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Planes, Trains and Big Rigs – An Overview of Kentucky Taxes on Transportation Companies

Almost every day, we can observe transportation companies doing their work. Semi-trailer trucks (18-wheelers, big rigs, whatever you might call them) transport goods, and buses transport people via our highways. Towboats push barges loaded with various goods along the Ohio River and other Kentucky waterways; other watercraft, like the Belle of Louisville, transport people. Planes whisk passengers and cargo through the air. Trains haul their cargo in rail cars on railroad tracks laid across the Commonwealth. These modes of transportation are integral to our everyday lives. 

The Commonwealth has integrated instrumentalities of transportation into its tax stems as well, which can be seen in income, property and sales-type taxes. This is a common practice among the states. 

Special Income Tax Apportionment for Transportation Companies 
Kentucky’s income tax provides an example of tax provisions that are tailored to transportation companies. By way of context, because transportation companies often operate in multiple states, it is often necessary to determine what portion of their income is subject to tax by the Commonwealth. See KRS 141.010(14); KRS 141.120; KRS 141.206. Apportionment of income is generally accomplished by applying a percentage ratio comprised of the average of a property, payroll and double-weighted sales factor to a company’s income. See KRS 141.120(8)&(9); KRS 141.206(12). Each factor is itself an in-state versus everywhere ratio of that subject matter. 

The General Assembly has provided specific rules for apportioning the income of passenger airlines. See KRS 141.121. These rules provide that a passenger airline determines the numerators for each apportionment factor by multiplying the ratio of revenue passenger miles in Kentucky to those everywhere to: aircraft value (property factor); flight personnel payroll (payroll factor); and, transportation revenues (sales factor). Observe that this methodology appears to consider the inherently mobile nature of aircraft. 

Administrative Regulations promulgated by the Kentucky Department of Revenue (“KDOR”) have also modified the standard apportionment factor for certain transportation companies including truck lines, bus lines, aircraft [103 KAR 16:120] and barge lines [103 KAR 16:145]. See also Liquid Transporters, Inc. v. Revenue Cabinet, 721 S.W.2d 722 (Ky. App. 1986) (concerning a trucking company’s challenge to the standard apportionment factor and the modified version of 103 KAR 16:120). Neither Regulation modifies the payroll factor. Notably, the value of transportation-type property is excluded from the property factor: over-the-road equipment (truck and bus lines); aircraft (airlines); and, watercraft and other floating property (barge lines). These Regulations also assign operating income to the sales factor numerator using a ratio of miles operated in Kentucky versus everywhere. 

KDOR’s Regulation concerning apportionment for railroad companies [103 KAR 16:130] takes an approach somewhat similar to that for other transportation companies. In this regard, there are no special provisions for the payroll factor. The property factor, however, does not exclude railroad equipment; rather, the Kentucky portion is assigned using a ratio of car miles in Kentucky versus everywhere. Railway operating revenue is assigned using a ratio of revenue car miles, defined as the movement of a loaded car one (1) mile, within Kentucky versus everywhere. 

It is interesting to compare the sales factor computation for railroad companies with that of other transportation companies. For railroads, text of 103 KAR 16:130 computes the sales factor only with regard to loaded cars, not unloaded cars; thus, deadhead miles would not appear to be included. In contrast, for other transportation companies, the text of 103 KAR 16:120 and 103 KAR 16:146 compute the sales factor without regard to whether or not a load is carried. 

The PSC Tax and Other Ad Valorem Taxes on Transportation Companies’ Property 
Kentucky imposes its public service company (“PSC”) tax pursuant to KRS 136.115 to 136.180 on companies that perform public services. Examples of such companies include utility companies and certain transportation companies. See KRS 136.120(1)(a). The theory is that a PSC exercises “special privileges.” See Tax Comm’n v. Tube Turns, 283 Ky. 474, 141 S.W.2d 875 (Ky. 1940). 

