Kentucky Board of Tax Appeals Holds that Leased Goods Do Not Qualify for Warehouse Property Tax Exemption
In Chegg, Inc. v. Finance and Administration Cabinet, Department of Revenue, Order No. K-24470, File No. K12-R-28, 2013 Ky. Tax LEXIS 62 (Jan. 13, 2014), the Kentucky Board of Tax Appeals (“Board”) held that textbooks stored in a Kentucky warehouse when not leased to students in and out of state did not qualify for the warehouse/distribution center property tax exemption.
Chegg, Inc. (“Chegg”) rents textbooks to college students for the duration of their semesters. The textbooks are shipped to students from Chegg’s warehouse in Bullitt County, Kentucky, and students then return the textbooks to the warehouse after the semester ends. Chegg then sells the books to other students directly or by shipping them to a third party seller. Chegg filed a Voluntary Disclosure Agreement with the Department of Revenue (“Department”) which listed the leased books as goods stored in a warehouse and requested the warehouse/distribution center property tax exemption. The Department refused the exemption and classified the books as taxable inventory. Chegg appealed to the Board.
The Board held that the books have a taxable situs in Bullitt County. Chegg did not argue the situs issue, but rather argued that it was entitled to the property tax exemption. KRS 132.097 mandates that property located in a warehouse or distribution center will be exempt from property tax if the property will be shipped out of state within six months. Chegg argued that the exemption does not require that property never returns to Kentucky, only that it leaves within the six months. It also argued that the exemption applies to leased goods and purchased goods. The Department argued that the property must never return, and that the legislature did not intend to grant the exemption to leased property.
The Board agreed with the Department, noting that Kentucky case law requires that to have a taxable situs, the property must have a “more or less permanent location” in the state. Reeves v. Island Creek Fuel & Transp. Co., 313 Ky. 400, 404, 230 S.W. 2d 924, 927 (1950). The Board found that the textbooks did. The Board held that it must construe property tax exemptions narrowly, and that because the books were shipped back into the state, the property tax exemption did not apply. For a good to qualify for the exemption, it must never return to Kentucky.
The Department had refused to waive penalties, and the Board upheld that decision. Chegg argued that it was entitled to a penalty waiver because it had relied on the advice of tax professionals in failing to pay the property tax. The Board held that Chegg needed to prove three things in order to be granted a waiver: unfamiliarity of the taxpayer with the tax laws, supporting documentation of full disclosure of all relevant facts that Chegg provided to the tax advisor, and exercise of reasonable care in deciding whether to seek further advice. The Board wrote that Chegg had only provided the Board with the names of the tax advisors and no other supporting documentation. The Board also noted that given the worth of Chegg’s warehouse and inventory, it should have sought further advice in determining how to handle the property tax exemption. Ultimately, the Board held that Chegg owed $95,622.88 in penalties.