Business failed to timely file for refund of overpayment of occupation tax in Louisville: PARADISE TOMATO KITCHENS, INC. V. LOUISVILLE-JEFFERSON COUNTY METRO REVENUE COMMISSION (COA 5/9/2008)

REVENUE AND TAXATION:  Overpayment of occupational tax and time for filing for refund


DATE RENDERED: 5/22/2008

Paradise Tomato Kitchens, Inc. sought a refund of the occupational tax assessed by the Louisville/Metro Government (the Metro Government) that it had overpaid.  However, the Commission refunded only a portion of the overpayment. Therefore, Paradise filed suit seeking a refund of the remainder of the overpayment. The Jefferson Circuit Court entered an opinion and order granting the Appellees’ motion for summary judgment and it is from this order and opinion that Paradise appeals.

In its appeal, Paradise raises several constitutional, statutory, and common law issues which were rejected by the COA and the lower court decision affirmed.

From 1993 through 2001, Paradise’s accounting firm calculated the amount owed for the occupational tax based on 100% of Paradise’s net profits, not on
the portion of those profits attributable to activities within the City. Paradise filed tax returns based on these incorrect calculations.

In early 2003, the accounting firm discovered its mistake and Paradise filed an amended return for the 2001 calendar year, seeking a refund. The Commission
approved Paradise’s claim and issued a refund in the amount of $76,113. Paradise also filed amended returns for 1993 through 2000, seeking an additional refund of
$202,434. The Commission did not approve those claims by Paradise

Ordinance § 112.10 was amended during the time period in question; however, the versions state that the Commission cannot authorize any refund unless
application is made within either one year of the date payment was due or the date the return was filed. KRS 160.487 is part of a statutory plan to provide funding for school systems in counties with populations of 300,000 or more

Paradise argued that the taxes collected here violate the mandate of fair apportionment.  However, Paradise mischaracterizes what occurred since the revenue commission did not “collect” and did not fail to apportion what was appropriately due.

Paradise failed to apportion and “paid” more than was due. While this may appear to be a pedantic distinction, it is, nonetheless, significant.

In Gossum, the Supreme Court of Kentucky cited to the United States Supreme Court’s holding in McKesson Corp. v. Division of Alcoholic Beverages and Tobacco, 496 U.S. 18, 110 S.Ct. 2238, 110 L.Ed.2d 17 (1990), that “the due process clause of the Fourteenth Amendment obligates the state to provide meaningful backward-looking relief to rectify any unconstitutional deprivation" and thus the Court held that a “two-year statute of limitations . . . is not violative of constitutional standards.”

COA then held that nothing in the application of Ordinance § 112.10 and KRS 160.487 is violative of the Commerce Clause.

The general rule is that a common law right to a tax refund exists: “(1) when the taxing statute or regulation is invalid and the tax payments were submitted involuntarily, [or] (2) when the taxing authority has engaged in misrepresentation.” Inland Container v. Mason County, 6 S.W.3d 374, 377 (Ky. 1999).  Since Paradise cannot establish that the Ordinance and Statute are wholly unauthorized or that it involuntarily paid the excess tax, it can have no common law right of action to recover that excess amount.

The general rule is that the knowledge of an agent is imputed to the principal. Paradise’s CPA’s were acting as Paradise’s agent so that knowledge of an agent is imputed to the principal.  There is no evidence that the CPA’s could not have known or should not have known how to correctly prepare Paradise’s tax returns.

Therefore, there is no reason why Paradise could not have known or should not have known how to correctly prepare the tax returns.

GRAVES, SENIOR JUDGE, CONCURRING: I concur, but I write separately to address the disparity in the respective positions of the parties. This case presents a basic inequity in the manner in which the government deals with its tax paying citizens. Were the roles of the parties herein reversed, that is, had the government mistakenly issued an excessive tax refund, the taxpayer would be prosecuted for failure to make required disposition of property if he refused to return the overpayment. The government should behave in the same manner it mandates its citizens behave. The government should not be rewarded for expropriating monies to which it is not entitled.

Digested by Michael Stevens

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