) is fairly apportioned; (3) does not discriminate against 
interstate commerce; and (4) is fairly related to services or benefits provided by the 
taxing state. Jefferson Lines, 514 U.S. at 183 (quoting Complete Auto, 430 U.S. at 279).  
 
The taxpayers' threshold argument is that the four-prong Complete Auto analysis 
does not govern their Commerce Clause claim because the tax here violates a bright-line 
rule prohibiting states from assessing taxes if the assessees' only connection with the state 
is through a common carrier. They rely on the United States Supreme Court's Quill 
decision. The gravamen of their claim is that interstate pipelines are common carriers, the 
pipelines establish the taxpayers' only connection with Kansas, and that connection is 
insufficient for the purpose of assessing taxes.  
13 
 
 
 
 
In Quill, a North Dakota statute required an out-of-state mail-order house with no 
North Dakota outlets or sales representatives to collect and pay use tax on goods 
purchased for use in North Dakota. The Court had previously declared a similar Illinois 
statute unconstitutional under the Due Process and Commerce Clauses in Nat. Bellas 
Hess v. Dept. of Revenue, 386 U.S. 753, 87 S. Ct. 1389, 18 L. Ed. 2d 505 (1967). The 
mail-order house appealed on those grounds. But the North Dakota Supreme Court 
declined to declare the tax unconstitutional under Bellas Hess, concluding that decision 
was rendered obsolete by the Court's later jurisprudence.  
 
A majority of the Quill Court reaffirmed Bellas Hess as establishing a bright-line 
rule for sales and use taxes under the Commerce Clause:  A state may not impose a use 
tax on an out-of-state vendor whose only connection with the state is through a common 
carrier. Quill, 504 U.S. at 314-15. And in declaring the North Dakota tax 
unconstitutional, the majority noted that "contemporary Commerce Clause jurisprudence 
might not dictate the same result were the issue to arise for the first time today," but 
Bellas Hess was not "inconsistent" with Complete Auto and the Court's later cases. Quill, 
504 U.S. at 311. The majority also noted the bright-line rule established in Bellas Hess 
had "engendered substantial reliance and has become part of the basic framework of a 
sizeable industry." Quill, 504 U.S. at 317. It affirmed its rule that "in the area of sales and 
use taxes" a state may not impose a use tax collection on an out-of-state vendor whose 
only connection with the state is through a common carrier. 504 U.S. at 314-15.  
 
There is a split of authority in our sister states on whether the Court's holding in 
Quill is limited to sales and use taxes. See Lanco, Inc. v. Director, Div. of Taxation, 188 
N.J. 380, 382-83, 908 A.2d 176 (2006) (noting the split). In Lanco, the New Jersey 
Supreme Court held that the better interpretation of Quill limits its application to sales 
and use taxes as reflected by the Court's plain language limiting Quill's holding to that 
14 
 
 
 
context. It also held the Quill Court did not "attempt to equate the substantial-nexus 
requirement with a universal physical-presence requirement." Lanco, 188 N.J. at 383. 
 
We agree with the Lanco court. Quill is best restricted to sales and use taxes 
because the Quill Court specifically limited the case's holding to that context and because 
the Court largely relied upon stare decisis to reach its result. We reject the taxpayers' 
reliance on Quill for these reasons. We consider next what test should apply.   
 
The taxpayers' second Commerce Clause argument relates to the Complete Auto 
test, which requires that the tax applies to an activity with a substantial nexus to the 
taxing state, is fairly apportioned, does not discriminate against interstate commerce, and 
is fairly related to the services provided by the state. See Jefferson Lines, 514 U.S. at 183 
(quoting Complete Auto, 430 U.S. at 279). Taxpayers argue the tax violates the first and 
fourth prongs of the Complete Auto test, i.e., the tax is neither fairly apportioned, nor 
fairly related to services provided by the state. 
 
We note those prongs are related and require a "substantial nexus and a 
relationship between the tax and state-provided services, limit[ing] the reach of state 
taxing authority so as to ensure that state taxation does not unduly burden interstate 
commerce." Quill, 504 U.S. at 313. The taxpayers argue the tax here violates the 
Commerce Clause because their business is conducted primarily outside Kansas, none of 
them have Kansas facilities or employees, and none "own property or facilities in Kansas 
for the transmission, distribution or storage of natural gas." They contend the natural gas 
stored in Kansas does not establish the required nexus because the taxpayers do not 
control or possess the gas; the gas is intermingled with gas owned by others; and they do 
not direct their business activities to Kansas—the pipeline companies determine where 
the gas is stored.  
 
15 
 
 
 
We are not the first court to address this question. The Oklahoma Supreme Court 
and Texas Court of Appeals have split on whether similar ad valorem taxes on natural gas 
stored in an interstate pipeline violated the Commerce Clause. See In re Assessment, 234 
P.3d at 952-59 (Oklahoma tax assessments did not violate Commerce Clause); Peoples 
Gas, Light v. Harrison Cent. App., 270 S.W.3d 208, 217-19 (Tex. App. 2008) (Texas tax 
assessments violated Commerce Clause). These cases demonstrate this is a difficult 
question. But after reviewing both, we agree with the Oklahoma Supreme Court and hold 
these taxes do not violate the Commerce Clause.   
 
