In the recent case of Kentucky Department of Revenue v. Hale, Inc., the Kentucky Court of Appeals decision provides clarification on how the state’s sales tax exemptions apply to food manufacturing businesses.
The Kentucky Court of appeals ruled in favor of Lotsa Pasta, a local Louisville business operating under Hale, Inc., after the state tried to assess them nearly $59,000 in taxes plus interest, and penalties through audit. The Kentucky Department of Revenue (DOR) argued that items such as salads, spreads, and Italian ices were taxable as prepared food, which is taxable in Kentucky. Lotsa Pasta disputed the assessment, claiming that these items were exempt under Kentucky’s food manufacturing exemption (KRS 139.485), which provides an exemption to food manufacturers who fall under NAICS Sector 311 if the food is not sold hot or with utensils. Ultimately, the court said that while Lotsa Pasta’s products were indeed prepared food under the law, they still qualified for the exemption because most of their space and staff were dedicated to food production, their business classification under NAICS code fell under food manufacturing, and they weren’t selling the items hot or with utensils.
This ruling confirms that small and mid-sized food manufacturers can qualify for Kentucky’s sales tax exemption, even if their products are considered prepared food, as long as they meet the following criteria:
The decision highlights the importance of proper classification and operational structure. Food businesses that focus on manufacturing could qualify for valuable tax exemptions, which might help reduce costs and improve compliance under Kentucky Law.
(Kentucky Department of Revenue v. Hale, Inc., Court of Appeals of Kentucky, No. 2023-CA-1192-MR, February 28, 2025)