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Kentucky: Supreme Court rules in favor of taxpayer following proper refund dispute procedure

On June 20, 2013, the Supreme Court of Kentucky (the Supreme Court) issued its opinion in Dep’t of Revenue v. Cox Interior, Inc., 400 S.W.3d 240 (Ky. 2013). In Cox Interior, the Supreme Court considered the requirements a taxpayer must satisfy in seeking a refund of tangible personal property taxes under Kentucky law.

The dispute between Cox Interior, Inc. (Cox) and the Department of Revenue (the Department) arose out of an audit for tax years 2001 through 2004 where the Department determined that Cox owed roughly $152,000 in ad valorem taxes on tangible personal property. Cox paid in full without protest. Over a year after the completion of the audit, Cox filed a refund claim for a portion of its payment, alleging overpayment due to the Department’s improper classification of certain machinery. The Department denied the refund claim on the basis that Cox paid the amount without protest after the conclusion of the audit and, as a consequence, Cox did not follow the proper procedure for contesting the classification of the machinery. This case came to the Supreme Court after the Kentucky Board of Tax Appeals ruled in favor of Cox, and both the circuit court and court of appeals affirmed the ruling.

Previously, in Cromwell Louisville Associates, LP v. Commonwealth, 323 S.W.3d 1 (Ky.2010), the Supreme Court held that a taxpayer’s compliance with administrative remedies by properly protesting a real property assessment was a condition precedent to seeking a tax refund. It was the Cromwell case that the Department used to advance its primary argument that Cox had not complied with its administrative remedies and is therefore, not entitled to a refund. The Department argued that Cox should have protested its tax assessment within 45 days after the assessment as part of the outcome of the audit. Kentucky Revised Statute (KRS) § 131.110 allows a taxpayer to protest a tax assessment within 45 days of notice of the taxed assessed. It was under KRS §131.110 that the Department claimed it had authority to deny Cox’s refund claim.

However, in Cox’s case, it was not protesting the assessment of property as was the case in Cromwell, but rather it disagreed with the Department’s classification of such property. Stated differently, the basis of Cox’s case rested on a legal argument (on classification of property) and not a dispute over the valuation of property subject to ad valorem tax.

KRS § 134.590(2) provides in part the following for taxpayers seeking refund of ad valorem taxes paid “when no taxes were due”:

No state government agency shall authorize a refund unless each taxpayer individually applies for a refund within two (2) years from the date the taxpayer paid the tax. Each claim or application for a refund shall be in writing and state the specified grounds upon which it is based. Denials of refund claims or applications may be protested and appealed in accordance with KRS 131.110 and 131.340. No state government agency shall refund ad valorem taxes, except those held unconstitutional, unless the taxpayer has properly followed the administrative remedy procedures established through the protest provisions of KRS 131.110, the appeal provisions of KRS 133.120, and the correction provisions of KRS 133.110 and 133.130, or other administrative remedy procedures.

KRS § 134.590(2) provides a taxpayer with two years to bring a claim, provided that such claim is not challenging the valuation of real or personal property, not seeking correction of clerical error and not claiming that such taxpayer has been erroneously charged with taxes on property it does not own – those issues are handled elsewhere. Furthermore, the Supreme Court specified that Kentucky has long recognized a distinction between disputes challenging an assessor’s valuation of taxed property and refund claims challenging the legality of assessed taxes in connection with ad valorem taxes (e.g., the appropriate classification of property for different tax rates). Cromwell, the court indicated, did not alter that distinction.

In rendering its decision, the Supreme Court reasoned that the Department’s interpretation of the KRS was so narrow that the two year limitation would have no meaning for taxpayers seeking a refund “when no taxes were due.” After lengthy analysis, the Supreme Court held for Cox and determined that Cox complied with the applicable administrative remedy procedures. Cox did not dispute the assessment of the valuation of the property under dispute, making the 45 days from the date of the assessment to protest limitation inapplicable to Cox. Having resolved the issue of whether Cox had standing to claim a refund, the case was remanded to be heard on its merits.

Massachusetts: Department of Revenue issues guidance, seeks public comment, on expansion of sales to software services law

On July 24, 2013, Massachusetts lawmakers overrode the governor’s veto to pass H. 3535, an $800 million transportation bill. H. 3535 subjects computer system design and software services to sales tax. More specifically, the relevant change expands the classes of services subject to sales taxes from “telecommunications services” to “telecommunications services, computer system design services and the modification, integration, enhancement, installation, or configuration of standardized software.” This new modification to sales taxes on services took effect as of July 31, 2013.

Since the bill’s passage, the business community has eagerly sought guidance from the Department of Revenue (the Department). The Department thus far has been responsive to the business community’s desire for guidance by publishing TIR 13-10, a Technical Information Release covering this very matter, as well as a companion FAQ. Note that as of the date of publication of this Client Alert, the Department is continuing to make updates to the relevant FAQ. However, the Department is withholding final guidance in the form of regulations until mid-October. Until that time, the Department is requesting public comment and inquiry concerning the new sales tax on computer system software services. We are in the process of considering whether to submit comments based on the confusion that this bill has caused.

If you are interested in expressing your concerns regarding this bill, please contact us and we can discuss the process of incorporating your concerns into any document that we submit to the Department.

Click here to read the complete text of H. 3535.

Ohio: Legislation increases Board of Tax Appeals authority

On July 11, 2013, Ohio Gov. John Kasich signed H.B. 138, which amends the provisions governing the Board of Tax Appeals, including, among other changes, establishing a small claims docket within the Board of Tax Appeals, requiring the Board of Tax Appeals to adopt rules to create and implement a mediation program and a case management schedule, and permitting notices of appeals to be filed by facsimile or electronic transmission. Most of the provisions of this legislation will be effective October 11, 2013, with limited provisions taking effect on January 1, 2015.

Click here to read the entire text of the legislation.

For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall

Susan Millradt McGlone

Jeremy J. Schirra

Multistate Tax Services

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.