State & Local Tax Updates in Kentucky and Louisiana

Kentucky Restaurant Win Decision as a Manufacturer

In a recent decision, the Kentucky Court of Appeals ruled in favor of Hale, Inc., doing business as Lotsa Pasta, a local deli and food manufacturer, exempting it from paying sales tax on certain prepared food items. In this case, the Commonwealth of Kentucky, Department of Revenue (DOR), appealed a decision made by the Jefferson Circuit Court, which reversed the Kentucky Board of Tax Appeals (KBTA) ruling that certain products made by Hale, Inc. d/b/a Lotsa Pasta (Lotsa Pasta) were subject to sales tax. The primary issue in the case revolved around whether the salads and spreads produced by Lotsa Pasta qualified as "prepared food" under KRS 139.485, which would make them subject to sales tax.

Key points from the case:

Background: Lotsa Pasta, based in Louisville, Kentucky, operates a business that includes a deli counter, café, grocery, and commercial kitchen. It makes various food products, including salads, spreads, pastas, pizzas, and Italian ices. After an audit in 2018, the DOR assessed additional sales tax for products such as pasta salads and potato salads, which Lotsa Pasta had not taxed from 2014 to 2017.

Legal dispute: Lotsa Pasta argued that these food products were exempt from tax under KRS 139.485(1), which provides an exemption for "food and food ingredients" unless the food is classified as "prepared food." The KBTA initially ruled against Lotsa Pasta, but the circuit court reversed this decision, ruling that the products were exempt because they did not meet the definition of "prepared food."

Statutory definitions: KRS 139.485(3)(g) defines "prepared food" as food made by a retailer from two or more ingredients combined into a single item for sale. However, the statute excludes certain activities, such as food manufacturing, from this definition. Lotsa Pasta argued that it was primarily engaged in food manufacturing, and thus its products should be exempt.

Court's decision:

• Prepared food: The Court of Appeals disagreed with the circuit court’s conclusion that Lotsa Pasta’s products were not "prepared food." The court found that combining ingredients in bulk for later sale in smaller containers still qualifies as "prepared food" under the statutory definition. The court emphasized that the definition of "prepared food" did not exclude bulk manufacturing.
• Food manufacturing exception: However, the Court of Appeals agreed with the circuit court's determination that Lotsa Pasta’s primary business was food manufacturing (perishable prepared food manufacturing as classified under NAICS code 311991), and as such, the products fell under the statutory exception for food manufacturing businesses. Therefore, the court ruled that Lotsa Pasta’s products were exempt from sales tax.

Conclusion: The Court of Appeals affirmed the circuit court’s decision, meaning Lotsa Pasta’s products, though technically "prepared food," were exempt from tax due to the company’s classification as a food manufacturer.

The court’s decision clarifies the interpretation of "prepared food" in the context of Kentucky's sales tax laws, particularly in cases where food is produced in bulk and then repackaged for sale.

Louisiana

Louisiana Voters to Decide on Major Tax Reforms in March 29 Referendum

Last year, the Louisiana legislature passed comprehensive tax reforms, but the implementation of these changes depends on a March 29 referendum. Voters will decide whether to approve more than 100 pages of tax revisions in the state constitution, with a significant focus on giving local parishes the power to determine how and whether to tax business inventory. The proposed changes, included in HB-7, aim to balance revenue generation for local governments while encouraging business investment in Louisiana.

HB-7 proposes to move ad valorem tax exemptions from the state constitution to statutes, providing the legislature more flexibility to amend exemptions without a constitutional change. Key exemptions impacted include those for industrial manufacturing facilities, freeport exemptions for imported goods, and construction materials. Governor Jeff Landry and supporters argue the changes are designed to foster business growth in Louisiana, especially by addressing the state’s relatively rare practice of taxing business inventory.

The bill proposes a new tax classification for business inventory, which would be taxed at 15 percent of its fair market value. However, HB-7 also allows parishes to reduce or eliminate this rate, potentially down to 0 percent, offering them a chance to compete for businesses by lowering taxes. This could incentivize businesses to keep their inventory in Louisiana while providing a flexible revenue stream for local governments.

Additionally, HB-7 includes provisions allowing parishes to permanently exempt business inventory from ad valorem taxes in exchange for a one-time payment from the State Revenue Stabilization Trust Fund. Parishes opting for a 100 percent exemption would receive a payment equal to three times the taxes collected on business inventory in 2023, up to $15 million, or $1 million, whichever is greater. The exemption can also be phased in over five years, with adjusted payments.

C-corporations need to closely monitor how HB-7 interacts with HB 2, another recent tax reform bill. HB-2 eliminates the business inventory tax credit for C-corporations starting in 2026, while keeping it for individuals and pass-through entities. Businesses should be prepared for possible changes depending on how parishes decide to handle business inventory taxes after the March 29 vote, as they may either exempt inventory from taxation or tax it at the proposed 15 percent rate or lower.