TAXATION – Corporations, physical presence: Revenue Cabinet v. Ashworth Corporation (COA 11/20/2009)

Revenue Cabinet v. Ashworth Corporation
2007-CA-002549 11/20/09 2009 WL 3877518

Opinion by Judge VanMeter; Judges Clayton and Nickell concurred.

The Court affirmed in part and reversed in part and remanded an order of the circuit court reversing an order of the Kentucky Board of Tax Appeals holding that KRS 141.040 did not reach the distributive shares paid to the appellee/cross-appellant corporations by partnerships doing business in Kentucky because the corporations did not have a physical presence in Kentucky.

The Court first held that the circuit court did not err by finding that the corporations were subject to taxation pursuant to KRS 141.206(5). The plain language of the statute subjected the corporations to taxation and the words “are taxable,” instead of “shall pay,” were sufficient to impose tax liability.

The Court next held that KRS 141.206 was not void for vagueness as the legislative will expressed in the statute intelligibly expressed the policy that nonresident corporations, which are partners in a partnership doing business within and without Kentucky, are taxable on their proportionate share of distributive income passed through the partnership attributable to business done in Kentucky.

The Court next held that subjecting the corporations to tax under KRS 141.206(5) did not violate the Commerce Clause. The corporations owned up to a 99% limited and/or general partnership interest in, and received distributive shares of partnership income from the profits of, the partnership doing business in Kentucky, the partnership received protection and benefits from Kentucky, thereby enabling distribution of income to the corporations. This connection gave rise to a substantial nexus with, and/or physical presence within, Kentucky. For the same reason, the Court held that subjecting the corporations to tax under the statute did not violate the Due Process Clause of the Fourteenth Amendment.

The Court next held that the circuit court erred in applying the three-factor formula found in KRS 141.120(8) to calculate the amount owed because KRS 141.206(5) contained the proper formula. The Court further held that the application of the formula in KRS 141.206(5) was constitutional and did not result in the taxation of extraterritorial values.
The Court next held that the circuit court erred by granting the corporations’ motion seeking immediate payment of their refunds. Under KRS 131.340 a refund payment is not due until the matter is finally adjudged by either the Board or a court.

The Court next held that the amendment of a number of Bills did not render them unconstitutional. The Court held that since the Bills rationally furthered the legitimate governmental purpose of raising revenue, they satisfied the rational basis test and the retroactive period extending to outstanding claims as of the Bills’ effective dates did not violate the due process clause. For the same reason, the Court held that the corporations’ equal protection claim was without merit. Further, the application of the Bills did not constitute an unconstitutional taking because the adjustment of the interest rate on tax refunds was not such an exertion of the legislative taxing power so as to constitute a taking. The Court also held that the Bills did not contain more than one subject or insufficiently express the subject matter contained therein in violation of Ky. Const. § 51.

The Court next held that the Bills were not impermissible special legislation in violation of Ky. Const. § 59.

REVENUE & TAXATION – KRS 141.120; unitary business model and combined tax returnJonathan Miller, Secretary of the Finance & Administration Cabinet, et al. v. Johnson Controls, Inc. (SC 8/27/2009)

Jonathan Miller, Secretary of the Finance & Administration Cabinet, et al. v. Johnson Controls, Inc. et al.
2006-SC-000416-DG August 27, 2009
2007-SC-000819-DG August 27, 2009
Opinion by Justice Noble. Chief Justice Minton not sitting.

The Court upheld the constitutionality of KRS 141.120 and 142.200 which retroactively prohibited the filing of combined tax return under the unitary business model (a means by which a multi state cooperate entity can apportion its state income taxes). The Court held that the amendments, including the seven year retroactivity window, were rationally related to the legitimate government purpose of regulating revenue. Justice Abramson, joined by Justice Cunningham, dissented, contending that the statutes violate the Due Process Clause by withdrawing the ability to contest illegally collected taxes. Justice Schroder concurred in result only.

TAXATION – Federal Telecommunications Act preempting local tax: Directv, Inc. and Echostar Satellite, LLC v. Commissioner, Dept. of Revenue (SC 6.25.2009)

Directv, Inc. and Echostar Satellite, LLC v. Commissioner, Dept. of Revenue and Frankfort Independent School District
2007-SC-000714-DG June 25, 2009
Opinion by Justice Abramson. All sitting; all concur.

