The Kentucky CPA Journal

Tax in the Bluegrass

Big questions in Kentucky tax cases

Issue 3
November 3, 2025

By Mark A. Loyd, JD, CPA

Kentucky Courts have recently been considering several questions that Kentucky taxpayers may find interesting.

Does Kentucky sales tax apply to salads made in bulk for sale as food items?

Hale, Inc. d/b/a Lotsa Pasta makes in bulk and packages food items like salads and spreads in its commercial kitchen and sells these food items in its grocery store; Lotsa Pasta also operates a small café. During a sales and use tax audit, the Kentucky Department of Revenue KDOR determined that salads and spreads made and packaged by Lotsa Pasta were subject to sales tax because KDOR took the position that such items were not exempt grocery items but rather taxable “prepared foods” under KRS 139.485. Lotsa Pasta maintained that the salads and spreads were exempt grocery items and that the items were exempt because Lotsa Pasta was a prepared food manufacturer. The Kentucky Board of Tax Appeals held for KDOR, but the Jefferson Circuit Court reversed. On appeal, the Court of Appeals in Dep’t of Revenue v. Hale, Inc., 707 S.W.3d 522 (Ky. App. 2025), found that while Lotsa Pasta’s food items came within the category of “prepared food” because Lotsa Pasta mixed or combined the salads and spreads for sale as a single item, the Court also found that Lotsa Pasta was engaged in a food manufacturing business, which would thus exclude the “prepared foods” manufactured by Lotsa Pasta from the statute’s definition of “prepared food.” The author’s law firm represented Lotsa Pasta in this case.

What is the property tax value of a lessee’s interest in exempt property?

Grand Lodge of Kentucky Free & Accepted Masons v. Plummer, No. 2023-CA-1080-MR (Ky. App. 2024), discretionary review granted, 2024-SC-0410 (Ky. 2025) is an appeal from the Kenton Circuit Court’s judgment affirming the ad valorem tax assessments of the residents of Spring Hill Village, a retirement community owned by the Grand Lodge, which is a tax-exempt entity. The Court of Appeals held that the residents are non-exempt lessees who must pay ad valorem tax on the rights they obtain. The value of the leasehold is calculated by subtracting the fair market value of the land as a whole if sold subject to the lease from the fair market value of the land as a whole if sold free and clear of the lease. The PVA and the residents disagree on the value of the residential units. The PVA appears to have taken the position that the residential units are 82 percent of the entrance fee which entitles the resident to exclusive occupancy of a residential unit until death, incapacity, relocation to a nursing home or 30 days’ written notice. The residents appear to have taken the position that the residential units have no value because the property itself has no value since title will revert to the United States if the property is used for non-Masonic purposes. The Court of Appeals also rejected the residents’ arguments that the tax assessments were applied in a discriminatory manner. The case is currently pending before the Kentucky Supreme Court on discretionary review and is fully briefed.

Does equal protection protect targeted leased properties from increased property tax assessments?

The Supreme Court of Kentucky granted discretionary review of lower-court rulings that upheld Jefferson County’s real property tax assessments on several Walgreens-occupied stores—valuations that averaged two to three times those of similar nearby retail properties in LWAGLVKY 1 LLC c/o Walgreen Co. v. Jefferson Cnty. Prop. Valuation Adm’r, No. 2024-CA-0302-MR (Ky. App. 2024), discretionary review granted, No. 2025-SC-0015 (Ky. 2025). Walgreens has alleged that the Jefferson County PVA targeted Walgreens properties for significant increases to real property tax assessments with PVA’s “drugstore valuation formula”, which values the leased fee using contract rent, when other properties are valued using the generally accepted method, which values the fee simple estate using market data. This resulted in assessment valuations two and three times higher than those of similar properties owned or leased by other taxpayers.

The KBTA made no conclusions of law on Walgreens’ constitution claims, concluded Walgreens overcame the evidentiary presumption in favor of PVA’s valuation, and sided with Walgreens on properties owned in fee simple, but the KBTA sided with PVA on Walgreens leased stores valued using the PVA’s drugstore valuation formula. The Circuit Court found no equal protection nor uniformity violation despite PVA singling out Walgreens, and the Court deferred to KBTA’s conclusions as to PVA’s leased fee values. Despite acknowledging PVA’s differential treatment of Walgreens, the Court of Appeals held, without identifying any basis, that PVA’s valuations passed the equal protections rational basis test and deferred to the KBTA’s leased fee values. As noted, the Kentucky Supreme Court granted discretionary review. The author’s law firm represents Walgreens in this case.

What evidence supports the property tax value of an owner-occupied property?

