‘Primary purpose’ test abandoned for tax exemptions

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Hon. Ann Walsh Bradley

In determining whether logging equipment is tax exempt under sec. 70.111(20), the “use of equipment” test should be applied, rather than the “primary purpose” test, the Wisconsin Supreme Court held on Dec. 4.

In so holding, the court reversed a published decision of the court of appeals, Village of Lannon v. Wood-Land Contractors, Inc., 2003 WI App 7, 259 Wis.2d 879, 659 N.W.2d 95.

Wood-Land Contractors, Inc., is a corporation headquartered in the Village of Lannon. It contracts to cut and clear trees on the property of its customers. As part of its operations, Wood-Land removes all of the timber from the site and produces forest products, such as saw logs, wood chips, and firewood. Wood-Land advertises both its land clearing services and sale of firewood and wood chips to the general public.

Wood-Land owns approximately $1.3 million in equipment. The most expensive item is a Timbco T-425 Feller Buncher machine. The Timbco’s cost to Wood-Land was approximately $210,000, plus $127,000 for its specialized tractor and transport trailer. Wood-Land uses the Timbco to cut trees with girths up to 33 inches, which are generally of a height 80 feet or greater.

For smaller trees, Wood-Land uses more conventional timbering machinery, including skidsters with grappling attachments, brush hogs, and chain saws. In addition to this type of equipment, Wood-Land also claimed an exemption for several of its office items including a typewriter, copier, telephones, calculators, and carpeting.

After Wood-Land cuts a tree, it either chips it on-site or loads it onto log racks. Wood-Land cuts desirable trees to lengths as saw logs and sells them to mills. It processes less desirable trees for wood chips and firewood that it sells to the public. Wood-Land maintains an eight-acre property where it prepares and sells firewood and wood chips.

In 2000, Wood-Land had a total revenue of $749,679. Of this total, almost 10 percent came from the sale of saw logs, wood chips, and firewood.

Lannon brought suit in May 2001 to collect unpaid personal property taxes on Wood-Land’s equipment. Wood-Land counterclaimed, seeking a declaratory judgment action that its property was exempt under sec. 70.111(20).

Waukesha County Circuit Court Judge J. Mac Davis granted summary judgment to the Village, concluding that Wood-Land’s “primary purpose” was not to harvest forest products, but rather to clear land for its customers.

Wood-Land appealed, but the court of appeals affirmed, applying the “primary purpose” test, and concluding that Wood-Land did not qualify for the exemption. The Supreme Court granted review and reversed in a decision written by Justice Ann Walsh Bradley and joined by Justice Diane S. Sykes.

Justice Patience D. Roggensack wrote a concurring opinion, joined by Justices Jon P. Wilcox and N. Patrick Crooks, agreeing with the reasoning, but disagreeing with method of the statutory analysis. Justice David T. Prosser also wrote a concurring opinion, agreeing with the opinion of the court, but “with reservation.”

Chief Justice Shirley S. Abrahamson also concurred, but only with the holding that the court of appeals decision be should reversed. Abrahamson agreed with the lower courts’ decisions to apply the “primary purpose” test, but concluded that factual questions were present, precluding summary judgment.

The Statute

Section 70.111 provides, “The property described in this section is exempted from general property taxes: … (20) logging equipment. 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.”

Both parties agreed, as did the court, that the phrase, “commercial use of forest products,” modifies each of the three types of logging equipment specified in the statute, and not merely equipment used “to clear land.” The court concluded, “To read the phrase as modifying only equipment used to clear land would render an exemption for nearly every saw in this state.”

The court rejected the “primary purpose” test, however, finding, “On its face, the statutory exemption contains no language that the equipment be used by a certain business model or industry. Moreover, the exemption contains no language that the user’s ‘primary purpose’ is to harvest forest products.”

The court thus set forth the relevant inquiry as follows: “whether the equipment is used: (1) to cut trees for the commercial use of forest products, (2) to transport trees in logging areas for the commercial use of forest products, or (3) to clear land of trees for the commercial use of forest products.”

Looking at the exemption in the context of the entire statute, the court cited numerous instances in which the legislature has narrowed a given exemption to equipment “used by” or “used in” particular industries or trades. Other exemptions refer to equipment “used exclusively,” or “used primarily,” for particular purposes.

The court reasoned, “Clearly the legislature has demonstrated an ability to use qualifying language which limits an exemption, as evidenced by these different subsections. Therefore, what Wis. Stat. sec. 70.111(20) does not say is also significant when interpreting its meaning.”

Legislative History

Turning to the exemption’s legislative history, the court found the record scant, but nevertheless, cited some support for its interpretation. The court noted that an earlier draft of the exemption explicitly referred to equipment used “in lumbering,” but was replaced by “for the commercial use of forest products.”