In Peoples, a Texas taxing jurisdiction assessed ad valorem taxes against a natural 
gas distribution company's gas stored in an interstate pipeline company's storage facility. 
The pipeline company's method of allocating stored gas to the distribution company was 
not disputed. The Texas court first held that Peoples owned the natural gas at issue, even 
though the pipeline company had full custody and control of the gas. The court noted that 
FERC regulations did not permit ownership rights to the gas to be transferred to the 
pipeline company, so it held "legal title must lie with Peoples." 270 S.W.3d at 213-14. 
Nevertheless, the court struck down the Texas assessment under the Commerce Clause 
after holding it failed to meet the first and fourth prongs of the Complete Auto test. 
Peoples, 270 S.W.3d at 217-19. 
 
As to the first prong's substantial nexus requirement, the court held there was not a 
substantial nexus between the taxing entity and the taxpayer, property, or transaction 
subject to the tax. It reached this result, even though the natural gas distributor owned 
tangible personal property located in Texas, because Peoples did not have any employees, 
representatives, or physical facilities in the state. It also found persuasive the argument 
that the pipeline company controlled whether the natural gas was stored in Texas; and it 
held Peoples' only connection to Texas was the pipeline company's decision to store 
16 
 
 
 
natural gas there. The court concluded that "such a connection is too tenuous to subject 
Peoples to ad valorem taxation in Texas." 270 S.W.3d at 218.  
 
The Peoples court also held that the fourth prong, requiring the tax be fairly 
related to the services provided by the state, was not met. In particular, Peoples was not 
the beneficiary of Texas services. The court explained that, in its view, the pipeline 
company was the only beneficiary, stating: 
 
"[S]ervices such as law enforcement and the fire department would serve the [Texas] 
facility itself, and the facility undoubtedly belongs to Pipeline, which does pay ad 
valorem taxes on both the 'cushion' gas it maintains in the facility and the physical plant 
of the facility itself." 270 S.W.3d at 219.  
 
In contrast, the Oklahoma Supreme Court upheld the taxation of a Missouri 
natural gas distributor's gas, which was similarly stored in an interstate pipeline 
company's storage facility. In re Assessment, 234 P.3d at 952-59. The distribution 
company (MGE) did not sell natural gas in Oklahoma, employ anyone in Oklahoma, or 
maintain any Oklahoma facilities. But it purchased gas from suppliers in other states and 
used a pipeline company with Oklahoma storage facilities to transport and store the 
natural gas. Like the taxpayers in this case, the gas distribution company argued the 
assessment violated the Due Process and Commerce Clauses.  
 
Regarding the Commerce Clause, a majority of the Oklahoma court held that 
Complete Auto's substantial nexus requirement was satisfied, even though the distributor 
had no control over where the gas was stored and the pipeline company benefited from its 
ability to store it. The court said the "storage of gas [was] not only anticipated by MGE 
[the distributor], but intended." In re Assessment, 234 P.3d at 955. It went on to explain:  
 
17 
 
 
 
"While MGE cannot direct the pipeline to use the Woods County facility, it contracts for 
storage knowing that the Woods County facility is one of two Field Zone storage 
facilities. If gas is stored there, and it is, MGE cannot claim it does not intend for that to 
happen. Were the court making the old 'in transit' or 'at rest' determination, this record 
would make that determination very difficult. Inasmuch as the subjective factors are 
inconclusive, the nexus issue is better decided on the basis of the objective fact that 
Panhandle stored gas on behalf of MGE and that a certain amount of it was held at 
North Hopeton at all times during the tax years in question." (Emphasis added.) 234 P.3d 
at 955.  
 
 
The court also held the tax was reasonably related to services provided by the 
state. In reaching this holding, the court determined the controlling question was 
"'whether the state has given anything for which it can ask return.'" 234 P.3d at 959. The 
court concluded MGE was simply shouldering its fair share of the taxes "for the support 
of government-provided services and the receipt of 'the advantages of a civilized 
society.'" 234 P.3d at 959. It noted the tax was assessed against personal property located 
in the taxing jurisdiction and MGE's gas was taxed to the same extent as other personal 
property in the jurisdiction. 234 P.3d at 959. 
 
 
But there is one distinction between In re Assessment and this case because MGE's 
natural gas was not just stored in Oklahoma—it also was produced there. And this could 
arguably impact the substantial nexus analysis. But the In re Assessment court did not 
indicate production of the gas within the state was significant to its analysis of the first 
and fourth Complete Auto prongs. And we see no distinction of merit, principally because 
this is an ad valorem tax on stored natural gas, not a severance tax. Cf. Commonwealth 
Edison Co. v. Montana, 453 U.S. 609, 101 S. Ct. 2946, 69 L. Ed. 2d 884 (1981) 
(upholding severance tax on coal mined in Montana and noting substantial nexus between 
activity of coal mining and state in which the activity occurs). We agree with the 
Oklahoma Supreme Court that the most important factor in determining whether a 
18 
 
 
 
substantial nexus exists to tax the taxpayers' gas is that this is a personal property tax on 
stored natural gas that was located in Kansas on the assessment date. 
 
