Title: Buelow v. Kemp Co., Inc.
Citation: 641 So. 2d 1226
Docket Number: 93-CC-00175
State: Mississippi
Issuer: Mississippi Supreme Court
Date: August 18, 1994

641 So. 2d 1226 (1994) Ed BUELOW, Jr., Chairman and Commissioner of Revenue for the Mississippi State Tax Commission v. KEMP COMPANY, INC. No. 93-CC-00175. Supreme Court of Mississippi. August 18, 1994. *1227 Bobby R. Long, Brenda G. Cameron, MS State Tax Com'n, Jackson, for appellant. Richard D. Foxworth, J. Leigh Kennington Berry, Columbia, for appellee. Before DAN M. LEE, P.J. and PITTMAN and JAMES L. ROBERTS Jr., JJ. DAN M. LEE, Presiding Justice, for the Court: On May 21, 1986, after exhausting all administrative remedies, Kemp Company, Incorporated (Kemp), paid $13,921.14 to the Mississippi State Tax Commission in satisfaction of an assessment levied in an order dated April 19, 1986. The assessment was for $12,382.95 in unpaid taxes and $1,538.19 interest, and arose from a dispute over whether some of Kemp's pit pumping activities were taxable at the full rate or at a special reduced rate for qualified drilling contractors. On June 30, 1986, Kemp filed a complaint in the Chancery Court of Marion County alleging that the taxes were assessed in contravention of the governing statutes and seeking a refund as authorized by Miss. Code Ann. § 27-65-47 (1972). The lower court ruled in favor of Kemp and the Commission appealed, raising the following issues: Because the lower court erroneously interpreted the governing statutes, we must reverse and render judgment in favor of the Commission. Certain background information is critical to a meaningful understanding of the facts in this case. Prior to this dispute, Kemp performed, for hire, a variety of functions related to the production of oil and gas in Mississippi. Pit pumping, one of these activities, involves removal of waste fluids from the well site. The legislature has enacted two taxation statutes that may impact pit pumpers such as Kemp. The first, Miss. Code Ann. § 27-65-23 (1972), is a general statute that imposes a 6% tax on oil field "services." The second, Miss. Code Ann. § 27-65-21 (1972), imposes a 3 1/2% tax on services provided in conjunction with a qualified drilling contract.[1] Kemp provided pit pumping services both at projects where it held the drilling contract and at locations where other parties contracted to drill. The Commission determined that income derived under the latter arrangement was taxable at the full rate. The parties stipulated the following facts: On June 30, 1986, Kemp Company filed a complaint in the Chancery Court of Marion County seeking a refund of the taxes assessed pursuant to § 27-65-47 Miss. Code Ann. (1972). On the basis of the parties' briefs and the extensive stipulation partially quoted above, the lower court held Kemp's business activities taxable at the lower rate provided in § 27-65-21 and the Commission appealed. Despite the multiple errors assigned by the Commission, the only issue on appeal is whether a contract solely for pit pumping is taxable under the reduced rate provided for in § 27-65-21 or the higher rate established in § 27-65-21. Section 27-65-21 provides for taxation of income with respect to contracts for drilling, redrilling or working over an oil well at a reduced rate. Specifically, this section provides, in pertinent part: (emphasis added). Section 27-65-23 imposes a six percent tax on a variety of activities including: The Commission contends that the pit pumping contracts in question were "services performed in connection with ... drilling" and therefore subject to the higher tax rate of § 27-65-23. Kemp counters by asserting that, "Pit pumping is not a service performed in connection with drilling, it is part of the drilling itself." Thus, both parties argue that the "plain language" of the statutes supports their respective positions. This question has not been addressed previously by the Court but it appears that the statutes, when read in pari materia, favor the position of the Commission. The Commission advances the following as the usual meaning of "drilling" within the industry: the "act of boring a hole through which oil and/or gas may be produced if encountered in commercial quantities," citing 8 Williams and Myers, Manual of Oil and Gas Terms (1972). Removal of waste fluids does not fall within this definition. This Court presumes that words used in statutes were *1229 intended to convey their usual meaning absent some indication to the contrary. See Mississippi State Tax Comm'n v. Moselle Fuel Co., 568 So. 2d 720 (Miss. 1990). One need look no further than the statutes we are asked to interpret for compelling evidence that the legislature did not intend a more expansive definition of "drilling." Section 27-65-23 specifically subjects "services performed in connection with