Commonwealth, Department of Revenue v. Majestic Collieries Co.

LUKOWSKY, Justice. The issue presented is whether the lessees of coal interests, who had contract miners extract coal from the leasehold for them were the taxpayers engaged in severing coal who should have paid the coal severance tax. The Board of Tax Appeals said yes. The Circuit Court said no. We granted a joint request for transfer from the Court of Appeals. We reverse. The facts are not in dispute. Majestic Collieries Company and Sovereign Coal Corporation are lessees of coal bearing properties having the right to remove and sell the coal and the duty to pay royalties to the lessor. These lessees entered into oral contracts with “contract miners” to physically sever the coal from the leasehold and to deliver the coal to the point at which it was loaded into rail cars. Sovereign and Majestic paid these contract miners for their services an agreed amount per ton of coal delivered over the scales. Sovereign and Majestic then sold the coal to the ultimate consumer through the use of a common marketing company. Sovereign and Majestic filed returns and paid the severance tax due under KRS Chapter 143 for the coal severed in the names of the contract miners. The funds came from either amounts withheld from payments made to the contract miners or by payments made on their behalf. The “gross value” used to compute the tax was the amount Majestic and Sovereign paid the contract miners for their services, not the proceeds from the sales to the ultimate consumer. In the briefs and at oral argument much ado was made about the “independent contractor” status, or lack thereof, of the con [878] tract miners. We are shown that the hiring and firing of employees and the negotiation of collective bargaining agreements lies with the contract miners. Further, the equipment is owned by these contract miners, although financing is sometimes provided by Majestic or Sovereign. The strip mine permits are issued to the contract miners, but the lessees must consent as owners of the coal. The contract miners paid workmen’s compensation insurance on their employees, except in a few cases in which Majestic and Sovereign stepped in and made the payments. If this was an agency case concerning the liability of the principal for the debts incurred by his agent, or if this was a tort case involving the responsibility of the master for the acts of his servant, then the evaluation of the contract miners and lessees relationship in terms of independent contractor would be pertinent. See Locust Coal Company v. Bennett, Ky., 325 S.W.2d 322, 324 (1959) for a list of the traditional evaluative factors to determine whether a particular relationship is that of independent contractor. But, it is neither. This is a tax case. The incidents of taxation are set out by the statute. It is to the statute we must look to determine who is the taxpayer. KRS 143.010(5) stated: “ ‘Taxpayer’ shall mean and include any individual, partnership, joint venture, association, or corporation engaged in severing coal in this state.” KRS 143.010(3) defined severing as “the physical removal of coal from the earth in this state.” Majestic and Sovereign submit that because the contract miners actually do the mining of the coal, they are the ones who “sever” the coal and are the taxpayers. Majestic and Sovereign owned the right to extract the coal and sell it. They arranged with the contract miners to perform the mining and transportation tasks for them. They paid the contract miners a per ton compensation for the cost of removing the coal. The contract miners never owned the coal nor sold it to Sovereign and Majestic. Rather, the contract miners dug the coal which Sovereign and Majestic wanted mined. Logically, the “gross value” of the coal severed is not the price paid the contract miners for their labors. This figure is but a cost of doing business of Majestic and Sovereign. KRS 143.010(5) required this result. A “taxpayer” is one “engaged in severing coal.” The argument of Majestic and Sovereign, taken to its logical conclusion, would result in the coal severance tax being levied upon the individual pick miner or machine operator merely because he is the one who physically removes the coal from the earth. Majestic and Sovereign were engaged in severing coal from their leaseholds, and the payments to the contract miners were a business expense necessary to get the coal out of the ground and to the rail car where it could be sold at the market price. In short, the contract miners were the tools with which Majestic and Sovereign severed the coal. Accord, Clay County v. Leslie County, Ky., 531 S.W.2d 524 (1975). Because we conclude that KRS Chapter 143 clearly makes Majestic and Sovereign the taxpayers engaged in severing coal in Kentucky, it is unnecessary for us to decide whether the administrative regulations cited are ultra vires. The arguments that the 1978 amendments to the coal taxation statute indicate the legislature meant to clear an ambiguity (commonwealth) or to expand that tax and revenue (Majestic and Sovereign) are mere sophism. The conclusions are equally plausible. There is no legislative history and we decline to speculate. We rely on the language of the statutes. The judgment of the Pike Circuit Court is reversed and the cause is remanded with directions to reinstate the order of the Board of Tax Appeals. All concur except AKER and STEPHENSON, JJ., who dissent.