We reject the taxpayers' arguments that ad valorem taxation of their stored natural 
gas fails to satisfy the first and fourth prongs of the Complete Auto test. There is 
axiomatically a substantial nexus between Kansas and the gas stored in this state. And ad 
valorem taxes, which are levied upon property situated in Kansas, are fairly related to the 
taxpayers' contact with Kansas, i.e., their storage of gas in this state. All property in 
Kansas is subject to ad valorem taxation, unless otherwise exempt. K.S.A. 79-101. For 
the purposes of this Commerce Clause analysis, ad valorem taxes will be levied upon the 
assessed value of the taxpayers' gas at the same rate as ad valorem taxes levied upon the 
other assessed property in the applicable taxing jurisdictions. See K.S.A. 79-5a25 
(assessed value of public utility property to be apportioned among taxing jurisdictions in 
which property is located); K.S.A. 2012 Supp. 79-1803 (tax levy rate to apply equally to 
all real and personal property subject to the same tax); accord In re Assessment, 234 P.3d 
at 959. We hold that the challenged ad valorem tax does not violate the Commerce 
Clause.  
 
Due Process 
 
The United States Supreme Court has held that due process "'requires some 
definite link, some minimum connection, between a state and the person, property or 
transaction it seeks to tax,'" as well as some rational relationship between the tax and the 
"'"values connected with the taxing State."'" Quill, 504 U.S. at 306; accord 
MeadWestvaco Corp. v. Illinois Dept. of Revenue, 553 U.S. 16, 24, 128 S. Ct. 1498, 170 
L. Ed. 2d 404 (2008). The taxpayers argue they lack the necessary minimum contacts 
with Kansas to permit ad valorem taxation of their gas and that the pipeline companies' 
independent decisions to store the gas in Kansas cannot establish the necessary contacts. 
19 
 
 
 
 
PVD argues minimum contacts exist because the taxpayers "have some 
expectation that some of the natural gas that they consign to the pipelines will be stored 
in Kansas." It then characterizes the pipeline companies as independent contractors and 
argues their activities are enough to establish the necessary contact. PVD further argues 
that "it is not the taxpayers' activities that are taxed, but tangible personal property—
natural gas—that is owned by the taxpayers and physically located in the state." 
 
 
The Oklahoma Supreme Court in In re Assessment of Personal Property Taxes, 
234 P.3d 938 (Okla. 2008), cert. denied 559 U.S. 970 (2010), also addressed a similar, 
but differently framed due process issue. In that case, the taxpayer argued the assessment 
violated due process because its gas was moving in interstate commerce and therefore did 
not have a tax situs in Oklahoma. The court noted due process requires a nexus between 
the taxed property and the taxing state, but that this nexus requirement is minimal under 
the Due Process Clause. 234 P.3d at 950. It held the gas' "sojourn in storage in Oklahoma 
gives it at least a minimal nexus . . . sufficient to establish tax situs and to survive the due 
process attack," even if the parties intended that the natural gas would ultimately be 
delivered to Missouri. 234 P.3d at 950.  
 
 
We agree with the In re Assessment court and hold there are sufficient contacts 
between the taxpayers' gas and the State of Kansas to eliminate any due process concerns. 
Specifically, the taxpayers own tangible personal property stored in Kansas. And the 
property is stored in this state under the taxpayers' contracts with pipeline companies that 
own storage facilities in Kansas. Accordingly, there is a sufficient nexus between the 
taxpayers' gas and the State of Kansas to establish the minimum contacts necessary to 
satisfy due process.   
 
20 
 
 
 
TAXPAYERS' STATUS AS PUBLIC UTILITIES 
 
The Kansas Constitution, Article 11, § 1(b) (2012 Supp.) exempts merchants' and 
manufacturers' inventory from property taxation, except inventory owned by a public 
utility. The legislature has defined what will constitute this subclass of public utility 
tangible personal property. See Kan. Const. art.  11, § 1(a) (2012 Supp.) ("Class 2—
tangible personal property . . . shall be defined by law for the purpose of 
subclassification"—i.e., subclass [3]). The statutory definition of "public utility" subject 
to this appeal appears in K.S.A. 2012 Supp. 79-5a01[a], which states in pertinent part:  
 
"[T]he terms 'public utility' or 'public utilities' means every individual, company, 
corporation, association of persons, brokers, marketers, lessees or receivers that now or 
hereafter own, broker or market natural gas inventories stored for resale in an 
underground formation in this state, or now or hereafter are in control, manage or operate 
a business of:  
 
 
. . . . 
 
(4) transporting or distributing to, from, through or in this state natural 
gas, oil or other commodities in pipes or pipelines, or engaging primarily 
in the business of storing natural gas in an underground formation." 
K.S.A. 2012 Supp. 79-5a01(a)(4).  
 
PVD argues the taxpayers' Kansas-stored gas is taxable public utility tangible 
personal property under the Kansas Constitution, Article 11, § 1 (2012 Supp.) and K.S.A. 
2012 Supp. 79-5a01. The taxpayers admit they fit within the statutory definition but 
argue the definition's expansive scope is inconsistent with the common meaning of 
"public utility" when Kansas voters ratified the constitutional amendment excepting 
public utility tangible personal property from the merchants' and manufacturers' 
inventory exemption. See L. 1992, ch. 342, sec. 1 (now Kan. Const. art. 11, § 1 [2012 
21 
 
 
 
Supp.]). This, the taxpayers contend, renders the statute unconstitutional. We begin by 
summarizing the history underlying the constitutional provision and its statutory progeny.  
 
