The Kentucky Court of Appeals ruled in favor of the taxpayer in a case involving the proper construction of an exemption from tangible personal property tax, affirming the circuit court’s holding that textbooks stored in a Kentucky warehouse for subsequent shipment out-of-state are exempt from tax.[1] The taxpayer, Chegg, Inc. (“Chegg”), operates the nation’s leading network for online college textbook rentals.  In 2010, Chegg opened a warehouse and distribution facility in Bullitt County, Kentucky.  During the 2009 and 2010 tax years, Chegg stored textbooks in its Bullitt County warehouse for shipment outside of the state within six months.  Specifically, at the beginning of each semester, Chegg rented out a substantial portion of its inventory.  When the semester came to a close, these books were returned to Chegg for subsequent rental.  Typically, at the end of a twelve to eighteen month cycle, Chegg shipped the books to a third-party seller or wholesale liquidator outside Kentucky for final disposition.

Chegg argued its textbook inventory was exempt from tangible personal property tax under KRS §§ 132.097 and 132.099.  KRS § 132.097 exempts from state ad valorem tax personal property placed in a warehouse or distribution center for subsequent shipment to an out-of-state destination.  The statute states that personal property shall be deemed to be held for shipment to an out-of-state destination if the owner can reasonably demonstrate that the personal property will be shipped out-of-state within the next six months.  KRS § 132.099 provides a similar exemption from most local ad valorem taxes. 

The Department of Revenue (the “Department”) disagreed, arguing that the word “destination” in the relevant statutes must be construed to mean “final destination;”; that is, the textbooks were exempt from tax only if they were held for shipment out-of-state, never to return to Kentucky again.  The Kentucky Board of Tax Appeals affirmed the Department’s assessment, and Chegg appealed to the circuit court.  The circuit court reversed, holding the plain language of the statutes does not require the personal property to be sent to a “final” or “permanent” destination, just a destination that is outside Kentucky.

The Court of Appeals affirmed.  The court acknowledged that statutes specifying tax exemptions are construed narrowly, but noted that no construction of a statute – narrow or otherwise – can “impinge upon the cardinal rule that a statute is to be construed in accordance with its real intent and meaning and not so strictly as to defeat the legislative purpose.”  The court held the Department’s interpretation of KRS §§ 132.097 and 132.099 impermissibly limits the effect of the statutes by adding a qualification that the “destination” referred to in the statutes be a “final” destination.  Citing to Merriam-Webster’s Collegiate Dictionary, the court stated that the plain meaning of “destination” is simply and unambiguously “a place to which one is journeying or to which something is sent.”  Nothing in this definition denotes or requires permanence.  Under the proper construction of the statutes, the court held Chegg was entitled to the exemptions.

The Department has thirty days to seek review with the Kentucky Supreme Court.