[Text Box: Mark A. Loyd, Partner Chair, Tax Group MLoyd@bgdlegal.com Mark’s Bio Bailey Roese, Attorney BRoese@bgdlegal.com Bailey’s Bio Maggie Hayes, Attorney MHayes@bgdlegal.com Maggie’s Bio] [Text Box: Jeffrey T. Bennett, Partner JBennett@bgdlegal.com Jeff’s Bio Brad Hasler, Partner BHasler@bgdlegal.com Brad’s Bio Brett J. Miller, Partner BMiller@bgdlegal.com Brett’s Bio] Kentucky Tax Developments
New Kentucky Governor – Changes at KDOR and KBTA in 2016?
With Governor Bevin taking office in December, 2015, one can expect changes in the administration of Kentucky taxes, at the Department of Revenue and at the Board of Tax Appeals. This is because new administrations inevitably put their stamp on these agencies, in one way or another. While there is no crystal ball to look into, the following represent some predictions for 2016.
New Tax Commissioner? Nearly every new Governor appoints a new Revenue Commissioner, and Governor Bevin did so on December 14, 2015. The Governor appointed Dan Bork, CPA, a former tax executive at Lexmark. It will be interesting to see how tax administration will change in Kentucky as a result of this new appointment.
New Faces at Revenue? One can anticipate that there will be a few new faces at Revenue, generally at the highest levels, as many of these are non-merit positions. Many of the current administrators at Revenue have extensive experience; so, many may stay. As of now, many of the faces at Revenue are familiar. The newest edition is Brent King. King was appointed the Executive Director of the Office of Field Operations in May of 2016. This is an early change for the administration and it will be interesting to see the approach that the new administration will take going forward.
More Regulations and Guidance? CPAs and other tax practitioners have been clamoring for guidance. Revenue did away with the old policies and circulars, which many found useful. Revenue promulgated quite a few new regulations in 2005 and 2006. But, many of these have not been updated and additional guidance that can be relied upon is needed. Hopefully, we will see more administrative guidance provided by Revenue.
Resolutions of Pending Cases? Fresh faces mean new looks. So, perhaps with the new administration, matters that could not previously have been resolved can be.
New Faces at the Kentucky Claims Commission? The Kentucky Board of Tax Appeals has experienced a dramatic change in structure as of October 1, 2016. Per an executive order by Governor Matt Bevin, the Kentucky Board of Tax Appeals has merged with the Kentucky Board of Claims and the Kentucky Crime Victims Compensation Board.
One thing is certain. Things will continue to change at Revenue and the KBTA.
Kentucky Governor’s Red Tape Reduction Initiative Provides Opportunity to Update Tax Regulations
In early July, Kentucky Governor Bevin announced the Red Tape Reduction Initiative. The details of the Initiative can be found at www.RedTapeReduction.com.
The Initiative’s website allows anyone to report a regulation, stating “If you are aware of a regulation that you believe to be outdated, unnecessary or overly complex, let us know by filling out this form. All suggestions will be reviewed and evaluated.”
The Kentucky Department of Revenue has promulgated many tax regulations. However, a good number of these have not been updated in years, even though the underlying statutory provisions that they address have been amended, sometimes multiple times. One example is the lack of an administrative regulation concerning the Limited Liability Entity Tax (“LLET”). Although there is a regulation for the LLET’s predecessor, the Alternative Minimum Calculation, 103 KAR 16:220, there is no LLET regulation.
This Initiative has been endorsed by business leaders and organizations throughout the Commonwealth. The Kentucky Chamber of Commerce and the Kentucky Society of CPAs have encouraged their members to participate.
Obviously, tax practitioners do not necessarily want tax regulations eliminated. They want outdated, unnecessary or overly complex tax regulations replaced with updated, necessary and appropriately tailored regulations, which include examples to make them easier to understand. In the tax area, more regulations are needed, not less.
The Red Tape Reduction Initiative’s website states that “The end goal is to allow businesses to operate in a modernized regulatory system that provides them with the flexibility they need to serve their customers.” Obviously, updated tax regulations come within this goal.