Article 11 and Our Cases Involving Taxing Stored Natural Gas 
 
A constitutional amendment exempting merchants' and manufacturers' inventory 
from ad valorem taxation was first adopted by voters in 1986. It read: "[M]erchant[s'] and 
manufacturer[s'] inventories . . . . shall be exempted from property taxation." L. 1985, ch. 
364, sec. 1; Kan. Const. art. 11, § 1(b)(2). At that time, public utility tangible personal 
property was not exempt from ad valorem taxation. See Kan. Const. art. 11, § 1(b)(1—
Class 2, subclass (C). In 1988, the legislature statutorily enacted the merchants' and 
manufacturers' inventory exemption. See L. 1988, ch. 375, sec. 2 (now K.S.A. 79-201m). 
It defined the terms "merchant" and "inventory" as follows: 
 
 
"'(a) "Merchant" means and includes every person, company or corporation who 
shall own or hold, subject to their control, any tangible personal property within this state 
which shall have been purchased for resale without modification or change in form or 
substance, and without any intervening use; 
 
 
. . . . 
 
 
"'(c) "inventory" means and includes those items of tangible personal property 
that: (1) Are held for sale in the ordinary course of business (finished goods); (2) are in 
process of production for such sale (work in process); or (3) are to be consumed either 
directly or indirectly in the production of finished goods (raw materials and supplies). 
Assets subject to depreciation or cost recovery accounting for federal income tax 
purposes shall not be classified as inventory. A depreciable asset that is retired from 
regular use and held for sale or as standby or as surplus equipment shall not be classified 
as inventory.'" Colorado Interstate Gas Co. v. Board of Morton County Comm'rs, 247 
Kan. 654, 656-57, 802 P.2d 584 (1990) (quoting K.S.A. 1988 Supp. 79-201m[a], [c]). 
22 
 
 
 
 
Litigation quickly arose over whether natural gas stored in pipelines located within 
the state was exempt merchants' inventory under these definitions. See Colorado 
Interstate Gas, 247 Kan. at 655. 
 
In Colorado Interstate Gas, the taxpayers were interstate pipeline companies that 
owned the natural gas at issue. They argued their stored gas was exempt merchants' and 
manufacturers' inventory, and PVD agreed based on the plain language of the then-
existing statute, K.S.A. 1988 Supp. 79-201m. But the Board of Tax Appeals (BOTA), 
which was the predecessor to COTA, reversed PVD's determination. BOTA accepted that 
the stored natural gas was "inventory," but BOTA concluded the pipeline companies 
were not "merchants" or "manufacturers." Colorado Interstate Gas, 247 Kan. at 658. In 
support, BOTA cited the legislative development of the constitutional provision; the fact 
that public utilities were taxed under a different statute before the provision was adopted; 
and various affidavits from legislators claiming the provision was not intended to alter 
the assessment and taxation of public utility inventories. See 247 Kan. at 661-62. The 
pipeline companies appealed.  
 
The Colorado Interstate Gas court held the pipeline companies were "merchants" 
as defined by K.S.A. 1988 Supp. 79-201m. The court reached that conclusion after 
finding the relevant portions of Article 11, § 1 of the Kansas Constitution exempting 
merchants' and manufacturers' inventory were self-executing, which meant the 
exemptions were granted by the amendment itself. 247 Kan. at 659. The court then 
summarized the legislature's limited authority in this area, stating:  
 
"'The rule is that a self-executing provision of the constitution does not 
necessarily exhaust legislative power on the subject, but any legislation must be in 
harmony with the constitution and further the exercise of [the] constitutional right to 
make it more available. Thus, even in the case of a constitutional provision which is self-
23 
 
 
 
executing, the legislature may enact legislation to facilitate the exercise of the powers 
directly granted by the constitution; legislation may be enacted to facilitate the operation 
of such a provision, prescribe a practice to be used for its enforcement, provide a 
convenient remedy for the protection of the rights secured or the determination thereof, or 
place reasonable safeguards around the exercise of the right. And, even though a 
provision states that it is self-executing, some legislative action may be necessary to 
effectuate its purposes. But legislative authority to provide the method of exercising a 
constitutional power exists only where the constitutional provisions themselves do not 
provide the manner and means and methods for executing the powers therein conferred. 
Procedure prescribed in a self-executing provision must be followed to the exclusion of 
that prescribed by statute, and failure to comply with the provisions of a statute which 
differ from those in the constitutional provision is not a defect. 
 
"'It is clear that legislation which would defeat or even restrict a self-executing 
mandate of the constitution is beyond the power of the legislature. Also, the legislature is 
neither required nor permitted to enact laws purporting to confer rights in excess of and 
different from those contemplated by the constitution. A liability imposed by a self-
executing provision is absolute and not subject to legislative enlargement or lessening or 
restriction as to manner of enforcement.'" 247 Kan. at 659-60 (quoting 16 Am. Jur. 2d, 
Constitutional Law § 139).   
 
To determine whether the pipeline companies were merchants or manufacturers 
within the constitution's meaning, the court recited several rules of constitutional 
construction, one of which was that "[a] constitution . . . should be held to mean what the 
words imply to the common understanding of men." 247 Kan. at 660. It noted this test is 
"what meaning people of common understanding would give to the words in question." 
247 Kan. at 660. The court observed that the K.S.A. 1988 Supp. 79-201m definition of 
"merchant" was consistent with definitions of "merchant" used in prior Kansas caselaw 
and found in a dictionary. It then held the pipeline companies were merchants because 
they "are clearly and undisputedly in the business of buying and selling natural gas." 247 
24 
 
 
 
Kan. at 661. The court discredited BOTA's analysis to determine that public utilities 
cannot be merchants or manufacturers, stating:  
 
"The problem here is that in enacting the proposed constitutional amendment the 
legislature determined the size of the mesh in the net and the requisite number of voters 
approved the mesh size. The mesh size is thus fixed in the constitution. The fact that 
unintended varieties of fish may pass through the mesh has little bearing on anything." 
247 Kan. at 662.  
 
