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A Kentucky company that acquired licenses to use prewritten computer software along with the hardware needed to run the software sought a refund of the sales and use tax paid on the software, arguing that it was not tangible personal property. When the purchase was made in 2002, “tangible personal property” was defined as “personal property which may be seen, weighed, measured, felt, or touched, or which is in any other manner perceptible to the senses and includes natural, artificial and mixed gases, electricity, water, and prepaid calling arrangements.” At that time, if software was delivered on a physical medium, it was considered tangible personal property subject to Kentucky sales and use tax. In 2004, Kentucky tax law was amended to include prewritten computer software as tangible personal property. The licensor of the software argued that the software itself is separate from the medium it was delivered on and is intangible, thus exempt from sales and use tax. The Court of Appeals stated that it was plausible that the Legislature intended to include software within tangible, taxable items since one cannot imagine something more intangible than gas, electricity or prepaid calling arrangements. The licensor’s argument that prewritten software was not included in the definition of tangible personal property until the 2004 tax law amendment was also refuted. The Court stated that this was no indication that prewritten software was exempt intangible property prior to the amendment. Instead, the amendment was made to remove the distinction made in regards to the software’s method of delivery (on a tangible medium vs. electronically) and to tax all prewritten computer software. (Computer Services, Inc. v. Finance and Administration Cabinet, Department of Revenue, Kentucky Court of Appeals, No. 09-CI-00118, January 7, 2011)


Kentucky Governor Steve Beshear has signed legislation that allows an expedited protest resolution process for any tax assessment that, as of January 19, 2010, has been protested, not been the subject of a final ruling and not been the subject of certain enforced collections. The assessment will be considered paid in full if the taxpayer pays the entire amount of tax assessed, exclusive of interest and penalties, on or after June 4, 2010 and before July 31, 2010. All payments of tax are considered final and are not subject to refund or recovery (Kentucky 10 SS HB 2/EN, effective June 4, 2010).


Kentucky Governor, Steve Beshear, has signed Streamlined Sales and Use Tax (SST) Agreement legislation that conforms to the Agreement’s definitions for digital products, effective July 1, 2009. The legislation maintains Kentucky’s application of sales and use taxes on sales and uses of digital products regardless of whether the purchaser has the right to permanently use the goods, its right to access or retain the property is not permanent, or its right of use is conditioned upon continued payment. Definition of terms and amendments to definition of terms such as “sale,” “use,” “purchase,” and “retailer” related to digital products have also been defined in the legislation. Furthermore, sourcing and bundling rules related to the sale of digital products are included. Additional regulations and rules apply. (H.B. 347, Laws 2009, effective July 1, 2009)


The Kentucky Board of Tax Appeals has determined that machinery purchased to be used directly in the manufacturing process by a manufacturer and retailer of German meats and sausages in order to expand its operations to include wholesale production is exempt from sales and use tax. Since the new machinery was installed next door to the retail operation, the two operations were found to be substantially segregated from each other. Further, since the retail operation continued to use the same machinery used prior to the purchase, the new machinery was determined to be purchased for a “new and expanded industry”, not to replace the machinery used in the retail operation. Therefore, the manufacturer’s purchase of the machinery meets all of the requirements for exemption from sales and use tax. (German Cuisine, LLC v. Commonwealth of Kentucky Finance and Administration Cabinet, Department of Revenue, Kentucky Board of Tax Appeals, File No. K07-R-03 (Order No. K-20214), February 5, 2009)


The Kentucky Board of Appeals issued a ruling on the appeal of PCA-Corrections, LLC seeking to overturn sales taxes levied upon drugs supplied to inpatient rehabilitation and convalescent institutions by the Kentucky Department of Revenue. The Board held that the mere dispensing of drugs ordinarily sold over the counter by prescription did not make them exempt “prescription drugs”. However, the Board did find that insulin products that PCA-Corrections, LLC sold were exempt as prescription drugs. (PCA-Corrections, LLC v. Finance and Administration Cabinet, Department of Revenue, Kentucky Board Tax Appeals, File NO. K07-R-17)



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