Lowe’s owned real property in Montgomery County, Kentucky. In 2020, Lowe’s appealed the PVA’s assessment of its property, which was based on data from 2008. Pursuant to KRS 49.220(5), while the PVA’s assessment is entitled to a presumption of validity, this presumption disappears once the taxpayer presents competent rebuttal evidence—here, expert testimony and analysis from Lowe’s. The burden then shifts to the PVA to support its assessment with substantial evidence. In Lowe’s Home Cntrs, L.L.C. v. Montgomery Cnty. Prop. Valuation Admn’r, No. 2024-CA-0307-MR (Ky. App. Aug. 22, 2025) (rehearing requested) the Court of Appeals held that the KBTA and the Circuit Court improperly required Lowe’s to prove its case during the prima facie phase and failed to shift the burden to the PVA once Lowe’s presented its expert evidence. Furthermore, the Court found that the PVA’s reliance on decade-old, unadjusted cost approach without annual revaluation or depreciation was unsupported by substantial evidence, and that the PVA’s expert’s use of leased property comparable for an owner-occupied, non-leased property was fundamentally flawed. Accordingly, the Court reversed the Circuit Court and remanded the case for further consideration consistent with its opinion.

When does manufacturing end for purposes of Kentucky’s property tax machinery exemption?

Ralcorp, a bulk manufacturer of food products, operates a food manufacturing plant in Louisville, Kentucky, where it produces items like frozen pancakes and biscuits for major restaurants and retailers. Ralcorp’s position was that the machinery it uses to palletize, shrink wrap, and label food products and which is necessary to comply with federal and state laws should be considered part of “machinery actually engaged in manufacturing”. This would make it eligible for a lower state tax rate and a local tax exemption for tangible personal property tax purposes. KDOR disagreed.

The KBTA concluded that the manufacturing process includes palletizing and labeling, as the products are not considered saleable until these steps are completed. The Franklin Circuit Court affirmed, explaining that the test is not whether the manufacturing process ends when the product can be eaten, but when the product is ready for sale. The Circuit Court found that palletization and labeling were necessary steps for Ralcorp’s manufacturing process, which ends when the packaged products are packed on pallets, secured with shrink wrap, and labeled with a barcode, as the customers will not accept the product until these steps have been completed. KDOR appealed to the Court of Appeals in Dep’t of Revenue v. Ralcorp Frozen Bakery Prods., Inc., 2023-CI-00193 (Ky. Franklin Cir. Ct. 2024), on appeal, No. 2024-CA-0114-MR (Ky. App.), where briefing is underway.

Can the city of Hazard impose a local restaurant tax?

The Commonwealth of Kentucky, ex rel. Attorney General Russell Coleman (“OAG”) appealed to the Court of Appeals from the Order of the Franklin Circuit Court which held that KRS 191A.400 was unconstitutionally arbitrary under Section 2 of the Kentucky Constitution as applied to the City of Hazard in City of Hazard v. Commonwealth, No. 23-CI-82 (Franklin Cir. Ct. 2024), reversed, 2024-CA-0629 (Ky. App. Oct. 3, 2025). Below, the Circuit Court held that the statute created an arbitrary classification by granting similarly situated cities authority to impose a local restaurant tax while depriving the same authority to Hazard without any rational basis to do so. The Circuit Court’s remedy was affirmative injunctive relief. The Circuit Court not only declared the law unconstitutional as applied to Hazard but also ordered the Governor’s Office of Local Government to include Hazard on the list of cities eligible to impose the restaurant tax permitted by KRS 91A.400. Notably, the Circuit Court’s initial ruling could have been read to authorize any city to impose a restaurant tax. On review, the Court of Appeals reversed the Franklin Circuit Court’s finding that KRS 91A.400 is unconstitutionally arbitrary and further determined that the Circuit Court did not have the power under the Kentucky Constitution to grant Hazard the remedy it granted and that there are no other constitutional bases upon which to affirm the Circuit Court. The Court of Appeals further determined that Hazard waited for an unreasonable amount of time to challenge its constitutional classification under Section 156, Section 156a, and KRS 91A.400.

“We're not gonna lose the stuff. This is America! We're gonna receive a fair trial from an impartial jury.” Navin R. Johnson in The Jerk (1979).

The common theme of these cases is in some form or fashion - fairness. It will be interesting to see how these cases are ultimately decided.

About the author: Mark A. Loyd, JD, CPA, is a partner of Dentons Bingham Greenebaum LLP in Louisville and chairs its Tax and Finance group. Loyd chairs the Society’s Editorial Board and serves on the KyCPA Board of Directors. He can be reached at mark.loyd@dentons.com.