 
In other words, the Colorado Interstate Gas court applied what it determined to be 
the constitution's plain language to hold that the pipeline companies were included within 
the merchants' inventory exemption, regardless of any contrary legislative intent. 247 
Kan. at 662 ("Under the circumstances, this court can only apply the clear language of the 
[constitutional] amendment.").  
 
In 1992, Article 11, § 1 of the Kansas Constitution was amended to accomplish 
what the previous amendment establishing the merchants' and manufacturers' inventory 
exemption had not:  it expressly excluded property falling within the public utility 
tangible personal property subclass from the exemption. Kan. Const. art. 11, § 1(b) (2012 
Supp.); L. 1992, ch. 42, sec. 1. Article 11, § 1 retained its clear grant of authority to the 
legislature to define the public utility tangible personal property subclass. See Kan. 
Const. art. 11, § 1(a) (2012 Supp.). 
 
At the time the 1992 constitutional amendment was adopted, K.S.A. 79-5a01(a) 
(Ensley 1989) defined the term "public utility" in part as:  
 
"every individual, company, corporation, association of persons, lessees or receivers that 
now or hereafter are in control, manage or operate a business of:  
 
. . . . 
25 
 
 
 
(4) transporting or distributing to, from, through or in this state natural 
gas, oil or other commodities in pipes or pipelines, or engaging primarily 
in the business of storing natural gas in an underground formation." 
(Emphasis added.) L. 1986, ch. 371, sec. 1. 
 
 
The statutory provisions defining public utility to include the natural gas pipelines 
remained unchanged when litigation arose again regarding taxation of natural gas stored 
in Kansas pipelines. See K.S.A. 2002 Supp. 79-5a01; In re Tax Exemption Application of 
Central Illinois Public Services Co., 276 Kan. 612, 78 P.3d 419 (2003). But in Central 
Illinois, the taxpayers were no longer pipeline companies because by this time FERC had 
issued a federal regulatory order divesting pipeline companies of their ownership interest 
in the gas, so the property tax was levied against the pipeline companies' customers.  
 
In Central Illinois, the taxpayers were three out-of-state public utilities, one out-
of-state municipal corporation, and one out-of-state political subdivision. Each owned gas 
stored in an interstate pipeline system's Kansas storage facility. The taxpayers sought ad 
valorem tax exemptions for their gas pursuant to the merchants' inventory exemption. All 
five taxpayers engaged in the business of selling or distributing natural gas, and all 
owned gas stored in a Kansas pipeline—but none delivered, sold, traded, or otherwise 
disposed of natural gas within Kansas. BOTA granted the exemption requests, holding 
the taxpayers were not public utilities, as defined in K.S.A. 2002 Supp. 79-5a01, and the 
taxpayers' gas therefore constituted exempt merchants' inventory. This court agreed. 276 
Kan. at 621-22.  
 
The Central Illinois court began its decision by affirming the previous rationale 
from Colorado Interstate Gas that the Article 11 merchants' inventory exemption was 
self-executing. But it also noted the 1992 constitutional amendment gave the legislature 
some authority to define what would constitute the public utility tangible personal 
26 
 
 
 
property subject to the amendment's exemption. But that authority, the court held, was 
not limitless because "as we stated in Colorado Interstate Gas, the legislature's definition 
must conform to the commonly understood meaning of the term." (Emphasis added.) 276 
Kan. at 619. Citing State ex rel. Stephan v. Parrish, 256 Kan. 746, 762, 887 P.2d 127 
(1994), this court explained that the legislative definition "must bear a reasonable and 
recognizable similarity to generally accepted definitions and the common understanding 
of the term by the people of Kansas." Central Illinois, 276 Kan. at 620.  
 
The Central Illinois court held that the statutory definition of "public utility" in 
K.S.A. 2002 Supp. 79-5a01 conformed to the common understanding of the term at the 
time of the constitutional amendment's adoption, despite the fact that the statute defined 
public utilities to include only those entities doing business in Kansas. The court 
explained that it approved this statutory definition because the legislature did not limit it 
to "avoid a constitutional provision by defining a constitutional term in a manner 
different from the common understanding." 276 Kan. at 620. The court also cited a rule 
of construction requiring that "'[a] statute and pertinent constitutional provisions must be 
construed together with a view to make effective the legislative intent rather than defeat 
it.'" 276 Kan. at 621. And it held the only way to determine legislative intent was to look 
at the statutes in existence at the time the constitutional amendment was proposed and 
adopted. The court then applied the definition of public utility in K.S.A. 2002 Supp. 79-
5a01 and held the taxpayers qualified for the merchants' inventory exemption because 
they were not public utilities operating in Kansas. See 276 Kan. at 622. The court made 
no effort to provide its own definition for the term "public utility." 
 
In 2004, the year following the Central Illinois decision, the legislature once again 
redefined public utility to include entities that "own, control and hold for resale stored 
natural gas in an underground formation in this state . . . ." (Emphasis added.) L. 2004, 
ch. 171, sec. 4. And in response to that statutory change, PVD assessed natural gas stored 
27 
 
 
 
by 44 out-of-state municipal utilities, marketing companies, and public utilities, which 
led to another round of litigation. See In re Appeal of Director of Property Valuation, 284 
Kan. 592, 593, 161 P.3d 755 (2007) (citing K.S.A. 2006 Supp. 79-5a01). 
 
