Source: https://www.bgdlegal.com/newsroom-insights-2582
Timestamp: 2019-04-25 14:37:00+00:00

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Kentucky has seen a number of changes in the Tax Law landscape as a result of new laws, regulations, and court decisions. The sections below highlight several of the more prominent developments and their impact on Kentucky taxpayers.
Based on his election platform on taxes, one can expect that a proposal for Kentucky tax reform may include: repealing the inheritance tax; decreasing personal and corporate income tax rates; simplifying the tax code; and, significantly reducing tax expenditures.
It would seem that the big hurdle for tax reform is going to be the tax expenditures, which include such things as deductions, exemptions, credits, subject not taxed (e.g., services not subject to sales tax), etc.
By Executive Order, Governor Bevin merged the Kentucky Board of Tax Appeals with two other statutory boards that hear and decide disputes administratively, the Kentucky Board of Claims and the Kentucky Crime Victims Compensation Board, creating the Kentucky Claims Commission, effective October 1, 2016. The Kentucky Claims Commission appears to be operating similarly to the KBTA as to tax matters. However, one could expect that the Commission will use hearing officers more extensively than the KBTA did in real property tax appeals and potentially in other tax cases as well.
HB 453 was enacted into law and essentially codifies the Executive Order that created the Kentucky Claims Commission by combining the Kentucky Board of Tax Appeals, Board of Claims, and the Crime Victims Compensation Board.
Kentucky Governor Bevin previously announced the Red Tape Reduction Initiative. The details of the Initiative can be found at www.RedTapeReduction.com.
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 They want outdated, unnecessary or overly complex tax regulations replaced with updated, necessary and appropriately tailored regulations, which include examples to make them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.
House Bill 245 amended KRS 131.130 to expand the Department of Revenue’s (“Department”) ability to provide guidance on tax issues. Specifically, the legislation permits the Department to respond to and publish responses to taxpayer questions. Additionally, the legislation allows the Department to include examples as part of those responses or explanations. Expanding the Department’s authority to issue this guidance should give taxpayers the opportunity to better understand the Department’s position on a variety of issues.
HB 50 was enacted into law and provides that administrative regulations will automatically expire every seven years without further action by the issuing agency. Effectively, this legislation requires an agency to review regulations at least once every seven years. Taxpayers obviously benefit from regulations that reflect the current statutory provisions. Many tax regulations have not been updated since the mid 2000’s or before; so, this could address such situations.
The addition of examples to these regulations would assist taxpayers in understanding the Department’s position. This would facilitate compliance.
The Department should also promulgate a regulation concerning the mandatory nexus consolidated return.
The Limited Liability Entity Tax (“LLET”) is one of Kentucky’s newest taxes. It is also one for which there is no administrative guidance in the form of a regulation. While there is an administrative regulation for the Alternative Minimum Calculation (“AMC”), 103 KAR 16:220, there is no administrative regulation for the LLET. Guidance is needed, particularly as to the computation of cost of goods sold, among other issues.
There are many issues in sales and use tax. However, questions regularly arise regarding exemptions for manufacturers. It would be helpful if the Department would update 103 KAR 30:120, Machinery for new and expanded industry, and to also promulgate a regulation regarding manufacturing supplies and industrial tools.
Another big issue in sales tax, nexus is a source of confusion for many taxpayers, especially those who are not based in Kentucky. Regulations regarding this would help non-Kentucky based taxpayers to better understand the Department’s position as to the requirements for filing and payment of sales tax.
In the area of personal property tax, one of the most pervasive issues is the classification of property, e.g., between Schedule A (full rate) and Schedule B (manufacturing machinery, etc.) property. As such, the Department should consider amending 103 KAR 8:090 or promulgating a new administrative regulation regarding the classification of property. The Department has already provided guidance for several industries including: coal [103 KAR 8:130]; crushed stone, sand, and gravel [103 KAR 8:140]; and hot mix asphalt [103 KAR 8:150]. Additional guidance as to classification of property, including examples, would provide needed guidance to taxpayers.
