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Board Denies Sales Tax Refund For Energy Used In Manufacturing

05.09.2007

In Rohm and Haas Co. v. Department of Revenue, File No. K05-R-34, Order No. K-19757 (KBTA, Feb. 13, 2007), the Kentucky Board of Tax Appeals (“KBTA”) denied a refund claim for sales tax paid for energy consumed during the manufacture of Plexiglas, plastic additives, and other products.

Rohm and Haas Company (“Rohm and Haas”) operated a manufacturing facility in Louisville, Kentucky. A component of many of the products manufactured at the location was raw, undistilled Methyl Methacrylate (“MMA”). Rohm and Haas produced distilled MMA, which was used primarily on site in the production of other products, including Plexiglas, plastic additives and emulsions. Rohm and Haas sought a refund of taxes paid on energy consumed in the manufacturing of the Plexiglas and emulsions based upon the application of KRS 139.480. KRS 139.480 provides a sales and use tax exemption for energy or energy producing fuels used in the course of manufacturing or refining which exceed three percent of the “cost of production.” Rohm and Haas based its refund claim upon the decision in Revenue Cabinet v. James B. Beam Distilling Co., 798 S.W.2d 134 (Ky. 1990).

In Beam, the distiller had sought a sales and use tax exemption for the fuels used in distilling liquor. The Department of Revenue (“Revenue”) argued that the exemption should be denied because Beam failed to include in the cost of production of the alcohol the cost of warehousing and bottling such liquor. However, Beam sought the exemption on the distillery process alone. In granting the exemption, the Kentucky Supreme Court held that the cost of bottling and warehousing were downstream processes and wholly unrelated to the cost of producing the liquor.

Rohm and Haas argued that similar to Beam, its operations were separate and distinct because they were on different parts of the work site, used separate chains of command, and were managed as separate accounts. Rohm and Haas therefore contended it had created “separate and complete” operations, and was thus entitled to a sales and use tax exemption on energy used in the production of Plexiglas and emulsions because the cost of that energy exceeded three percent of the “cost of production” in those operations. However, in making its calculation, Rohm and Haas did not include or account for the “cost” of the distilled MMA, which was an integral raw material used in making the products at issue.

Revenue’s position was that the cost of producing the distilled MMA should be allocated among the various operations in order to calculate the “cost of production” of the processes at issue. Testimony before the KBTA was that Rohm and Haas included the cost of the distilled MMA in calculating its “profit” for the operations, but excluded it in calculating the “cost of production” for purposes of seeking the tax exemption under KRS 139.480.

The KBTA held that not only must the operations for which the exemption is claimed be “separate and complete,” they also must “not [be] dependent on other operations at that site for the production of a completed product or process.” The KBTA noted that Rohm and Haas did not seek an exemption for the distillation of the MMA, but rather for other manufacturing processes downstream, conducted at the same work site, and which were dependent upon the distilled MMA being produced in the first place. Thus, the KBTA held that the cost of the distilled MMA must be included in the calculation to determine the “cost of production” for purposes of the energy exemption so that Rohm and Haas did not qualify for the energy exemption. Rohm and Haas has appealed the KBTA’s decision to the Franklin Circuit Court.

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