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Board of Tax Appeals Finds Counter Tickets to be Valid Forms of Exemption and Resale Certificates

05.26.2010

In Tractor Supply Company v. Department of Revenue, Order No. K-20813 (KBTA May 19, 2010), the Kentucky Board of Tax Appeals (“Board”) held that Tractor Supply Company (“TSC”) was permitted to treat properly completed counter tickets as valid exemption and resale certificates for Kentucky sales tax purposes.  The primary issue before the Board was “whether TSC’s counter tickets operated as valid exemption and resale certificates for purposes of exempting its sales from sales tax.” 

The Board found that TSC is a farm supply store chain with stores in Kentucky and other states, including Ohio.  TSC stores sell agricultural and farming items and supplies as well as other items to its customers, who are primarily farmers, but also resellers, tax-exempt organizations and others.

TSC has a detailed point-of-sale system that identified, tracked and documented tax-exempt items.  When a sale takes place, the applicable sales tax is applied unless the purchaser represents to the cashier that he is a farmer, a reseller or otherwise tax-exempt entity entitled to purchase goods qualifying for tax exemption.

For each tax-exempt sale, the cashier would run a blank counter ticket, designated as a “Certificate of Exemption,” which included a “General Exemption Statement,” through the cash register which printed all customer and transaction information on it, including text denoting that the items were purchased for an exempt purpose.  The cashier then gave the counter ticket to the customer to sign for the sole purpose of validating and documenting their sales tax exemption status and the exempt nature of each item. 

The Board noted that KDOR has recognized that non-KDOR forms can qualify as exemption and resale certificates.  In fact, KDOR had previously audited TSC’s Kentucky stores and approved counter tickets for use in place of KDOR’s form certificates.

Following a Kentucky Department of Revenue (“KDOR”) audit and assessment, KDOR issued a Final Ruling affirming its revised sales tax assessments on the sole basis that, “It is the Department’s position that TSC’s signed counter tickets are not valid exemption certificates in accordance with KRS 139.260, KRS 139.270, KRS 139.280 and KRS 139.490.” 

In concluding that TSC’s counter tickets must be treated as valid exemption and resale certificates, the Board restated the rule that substance, not form, controls.  Citing case law, the Board stated that satisfaction of a directory provision requires only substantial compliance, and accordingly, “every slight departure” from a directory provision here should not invalidate the treatment of a “whole” counter ticket as an exemption certificate or a resale certificate.  So, according to the Board, substantial, not exacting, compliance with the exemption and resale certificate provisions is all that the law requires.

After analyzing the content of the counter tickets as both an exemption certificate and a resale certificate, the Board concluded that the counter tickets substantially complied with the statutory requirements for each, and therefore, must be treated as such.  The Board also found that TSC’s methodical system for verifying and documenting the validity of each and every tax-exempt sale via its point-of-sale system and counter ticket process provided additional proof that the appropriate sales were tax-exempt.

The authors’ law firm represents TSC in this matter.

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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