Kentucky: Property Leased to Non-Residents Qualified for Warehouse/Distribution Center Exemption to Tangible Personal Property Tax
The Kentucky Supreme Court recently denied the Kentucky Department of Revenue’s (“Department”) motion for discretionary review in a dispute over whether textbooks stored in a Kentucky warehouse when not leased to students in and out of Kentucky qualified for the warehouse/distribution center property tax exemption. Chegg, Inc. v. Finance and Administration Cabinet, Department of Revenue, 2014-CA-001922-MR (Ky. Ct. App. Mar. 4, 2016), discretionary review denied, 2016-SC-000164 (Ky. Sept. 15, 2016). So, the Kentucky Court of Appeals (“Court of Appeals”) decision holding that textbooks stored in a Kentucky warehouse when not leased to students in and out of state qualified for the warehouse/distribution center property tax exemption will stand. The Court of Appeals reasoned that the textbooks qualified for exemptions under KRS 132.097 and KRS 132.099 because there was no statutory requirement that the property permanently leave the state.
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 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 Kentucky Board of Tax Appeals (“Board”), which held that the textbooks did not qualify for the property tax exemption enumerated in KRS 132.097, which provides an exemption for property located in a warehouse or distribution center if the property will be shipped out of state within six months. 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, finding that the textbooks were subject to tax due to their “more or less permanent” situs within Kentucky.
On appeal, the Franklin Circuit Court (“Circuit Court”) reversed the findings of the Board. The Circuit Court reviewed KRS 132.097’s statutory construction, and held that the statute did not require that the property be sent to a final or permanent destination, only one that is located outside of Kentucky. Furthermore, the Circuit Court held that the statute did not require that the property be sold, and did not specifically exempt leased or rented property. The Circuit Court also noted that KRS 132.097 was intended to lessen the tax burden on retailers who keep inventory in the state, as Kentucky is one of the few states that taxes inventory. Based on the intent and construction of the statute, the Circuit Court held that the textbooks were not subject to property tax. The Circuit Court also vacated the penalties imposed by the Department, given that it determined the underlying tax was not owed.
The Department appealed to the Court of Appeals. The Department argued that “destination” is ambiguous, and that given that the word is used in an exemption statute, it should be construed narrowly, with the Department’s view of the word given deference. The Court of Appeals agreed with the Circuit Court’s reasoning, which gave plain meaning to “destination” and indicated that permanence was not encompassed within that definition.
Taxpayers who lease tangible personal property out of state with the expectation that the property will one day return to Kentucky can benefit from this opinion. If there had been confusion over whether property must permanently leave Kentucky in order to qualify for the warehouse and distribution center exemption, the Court of Appeals’ decision in Chegg clears up this matter. Taxpayers with operations similar to Chegg may wish to evaluate their tangible personal property return positions to determine whether they are eligible for exemptions under KRS 132.097 and KRS 132.099.