Case Name: REVENUE CABINET, COMMONWEALTH OF KENTUCKY, Movant, v. JAMES B. BEAM DISTILLING COMPANY, Respondent
Court: Supreme Court of Kentucky
Jurisdiction: Kentucky
Decision Date: 1990-09-27
Citations: 798 S.W.2d 134
Docket Number: No. 89-SC-000697-DG
Parties: REVENUE CABINET, COMMONWEALTH OF KENTUCKY, Movant, v. JAMES B. BEAM DISTILLING COMPANY, Respondent.
Judges: STEPHENS, C.J., and GANT, LEIBSON and VANCE, JJ., concur.
Reporter: South Western Reporter Second Series
Volume: 798
Pages: 134–136

Head Matter:
REVENUE CABINET, COMMONWEALTH OF KENTUCKY, Movant, v. JAMES B. BEAM DISTILLING COMPANY, Respondent.
No. 89-SC-000697-DG.
Supreme Court of Kentucky.
Sept. 27, 1990.
Rehearing Denied Nov. 29, 1990.
Celia M. Dunlap, Revenue Cabinet, Frankfort, for movant.
Bruce F. Clark, Judith A. Villines, Stites & Harbison, Frankfort, for respondent.

Opinion:
OPINION OF THE COURT
The Kentucky Supreme Court hereby affirms the decision of the Court of Appeals in this matter. This Court adopts the opinion of the Court of Appeals which is as follows:
"This appeal centers on the proper construction to be given KRS 139.480(3) which grants an exemption from sales tax for "energy or energy-producing fuels used in the course of manufacturing, processing, mining or refining to the extent that costs of the energy or energy-producing fuels exceeds three percent (3%) of the cost of production." The statute states that "cost of production shall be computed on the basis of plant facilities which shall mean all permanent structures affixed to real property at one location." It is this definition of "cost of production" which is the heart of the controversy.
James B. Beam Distillery sought to avail itself of the exemption for its distillery at Clermont, Kentucky. Beam has separate and distinct bottling and warehousing operations located at the Clermont site, but it did not include the costs associated with those operations in its cost of production calculation for the energy exemption because it was claiming the exemption for the distillery alone.
The Board, however, held that the statute required the calculation to be based on the taxpayer's (Beam's) total costs at Cler-mont, including those unrelated to the distillery (the warehouse and bottling operations). On appeal, the Bullitt Circuit Court concluded that the statute does not require or permit the lumping together of all of a taxpayer's separate and distinct operations "simply because by choice or by chance such operations are conducted on one or more adjoining tracts of land or in one community." We agree and affirm.
It seems plain to us that the legislature intended that a taxpayer who seeks the exemption must include in its calculation of cost of production only the permanent structures which contain the operation for which the exemption is sought. Were it otherwise the focus would be shifted to defining "one location," i.e., is "one location" all the facilities in one plant, or one community. What if the operations are separated by fences with separate ingress and egress? Such a criteria seems purely arbitrary and subverts the intent of the legislature in allowing the exemption. It seems only logical that a taxpayer which can demonstrate that the operation for which the exemption is claimed is a truly separate and complete operation, not dependent on the other operations at that site for production of a completed product or process, need not include the costs of the other unrelated operations in its costs of production for that one operation.
We are convinced that Beam's application for an exemption satisfies this criteria. While it is true that the majority of the whiskey produced at the Clermont distillery is transported to the on-site warehouse for aging, it is clear beyond dispute that it could be transported anywhere for this separate and discrete operation. In fact, the testimony indicates that ten percent of the product is sold for aging or bottling elsewhere. As stated in Department of Revenue, etc. v. Allied Drum Service, Ky., 561 S.W.2d 323 (1978), in its attempt to define manufacturing, "[t]he thread that runs through all these opinions is that material of little or no market value has been converted into a marketable product for its intended use." If Beam sells part of its product, it must be marketable for its intended use without regard to the other operations conducted at the Clermont site. Further, it is undisputed that the operations are distinct from an accounting standpoint.
Finally, we note the following language in Schenley Distillers, Inc. v. Commonwealth, et rel Luckett, Ky., 467 S.W.2d 598 (1971), concerning legislative intent:
Although, as the Department argues, tax-exemption statutes are strictly construed against the taxpayer, we also must take into consideration the objective of the legislature in creating particular exemptions to encourage the location and expansion of industries in Kentucky. In our opinion both items herein considered fall within the scope of machinery and materials the legislature intended to exempt.
In this case, we find that Beam's calculation of the cost of production based solely on the distillery operations for which the exemption was sought, squarely fits the intent of the legislation.
The judgment of the Bullitt Circuit Court is affirmed."
STEPHENS, C.J., and GANT, LEIBSON and VANCE, JJ., concur.
WINTERSHEIMER, J., dissents with a separate opinion in which COMBS and LAMBERT, JJ., join.
. Opinion of the Court of Appeals by Hayes, J. Hayes, Lester and Wilhoit, JJ., sitting.