In that appeal, the taxpayers argued they were not public utilities within the plain 
language of K.S.A. 2006 Supp. 79-5a01 because they did not control the natural gas 
while it was in the pipelines. BOTA agreed, ruling that K.S.A. 2006 Supp. 79-5a01 
imposed three requirements—that the public utility own, control, and hold for resale the 
natural gas in underground storage. It held all three requirements were not met. The PVD 
appealed, arguing in part that BOTA "ignored legislative intent." PVD also argued the 
"and" in K.S.A. 2006 Supp. 79-5a01 should be construed as "or." And as an alternative 
claim, PVD argued the taxpayers had satisfied all three requirements. See 284 Kan. at 
596-601. 
 
The court agreed with the taxpayers and held they fell outside the K.S.A. 2006 
Supp. 79-5a01(a) definition of public utility because the pipeline companies, rather than 
the taxpayers, controlled the natural gas at all times it was in the pipeline system. With 
this rationale, the natural gas was exempt as merchants' inventory. 284 Kan. at 606.  
 
In 2009, the legislature amended the definition of public utility in K.S.A. 79-5a01 
again. L. 2009, ch. 97, sec. 5; see K.S.A. 2012 Supp. 79-5a01. That amendment led to the 
controversy underlying this appeal.   
 
Current Law  
 
K.S.A. 2012 Supp. 79-5a01(a) now defines public utility to include "every 
individual, company, corporation, association of persons, brokers, marketers, lessees or 
receivers that now or hereafter own, broker or market natural gas inventories stored for 
28 
 
 
 
resale in an underground formation in this state . . . ." (Emphasis added.) The taxpayers 
admit they fit within that definition, but they argue K.S.A. 2012 Supp. 79-5a01 is 
unconstitutional because it is inconsistent with the commonly understood meaning people 
of Kansas would have given the words "public utility tangible personal property" at the 
time they voted for the constitutional amendment in 1992. They also claim "the meaning 
of the term 'public utility' as used in [the] constitutional amendment passed in 1992 is the 
statutory definition of 'public utility' for ad valorem tax purposes that was in existence at 
the time of the passage of the amendment," citing this court's Central Illinois decision.   
 
PVD disagrees and argues the definition of public utility adopted in K.S.A. 2012 
Supp. 79-5a01 is consistent with people's common understanding of the term and is a 
valid exercise of the legislature's authority to define property for subclassification under 
Article 11, § 1 of the Kansas Constitution (2012 Supp.).  
 
 
We begin with the taxpayers' argument that under the Central Illinois decision the 
constitutional definition of public utility is frozen in time and the statutory definition in 
existence in 1992 has become the constitutional definition. The taxpayers urge this court 
to interpret Central Illinois as establishing the one and only definition of public utility 
applicable to Article 11, § 1 of the Kansas Constitution (2012 Supp.). Support for their 
argument principally arises from the court's application of the rule that legislative intent 
must be determined by the statutes that existed at the time the constitutional amendment 
was proposed and adopted. 276 Kan. at 621-22. But, if that is true, the statute in effect at 
the time the amendment was adopted would always control; and that runs afoul of the 
legislature's continuing (but limited) constitutional authority to define the subclasses, 
including public utility tangible personal property.  
 
In Central Illinois, the court simply upheld the statutory definition of public utility 
in K.S.A. 2002 Supp. 79-5a01(a), even though it was not the only definition that could 
29 
 
 
 
conform to the common understanding of the term. And unlike the Colorado Interstate 
Gas court, which examined prior caselaw and the dictionary in an attempt to ascertain the 
common meaning of merchants' inventory, the Central Illinois court simply looked at the 
statute and determined it was close enough—without defining more generally the term's 
common meaning. Otherwise, Article 11's grant of legislative authority to define the 
subclasses would be meaningless. See 276 Kan. at 621-22.  
 
This view of Central Illinois is consistent with how the court treated the 
legislature's failed attempt to modify K.S.A. 2006 Supp. 79-5a01(a) in the more recent 
decision of In re Appeal of Director of Property Valuation, 284 Kan. at 604. There this 
court held the legislature was unsuccessful in its first attempt to redefine public utility 
because the taxpayers were not included within the unambiguous statutory language 
defining public utility in K.S.A. 2006 Supp. 79-5a01(a). 284 Kan. at 606. Notably, the 
court did not hold the legislature was limited to the definition of public utility in K.S.A. 
2002 Supp. 79-5a01(a). We held the legislature was—and is—free to amend the 
definition of public utility. We address next whether the legislature's definition of public 
utility under K.S.A. 2012 Supp. 79-5a01 is unconstitutional. 
 
To be constitutional, the legislative definition must bear a reasonable and 
recognizable similarity to generally accepted definitions and the common understanding 
of the term by the people of Kansas. See Central Illinois, 276 Kan. at 620. The parties 
present two sources for identifying the common meaning of the term "public utilities":  
the common characteristics recognized by the taxpayers' expert witness and a dictionary 
definition. 
 
John Wine, the former Kansas Corporation Commission chair, was the only 
witness to testify about the characteristics commonly associated with public utilities. He 
identified these as:  (1) enjoying natural monopolies; (2) providing essential services; (3) 
30 
 
 
 
possessing restricted or protected service territories; (4) subjection to regulation that 
restricts the rates that can be charged for services; (5) obligations to provide non-
discriminatory services to the public; and (6) usually enjoying eminent domain powers. 
The taxpayers advocate for this court to adopt Wine's definition of public utility.  
 