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 (“KBTA”) (Order No. K-24682) and held that certain factors were present that would require the taxpayer, World Acceptance Corp. (“WAC”) & World Fin. Corp. of Kentucky (“WFCKY”), a South Carolina corporation, to file a consolidated return together with its subsidiary. The three factors taken into consideration under KRS 141.120 are the payroll factor, the property factor, and a double-weighted sales factor. There was a single employee at issue whose payroll was assigned to Tennessee. Additionally, the property in issue was a vehicle and a laptop used in Kentucky, with the vehicle being titled in Tennessee. Further, the Court determined that the sales factor was sourced to South Carolina, rather than Kentucky. The Court concluded that “WAC was not an ‘includable corporation’ because WAC’s payroll, property, and sales factors were either de minimis or zero.” World Acceptance is on appeal at the Court of Appeals.
Owensboro Grain Company, LLC v. Department of Revenue, Order No. K-25051, File No. K14-R-23, (Ky. Bd. Tax App. Feb. 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).
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.
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), on appeal, No. 16-CI-01075 (Franklin Cir. Ct.).
The Kentucky Board of Tax Appeals (“KBTA”) 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 KBTA 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.
Buffalo School Apartments, LLLP v. LaRue County Board of Assessment Appeals, et al., K16-S-30; K16-S-77 (KCC July 7, 2017) (final).
In Buffalo School Apartments, LLLP v. LaRue County Board of Assessment Appeals, et al., the Kentucky Claims Commission (“KCC”) found that tax credits awarded under Section 42 of the Internal Revenue Code must be excluded from the value of low-income housing. In the case, the property at issue was a low-income apartment complex used for senior citizens, and the LaRue County Property Valuation Administrator (“PVA”) assessed the property at $2,671,454, which included the value of the tax credits. The local Board of Assessment Appeals reduced the assessment to $1,323,936. The taxpayer appealed to the KCC, and the PVA filed a cross-appeal.
In finding for the taxpayer and valuing the property at $230,000, the KCC relied upon an appraisal presented by the taxpayer as well as Kentucky case law that holds that the value of tax credits for low-income housing are to be excluded from the value of the real property. Furthermore, the KCC found that the tax credits were intangible property that were not subject to state and local property tax.
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.
CPT Louisville I LLC v. Jefferson County PVA, Order No. K-24995, File No. K14-S-85, K15-S-278 (Ky. Bd. Tax App. Jan. 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.
Grand Lodge of Kentucky Free and Accepted Masons, et al. v. City of Taylor Mill et al., No. 2015-CA-001617-MR (Ky. App. Feb. 10, 2017), motion for discretionary review pending, 2017-SC-000122 (Mar. 10, 2017).
In Grand Lodge of Kentucky Free and Accepted Masons, et al. v. City of Taylor Mill et al., the Kentucky Court of Appeals held that the real property owned by a non-profit organization but occupied by senior citizens as their residence is subject to ad valorem taxation and not subject to the charitable exemption found in Section 170 of the Kentucky Constitution.
Grand Lodge of Kentucky Free and Accepted Masons (“Grand Lodge”) is a recognized public charity and generally receives the constitutional exemption from property taxes on real property it owns and occupies, as guaranteed by Section 170 of the Kentucky Constitution. The property at issue in this case is a 24-acre tract of real property that Grand Lodge leases to Masonic Retirement Village of Taylor Mill, Inc. (“MRV”). MRV is a nonprofit organization with a purpose of providing and maintaining affordable housing to senior citizens. It established a retirement community in the city of Taylor Mill, Springhill Village, which is located on the real property MRV leases from Grand Lodge.
