Kentucky Court of Appeals Determines Use Tax Due on Materials Fabricated Out of State

The Kentucky Court of Appeals ("the Court") affirmed a Franklin County Circuit Court of Appeals decision denying the refund of use tax paid on materials purchased, stored, and transformed outside of Kentucky in a decision issued on July 25, 2003. Morton Buildings, Inc. v. Revenue Cabinet, 2002-CA-001787-MR, Court of Appeals of Kentucky.

Morton Buildings, Inc. ("Morton") has sales locations in Kentucky but does not operate manufacturing operations in the state. Morton filed for a refund of use taxes paid on materials that were purchased, stored, then transformed into building components outside of the state and subsequently transported into Kentucky for integration into customer buildings. Morton contended that it did not meet all four criteria required by Kentucky Statute Annotated § 139.310 for the imposition of use tax. Morton argued that the materials transformed out of state were not intended for storage, use or consumption within Kentucky. Additionally, Morton argued that the actual storage, use or consumption did not occur when the prefabricated buildings were constructed.

The court disagreed, stating, "Intent may be proved by circumstances as well as by declarations." Harkey v. Haddox, 244 Ky. 380, 50 S.W.2d 955, 956 (1932) . The court determined that since Morton maintained Kentucky sales offices that sold prefabricated buildings, and that at least 700 buildings were constructed during the period in question that Morton intended to use the raw materials in conducting its business within Kentucky. Morton's second argument that consumption did not occur in Kentucky was denied. The Court ruled that Morton did meet the definition of "use" in that they exercised a right or power over tangible personal property within the state.

Morton contended that the lower court ignored decisions from other states (Connecticut, New York, Massachusetts, and Texas) which supported their contention that use tax can not be imposed on the raw materials transformed out of state. The Court concluded that cases and statute from other jurisdictions may be informational or persuasive but are not decisive and Kentucky courts are not required to follow these cases.

If you have any questions regarding this information, please call James Trester, Principal at Ryan & Company, at 972.934.0022. Mr. Trester can also be reached by e-mail.