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Tax exemption only applies to traditional logging

By: dmc-admin//January 1, 2003//

Tax exemption only applies to traditional logging

By: dmc-admin//January 1, 2003//

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Abrahamson
Hon. Richard S. Brown

For business property to be exempt from taxes, the primary purpose of the business must be one for which the exemption is intended by the legislature, the Wisconsin Court of Appeals held on Dec. 26.

As a result, a business primarily involved in clearing trees for development, and only incidentally involved in selling the removed wood, does not qualify for the exemption in sec. 70.111(20).

The statute, entitled "Logging Equipment," gives an exemption from local property taxes for "All equipment used to cut trees, to transport trees in logging areas or to clear land of trees for the commercial use of forest products."

Wood-Land Contractors, Inc., is in the business of clearing land for real estate developers. Wood-Land cuts trees and removes them from the developers’ land. It then produces lumber, firewood, or wood chips with the wood, and sells the products. Fifteen percent of its revenues comes from selling wood products, and 85 percent from the contracts for clearing land.

The Village of Lannon sought to tax Wood-Land’s tree cutting equipment. Wood-Land refused to pay the tax, relying on the logging equipment exemption, and the Village sued.

Waukesha County Circuit Court Judge J. Mac Davis held that the statute was designed to give an exemption only for those systematically involved in the logging business, not to those who incidentally cut logs and sell the products as a part of an altogether different kind of business, and granted summary judgment in favor of the Village.

Wood-Land appealed, but the court of appeals affirmed in a decision written by Judge Richard S. Brown and joined by Judge Daniel P. Anderson. Judge Neal Nettesheim dissented.

Logging

The court began by defining the various terms used in the exemption, beginning with "logging," and adopting definitions contained in both Black’s Law Dictionary and lay dictionaries.

The fourth edition of Black’s (current editions no longer contain the term) define "logging" as, an industry which, "[i]ncludes felling and preparation of logs for transport, log assemblage, and main log haul; it includes also production of large quantities of pulpwood, cross ties, poles, piling, mine timbers, veneer logs, bolts and miscellaneous other forms."

Webster’s defines "logging" as, "[T]he occupation of felling trees and cutting them up into logs and transporting the logs to sawmills or to a place of sale."

Applying the definitions to the exemption, the court concluded, "the statute applies to a specific genre known as the logging industry, an industry involved in the systematic cutting and transporting of logs for eventual commercial use. We emphasize the word ‘systematic’ because it separates those in the logging business from those who incidentally cut trees as part of some other business."

Forest Products

The court then examined the definition of the expression, "forest products," utilizing the Webster’s definition of "forest" – "a dense growth of trees and underbrush covering a large tract of land."

The court concluded, "We surmise that most Wisconsinites would agree that this is the common and generally understood meaning of the term. A reasonable person would also not think of a tree standing in front of a residential lawn as a potential "forest product."

What the court held

Case: Village of Lannon v. Wood-Land Contractors, Inc., No. 02-0236.

Issue: Is a business which removes trees for real estate development, and then sells the wood entitled to the logging equipment tax exemption in sec. 70.111(20)?

Holding: No. The legislature did not intend for the exemption to apply to businesses for whom selling forest products is only an incidental part of another purpose.

Counsel: Robert F. Klaver Jr., James J. Carrig, Menomonee Falls,
for appellant; Mark G. Blum, Waukesha, for respondent.

Applying this definition, the court concluded that Wood-Land did not qualify for the exemption, reasoning, "we cannot take words in isolation, but must look to the relevant language in the whole statute. When we do, we see that this exemption applies to the logging industry, to those who are in the business of cutting and transporting trees in logging areas or who are in the business of clearing forest land for the express purpose of using the fruits of their labor for eventual commercial use. Under this definition, Wood-Land does not qualify. Its business is to clear land for the purpose of giving developers what they want: land free from obstructions. That is what it gets paid for. While Wood-Land may incidentally fell trees as part of its business, it does not cut and transport from logging areas. And it does not go into a forest with the express purpose in mind of clearing land ‘for the purpose of’ commercially using the felled trees. Any incidental value it gets from commercially selling the felled trees it carries from developers’ property is collateral to its main occupation. Wood-Land is not engaged in the systematic occupation of logging."

The court thus concluded that the statute unambiguously does not allow for the exemption.

Case Law

The court then considered the applicability of its opinion in Village of Menomonee Falls v. Falls Rental World, 135 Wis.2d 393, 400 N.W.2d 478 (Ct.App.1986). In that case, the court held that the stock of a rental center was not exempt as stock-in-trade, because, even though worn-out rental equipment might be moved out of stock and sold, the real purpose of the stock was to rent it, not sell it.

Examining its decision, the court rejected the interpretation of Lannon and the trial court – that the decision adopted a "primary purpose" test. Instead, the court determined that the controlling factor in Falls Rental World was that the legislature did not intend to grant an exemption to rental centers.

Nevertheless, the court then went on to hold that, although Falls Rental World did not provide the support for a "primary purpose" test, such a test is proper anyway.

The court stated, "even if Falls Rental World did not establish a ‘primary purpose test,’ we do. The bottom line is we must ask ourselves the purpose for which the tax exemption was granted. If it was for a specific industry, then all of those who incidentally may come within the statute, but who are not part of that industry do not get the exemption."

Finally, the court stated that, even if the statute was ambiguous, and that Wood-Land’s interpretation was reasonable, the statute must, as a tax exemption, be construed in favor of the taxing authority. Accordingly, the court affirmed.

The Dissent

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Wisconsin Court of Appeals

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Case Analysis

Judge Nettesheim dissented. Although he agreed with the holding that, to qualify for the exemption, a taxpayer must be primarily engaged in a logging operating a forest setting, Nettesheim concluded that summary judgment was inappropriate on these facts.

The dissent stated, "I fail to see how the motives of the land owners factor into the statutory analysis. The statute requires an examination of Wood-Land’s primary reason for the use of its logging equipment, not an examination of the land owners’ motives for wanting the timber removed and their lands cleared."

The dissent added, "The resolution of this case rests, in part, on Wood-Land’s primary business intent. Does Wood-Land exist to provide land-clearing services or does it exist to perform logging operations within the meaning of Wis. Stat. sec. 70.111(20)? Intent is a question that does not lend itself to summary judgment methodology."

Click here for Case Analysis.

David Ziemer can be reache
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