The Kentucky Board of Tax Appeals (“KBTA”) recently 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, (Ky. Bd. Tax App. February 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).

The Department argued that per the terms of Owensboro Grain’s sales contracts, the fuel was FOB in Owensboro, Kentucky, and the out-of-state purchasers would then make their own arrangements for the fuel to be shipped to their non-Kentucky locations. Because of this, the Department argued that the fuel was “received” by the purchasers when they made arrangements for out-of-state shipping. Owensboro Grain argued that the Department’s characterization of the sales was at odds with its own sourcing rules for sales for income tax, severance tax, and sales and use tax purposes and that the Department’s position conflicted with the Streamlined Sales Tax Agreement, which Kentucky has recently adopted, and which eliminates the consideration of FOB terms in determining taxability.

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.

Although this case applies specifically to special fuels, it marks a trend for the KBTA and Kentucky courts to hold against the taxation of goods purchased by out-of-state customers. The KBTA mentions another recent case, Department of Revenue v. Roanoke Cement, LLC, 443 S.W.3d 1 (Ky. App. 2014), where the Kentucky Court of Appeals upheld the KBTA’s finding that sales of limestone delivered to out-of-state purchasers were not subject to Kentucky tax regardless of their FOB location.

Kentucky retailers who sell to out-of-state purchasers are encouraged to keep careful records of their sales, including the location of the purchaser and shipping documents. Consideration should be given to reviewing sales for refund opportunities.

Kentucky PVA Not Permitted to Issue Retroactive Tax Bill

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, Order No. K-25071, File No. K15-S-01 (Ky. Bd. Tax App. April 11, 2016).

The taxpayer, Union Underwear Company, Inc. d/b/a Fruit of the Loom (“Fruit of the Loom”) purchased land from the Russell County Development Association in 1980 and financed the construction of a facility there through industrial revenue bonds (“IRBs”). Fruit of the Loom transferred the property back 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 City was not notified, and 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. So, it further found that the property should have been taxed at the full rate after the bonds were paid off.

However, the Board did not stop its analysis there. It inquired whether the PVA was permitted to send an “additional bill” to the taxpayer at all. The Board found that it was not, stating that while late assessments are permitted for omitted property, they are not permitted for assessments that were issued at the incorrect rate. The Board found that 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 PVA tried to argue that it was permitted to issue retroactive tax assessments to address “special situations.” But, the Board could locate no authority for such a claim. Although KRS 132.220(2) permits the PVA to seek additional information from a taxpayer and assess property that has been intentionally left off a property tax return, the PVA in this case never sought additional information from Fruit of the Loom, and Fruit of the Loom did not leave out any information. Accordingly, the Board determined that the tax bills issued by the PVA were invalid.

Taxpayers should be able to rely on statutes of limitations. This case emphasizes the availability of this statutorily-provided comfort. Also, this case recognizes that administrative agencies have no inherent authority. To exercise authority, an agency must have a statutory basis.