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Administrative Regulation Cannot Impose Sales and Use Tax on Equipment in an Enterprise Zone Where Statute Exempts Such Equipment from Tax

07.14.2010

In AK Steel Corporation v. Dep’t of Revenue, Order No. K-20707 (KBTA Apr. 23, 2010), the Kentucky Board of Tax Appeals (“Board”) held that an administrative regulation cannot change a statutory exemption from sales and use tax for equipment purchased and used by a qualified business in an enterprise zone.

AK Steel Corporation (“AK Steel”) was a steelmaker with its primary works located in Ashland, Kentucky, which was designated as an enterprise zone (“Ashland Works”).  This designation provided certain tax incentives to encourage economic development.  On February 10, 1988, Ashland Works was designated as a “qualified business” and thus was entitled to tax incentives.  Under KRS 154.45-09(3), now repealed, any “new and used equipment purchased and used by a qualified business within an enterprise zone shall be exempt from sales and use taxes.”

In February 2005, the Department of Revenue (“Department”) audited AK Steel, and determined that it was entitled to a refund of $1,399,516.94 for overpayment of sales and use taxes.  AK Steel, however, claimed that it was entitled to an additional refund of $6,217,372.56, plus interest, for sales and use tax paid during the audit period for parts used to repair, replace or  modify existing equipment and machinery within Ashland Works, pursuant to KRS 154.45-090(3).

The Department denied this additional refund claim pursuant to 306 KAR 1:010, which provided that repair and replacement parts were subject to sales and use tax.  The Board determined that 306 KAR 1:010 was promulgated by the Department to deny the exemption created by KRS 154.45-090(3) and upheld in Dupont Performance Enhancers, LLC v. Dep’t of Revenue, No. 2007-CA-000685 (Ky. App. Mar. 21, 2008).  The Board concluded that “when a regulation appears to modify a statute out of existence in a given application, it must, in that application, give way.”  Furthermore, the Board concluded as a matter of law, that because “administrative regulations cannot define away the clear meaning of a statute,” 306 KAR 1:010 may not be used by the Department to “define away” the exemptions provided by KRS 154.45-090(3).  Accordingly, the Board held that the provisions of KRS 154.45-090(3) controlled and AK Steel was entitled to the refund sought.

If you have questions about this topic or any other legal issue, please contact any member of the firm's State and Local Tax Team.

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