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Department of Revenue v. Cox Interior, Inc.

Supreme Court of Kentucky

June 20, 2013

DEPARTMENT OF REVENUE, FINANCE AND ADMINISTRATION CABINET, COMMONWEALTH OF KENTUCKY, APPELLANT,
v.
COX INTERIOR, INC., APPELLEE

ON REVIEW FROM COURT OF APPEALS CASE NO. 2009-CA-001691-MR FRANKLIN CIRCUIT COURT NO. 09-CI-00305.

COUNSEL FOR APPELLANT: Douglas M. Dowell.

COUNSEL FOR APPELLEE: Steven Lowell Lenarz, Michael David Kalinyak, James Lee Deckard.

COUNSEL FOR AMICUS CURIAE BLUEGRASS INSTITUTE FOR PUBLIC POLICY SOLUTIONS, INC.: Deborah Tully Ever sole Timothy Joseph Eifler

COUNSEL FOR AMICUS CURIAE KENTUCKY CHAMBER OF COMMERCE, INC., AND NATIONAL FEDERATION OF INDEPENDENT BUSINESS: Jennifer Yue Barber Mark Francis Sommer.

OPINION

ABRAMSON, JUSTICE.

The Department of Revenue audited Cox Interior, Inc., for the period 2001 through 2004 and determined that Cox Interior owed $151, 943.51 in ad valorem taxes on tangible personal property. Cox Interior paid the full amount without protest and months later filed a refund claim for a portion of the taxes, alleging it had overpaid because the Department had improperly classified certain machinery. The Department denied the refund claim because Cox Interior paid without protest. The Kentucky Board of Tax Appeals (KBTA), ruling in favor of the taxpayer, reversed, and both the Franklin Circuit Court and the Court of Appeals affirmed.

We granted the Department's motion for discretionary review to consider the requirements a taxpayer must satisfy when seeking a refund of tangible personal property taxes under Kentucky Revised Statute (KRS) 134.590 in light of our recent decision in Cromwell Louisville Associates, LLP v. Commonwealth, 323 S.W.3d 1 (Ky. 2010). In Cromwell, we 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. Because Cox Interior properly followed the appropriate administrative remedies in this case, we affirm the decision of the Court of Appeals.

FACTUAL AND PROCEDURAL BACKGROUND

The facts of this case are undisputed. In 2006, the Department audited Cox Interior's compliance with ad valorem tax laws for tangible personal property for the tax years 2001 through 2004. The Department determined that Cox Interior had omitted certain tangible personal property from its tax returns during the relevant years, resulting in a bill of $151, 943.51. Cox Interior did not protest the new assessments and, in March 2006, paid them in full with the exception of the assessed penalties, which the Department waived.

Cox Interior later determined that the Department's audit improperly listed manufacturing machinery on the non-manufacturing schedule of the return. This was important because manufacturing machinery is subject to a more favorable tax rate than non-manufacturing machinery and is exempt from local tax. Because of this discovery, Cox Interior filed for a refund under KRS 134.590 in July 2007, sixteen months after it had fully paid the new assessments from the Department's audit. Cox Interior alleged that the Department improperly assessed $44, 717 in tangible property taxes. The Department denied Cox Interior's refund claim strictly on procedural grounds, stating that Cox Interior had failed to follow the applicable administrative procedure. The Department contended that Cox Interior had to protest the assessment pursuant to KRS 131.110 within forty-five (45) days of receiving notice of the tax due in order to preserve its right to a refund.

Cox Interior appealed the Department's final ruling to the KBTA, following proper procedure under KRS 131.110 and 131.340. Cox Interior stressed that it had fully complied with KRS 134.590 and the relevant administrative procedures for a tax refund. The Department disagreed and moved for summary judgment, again arguing that Cox Interior was required to protest the assessment before paying the taxes in order to have a valid claim for a refund. Ruling in favor of Cox Interior, the KBTA relied heavily on Revenue Cabinet v. Castleton, 826 S.W.2d 334 (Ky.App. 1992), and concluded that the refund claim was timely filed and was not waived by Cox Interior's failure to protest the Department's audit assessment.

The Department appealed to the Franklin Circuit Court. The Franklin Circuit Court, also relying primarily on Castleton, agreed with the KBTA and held that Cox Interior had properly exhausted administrative remedies. Further, the Franklin Circuit Court noted that the Department's view of KRS 134.590 was improper and erected unnecessary procedural obstacles to Cox Interior's obtaining a refund. The circuit court concluded that requiring Cox Interior to protest the assessment in order to preserve the right to file a refund claim exceeded what the doctrine of exhaustion of administrative remedies can or should require.

The Department appealed and, consistent with the KBTA and the circuit court, the Court of Appeals found Castleton to be controlling and held that Cox Interior was not required to protest the assessment in order to preserve the claim for a refund. Rather, the Court of Appeals found that Cox Interior fully complied with KRS 134.590 by submitting its refund claim within two years and then protesting the Department's denial of that refund claim. The Court of Appeals noted that the Department's reading of KRS 134.590 would require Cox Interior to exhaust not one, but two administrative remedies.

We granted discretionary review because of an alleged conflict between Cromwell and the decision of the Court of Appeals in the present case.[1]Finding the Court of Appeals decision consistent with ...


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