Kentucky Modifies Manufacturing Exemptions for Energy-Producing Fuels and Tangible Personal Property

Kentucky has enacted legislation that modifies the state’s sales and use tax manufacturing exemptions for energy-producing fuels and tangible personal property.

The legislation modifies the partial exemption for all energy or energy-producing fuels used in the course of manufacturing, processing, mining, or refining and any related distribution, transmission, and transportation services for the energy that are billed to the user, to the extent that the cost of the energy or fuels used and the related services that are billed to the user exceed 3% of the cost of production. Per the legislative change, the cost of production must be computed on the basis of a plant facility, which includes all operations within the continuous, unbroken, integrated manufacturing or industrial processing process that ends with a product packaged and ready for sale. Cost of production includes the raw materials. Additionally, if a person who independently performs a manufacturing or industrial processing production activity for a fee applies for the exemption and does not take ownership of the tangible personal property that is incorporated into, or becomes the product of the manufacturing or industrial processing activity, then all costs of production, including raw material costs, must be allocated in proportion to all manufacturing or industrial processing operations at the plant facility. Since the exemption only applies if the utility costs exceed 3% of the cost of production, this expansion of the definition of costs could result in a loss of the exemption.

The legislation also makes the following changes to the definitions in regards to the Kentucky’s sales and use tax exemption for tangible personal property used in manufacturing.

• “Industrial Processing” is added, which includes Refining; Extraction of minerals, ores, coal, clay, stone, petroleum, or natural gas; Mining, quarrying, fabricating, and industrial assembling; The processing and packaging of raw materials, in-process materials, and finished products; and the processing and packaging of farm and dairy products for sale.
• “Directly used in the manufacturing or industrial processing process” is added, which means the process within a plant facility that commences with the movement of raw materials from storage into a continuous, unbroken, integrated process and ends when the finished product is packaged and ready for sale.
• “Processing production” is removed.
• “Machinery for new and expanded industry” is changed to mean machinery directly used in the manufacturing or industrial processing process.
• The definition of “manufacturing” has been changed to remove the statement that the manufacturing or processing production process begins with the movement of raw materials from storage into a continuous, unbroken, integrated process and ends when the product being manufactured is packaged and ready for sale

The legislation also extends the manufacturing exemption to an individual or processor that performs only part of the manufacturing or industrial processing activities, and there is no requirement that this individual or business take title to the tangible personal property that is incorporated into or becomes the product of the activity.  (H.B. 487, Laws 2018, effective April 26, 2018)