by Stephen A. Sherman
In an opinion rendered February 21, 2014, the Kentucky Court of Appeals found the availability of the limestone tax credit contained in KRS 143A.035 is determined by the residency of the purchaser and not the place of consummation of the sale. Dept. of Revenue v. Roanoke Cement Company, LLC, Case No. 2013-CA-471-MR (Ky. Ct. App., February 21, 2014).
Roanoke Cement Company, LLC (“Roanoke”) owned and operated a limestone quarry in Salem, Kentucky from March 31, 2007 through January 31, 2009. Roanoke sold approximately 99% of the limestone it severed to out-of-state customers. In those sales, the customer arranged transportation of the limestone from the Roanoke quarry. Pursuant to KRS 143A.020, Roanoke paid the mineral severance tax on the limestone severed from the quarry. Roanoke subsequently claimed a refund of tax paid by claiming a credit under KRS 143A.035. The credit is permitted against the mineral severance tax where at least 60% of the limestone is sold in interstate commerce and sold to a purchaser outside of Kentucky. The relevant portion of the statute reads:
(1) A credit is hereby allowed… on the gross value of limestone which is severed or processed within this state and sold to a purchaser outside of this state.
(3) The credit allowed in this section shall extend only to a taxpayer … who sells in interstate commerce not less than sixty percent (60%) of such stone….
KRS 143A.035. Roanoke believed it was entitled to the credit because it sold 99% of its limestone to out-of-state purchasers and shipment was made via common carrier (i.e. the Cumberland River).
The Kentucky Department of Revenue (the “Department”) denied Roanoke’s refund claim asserting Roanoke did not satisfy the credit statute because less than 60% of the limestone was sold in interstate commerce. The Department alleged that to qualify for the credit, the sales must be consummated outside the state. Because Roanoke consummated the sale and delivered the product within Kentucky, the Department denied the credit. Roanoke appealed the denial to the Kentucky Board of Tax Appeals.
On appeal, the Kentucky Board of Tax Appeals found Roanoke was entitled to the credit. The Board found that the credit was available to offset the tax imposed on limestone sold to out-of-state purchasers, no matter the place of consummation of the sale. Because Roanoke sold more than 60% of its limestone in interstate commerce, the Board found it was entitled to the credit. The Department appealed to the Franklin Circuit Court. The Circuit Court affirmed the order of the Board and found that the phrase “out of state”, as used in the credit statute, modified the word “purchaser” and was not used to describe the location of the sale. Therefore, the Circuit Court found that, as the majority of the sales were in interstate commerce, Roanoke was entitled to the credit. The Department appealed to the Kentucky Court of Appeals.
On appeal, the Court of Appeals noted that although the credit provision should be interpreted narrowly in favor of the state, the primary objective is to apply the legislative intent. The Department argued that the phrase “in interstate commerce” as used in the statute means only those sales that trigger Commerce Clause protections. Because Roanoke’s sales were completed entirely within Kentucky, the Department argued they were not in interstate commerce. In support of its contention, the Department cited to sales and use tax regulation 103 KAR 30:190. The Court rejected the application of sales and use tax concepts in the interpretation of the credit. The Court found that the severance tax and the credit did not implicate the Commerce Clause as does the sales and use tax. Because Roanoke’s sales were to out-of-state purchasers and therefore such sales affected the price and supply of limestone nationwide, the Court found such sales are necessarily in interstate commerce. Therefore, the Court held Roanoke was entitled to the credit.
The Department next argued that, even if Roanoke were entitled to the credit, the credit should exclude sales consummated in Kentucky and sold along the Cumberland River because such sales were not “to a purchaser outside the state” as required by the statute. In essence, the Department argued the phrase “outside the state” properly modified the word “sold”. Relying upon Revenue Cabinet v. Rohm and Haas Kentucky, Inc., 929 S.W.2d 741 (Ky. App. 1996), the Court found the phrase properly modified the word “purchaser” and not the word “sold”. The Court held that the method of delivery was irrelevant to the underlying policy of the credit, and the method by which the limestone reached the out of state purchaser was irrelevant in determining entitlement to the credit. Therefore, the Court held the sales with delivery made within Kentucky to out of state purchasers qualified for the credit. Therefore, the Court affirmed the opinions of the Board and the Circuit Court and held Roanoke was entitled to the tax credit and its refund.