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A corporation was set up to acquire and lease equipment to its sister corporations and has not been remitting sales tax on these transactions, which are ongoing. The corporation and all its sister corporations are all 100% owned by the same parent and the leasing company does not sell or lease tangible personal property to outside entities. The Supreme Court of Kentucky ruled that the occasional sale exemption did not apply because the leasing transactions were ongoing and regular. The corporation was set up for the sole purpose of avoiding sales and use taxes, claiming an exemption for the purchase of the equipment as sales for resale, which was not the intention of the law. (Kentucky Supreme Court, Nos. 2202-SC-0329-DG and 2003-SC-0318-DG, June 17, 2004)


Changes to KRS 139.472 as a result of House Bill 293 broaden the exemption granted to medical items and clarify what items are included in the exemption. As of July 1, 2004, the exemption for prescription drugs extends to the purchase of drugs to treat a person when the prescription is required by law. Unless purchased by a nonprofit healthcare provider, over the counter drugs are not included in this exemption. Also effective July 1, 2004, the exemption for the purchase of prosthetic devices is broadened to include physicians, healthcare providers and individuals purchasing customized or prescribed products. (Kentucky Department of Revenue, Kentucky Sales Tax Facts, April 29, 2004, effective as noted above)


A new Kentucky regulation, effective February 16, 2004, clarifies that charges by an advertising agency to provide its customer with advertising services is exempt from tax but the sale of tangible personal property is taxable. Examples of taxable tangible personal property include materials that become a component of the master advertisement, materials presented to the client as part of the advertising service and materials used in performance of the advertising service. Tangible personal property used as part of a contract with the federal or state government, government agencies or political subdivisions thereof, and religious, educational or charitable organizations are likewise subject to tax regardless of the exemption status of the contracting party. In the instance where charges for advertising services are not clearly separated on the customer's invoice from the charges for tangible personal property, the entire sum is subject to tax. (Kentucky Regulation, Reg. 103 KAR 26:120, effective as noted above)


The Kentucky Board of Appeals found that sellers accepting incomplete or obviously invalid sales tax exemption certificates would be held liable for sales tax if the purchaser does not either correct the exemption certificate or pay the sales tax. The board held that it is the responsibility of the seller to ensure the validity of the certificates since the certificates clearly state the terms, "certificate not valid unless completed." (Griffin Industries, Inc. v. Revenue Cabinet, Order No. K-19053, December 5, 2004)


If an exemption certificate is filled out properly and completely, the purchaser and not the seller is responsible for any future tax liability. However, if the seller accepts the wrong exemption form or if it is not properly filled out then the seller can still be held liable for any taxes due. (Kentucky Board of Tax Appeals, Order No. K02-R-40, Whayne Supply Company v. Revenue Cabinet., November 10, 2003.)



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