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Court of Appeals Affirms Refund for Cost of Fuel Produced and Used by Taxpayer

03.18.2009

In Finance and Administration Cabinet, Department of Revenue v. Rohm & Haas, Co., Case No. 2008-CA-000022 (Ky. App., Feb. 6, 2009), the Kentucky Court of Appeals (“Court”) affirmed the Franklin Circuit Court’s holding that a manufacturer which produced an energy-producing fuel was entitled to sales and use tax exemption for such fuels when used in the course of its other separate and distinct manufacturing operations.

KRS 139.480(3) exempts from sales and use tax all energy or energy producing fuels used in the course of manufacturing or processing to the extent that the costs of the energy or fuel exceeds three percent (3%) of the cost of production. Rohm & Haas, Co. (“Rohm & Haas”) filed a claim for refund under KRS 139.480(3) for distilled methyl methacrylate (“MMA”) used in some of its manufacturing operations. The refund was denied by the Kentucky Department of Revenue (“Department”), whose determination was upheld by the Kentucky Board of Tax Appeals (“KBTA”) but reversed by the Franklin Circuit Court.

In its review of the Franklin Circuit Court’s reversal, the Court looked at three operations of Rohm & Haas: the Distilling Operation, the Plexi-glass Operation; and the Emulsions Operation. In its Distilling Operation, Rohm & Haas distills MMA at its plant facility. Prior to the sale of its Plexi-glass Operation as a going concern, Rohm & Haas consumed approximately ninety-five percent (95%) of the distilled MMA that it produced. After the sale of the Plexi-glass Operation, it consumed approximately forty-five percent (45%) of its distilled MMA, increasing its sales to third parties from five percent (5%) to fifty-five percent (55%).

Rohm & Haas claimed that the three operations discussed herein were “separate and distinct.” The Court determined that neither the Plexi-glass nor Emulsions Operations were dependent upon the Distilling Operation. The Court noted that while the former were dependent upon distilled MMA, they were not dependent on the plant’s Distilling Operation to produce it.

The Court also rejected the “integrated plant concept” as applied to Rohm & Haas. The Department argued that as the distilled MMA was transported from the Distilling Operation to the Plexi-glass and Emulsions Operations via pipeline, the conversion of crude MMA to plexi-glass or emulsions was an integrated process. The Court found otherwise, noting that Rohm & Haas’ Distillation Operation was separate and distinct from the Plexi-glass and Emulsion Operations, both physically and for accounting purposes. Further, Rohm & Haas could and had purchased distilled MMA from third party suppliers for these downstream operations. Accordingly, production of distilled MMA on-site did not make Rohm & Haas’ other operations dependent upon the Distilling Operation. Thus, the Court affirmed the holding of the Franklin Circuit Court that Rohm & Haas is entitled to a refund of its cost for distilled MMA allocated to its Plexi-glass and Emulsions Operations in excess of three percent (3%) of the total cost of production.

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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