The court concluded, “We do not view the subsequent change as still referring exclusively to the lumbering or logging industry. Rather, we view the new language as removing the industry component from the subsection altogether.”

Application

The court further noted that the “primary purpose” test would be difficult to apply in practice. The court reasoned, “Because the test is subjective in nature, it places an enormous burden on assessors or courts applying the exemption. First, they must ascertain whose ‘purpose’ they are to consider. In a case involving two companies — one logging and one processing — this could be a troublesome task. Second, they must determine the individual business’ ‘primary purpose’ for each taxable year. We can imagine scenarios in which fluctuating markets could alter Wood-Land’s percentage of forest products sales and transform otherwise non-exempt equipment into exempt equipment.”

Accordingly, the court adopted the “use of the equipment” test, reversed the lower courts, and issued the following instructions upon remand: “On remand, the circuit court should consider what equipment of Wood-Land’s is used: (1) to cut trees for the commercial use of forest products, (2) to transport trees in logging areas for the commercial use of forest products, or (3) to clear land of trees for the commercial use of forest products. Wood-Land will bear the burden of proving entitlement to the exemption.”

The court also stated that the burden that must be met by Wood-Land is the “strict but reasonable” standard adopted in Deutsches Land, Inc., v. City of Glendale, 225 Wis.2d 70, 591 N.W.2d 583 (1999), even though Deutsches Land concerned real, rather than personal, property.

The court reasoned, “Without such a construction, we believe that the exemption would invite subterfuge or sham in claims involving de minimis use. Accordingly, we recognize the corollary to the above principle here: de minimis uses of the property are not sufficient to invoke this exemption.”

Roggensack Concurrence

Justices Roggensack, Wilcox, and Crooks did not join the opinion of the court in its entirety, stating, “I agree with the conclusions reached in the majority opinion.

However, I write separately to point out that the majority opinion’s statutory analysis … is a departure from that which has been this court’s mode of statutory analysis and that it is not one that the court has discussed and decided to adopt.”

Specifically, the concurrenc
e objects to the failure, in the opinion of the court, to explicitly decide whether or not the statute is ambiguous or unambiguous.

The concurrence concludes, “The majority opinion employs the analytic framework for a statute that is ambiguous, while purposely not analyzing whether Wis. Stat. sec. 70.111(20) is ambiguous. This is a change in our traditional analysis… I offer no opinion about whether our mode of statutory analysis ought to be changed.

However, when we change the statutory analysis in a majority opinion without explaining that the majority of the court has not decided to change its analysis, we lead our readers to conclude that we have changed. This can cause confusion among those we write to assist and make our opinions less useful to the public. Accordingly, I respectfully concur.”

Prosser Concurrence

Prosser wrote separately to state that he has reservations about whether the opinion of the court can be reconciled with the statutory directive in sec. 70.109 that property tax exemptions “shall be strictly construed in every instance.”

Prosser added, “In the wake of the court’s decision, a property owner may be able to secure a property tax exemption for certain equipment merely by demonstrating that the equipment is used to cut trees for the commercial use of forest products, to transport trees for the commercial use of forest products, or to clear land for the commercial use of forest products, so long as use of the equipment for one or more of these purposes is not de minimis. This may be a broader exemption than the legislature intended (emphasis in original).”

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Abrahamson Concurrence

Chief Justice Abrahamson also wrote separately, stating, “I agree with Judge Nettesheim’s dissent [in the court of appeals] that summary judgment is not appropriate in the present case. I, like Judge Nettesheim, agree with the test set forth by the court of appeals. He and I conclude that competing reasonable inferences can be drawn on the question of whether Wood-Land’s primary business activity is logging or whether it is the clearing of land with timbering as an ancillary activity. Like Judge Nettesheim, I would remand the cause to the circuit court for trial on that question.”

Abrahamson reasoned, “That the statute requires equipment to be used for the commercial use of forest products rather than a commercial use of forest products suggests that the first, highest, or foremost purpose of the business using the equipment, or of the use of the equipment itself, is for the commercial use of forest products. Use of the definite article in the statute rather than the indefinite article, coupled with the various references to ‘logging’ in both the title and body of the statute, and general rules of interpreting tax exemptions lead me to believe that the legislature sought to craft a very narrow exemption limiting the business entities capable of claiming an exemption to those that are part of the logging industry (emphases in original).”

Abrahamson also concluded that the test adopted in the majority opinion may be just as difficult to apply as the “primary purpose” test, because both “tests ultimately require a determination of how much use must be for commercial use of forest products in order to qualify for a tax exemption.”

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David Ziemer can be reached by email.