United States: The Long And Narrow Road To A Sales Tax Exemption Supplies And Industrial Tools

Sales and use taxes are significant sources of revenue for the Commonwealth, generating over three billion dollars each fiscal year. However, recognizing the importance of manufacturing to the state, the General Assembly enacted several exemptions from the taxes to encourage manufacturers to locate and remain in Kentucky.

When considering the sales and use tax liability of manufacturing companies, two important exemptions should be kept in mind: the exemption for materials, supplies, and industrial tools and the exemption for machinery for new and expanded industry.  Because there seems to be little dispute about what constitutes raw materials, this article focuses upon the exemption for supplies and industrial tools; in a future article we will address the exemption for machinery for new and expanded industry.

The Exemption for Supplies and Industrial Tools in KRS § 139.470(10)

The exemption for supplies and industrial tools is based on the theory that sales tax should only be collected once – when the final product is sold to its end user. Therefore, supplies and industrial tools "used up" during the manufacturing process should not be taxed. While this is a great "theory," manufacturers know the Kentucky Department of Revenue (KDOR or Department) is really stingy when it comes to allowing exempt purchases of supplies and industrial tools. Instead, the KDOR treats most of these purchases as taxable repair or replacement parts. A recent case (described below) illustrates problems that may be encountered when claiming an exemption from tax for the purchase of industrial tools.

Before turning to the case, some definitions and background are necessary.

To qualify for the exemption, the supplies and industrial tools must be "directly used in manufacturing or industrial processing" and must have a useful life of less than one year.  According to the statute, "supplies" include lubricating and compounding oils, grease, machine waste, abrasives, chemicals, solvents, fluxes, anodes, filtering materials, fire brick, catalysts, dyes, refrigerants, explosives, etc."

"Industrial tools" include "hand tools such as jigs, dies, drills, cutters, rolls, reamers, chucks, saws, spray guns, etc., and . . . tools attached to a machine such as molds, grinding balls, grinding wheels, dies, bits, cutting blades, etc."  Unlike supplies, industrial tools normally must come into direct contact with the product being manufactured to qualify for the exemption.

KDOR's Narrow Interpretation of the Exemption

Although it has the potential to result in significant cost savings for manufacturers, as the title of this article suggests, the KDOR has taken an increasingly narrow interpretation of the exemption for supplies and industrial tools. With respect to industrial tools, for example, the Department has strictly interpreted the requirement that such tools come into "direct contact" with the product being manufactured. The Department has construed this requirement to mean the industrial tools must act upon the product to change its size, shape or character.

As previously stated, the Department finds a vast majority of purchases to be taxable because they are deemed to be purchases of "repair, replacement or spare parts" which are not exempt from tax. The statute states that "[r]epair, replacement or spare parts shall not be considered to be materials, supplies or industrial tools directly used in manufacturing or industrial processing."  "Repair, replacement, or spare parts" are defined as "any tangible personal property used to maintain, restore, mend or repair machinery or equipment" and do not include "machine oils, grease or industrial tools."

For instance, the Department has taken the position that chemicals used to maintain machinery and equipment do not qualify for the exemption because they are by definition repair and replacement parts. The tension between the requirement that industrial tools have a useful life of less than one year and the exclusion of repair, replacement and spare parts from the exemption is illustrated in the recent case of Progress Metal Reclamation Company v. Department of Revenue[1], currently pending before the Kentucky Supreme Court.

Progress Metal Reclamation Company v. Department of Revenue

The taxpayer, Progress Metal Reclamation Company, operates a metal processing business in Ashland, Kentucky. Part of its business involves cutting metal so it can be placed in a furnace and melted. This process employs torches that use a mixture of acetylene and liquid oxygen to create temperatures hot enough to cut the metal, and hammers that break large pieces of metal into smaller pieces. Pins hold the hammers in place; hammer pins have a useful life of two weeks to one month.

During a sales tax audit, the KDOR treated both liquid oxygen and hammer pins as taxable. Progress Metal protested the audit assessment. The company argued the hammer pins are exempt as industrial tools because they function as "chucks" or "tool holders," which are expressly listed in the statute as exempt, and the hammer pins have a useful life of less than one year. The Department argued the hammer pins are not industrial tools, but are repair or replacement parts.

Progress Metal also maintained liquid oxygen is exempt as an industrial supply, noting that the Department previously had exempted liquid oxygen between tax 1965 and 2004.  Progress Metal argued the Department's change of position violated a legal doctrine known as "contemporaneous construction," which provides that an agency may not unilaterally revoke its own longstanding interpretation of a statute. In revoking the exemption, the Department asserted the liquid oxygen was an energy producing fuel and not an industrial supply.

On March 13, 2015, the Court of Appeals issued an opinion affirming the decisions of the lower court and Kentucky Board of Tax Appeals. The court addressed the Department's treatment of liquid oxygen and found the doctrine of contemporaneous construction prohibited the Department from abandoning its "four-decade long pattern" of exempting liquid oxygen from tax as an industrial supply. Regarding Progress Metal's use of hammer pins, the court held the hammer pins are not "industrial tools" but instead are "replacement parts" not exempt from taxation. The court noted that, at best, the hammer pins only have incidental contact with the metal the mechanical hammer destroys, and the hammer pins simply "wore out" and are not intended to be "used up" in the manufacturing process.

Progress Metal has asked the Kentucky Supreme Court to review the case.

The holding of the Court of Appeals results in a very narrow interpretation of the exemption that thwarts the legislature's goal of encouraging manufacturing in the Commonwealth. Hopefully, the Kentucky Supreme Court will weigh in on this issue and hold that the industrial tools exemption must be construed more broadly, in accordance with the General Assembly's intent. In any event, Progress Metal is a case that could have major implications for the manufacturing industry for years to come.

[1] Case Nos. 2013-CA-1765 and 2013-CA-1776 (Ky. App. Mar. 13, 2015), motion for discretionary review filed, Kentucky Supreme Court, No. 2015-SC-175-D (Apr. 9, 2015).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.