PVD urges this court to use the dictionary definition from Webster's II New 
College Dictionary 952 (1st ed. 1984), which describes a public utility as "'[a] private 
business organization, subject to governmental regulation, that provides an essential 
commodity or service, such as water, electricity, or communication, to the public." Cf. 
Merriam-Webster's Collegiate Dictionary 1006 (11th ed. 2003) ("a business organization 
[as an electric company] performing a public service and subject to special governmental 
regulation"). 
 
PVD interprets the dictionary definition as having three elements:  (1) an essential 
commodity; (2) private business organizations; and (3) subject to regulation. PVD argues 
the first element is satisfied because natural gas is an essential commodity. It reaches that 
conclusion by ignoring the surrounding words which require that a public utility 
"provides an essential commodity . . . to the public." PVD then argues the second 
element is met because the taxpayers are private business organizations. But this is not 
accurate as to all the taxpayers because some are publicly held out-of-state municipal 
utilities, some are out-of-state public utilities, and some are out-of-state marketers and 
brokers. Finally, PVD argues the marketers and brokers are subject to regulation by the 
federal Energy Policy Act of 2005, which regulates the purchase and sale of natural gas. 
PVD's deconstruction saps the dictionary definition of all meaning and reaches an absurd 
result. 
 
But despite both parties' attempts to lump the taxpayers into one group and 
conclude that either all or none of them are public utilities, we must address each group 
31 
 
 
 
individually because they have different business purposes and structures. See Cities 
Service Gas Co. v. State Corporation Commission, 222 Kan. 598, 609, 567 P.2d 1343 
(1977) ("[W]hether a business is a public utility must, of necessity, be determined by the 
character of its operations."). 
 
Marketers and Brokers of Natural Gas 
 
Wine concluded that none of the taxpayers met his definition of a public utility, 
although on a closer examination of his testimony it appears different reasoning applied 
to particular groups. As to the marketers and brokers, he said they did not meet the 
common characteristics he established. But as to the other two groups, his conclusion 
appears to have been based on the prior language of K.S.A. 79-5a01 defining public 
utility to exclude entities not doing business in Kansas.  
 
In his report, Wine stated:  "The Marketers, Brokers, or other entities that trade in 
gas, and possess the right to take delivery of that gas from a federally regulated pipeline 
do not possess any characteristics of a public utility except for the fact that they deal in 
natural gas, a commodity that is highly regulated." But at the hearing, Wine testified the 
current definition of public utility adopted by the Kansas Legislature in K.S.A. 2012 
Supp. 79-5a01 was inconsistent with his view of what a public utility is, stating: 
 
"[T]he fact that someone might be brokering or marketing a—a commodity, a natural gas 
commodity, does not make it a public utility looking at those common characteristics 
in—in any way. I mean, any more than a—a facility that held some coal that might 
eventually be delivered to an electric utility to burn to make electricity, it wouldn't make 
that—that marketer of coal a public utility."  
 
PVD urges this court to find the marketers and brokers are nevertheless public 
utilities, analogizing the marketers and brokers to resellers of telecommunication 
32 
 
 
 
services. PVD cites In re Appeal of United Teleservices, Inc., 267 Kan. 570, 983 P.2d 250 
(1999). In that case, United Telephone Long Distance Company (UTLD) claimed it could 
not be taxed under K.S.A. 79-5a01(a)(3), which defined a public utility as a company 
operating a business of "'transmitting to, from, through, or in this state telephonic 
messages.'" 267 Kan. at 573. UTLD was a reseller of long distance services, which its 
expert described as:  
 
"'[W]hat resellers do is resell the services of the interexchange companies. And so in 
effect they don't own fiber, they don't own switches, they don't own what we call POPs, 
points of presence. They're simply a marketing entity that tries to find a market and sell 
what they have purchased from the interexchange carriers.'" 267 Kan. at 573.  
 
The question before the United Teleservices court was "whether the State has 
authority to assess UTLD as a business transmitting telephonic messages, i.e., a public 
utility." 267 Kan. at 573. The parties' arguments concerned the interpretation of K.S.A. 
79-5a01(a)(3). But the parties did not argue the statutory language was inconsistent with 
the meaning of the term "public utility" in Article 11, § 1. See Kan. Const. art. 11, § 1 
(2012 Supp.). In other words, the court was asked whether UTLD fit the definition of 
public utility established by the legislature in K.S.A. 79-5a01(a)(3)—not whether that 
definition was consistent with people's common understanding of the term. The court 
held UTLD met the statutory definition because it purchased access for long distance 
service from Sprint and then sold that service to consumers. Thus, "UTLD operates a 
business of transmitting telephonic messages by contracting for the service." 267 Kan. at 
581-82.  
 
PVD is correct that both UTLD and the marketers and brokers of natural gas in 
this appeal are resellers of a commodity. But United Teleservices is distinguishable 
because a different question was asked and answered. The United Teleservices court did 
33 
 
 
 
not decide whether the legislature's definition of public utility was consistent with the 
Kansas Constitution. It simply determined whether UTLD fit within a statutory definition 
the legislature had established. Therefore, this case does not support PVD's claim that 
these marketers and brokers are public utilities under the common meaning of the term as 
constitutionally adopted in Kansas.   
 