The Court of Appeals first held that the residents, not Grand Lodge or MRV, were the occupants of the property for purposes of the constitutional tax exemption. The Court explained that the Resident Agreements gave the residents exclusive rights to occupy the property during the term of the agreement in exchange for consideration. The Court further held that there is no “occupancy” interest in real property, and that occupancy was instead a result of possession of real property. Thus, this possessory interest was enough to subject the residents to property tax under Section 170 and KRS 132.195.
Union Underwear Company, Inc. d/b/a Fruit of the Loom, Order No. K-25071, File No. K15-S-01 (Ky. Bd. Tax App. Apr. 11, 2016), order, No. 16-CI-00151 (Russell Cir. Ct. Nov. 7, 2016) (final).
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 KBTA 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 KBTA 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 KBTA could locate no authority for “special situations” argued by the PVA. Accordingly, the KBTA determined that the tax bills issued by the PVA were invalid.
Wilgreens, LLC 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), discretionary review denied, 2016-SC-000590 (Mar. 15, 2017).
Finance & Administration Cabinet v. Sommer, No. 2015-CA-001128 (Ky. App. Jan. 13, 2017), discretionary review granted, 2017-SC-000071 (Aug. 16, 2017).
In Finance & Administration Cabinet v. Sommer, the Kentucky Court of Appeals held that the Kentucky Department of Revenue (“Department”) must publish its final rulings after redacting them for confidential taxpayer information. The decision, which will greatly increase the transparency of Department policies, procedures, and positions, directs the Department to join the ranks of other states like Indiana, who already publish rulings on taxpayer appeals.
The Court of Appeals held that the Department had to publish all the final rulings, explaining that the rulings “contain great bodies of information related to the reasoning and analysis of the [Department] with respect to its task in administration of court tax laws.” The Court noted that in its view, the information could be made public while protecting taxpayer privacy interests through redaction.
Kentucky CATV Association, Inc. v. City of Florence, et al., 520 S.W.3d 355 (Ky. 2017).
As a result of Kentucky CATV Association, Inc. v. City of Florence, et al., 520 S.W.3d 355 (Ky. 2017), municipalities may begin to subject services providers of multichannel video programming, previously subject only to the State-based “Telecom Tax,” to additional fees in the near future. In this case, the Supreme Court of Kentucky found that the Kentucky Constitution intended to grant municipalities the power to grant franchises and collect fees in exchange for permitting utilities to use municipal rights-of-way. The Telecom Tax provision prohibiting cities from collecting these franchise fees from certain service providers was therefore held to be an unconstitutional violation of cities’ rights.
Affected service providers should review the ordinances of localities in which they have (or may be required to have) a permit to access a right-of-way and proactively develop a go-forward strategy.
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), discretionary review denied, 2016-SC-000550-D (Mar. 15, 2017).
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. The Kentucky Supreme Court denied discretionary review on March 15, 2017.
The Kentucky Department of Revenue (“Department”) issued an opinion on June 6, 2016 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.
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.
In OAG 17-018, the Kentucky Attorney General addressed whether a county enacting a business licensing tax upon businesses engaged in extracting nonrenewable would be constitutional in response to a recent ordinance enacted in Letcher County. In OAG 17-003 (and citing to OAG 79-385), the Kentucky Attorney General “advised that a license or occupational tax is constitutional if it is fairly and equitably integrated with a general county occupational or license tax; based upon reasonable classifications; uniform as to the class; and not discriminatory, arbitrary or confiscatory” based upon Section 171 of the Kentucky Constitution and prior Attorney General opinions (OAG 17-003; OAG-79-385). A particular business cannot be singled out and burdened with a substantially heavier tax than other similar businesses without some rational basis. This applies to license taxes.
The Office of the Attorney General also concluded that a re-drafting of the ordinance to mirror the state severance tax, would still result in unconstitutional discrimination against the business of extracting non-renewable resources. It reasoned that KRS 143A.020(1), which “levies a tax for the privilege of severing or processing natural resources in the state,” applies to all taxpayers severing and/or processing natural resources in the state, not only those extracting non-renewable resources.

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