While this Initiative is going on, Kentucky taxpayers should review regulations that are important to them and, if appropriate, request a review of those regulations.
Kentucky Department of Revenue Issues Opinion Narrowing Definition of Agricultural Property
The Kentucky Department of Revenue (“Department”) recently issued an opinion in which it discussed the definition and applicability of certain Kentucky statutes that relate to “agricultural use” valuation for real property tax purposes. The Department was prompted to do so by the Property Valuation Administrator (“PVA”) of Fayette County, David O’Neill, after several articles in the Lexington Herald-Leader questioned how agricultural use valuation was applied in Fayette County. In its opinion, the Department states that over the years, it has improperly advised PVAs on the method for assessing agricultural property.
The Kentucky Constitution permits agricultural or horticultural land to be valued differently than other real property. In 1992, the Kentucky General Assembly passed HB 585, which altered some of the requirements for land to be valued as agricultural or horticultural. In particular, landowners were no longer required to provide proof of income from any land claimed as agricultural or horticultural. Because of this, PVAs across Kentucky were, as the Department put it, “left with slim legal footing from which to refute a landowner’s claims that their property has the ‘potential’ to be used for agricultural or horticultural purposes, even when no such activities are likely to occur.”
KRS 132.010(9) requires that the land at issue be at least 10 acres to qualify for the agricultural valuation and 5 acres to qualify for the horticultural valuation. Under certain circumstances, PVAs would permit this 5 or 10 acres to include a house or other improvements. In its opinion, the Department has articulated the position that acreage including a dwelling house cannot be included in the 5 or 10 acre minimum. Because of this, a number of taxpayers who live on a lot that is 5 or 10 acres or less but that includes a dwelling house may discover that their property taxes will increase in the coming years.
The Department also announced that it did not believe “grandfathering” to be appropriate for taxpayers who had previously had their property valued as agricultural but who stand to lose that valuation under the new opinion.
Taxpayers should review their property tax records to determine if they qualified for this valuation in the past. The Department has cautioned that “unless sufficient acreage is added to the parcel,” taxpayers with a dwelling house on properties whose acreage was on the cusp of qualifying for the reduced agricultural or horticultural valuation will lose this valuation status. Taxpayers aggrieved by the changes in these valuation procedures may wish to challenge their future property tax assessments. As of yet there has been no new legislation passed in the General Assembly to codify the Department’s opinion.
2016 Kentucky Tax Legislature Wrap-Up: Tax Reform is on the Horizon
The Kentucky State Legislature recently wrapped up its 2016 legislative session, with some tax legislation meeting Governor Bevin’s approval and being signed into law. Governor Bevin has promised to explore the possibility of tax reform for future years. Some of the legislative highlights in the area of tax follow:
Taxpayer Ombudsman: 2016 S.B. 293 creates a “Division of Taxpayer Ombudsman” in the Office of the Commissioner of the Department of Revenue. There will be a division director who reports to the tax commissioner. The Division of Taxpayer Ombudsman will help solve taxpayer complaints and problems, provide recommendations related to improving and revising informational publications and facilitating voluntary taxpayer compliance, and suggest other improvements to the Kentucky Department of Revenue and its administrative purview. This is a good first step toward strengthening the Kentucky Taxpayer Bill of Rights.
Administrative Regulations: 2016 S.B. 129 makes several reforms to the administrative regulation process. It removes the requirement that the Department of Revenue publish tax forms and instructions to those forms by promulgating an administrative regulation. This law also repeals KRS 13A.140, which provides that an administrative regulation is presumed valid. Practitioners have been concerned about proper notice to affected parties and the legal effect of the Department’s tax forms because, for example, changes to tax forms were not apparent like in substantive regulations, which highlight added, deleted, or modified language in the regulation itself. S.B. 129 addresses these concerns.