We hold that the natural gas marketers and brokers in this appeal are not public 
utilities as that term is used in Article 11, § 1 of the Kansas Constitution (2012 Supp.). 
This is because they are not obligated to provide nondiscriminatory services to the public, 
do not have eminent domain powers, and do not enjoy natural monopolies. These entities 
do not possess Wine's common public utility characteristics, and they do not fall within 
the dictionary definition of "public utility." Accordingly, we conclude they are not public 
utilities under that term's common meaning as used in Article 11, § 1. See Colorado 
Interstate Gas Co. v. Board of Morton County Comm'rs, 247 Kan. 654, 660-61, 802 P.2d 
584 (1990). K.S.A. 2012 Supp. 79-5a01 is unconstitutional as applied to the natural gas 
brokers and marketers.  
 
Local Distribution Companies Certified as Public Utilities in Other States  
 
At the COTA hearing, Wine conceded the public utilities operating in other states 
and the local distribution companies met his definition of "public utilities," i.e., including 
them within the K.S.A. 2012 Supp. 79-5a01 definition was consistent with the term's 
common meaning. The taxpayers' argument for why these entities are exempt is not 
entirely clear. But it appears to be premised on the contention, rejected above, that this 
court must define "public utility" for the purposes of Article 11, § 1 of the Kansas 
Constitution (2012 Supp.), as the term was defined in K.S.A. 2002 Supp. 79-5a01 at the 
time of the Central Illinois decision. And absent the previous statutory language in 
K.S.A. 2002 Supp. 79-5a01 limiting public utilities to utilities operating in this state, 
34 
 
 
 
there is no basis for concluding these entities are not public utilities for the purposes of 
Article 11, § 1 of the Kansas Constitution (2012 Supp.) or K.S.A. 2012 Supp. 79-5a01. 
 
We hold the statute is constitutional as applied to these taxpayers, and we affirm 
the denial of their tax exemption claims. See State v. Limon, 280 Kan. 275, 302-03, 122 
P.3d 22 (2005) (constitutional part of statute may stand while the unconstitutional part is 
rejected); State ex rel. Tomasic v. Unified Gov. of Wyandotte Co./Kansas City, 264 Kan. 
293, 316, 955 P.2d 1136 (1998) (same).  
 
Out-of-state Municipal Utilities 
 
 
PVD also attempted to elicit testimony from Wine concerning the municipal 
utilities it considered local distribution companies, but Wine testified he did not know if 
it was appropriate to call them local distribution companies if they were not public 
utilities, even though the municipal utilities were providing analogous services. This 
statement was not further clarified, and COTA did not make a finding relevant to this 
taxpayer group. 
 
Notably, the dictionary definition of "public utility" PVD cites to this court limits 
public utilities to "private business organization[s]." Webster's II New College Dictionary 
952 (1st ed. 1984). But see Merriam-Webster's Collegiate Dictionary 1006 (11th ed. 
2003) (defining "public utility" as "a business organization . . . performing a public 
service and subject to special governmental regulation"). We hold that people's common 
understanding of the term "public utility" would not bring within its grasp municipally 
owned entities providing utility services to a municipality's citizens. 
 
PVD's favored definition of "public utility" includes within the term only private 
business organizations, and Wine could not say whether municipal utilities could be 
35 
 
 
 
considered public utilities under the common characteristics to which he testified. 
Moreover, both PVD's and Wine's understanding of the term included a regulatory 
component. And at the time Kansas voters added the "public utility" subclass to the 
constitution in 1985—and in the decades prior—Kansas treated municipal utilities and 
public utilities differently for regulatory purposes. Specifically, municipal utilities 
enjoyed a degree of self-regulation not available to other public utilities. See L. 1978, ch. 
263, secs. 1, 2 (now codified at K.S.A. 2012 Supp. 66-104) ("public utility" subject to 
Kansas Corporation Commission's regulatory jurisdiction do not include municipally 
owned or operated utility located in municipality's corporate boundaries, but such entities 
"deemed" public utilities for certain purposes); see also Kansas Public Service Co. v. 
State Corporation Commission, 199 Kan. 736, 746, 433 P.2d 572 (1967) (power to 
control and regulate "'one-city' public utilities" belongs exclusively to city); Holton 
Creamery Co. v. Brown, 137 Kan. 418, 421, 20 P.2d 503 (1933) (state utilities act 
provided that no category applied to any public utility owned and operated by 
municipality in this state was "'plain and unambiguous exclusion from the definition of 
"public utilities" of public utilities owned and operated by municipalities.'" [quoting 
Humphrey v. City of Pratt, 93 Kan. 413, 417, 144 P. 197 (1914)]).  
 
The definition PVD advances, which restricts public utilities to private business 
organizations, is consistent with the common meaning of public utility—particularly in 
light of Kansas' regulatory discernment between true public utilities on one hand and 
municipal utilities on the other. It is also consistent to exclude municipal utilities as 
governmental entities from a provision intended to impose a tax burden. And it is 
unrealistic to believe voters would understand the amendment to impose an ad valorem 
tax on a governmental body. Out-of-state municipal utilities are exempt under Article 11, 
§ 1(b) of the Kansas Constitution (2012 Supp.).     
 
36 
 
 
 
In light of this holding, the remaining issues raised on appeal are moot. We 
remand to COTA to determine which taxpayers fall within each of the three generally 
described categories identified previously by COTA. The record on appeal provided to 
this court does not give sufficient detail to complete that analysis. 
 
The COTA decision is affirmed in part and reversed and vacated in part, and the 
matter is remanded to COTA with directions.