Direct broadcast satellite (DBS) television providers brought an action seeking to have KRS 160.140, which imposes a gross receipts tax declared preempted under the federal Telecommunications Act of 1996. The circuit court awarded summary judgment to the DBS providers. The Court of Appeals reversed, holding that because the tax was levied to fund schools, it was, in effect, a state tax, not local, and thus was not preempted by the Act. The Supreme Court reversed the Court of Appeals and reinstated the circuit court’s summary judgment in favor of the DBS providers. The Court held that the tax was of the type expressly prohibited by the Act because the taxes were imposed on a district-by-district basis. The Court noted that the Act’s legislative history buttressed this conclusion.

TAXATION – Religious institution exemption: John Bradford Freeman, Jessamine Co. PVA, et al. v. St. Andrew Orthodox Church, Inc. (SC 5/21/2009

John Bradford Freeman, Jessamine Co. PVA, et al. v. St. Andrew Orthodox Church, Inc.
2007-SC-000640-DG May 21, 2009

Opinion by Justice Cunningham. All sitting; all concur.

St. Andrew Orthodox Church, Inc. appealed a property tax assessment, claiming it violated the exemption on real property “owned and occupied” by religious institutions found in Section 170 of the state constitution. The 10-acre property included two single family homes that the church rented to tenants until such time as it could afford to build a new church on the land. In addition to the rental dwellings, parts of the property were used for church activities such as picnics, recreation, prayer and meditation. The circuit court upheld the assessment, but ruled that it must be apportioned—with the parts occupied by the renters taxed and the parts used by the church exempt. The Court of Appeals reversed, holding the entire property exempt under Section 170. In reaching its decision the Court of Appeals relied on an Attorney General’s opinion stating that the requirement that the church “occupy” the property did not require use for religious purposes, and that plans for future occupation were sufficient for the exemption. The Supreme Court reinstated the circuit court’s decision that the assessment be apportioned, noting that the advisory AG opinion would extend the exemption to church-owned shopping centers, commercial enterprises and land speculation.

Sovereign Immunity – Revenue and taxation: St. Matthews Fire Protection District v. Aubrey (COA 3/27/2009)

St. Matthews Fire Protection District v. Aubrey
2009 WL 792493
Opinion by Senior Judge Henry; Chief Judge Combs and Judge Moore concurred.

The Court affirmed a summary judgment dismissing claims against various county tax collection officials arising from their failure to assess and collect a portion of tax revenue due to the St. Matthews Fire Protection District.

The Court held that the circuit court correctly found that the officers, sued only in their official or representative capacities, were protected from suit by the doctrine of sovereign immunity.

The Court next held that, because the District’s declaratory judgment claim was, for all practical purposes, a claim for damages for past negligent conduct, rather than a request for a declaration of rights to aid the parties in conforming their future conduct to the law’s requirements, sovereign immunity barred the action.

The Court then held because the District was not a party nor a third-party beneficiary to a letter memorializing an agreement regarding payment to the sheriff for preparation of tax bills, the contract claim failed. The Court finally held that sovereign immunity was not waived by the requirement that the officials post performance bonds or the authorization of recovery on the bonds.

Revenue & taxation – tax refunds: Finance and Administration Cabinet v. Rohm and Haas Company (COA 2/6/2009)

Finance and Administration Cabinet v. Rohm and Haas Company
2009 WL 277054

Opinion by Judge Acree; Judges Clayton and Keller concurred.

The Court affirmed an order of the circuit court which overturned an order from the Board of Tax Appeals upholding the denial of tax refunds claimed by appellees under KRS 139.480(3) for sales and use tax imposed on energy costs.

The Court held that, as a matter of law, each of appellees’ three business operations was separate and distinct from the others for purposes of the statute. The Court distinguished the holding in Schenley Distillers, Inc. v. Commonwealth, ex rel. Luckett, 467 S.W.2d 598 (Ky. 1971) from the holding in Revenue Cabinet, Com. of Ky. v. James B. Beam Distilling Co., 798 S.W.2d 134 (Ky. 1990), and held that Beam was applicable and that the distinction between the various stages of the process of converting crude methyl methacrylate into Plexiglas and emulsions was not at odds with the “integrated plant concept” embraced in Schenley. The Court finally held that appellees did not fail to include the cost of raw materials in the costs of production in the downstream operations, as the costs were factored in the accounting by the upstream operation.