Conformity with the Internal Revenue Code: 2016 H.B. 80 revises the definition of the Internal Revenue Code within the Kentucky Revised Statutes to mean the Code as in effect on December 31, 2015, exclusive of any amendments made after that date and inclusive of amendments that extend provisions from that date that would otherwise have terminated. The prior date was December 31, 2013.
Non-Profit Exemption: 2016 H.B. 52 exempts purchases made by any resident, single member limited liability company that is wholly owned by a resident or nonresident 501(c)(3) organization from sales and use tax. The single member LLC must be disregarded as an entity separate from the nonprofit.
Water Withdrawal Fees: 2016 H.B. 80 exempts water withdrawal fees imposed by the Kentucky River Authority from state and local taxes. The exemption expires on June 30, 2018.
Landfills: 2016 H.B. 402 revises the valuation and assessment methodology for landfills. Prior to this law’s passage, landfills were valued and assessed in the same manner as public service companies; now, they will be subject to the same methodology as most taxpayers. The Department of Revenue, not the local county assessor, will value municipal solid waste disposal facilities. The law also classifies certain pollution control property that is part of the solid waste disposal facility as tangible personal property instead of real property.
CMRS Fees: 2016 H.B. 585 replaces the current Commercial Mobile Radio Service (“CMRS”) (also known as 911 emergency service fees) prepaid service charge with a new retail charge at a flat rate of 93 cents on each retail transaction involving the purchase or sale of prepaid cellular telephones, calling cards with preloaded set dollar amounts for minutes or units of air time, the recharging of such a calling card, or the recharging of a prepaid cellular phone itself with additional minutes or units of air time. The retailer will collect the service charge from the purchaser at the time of the retail transaction. It is effective January 1, 2017. This is an example of the law eventually catching up with technology as well as new and innovative business models.
Alcohol & Tobacco
Alcoholic Beverages: 2016 S.B. 11 amends the definition of alcoholic beverage to include powder or crystal. This new legislation also permits small farm wineries to manufacture brandy, fortified wine, and other products. Under the law, to be considered a small farm winery, the winery must produce no more than 100,000 gallons per year of wine, an amount that has increased from the previous 50,000 gallons per year. Likewise, the law increases the permitted production of a microbrewery from 25,000 barrels to 50,000 barrels. The law also makes it legal for a distiller, rectifier, winery, small farm winery, brewer, microbrewery, wholesaler, distributor, or retailer to donate alcoholic beverages to a charitable organization that possesses a special temporary alcoholic beverage auction license.
Tobacco Products: 2016 H.B. 83 carves out a tax exemption for “reference tobacco products,” which are tobacco products, including cigarettes, that are made by a manufacturer specifically for use by colleges and universities in conducting tobacco health-related research or other experiments. Reference tobacco products must be marked as such and cannot be sold to customers, but they are not subject to cigarette or tobacco product taxes.
A New “Blue Ribbon” Commission? Governor Bevin has promised to assemble a team to review the possibility of tax reform after the conclusion of the 2016 legislative session. This is not the first time tax reform has been considered in Kentucky; in 2012, Governor Steve Beshear put together a Blue Ribbon Tax Commission which presented a plan to modernize Kentucky’s tax code. However, legislators chose not to put the plan in motion, although some ideas were adopted in a piecemeal fashion.
Data Centers: 2016 H.B. 237 creates a 5-year city tax exemption for qualified data centers by deeming them manufacturing facilities. A “data center” is a “structure or portion of a structure that is predominantly used to house and continuously operate computer servers and associated telecommunications, electronic data processing or storage, or similar components.” The exemption applies only to a new data center that chooses to locate in the city or county after July 15, 2016.
Governor’s Veto Message Portends Tax Reform: Governor Bevin appeared hesitant to adopt any tax credits without comprehensive tax reform. He vetoed H.B. 19, which provided for a tax credit for organ and bone marrow donation. In his veto message, Governor Bevin explained that in his view, the costs of the bill outweighed its benefits, and that given Kentucky’s financial climate, new tax credits were not advisable. He also said that “[a]s with numerous other proposed tax changes by the 2016 General Assembly, the tax credit proposed by House Bill 19 would be appropriate for debate and potential inclusion in a comprehensive tax reform proposal.”
