Kentucky Manufacturer Denied Partial Energy Exemptions

A Kentucky court ruling was upheld that denied a manufacturer refunds of sales and use tax and utilities gross receipts license tax that the manufacturer sought based on energy-related partial exemptions. The exemptions were the partial exemption from sales and use tax for the consumption of energy used in in the course of manufacturing, processing, mining or refining, and any related transportation services to the extent that the energy cost exceeds 3% of the production cost; and the partial exemption from utilities gross receipts license tax, involving the exclusion from gross receipts of amounts received for furnishing energy used in the course of manufacturing, processing, mining or refining, to the extent that the energy cost exceeds 3% of the production cost. The Board of Appeals analyzed similar exemptions for sales and use tax. The manufacturer of aluminum billets restructured and created a wholly-owned subsidiary, the purpose of which was to speculate, hedge, purchase, and own raw aluminum to make billets. The manufacturer transferred all raw aluminum to the subsidiary and entered into a tolling agreement with the subsidiary in which the manufacturer processed the aluminum into billets for a fee. The manufacturer claimed that it was a toller and was therefore entitled to exclude the cost of aluminum from production costs for the purposes of the exemptions. For the purposes of the exemptions, cost of production is computed on the basis of plant facilities, defined as all permanent structures affixed to real property at one location. The board of appeals found that because the manufacturer and subsidiary operations constituted one plant facility, the manufacturer could not allocate the cost of aluminum to the subsidiary for speculating/hedging as well as allocate the cost of aluminum to the subsidiary for purposes of calculating the cost of production for the exemptions. The manufacturer failed to demonstrate that the two operations were truly separate and distinct or that the manufacturer was not dependent on the subsidiary for the production of the billets. The board of appeals found that there was only one operation at the plant facility. The raw aluminum had to be included in the cost of production calculation, despite the subsidiary owning it, because the aluminum was associated with and necessary for the plant operation for which the manufacturer sought the exemption. Therefore, the energy costs did not exceed 3% of the production costs. (Ohio Valley Aluminum Company, LLC v. Finance and Administration Cabinet, Kentucky Board of Tax Appeals, File Nos. K-10-R-35 and K-10-R-36 (Order No. K-22086), May 22, 2012)

Posted on June 12, 2013