At its core, the PSC tax is an ad valorem property tax on each PSC’s operating property, which is centrally administered by KDOR. See KRS 136.120. The fair cash value of operating property is determined as a unit, which has been construed to include the “intangible enhancement of the physical properties resulting from the use of this property under special privilege by the government.” Luckett v. Tennessee Gas Transmission Co., 331 S.W.2d 879, 881 (Ky. 1960). See also KRS 136.160. The Kentucky portion of the unit’s value is then apportioned to Kentucky using an apportionment formula, i.e., a percentage ratio, comprised of a property factor and a business factor. The apportionment formula is used to determine Kentucky’s “slice” of the unit “pie.” 

Examples of PSCs include railway companies of various types [KRS 136.120(1)(a)1-4,8,18], commercial air carriers [KRS 136.120(1)(a)13], and air freight carriers [KRS 136.120(1)(a)14]. These transportation companies are heavy users of transportation infrastructure, e.g., rails and airports. Perhaps the General Assembly considers this to be the exercise of a special privilege? 

Other transportation companies such as common carrier trucking companies, bus lines and taxi companies have been specifically excluded from the PSC tax. See KRS 136.120(1)(b). So, these companies’ tangible personal property is no longer subject to PSC tax though it would be subject to the regular tangible personal property tax, unless otherwise exempt. See KRS 132.487. Trucks, tractors and buses which are used on routes or in systems that are partly within and partly outside Kentucky are exempt from property tax though they are subject to the fee imposed by KRS 136.188. See KRS 132.760. That fee is assessed using a weighted average commercial and industrial state and local ad valorem tax rate on the depreciated value apportioned to Kentucky. See KRS 136.188. 

Commercial watercraft is subject to the aptly named commercial watercraft tax provided for by KRS 136.1801 to 136.1806. This tax, similar to the PSC tax, is an ad valorem tangible personal property tax on the value of commercial watercraft which apportions the value of watercraft based on “route miles” – specifically, the ratio of the length of waterway routes in Kentucky to the length of waterway routes of the involved taxpayer in all states. 

Sales Tax, Use Tax and Motor Vehicle Usage Taxes 
Kentucky imposes its sales and use tax on non-exempt tangible personal property. See KRS 139.200; KRS 139.310. There are several important exemptions for transportation companies. 

For example, locomotive and rolling stock are exempt from sales tax. See KRS 139.480(1). Aircraft used exclusively for the conveyance of property or passengers for hire is exempt as well. See KRS 139.480(19). Ships and vessels used principally in the transportation of property or in the conveyance of persons for hire are likewise exempt. See KRS 139.483. The watercraft exemption was the subject of a dispute in Popplewell’s Alligator Dock No. 1, Inc. v. Revenue Cabinet, 133 S.W.3d 456 (Ky. 2004) which held that the exemption applied to commercial but not recreational watercraft. Id. at 466. Sales of motor vehicles like big rigs and buses are generally exempt from sales tax, provided that motor vehicle usage tax is paid. See KRS 139.470(21). 

Rather than impose sales tax on motor vehicles, Kentucky imposes motor vehicle usage tax on motor vehicles, unless exempt. See KRS 138.460. For example, certain nonresident-owned commercial vehicles registered outside of Kentucky, motor carriers operating under a charter bus certificate, and vehicles with a declared gross vehicle weight with any towed unit of more than 22 tons are exempt. See KRS 138.470(5),(15)&(16). 

Motor fuel used by transportation companies is sometimes exempt from tax, for example, fuel used to operate trains and certain commercial watercraft. See KRS 139.480(1); KRS 139.483. Aircraft fuel is not, however, exempt from sales tax. See KRS 139.480(19). 

Motor fuels, e.g., gasoline and special fuel (including diesel) is subject to motor fuels tax. See KRS 138.220; KRS 138.210(4). But, special rules apply to motor carriers, such as bus lines and operators of certain commercial trucks, which are subject to the weight distance tax on motor fuel used in Kentucky. See KRS 138.660 to 138.7291. 

“Atlanta to Texarkana and back in twenty eight hours? That ain't never been done before.” Cledus Snow in Smokey and the Bandit (1977). 

The role that transportation companies play in our economy is important. As far as taxes are concerned, it is also important to understand the special tax rules that apply to the transportation industry.



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