What Could Modernizing Kentucky’s Tax Code Look Like?
New governors want to put their stamp on Kentucky’s tax system. Governor Bevin is no exception. So, what could Governor Bevin’s plan for “Modernizing Kentucky’s Tax Code” look like?
The overall theme of the Governor’s tax plan, which is available at http://www.mattbevin.com/plan, is to “reduce tax rates for families and businesses.” As with many things, the devil is in the details and reducing tax rates without reducing revenue necessarily entails broadening the tax base.
Repeal the Death Tax
Decrease Personal and Corporate Income Tax Rates
Simplify the Tax Code
Significantly Reduce Tax Expenditures
Select Case Updates
Kentucky Supreme Court
Commonwealth of Kentucky v. AT&T Corporation, 2013-SC-000800-DG (Ky. June 11, 2015).
In Commonwealth of Kentucky v. AT&T Corporation, the Kentucky Supreme Court has held that a taxpayer must appeal to the Kentucky Board of Tax Appeals (“Board”) to resolve as-applied constitutional and administrative challenges before a Circuit Court can make a finding on AT&T Corporation’s challenge to the constitutionality of attempted amendments to a statute as void on their face. The Court reversed the decision of the Court of Appeals, holding that the factors set forth in W.B. v. Commonwealth, Cabinet for Health and Family Services, 388 S.W.3d 108 (Ky. 2012) weigh in favor of requiring AT&T to first exhaust administrative remedies. The Court explained that the administrative record was undeveloped regarding several issues, including whether the refund claims were timely filed, whether AT&T had properly documented the refund applications, and whether AT&T’s refund claims all fell under KRS 139.505. Without this information, the Court determined, the action was not ripe for review. The Court therefore reinstated the Jefferson Circuit Court’s order of dismissal.
Kentucky Court of Appeals
World Acceptance Corp. & World Fin. Corp. of Kentucky v. Kentucky Dep’t of Rev, 14-CI-01193, (Ky. Cir. Ct. Aug. 12, 2015), on appeal, 2015-CA-001852, (Ky. App. Dec. 3, 2015).
In World Acceptance Corp. & World Fin. Corp. of Kentucky v. Kentucky Dep’t of Rev, the Franklin Circuit Court of Kentucky reversed a Final Order of the Kentucky Board of Tax Appeals (“Board”) (Order No. K-24682) and held that certain factors were present that would require the taxpayer, World Acceptance Corp. & World Fin. Corp. of Kentucky (“WAC”), a South Carolina corporation, to file a consolidated return together with its subsidiary. In reversing the Board, the Court noted that KRS 141.200(10) mandates which corporations must file a consolidated return, including corporations that are an includible corporation in an affiliated group or a common parent corporation doing business in Kentucky. The Court concluded that WAC met the standard for doing business in Kentucky under KRS 141.010(25), so it looked to whether WAC met the definition of “common parent corporation.” The Court looked to several factors and concluded that WAC was a common parent corporation because it owned 80% of the vote and 80% of the value of at least one other includible corporation, WFCKY, and the stock that met the 80% vote and value test of WFCKY was owned 100% by WAC. The Court also agreed with WAC that under the plain meaning of KRS 141.200(9)(b)(1), the statute did not apply to common parent corporations and instead only applied to subsidiary corporations. Therefore, the Court reversed the Board’s Order and held that WAC and WFCKY must file consolidated tax returns. This case is currently on appeal in the Court of Appeals.
Wal-Mart Stores East, L.P. et al. v. Department of Revenue, Finance & Administration Cabinet, Commonwealth of Kentucky, et al., No. 2015-CA-001054-MR (Ky. App. Sept. 9, 2016).
