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Circuit Court Holds that Enterprise Zone Exemption Applies to Component Parts of Machinery and Equipment

03.20.2007

In Dupont Performance Elastomers, L.L.C. v. Department of Revenue, Case No. 06-CI-03512 (Jefferson Cir. Ct., Div. III, Mar. 2, 2007), the Jefferson Circuit Court held that component parts of machinery and equipment qualify for the enterprise zone exemption as provided in KRS 154, et seq.

The Kentucky Department of Revenue (“Revenue”) had assessed use tax against Dupont Performance Elastomers, L.L.C. (“Dupont”) on such items as gaskets, gauges, screws, scrapers, washers, fittings, valves, fasteners, and similar items that were used in the process of producing elastomers at Dupont’s Louisville, Kentucky manufacturing plant. During the period in question Dupont’s plant was located within an enterprise zone and subject to the sales and use tax exemption authorized by KRS 154. KRS 154.45-09 exempts all “new or used equipment or machinery purchased and used by qualified business within an enterprise zone.”

The issue in this case was whether the involved parts qualified as “machinery.” Dupont argued that machinery should be given its plain meaning as provided both in the statute and in Revenue’s own regulation. Revenue countered that the enterprise zone exemption should be interpreted consistent with KRS 139, the general taxing statute.

The Court determined the definition of machinery does not necessarily require that it be working parts to perform a function in and of itself; rather, machinery of a manufacturing operation is composed of all the component parts making up the process, including both movable and non-movable parts.

The Kentucky Board of Tax Appeals (“KBTA”) had determined that Dupont’s position unduly broadened the scope of the common and ordinary meaning of machinery. The Court, in overruling the KBTA, determined that KRS 154 and the enterprise zone exemption are separate and apart from the general sales tax scheme, contained in KRS Chapter 139. The Court therefore held that the KTBA misapplied the statutory exemption as authorized in KRS 154, and erroneously applied the law to the facts. The Court concluded that Dupont was entitled to the use tax exemption because the property in question was “machinery” pursuant to KRS 154.

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