by Jennifer Smart
In Department of Revenue v. Pinkerton Tobacco Company, LP, Civil Action No. 13-CI-00480, Franklin Cir. Ct., (January 22, 2014), the Franklin Circuit Court (“Court”) affirmed the Kentucky Board of Tax Appeals’ opinion holding that Pinkerton Tobacco Company, LP (“Pinkerton”) was entitled to an exemption from Kentucky tangible personal property tax on inventory shipped out of Kentucky within six months of manufacture since Pinkerton owned the inventory on the assessment date of January 1, even though it did not own the inventory at the time it was shipped out-of-state by its parent company.
The Court noted the following facts in the case. Pinkerton, a manufacturer of tobacco products, is owned by Pinkerton Tobacco Company (“PTC”). PTC and Swedish Match Leaf Tobacco Company (“Leaf”) are wholly owned subsidiaries of Swedish Match North America, Inc. (“SMNA”). Pinkerton, PTC, Leaf and SMNA are separate legal entities. Leaf supplies tobacco to Pinkerton to manufacture tobacco products in Owensboro, Kentucky. Pinkerton stored the finished product on-site until it was transferred by common carrier to SMNA’s out-of-state buyers within six months of manufacture. When SMNA made a sale, Pinkerton loaded the tobacco product onto a common carrier’s truck for shipment to SMNA’s out-of-state purchasers. SMNA never took possession of the tobacco products, but sometimes made arrangements for transportation for the products, depending on the location of the purchaser. The evidence of record indicated that Pinkerton only made “intercompany sales” to SMNA, and 93% of SMNA’s customers were outside of Kentucky.
The Department of Revenue (“Department”) determined that Pinkerton was the owner of the inventory in question, and issued tangible personal property tax assessments against Pinkerton for the 2003 and 2004 tax years. Pinkerton protested the assessments, and the Department issued a final ruling letter to Pinkerton upholding the assessments. Pinkerton appealed to the Kentucky Board of Tax Appeals (“Board”). The Board held in in an Order issued March 27, 2013 that Pinkerton’s inventory was exempt under KRS 132.097, which exempts goods shipped placed in a warehouse or distribution center and shipped out of Kentucky within six months of manufacture.
The Court noted that the case involved a single issue – whether inventory stored in a Kentucky warehouse qualified for the state property tax exemption for inventory-in-transit set forth in KRS 132.097. KRS 132.097 provides an exemption for personal property “placed in a warehouse or distribution center for the purpose of subsequent shipment to an out-of-state destination. 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 (6) months.”
The Department argued that the intercompany sales from Pinkerton to SMNA resulted in Pinkerton being unable to reasonably establish that the inventory would be shipped out of Kentucky within six months as required by KRS 132.097. The Court held that Pinkerton established its burden of proving that it was entitled to the exemption from tax, which is available only to the owner of the property. The Court noted that in the Department’s Petition of Judicial Review of Decision of Kentucky Board of Tax Appeals, it admitted that Pinkerton was the owner of the property at issue, but later modified its statement to argue that Pinkerton owned the property on the assessment date of January 1, but that SMNA owned the property when it was sold to the out-of-state purchasers. However, the Court held that the Department’s distinction was not supported by the plain language of the statute, and confirmed the long-standing rule that “liability for ad valorem taxes is related to an assessment date, rather than a levy date or a collection date.” The Court therefore concluded that that because Pinkerton owned the property as of the assessment date of January 1, it was entitled to claim the inventory-in-transit exemption under KRS 132.097.
The Court also discussed the Kentucky Court of Appeals decision in Revenue Cabinet v. Rohm & Haas Kentucky, Inc., 929 S.W.2d 741 (Ky. App. 1996), which held that dock sales to parent companies by subsidiary companies are not sales of tangible personal property within Kentucky. The Court applied the holding in Rohm & Haas to conclude that the intercompany accounting method which the Department claimed to have been a sale to SMNA was not a sale for Kentucky tax purposes since the parent company never took delivery of the goods in Kentucky.
The Court also rejected the Department’s argument that Pinkerton did not qualify for the exemption since it was not the shipper of the inventory in question. The Court held that the language of the statutory exemption does not require that Pinkerton must be the shipper of the goods, but held the exemption merely requires the owner to reasonably demonstrate that the property will be shipped out-of-state within six months. The Court held “undisputed evidence in the record shows that Pinkerton transports its goods outside of Kentucky for sale within six months, and substantial evidence in the record supports the KBTA’s finding that Pinkerton made the required showing that the inventory would be shipped out of its Owensboro warehouse to out-of-state destinations within six months.”
The Court concluded that Pinkerton met its burden of proving all of the requisite elements of the inventory-in-transit exemption set forth in KRS 132.097, and the Board correctly found that Pinkerton was entitled to claim the exemption from property tax. Accordingly, the Court held that the tax assessments should be voided, and the case remanded to the Department with instructions to issue a tangible personal property tax refund to Pinkerton.