September 3, 2026
Kentucky's manufacturing property tax exemption: Saleable means packaged
By Mark A. Loyd, JD, CPA
Kentucky’s manufacturing machinery property tax exemption was addressed earlier this year in Department of Revenue v. Ralcorp Frozen Bakery Products, Inc., No. 2024-CA-0114-MR (Ky. App. Jan. 16, 2026). The Kentucky Court of Appeals held in favor of the taxpayer in an opinion designated not to be published. The Court affirmed both the Kentucky Board of Tax Appeals and the Franklin Circuit Court.
Is the Ralcorp case a big deal?
Many manufacturers operating in Kentucky have manufacturing processes that produce packaged manufactured products. “Machinery actually engaged in manufacturing” is taxed at $0.15 per $100 of assessed value. KRS 132.020(1)(c)1. This is one-third the general tangible personal property rate of $0.45 per $100. Such machinery is also exempt from local property taxes entirely. KRS 132.200(2). The difference is significant. For a manufacturing plant with tens of millions of dollars in manufacturing machinery, the exemption is worth hundreds of thousands of dollars annually. That holding matters to every Kentucky manufacturer that manufactures products that are packaged for sale.
What was at issue in the Ralcorp case?
The question in Ralcorp turned on when the manufacturing process ends. Specifically, does manufacturing end with the product itself as the Department of Revenue (Department) argued or when that product has been packaged and labeled in the form in which it is sold which was the taxpayer’s position.
What does Ralcorp manufacture?
Ralcorp operates a large frozen food manufacturing plant in Louisville. The plant produces frozen pancakes and biscuits. Testimony at the Kentucky Board of Tax Appeals expressed the “heartfelt sentiment” that one Ralcorp product was so delicious that it inspired the Court of Appeals to compare the description to Mr. Darcy’s admiration of Elizabeth Bennet in Pride and Prejudice. The plant’s customers include well known national restaurant chains and retailers.
As to Ralcorp’s manufacturing process, after raw materials are blended, mixed, baked, frozen, and boxed, Ralcorp’s machinery palletizes the products, wraps the pallets in shrink wrap, and affixes labels bearing serialized shipping container barcodes. These barcodes are essential for traceability under the federal Food Safety Modernization Act.
How did the Ralcorp case get to the Court of Appeals?
The Department audited Ralcorp’s property tax returns for 2013–2015 and determined that the palletizing, wrapping, and labeling machinery was not “machinery actually engaged in manufacturing.” Ralcorp disagreed. The Kentucky Board of Tax Appeals reversed the Department. The Franklin Circuit Court affirmed. The Department appealed to the Court of Appeals.
How did the Court analyze the issue?
The Court applied the well-established Ross v. Greene & Webb Lumber Co. framework, which defines manufacturing as beginning “when the raw material starts moving in a chain of unbroken, integrated sequence into the plant” and ending “with a generally accepted saleable product.” 567 S.W.2d 302, 304 (Ky. 1978). The key is “saleable.”
The Department contended that Ross should not apply to property tax because it is a sales and use tax case. The Court rejected this, citing Revenue Cabinet v. Kentucky-American Water Co., 997 S.W.2d 2, 7 (Ky. 1999), which recognized that the manufacturing exemptions for sales tax and property tax serve the same purpose across tax types.
The Department also put forward Burke v. Stitzel-Weller Distillery, 145 S.W.2d 861 (Ky. 1940), which describes manufacturing as including “all things necessary to make [the product] ready to be put on the market so as to be sold to the consuming public.” But, the Court found the Burke test essentially identical to Ross:
Whatever daylight the Department discerns between these two articulations, we confess to being in the dark. The Ross articulation includes machinery “necessary” to the manufacturing process, which ends with a “saleable” product. The Burke articulation includes everything “necessary” to make the product “ready ... to be sold.” The Department has advanced a definition of “actually engaged in manufacturing” that is substantially the same as the one upon which the KBTA relies.
The Court’s holding focused on whether Ralcorp’s products are “saleable” or “ready ... to be sold” prior to being palletized, wrapped, and labeled by its machinery, or put another way, whether palletizing, wrapping, and labeling the products is “necessary” to make them “saleable” or “ready ... to be sold.”
Focusing on the KBTA’s findings, Ralcorp’s products must be traceable to be saleable, and Ralcorp’s machinery makes its products traceable. Ralcorp’s machinery is therefore entitled to the favorable tax treatment for machinery “actually engaged in manufacturing”.
The KBTA’s and the Circuit Court’s findings that Ralcorp’s products are not “saleable” without FSMA-compliant traceability labeling (similar to the whiskey bottles in Burke) provided a ready basis for the Court of Appeals to affirm that the palletizing, wrapping, and labeling machinery is “actually engaged in manufacturing”.
What about the Department’s “old law, new machines” argument?
The Department made an interesting but unpersuasive old law, new machine argument. The Department argued that the manufacturing machinery exemption predates FSMA, so the legislature could not have intended to cover FSMA-compliance machinery. The Court dispatched this neatly by noting that the exemptions have been “repeatedly maintained through successive iterations of our laws,” most recently in 2023. Moreover, Burke itself involved a federal statute (enacted 1935) that postdated the first local property tax exemption (1917) by eighteen years. Similarly, the Department doubled down and argued that exemptions cannot apply to machinery not yet invented when the statute was enacted. The Court’s response was direct: “We reject the argument that the legislative purpose of the exemptions is to encourage manufacturers to locate in the state, but only those manufacturers employing machinery of ancient design.” Fortunately, the Court declined to limit the manufacturing exemption to old machinery.
What comes next for Kentucky manufacturers?
Manufacturers have been reporting similar manufacturing machinery as manufacturing machinery for many years for property tax purposes. Notably, the Department audited Ralcorp for 2013–2015. So, Ralcorp had been taking the position that its palletizing, wrapping, and labeling machinery was “actually engaged in manufacturing”. This was not a refund claim, and this appears to be the consensus position of many Kentucky manufacturers. So, this issue could come up again.
The Department did not appeal Ralcorp to the Kentucky Supreme Court. So, the case is final. And, although the Ralcorp case was designated “not to be published”, its reasoning is persuasive and consistent with published Kentucky Supreme Court authority (Ross, Burke, and Kentucky-American Water Co.). Importantly, the logic of Ralcorp applies beyond and is not limited to FSMA. The Court’s rejection of the Department’s old law, new machines argument makes this clear.
“You have bewitched me, body and soul, and I love… I love… I love you. I never wish to be parted from you from this day on.” Mr. Darcy in Pride and Prejudice (2005).
Kentucky manufacturers should love the Ralcorp case. Manufacturing does not end merely because a product has been produced; it does not end until a saleable product has been produced.
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.
