Water District's Electricity Exempt From Taxes: Fid-Bau Portal

Water District's Electricity Exempt From Taxes

Water District Number 1 of Johnson County, Kansas, is a quasimunicipal corporation that sells water to commercial, residential, and municipal customers in the county. After treatment, the water is pumped through pipes to various pumping stations and then to the customers. The water district purchases electricity to supply power to the pumping station, which pressurizes the water. Then the district sells the pressurized water. The state Department of Revenue assessed additional retailer's sales taxes against the district for its purchases of electricity and also levied a penalty. The district paid the taxes and penalty under protest and then appealed to the director of taxation without success. A further appeal to the Board of Tax Appeals was also unsuccessful. The district then sought judicial review of the board's ruling. The appellate court said that the initial pressurization of the district's water to its pumping stations was an integral part of the manufacturing process because the water is not realistically usable until after it is pressurized. Pressurization of the water changes its character and quality and is required by state regulation to meet the health needs of Kansas citizens. Thus, the court found that the electricity used to pressurize the water was exempt from taxation under state law as property consumed in production, manufacturing, and processing. However, the court reluctantly affirmed the penalty imposed on a technicality.