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Court Holds That Taxpayers May Seek Tangible Personal Property Tax Refunds When Tax Is Paid Before Protest Is Filed

11.06.2009

In Department of Revenue v. Cox Interior, Inc., Civil Action No. 09-CI-305 (Franklin Cir. Ct., Div. I., Aug. 27, 2009), the Franklin Circuit Court affirmed the Kentucky Board of Tax Appeals’ (“Board”) decision holding that Cox Interior, Inc. (“Cox Interior”) timely filed refund claims for tangible personal property taxes paid and timely protested the Kentucky Department of Revenue’s (“Department”) denial of such refund claims.  

In 2005, the Department conducted a tangible personal property tax audit of Cox Interior for the tax years 2001 through 2004 and issued a Notice of Assessment.  Cox Interior paid the assessed tax and interest in March 2006 and then filed refund claims in July 2007 in the amount of $44,717.00 representing a portion of the tax and interest paid in March 2006.  The Department denied Cox Interior’s refund claims on August 17, 2007.  Cox Interior submitted a Protest on August 28, 2007, which was within the forty-five (45) day statutory period for filing a Protest.

KRS 134.590(2) provides for a two (2) year statute of limitations for a taxpayer to file a refund claim for tangible personal property taxes paid and KRS 131.110 provides a taxpayer forty-five (45) days to file a protest of the Department’s denial of refund claims.  KRS 134.590 also provides that no ad valorem taxes will be refunded unless the taxpayer has properly exhausted its administrative remedies.   

At issue was whether Cox Interior forfeited its ability to file a refund claim under KRS 134.590 by paying the tax first.  The Department asserted that Cox Interior effectively waived the right to a refund by failing to protest the assessment at the time it paid the tax. 

The Court cited to Cabinet v. Castleton, Inc., 826 S.W.2d 334 (Ky. App. 1992), a sales and use tax case which held that, “the remedy for filing a claim for a refund of taxes…is not conditioned upon satisfaction of the procedural requirements provided in 131.110 for filing a protest of tax assessment.”  The Court stated that the Department’s position would have required the exhaustion of two administrative remedies rather than one and would prevent taxpayers from pursuing valid refund claims if no protest was made to the initial tax assessment within forty-five (45) days.  Accordingly, the Court held that the Board “reasonably concluded that the statute of limitations for filing a refund should not collapse merely because the taxpayer initially paid the tax without filing a formal protest.”  This case is significant because it confirms that the Castleton holding is not limited to sales and use taxes, but applies in property tax cases.  The Department has appealed the decision to the Kentucky Court of Appeals.

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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