In Wal-Mart Stores East, L.P. et al. v. Department of Revenue, Finance & Administration Cabinet, Commonwealth of Kentucky, et al., the Kentucky Court of Appeals affirmed a ruling of the Franklin Circuit Court that the Kentucky legislature’s amendments of a vendors’ compensation statute through several budget bills and then repeal and reenactment of the statute did not violate Sections 51 and 180 of the Kentucky Constitution, respectively. The taxpayers in this case, Wal-Mart Stores East, L.P. and Sam’s East, Inc. (“Wal-Mart”), submitted refund claims for amounts it argued were owed to them under the vendors compensation statute that had been amended by three budget bills to cap reimbursement at $1,500 and was then repealed and reenacted to retroactively apply to 2003. Wal-Mart argued that the budget bills and repeal and reenactment were unconstitutional.
In holding for the Department, the Court reviewed the 2009 act first, and held that the retroactive application of the repealed and reenacted statute did not violate Section 180 because the funds at issue were not private funds, despite Wal-Mart’s arguments that the funds at issue had been collected for one purpose and then later devoted to another. The Court held that the funds were part of the General Fund, given that they were held in trust by Wal-Mart for the Commonwealth. Because the Court found that the repeal and reenactment statute was constitutional under Section 180, it did not address the constitutionality of the budget bills under Section 51.
OVWD, Inc. v. Commonwealth of Kentucky, et al, No. 2015-CA-000754 (Ky. App. 2015) (pending).
OVWD, Inc. (“OVWD”) is a wholesale tobacco and convenience store merchandise distributor located in Ashland, Kentucky. The Kentucky Department of Revenue assessed OVWD $11.5 million in cigarette and other tobacco products tax, as well as interest, penalties, and fees. The Department’s position was that cigarettes and other tobacco products were not sold to a licensed resident wholesaler in Kentucky instead of to an out-of-state distributor, in violation of KRS 138.195, which provides that only nonresident wholesalers may sell to or purchase from another licensee untax-paid cigarettes. The Department claims that OVWD was required to stamp the cigarettes prior to sale to a licensed, resident wholesaler.
OVWD appealed to the Kentucky Board of Tax Appeals (“Board”), alleging that the cigarettes and other tobacco products were sold to out-of-state distributors. OVWD also asserted that the Department did not have the statutory authority to directly assess cigarette tax against a cigarette licensee. Instead, the Department is permitted only to seize and sell untax-paid cigarettes. OVWD also argued that the Department’s cigarette and other tobacco product tax assessment is unconstitutional under Section 2 of the Kentucky Constitution and the Commerce Clause of the United States Constitution because it places an undue burden on interstate commerce. OVWD has challenged the Board’s authority to assess the tax at each level of appeal, but the action was dismissed for failure to exhaust administrative remedies. The action is now pending in the Court of Appeals.
Chegg, Inc. v. Finance and Administration Cabinet, Department of Revenue, 2014-CA-001922-MR (Ky. App. Mar. 4, 2016), discretionary review denied, 2016-SC-000164 (Ky. Sept. 15, 2016).
The Kentucky Supreme Court recently denied the Kentucky Department of Revenue’s (“Department”) motion for discretionary review in a dispute over whether textbooks stored in a Kentucky warehouse when not leased to students in and out of Kentucky qualified for the warehouse/distribution center property tax exemption. Chegg, Inc. v. Finance and Administration Cabinet, Department of Revenue. So, the Kentucky Court of Appeals (“Court of Appeals”) decision holding that textbooks stored in a Kentucky warehouse when not leased to students in and out of state qualified for the warehouse/distribution center property tax exemption will stand. The Court of Appeals reasoned that the textbooks qualified for exemptions under KRS 132.097 and KRS 132.099 because there was no statutory requirement that the property permanently leave the state.
Walgreens Co. v. Fayette County Property Valuation Administrator, File No. K12-S-21; K13-S-38, Order No. K-24624 (KBTA Mar. 26, 2014), aff’d, No. 14-CI-01566 (Fayette Cir. Ct. Feb. 18, 2015), aff’d, No. 2015-CA-000407 (Ky. App. Sept. 23, 2016).
