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Kentucky Supreme Court rules to protect state’s manufacturing sales tax exemption

The Kentucky Supreme Court has ruled to protect an important manufacturing sales tax exemption from becoming hollowed out in an opinion released last week.

The Kentucky Chamber of Commerce and Kentucky Association of Manufacturers (KAM) filed an amicus brief in April 2022 in support of the taxpayer in the case, Century Aluminum, arguing that the exemption plays a key role in fostering a competitive business environment for manufacturers in the Commonwealth.

The case focused on a provision in state law that exempts from the state’s six percent sales and use tax tangible personal property that qualifies as manufacturing materials and supplies. The exemption exists to encourage manufacturing in Kentucky and to avoid “tax pyramiding,” in which taxes are layered on top of other taxes and function to inflate prices for end-consumers.

Under this same law, items that qualify as “replacement, repair, or spare” parts are excluded from the exemption, meaning they are subject to state sales and use taxes. The question considered by the Court was whether certain items purchased by Century Aluminum qualified as exempt manufacturing supplies or as taxable replacement, repair, or spare parts. Ultimately, the Court ruled in the favor of the taxpayer, thereby protecting an important sales tax exemption from being diminished by a broad interpretation of the replacement, repair, or spare parts exception.

In its brief with KAM, the Chamber stressed the importance of manufacturing to Kentucky’s economy and the role that the exemption has played in fostering a business environment that attracts and supports manufacturers. The brief also explained how the exemption functions to prevent tax pyramiding. An unfavorable ruling in the case could have jeopardized the economic benefits of the materials and supplies exemption, in turn harming Kentucky’s manufacturing sector and artificially raising prices on end-consumers.

“The supplies exemption has encouraged the location to and expansion of manufacturing in Kentucky,” the brief stated. “The Department of Revenue’s overbroad use and application of the repair, replacement, and spare parts exception … threatens to eviscerate the supplies exemption.”

The Court’s ruling was unanimous. Protecting and strengthening Kentucky’s manufacturing sales tax exemptions remain key legislative priorities for the Kentucky Chamber.

Kentucky Chamber of Commerce

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