drilling" to the higher tax rate. Clearly, there would be no need to tax such services separately if they were intended to fall within a broad definition of "drilling". Thus, the ordinary meaning of the statutory language in question clearly excludes contracts solely for pit pumping from the favorable treatment established in § 27-65-21. The next question is whether some compelling reason exists for construing these statutes other than according to their apparent plain language. By way of a factual predicate, it appears from the record and briefs that two alternatives exist for procuring or reworking an oil well. The first method, known as a turnkey drilling contract is statutorily defined as: Miss. Code Ann. § 27-65-21 (1990). According to the record, a turnkey contractor will typically provide the following services: (i) building the location or pad for the actual drilling operation, (ii) providing drilling fluid, (iii) setting the surface casing, (iv) actually drilling the hole, (v) logging the well, (vi) plugging the well if nonproductive, (vii) pumping the pits, and (viii) cleanup of the location. The second method involves the owner of the project contracting directly with different entities to secure the various necessary services. When business is conducted under the first alternative, the turnkey contractor is subject to the lower tax rate for the total contract amount. This is mandated by the language of § 27-65-21(2) which provides: Thus, it is clear that the legislature has chosen to tax income from some services, including pit pumping, at a lower rate when performed in conjunction with a contract to drill, redrill or work over an oil well. Under the present scheme, the same pumping activity would be subject to a higher tax rate if the owner or operator of the project contracted directly with party other than the driller to obtain the service. Kemp's contention is that this disparate treatment amounts to a violation of the Equal Protection Clause of the Fourteenth Amendment. This contention is without merit. Where no fundamental right or suspect classification is involved, the state may treat citizens differently so long as a rational basis exists for the distinction. See Mississippi High School Activities Ass'n v. Coleman, 631 So. 2d 768, 776 (Miss. 1994). In the present case, at least one rational basis exists for the disparate treatment. The administrative burden of allocating proceeds from turnkey contracts between drilling and non-drilling functions would be formidable. Apparently the legislature elected not to attempt to do so, instead opting for the simpler application of the lower rate to the entire contract price. Where the exact amount of revenue allocable to non-drilling services is readily ascertainable, however, as where the sole object of the parties' association is to procure and provide pit pumping service, no reason exists to charge other than the full rate. The fiscal wisdom (or lack thereof) of such a decision is for the legislature to evaluate. Finally, both below and on appeal, Kemp relies extensively on subsection (3) of § 27-65-21 which states: Kemp contends that its status as a "contractor" is established by the stipulation of the parties, and that, therefore, the second paragraph of this section requires all contracts entered by Kemp to be taxed at the lower rate. The lower court agreed with this argument, holding: As the Commission points out, however, the term "contractor" can only refer to a party who holds a qualified drilling contract for the site where the auxiliary service is performed. Qualifying as a "contractor" for one job does not carry over to other jobs engaged in by the same taxpayer. Reading the statutes together, it appears that the legislature intended different tax consequences for activities performed in conjunction with a drilling contract. The lower court's ruling effectively erases the differences mandated by the legislature for taxpayers who have drilled in the past regardless of the connection to any current drilling. This was reversible error. Furthermore, the relevant portion of the stipulation clearly does not bind the Commission to the position that Kemp was a "contractor" with respect to the activities which were taxed under § 21-65-23: The lower court erred in adopting Kemp's construction of the relevant statutes and must be reversed. The Commission was entitled to judgment in its favor denying Kemp's action to recover taxes legally assessed and paid on May 21, 1986, and the same is hereby rendered by this Court. REVERSED AND JUDGMENT RENDERED HERE DENYING REFUND TO KEMP COMPANY, INC. HAWKINS, C.J., PRATHER, P.J., and SULLIVAN, PITTMAN, BANKS, McRAE, JAMES L. ROBERTS, Jr. and SMITH, JJ., concur. [1] At the time this dispute arose, the higher rate was five percent and the lower was two and one-half percent.