In Walgreens Co. v. Fayette County Property Valuation Administrator, the Kentucky Court of Appeals affirmed the Fayette Circuit Court which affirmed a Final Order of the Kentucky Board of Tax Appeals (“Board”) finding that the value of a build-to-suit lease must be taken into consideration when assessing a property at its fair cash value. The Court of Appeals determined that the Property Value Administrator’s (“PVA”) assessment, which included the income generated under a 75-year lease, was consistent with KRS 132.191(2)(b) in estimating the “present value of future benefits.” Ultimately, Walgreens did not satisfy the burden to establish overvaluation, as is required to overturn the Board of Tax Appeals decision. The Court stated that Walgreens had “compared apples to oranges” when selecting the properties to evaluate for a comparison. While not accepting the higher rate proposed by the PVA, the Court concluded that Walgreens’ failure to provide competent evidence had solidified the original PVA assessment.
Progress Metal Reclamation Co. v. Dep’t of Revenue, No. 2013-CA-001765 (Ky. App. Mar. 13, 2015), discretionary review denied, No. 2015-SC-000175 (Feb. 2, 2016).
In Progress Metal Reclamation Co. v. Dep’t of Revenue, the Kentucky Court of Appeals held that a hammer pin, used to hold a hammer in place on a rotor which turns and breaks up metal, was not an “industrial tool” pursuant to KRS 139.470(11) because it was actually a repair, replacement, or spare part, and therefore, was not exempt from sales and use tax. However, the Court also held that liquid oxygen used in a torch cutting process was an “industrial supply” pursuant to KRS 130.470(11), and therefore, was exempt from sales and use tax. The taxpayer in this case, Progress Metal Reclamation Company (“Progress Metal”), used the tools and supplies at issue in its recycling and manufacturing scrap metal business. The Kentucky Supreme Court denied discretionary review of this case.
Kentucky Board of Tax Appeals
CPT Louisville I LLC v. Jefferson County PVA, Order No. K-24995, File No. K14-S-85, K15-S-278 (Ky. Bd. Tax App. January 8, 2016) (final).
The Kentucky Board of Tax Appeals (“KBTA”) recently entered a “directed verdict”, finding that the recent sales price of a shopping mall was the best evidence of fair cash value in a real property tax appeal and rejecting an appraisal using the residual method. CPT Louisville I LLC v. Jefferson County PVA. The taxpayer’s appraiser testified that the sales price was inflated due to certain tangible and intangible factors such as a trained work force, aesthetics, going-concern value, business value, and buyer appeal. He testified that none of these factors should be included in an assessment. The appraiser had applied a “residual method” which involved appraising the property and then assuming that any discrepancy in value is attributable to factors that would not be evaluated in an appraisal. Under this method, which is commonly used in appraising shopping malls, the appraisal value includes the value of the land and buildings only. The KBTA found that because Kentucky values property based on its fair cash value, the value of a property must be based on what it is worth in money, or, the price of the property in a voluntary cash sale.
The KBTA found that the taxpayer did not overcome its burden to show that the recent sale did not represent the property’s fair cash value noting that when a retail property such as the one at issue here is in a desirable location and has desirable tenants, those factors would necessarily be encompassed in a fair cash value determination and could not be separated from the value of the buildings and land alone. This case has not been appealed as of publication.
Union Underwear Company, Inc. d/b/a Fruit of the Loom, Order No. K-25071, File No. K15-S-01 (Ky. Bd. Tax App. April 11, 2016), on appeal, No. 16-CI-00151 (Russell Cir. Ct.).
The Kentucky Board of Tax Appeals (“KBTA”) recently found that the Russell County Property Valuation Administrator (“PVA”) was not permitted to issue retroactive tax bills for past tax years in which it had incorrectly treated a property as tax-exempt. Union Underwear Company, Inc. d/b/a Fruit of the Loom. The taxpayer, Union Underwear Company, Inc. d/b/a Fruit of the Loom (“Fruit of the Loom”) purchased land in 1980 and financed the construction of a facility through industrial revenue bonds (“IRBs”). Fruit of the Loom transferred the property to the City of Jamestown (the “City”), who then leased it back to Fruit of the Loom. The term of the lease lasted from the date of the issuance of the bonds to the date they retired or December 1, 2010, whichever was later. The IRBs were paid off in 2000, but the PVA continued to assess the property at a reduced tax rate. The City held title to the property from 1983 to 2014 and allowed Fruit of the Loom to continue to occupy the property. In 2015, the City conveyed the property to Fruit of the Loom. The PVA issued tax bills to Fruit of the Loom stating that the property was deemed omitted for the tax years 2009 through 2014 and increased the value of the property. Fruit of the Loom appealed the bills.
The Board found that IRB property is exempt from state and local taxation only until the point at which the bonds are paid off and thus should have been taxed at the full rate following 2000. However, the Board stated that while late assessments are permitted for omitted property, they are not permitted for assessments that were issued at the incorrect rate. The property at issue had never been “omitted”; instead, it appeared on the tax roll but was merely taxed at a reduced state rate. The Board could locate no authority for “special situations” argued by the PVA. Accordingly, the Board determined that the tax bills issued by the PVA were invalid.
Owensboro Grain Company, LLC v. Department of Revenue, Order No. K-25051, File No. K14-R-23, (Ky. Bd. Tax App. February 25, 2016) (final).
The Kentucky Board of Tax Appeals (“KBTA”) found that biodiesel fuel purchased by out-of-state customers was not subject to Kentucky excise tax. Owensboro Grain Company, LLC v. Department of Revenue, Order No. K-25051, File No. K14-R-23, (KBTA Feb. 25, 2016). The taxpayer, Owensboro Grain Company, LLC (“Owensboro Grain”) produces B100 biodiesel fuel at plants in Western Kentucky. During an audit, the Department of Revenue (“Department”) determined that the biodiesel fuel was received in Kentucky despite its export to out-of-state purchasers. Therefore, the Department determined that the fuel was subject to the 9% Kentucky excise tax on gasoline and special fuel “received in this state” under KRS 138.220(1).
In holding for Owensboro Grain, the KBTA looked to the applicable definitional statute, KRS 138.210(15). That statute provides that the special fuel is deemed received when it is loaded onto a truck or tank for delivery within the state, and that there is a presumption that all fuel loaded onto a truck or tank within Kentucky will be presumed to have a destination within the state. However, the statute provides that a dealer can overcome the presumption by showing the fuel is bound for an out-of-state destination. Neither the statute nor the regulations required any specific documentation. Therefore, the KBTA found that Owensboro Grain had shown the fuel was sent to out-of-state destinations, given that both parties had stipulated to that fact. The KBTA also noted that if Kentucky were to tax these out-of-state purchases, it could run afoul of the dormant Commerce Clause, which forbids states from interfering with interstate commerce.
Rent-A-Center East, Inc. et al. v. Finance & Admin. Cabinet, Dep’t of Revenue, Order No. K-25136, K14-R-17 (KBTA Sept. 9, 2016).
The Kentucky Board of Tax Appeals (“Board”) has found that rent-to-own companies were not required to collect sales tax on separate liability waiver contracts they offered to their customers to protect against property damage. Rent-A-Center East, Inc. et al. v. Finance & Admin. Cabinet, Dep’t of Revenue. Rent-A-Center and Rent-Way, Inc. (“Rent-A-Center”) are rent-to-own companies that rent and sell household goods to Kentucky and out-of-state customers. A customer who wishes to rent or purchase an item signs a Rental Purchase Agreement and pays a rental purchase fee. They also have the option of purchasing an extra damage waiver that protects against the customer’s potential liability for damage or loss, which is covered by a waiver fee. While Rent-A-Center collected and remitted sales tax on the rental purchase fee, it did not collect and remit sales tax on the waiver fee. The Board found that the waiver fees were related to the waiver agreement, which is not tangible personal property. Because they were not tangible personal property, they were not subject to Kentucky sales tax.
October 12, 2016