REVENUE AND TAXATION: Time limits for contesting real property evaluation for tax purposes not met by property owner: COM. OF KENTUCKY V. CROMWELL LOUISVILLE ASSOCIATES (COA 8/8/2008)

REVENUE AND TAXATION:  Time limits for contesting real property evaluation
for tax purposes

COMBS, CHIEF JUDGE: This appeal arose from a contested a 2001 real property tax valuation. The Board concluded that Cromwell had failed to comply with the provisions of Kentucky Revised Statutes (KRS)
      133.120 and KRS 133.045 because he had not filed his challenge in the same year that the property valuation occurred. The circuit court disagreed and  concluded that the Board erred in dismissing Cromwell’s case.  COA disagreed with the court’s finding of error by the Board and reversed and remanded with instructions for the court to dismiss this action in accordance with the decision of the Board of Tax Appeals.
The Board determined that KRS 133.120 required Cromwell to have challenged  the 2001 tax assessment during the 2001 inspection period. Because Cromwell did not request a conference or a review of the 2001 assessment until the following year (well after the inspection period for the 2001 tax rolls had closed), the Board found that the appeal was fatally flawed and that dismissal was mandated.
The PVA challenged the conclusion of the circuit court that Cromwell properly followed the administrative remedy provisions of KRS 133.120.
KRS 133.120 addresses the mandatory administrative appeals procedure for any party wishing to challenge a PVA’s real property value assessment by a PVA. KRS 133.120(1) provides that  any taxpayer desiring to appeal an assessment on real property made by the property valuation administrator shall first request a conference with the property valuation administrator or his designated deputy. The conference shall be held prior to or during the inspection period provided for in KRS 133.045.   Taxpayers wishing to challenge decisions of the Board of Assessment Appeals must appeal to the Kentucky Board of Tax Appeals. KRS 133.120(10).
It is undisputed that Cromwell did not request a KRS 133.120(1) conference as to the 2001 property valuation – nor did it pursue a KRS 133.120(2) appeal to the Jefferson County Board of Assessment Appeals – until 2002.
The Board of Tax Appeals consequently – and correctly – refused to
      entertain Cromwell’s appeal because of its failure to comply with the requirements of the statute; i.e., the filing of its protest during “the current year” of 2001.
Failure to comply fully with KRS 133.120 prevented Cromwell from seeking a
      tax refund of an overpayment under the provisions of KRS 134.590.
The judgment of the Jefferson Circuit Court is reversed, and this matter
      is remanded with instructions that the court dismiss this action in
      accordance with the decision of the Board of Tax Appeals.

Digested by Michael Stevens

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

Trial court erred in reversing the Department of Revenues determination that the taxpayer was domiciled in Kentucky for tax purposes: FINANCE AND ADMINISTRATION CAB. V. SLAGEL (COA 4/25/2008)

REVENUE & TAXATION: Board of Tax Appeals, standard of review

Commonwealth Of Kentucky – 497
DATE RENDERED: 4/25/2008

The Court of Appeals found the trial court erred in reversing the Department of Revenues determination that the taxpayer was domiciled in Kentucky for tax purposes.

The Department of Revenue adjusted the individual income tax returns of Peter and Linda Slagel for the tax years 1996 through 2000 to include wages earned by Peter while working in Venezuela. The total amount of the resulting assessment of additional tax, including fees, penalties, and interest, is $72,731.50. The Slagels protested the assessment, but the Department issued a final ruling upholding the adjustment. The Slagels appealed to the Board, which affirmed the Department’s adjustment. The Slagels then appealed to the Franklin Circuit Court, which reversed the Board, finding that the Department failed to show with substantial evidence that Peter established domicile in Kentucky. This appeal followed.

In reviewing the trial court decision the issue is whether the trial court was correct in determining that the Department’s decision was not supported by substantial evidence. Whether a decision or action of the Department is unreasonable, arbitrary and capricious, because it is not based upon substantial evidence, is one of law, thus our review is de novo. 

Where an administrative agency’s decision is to deny relief to the party with the burden of proof or persuasion, as was the case here, the issue on appeal is whether the evidence in that party’s favor is so compelling that no reasonable person could have failed to be persuaded by it.

The COA held the evidence was not so compellingly in favor of the Slagels that no reasonable person could have failed to be persuaded by it.  First, Peter was registered to vote in Kentucky in 1992 and exercised his right to vote in 1999 and 2000. He additionally held driver’s licenses in both Kentucky and Venezuela. He owns property in Kentucky, maintains bank accounts in Kentucky, and has an incorporated business in Kentucky. His passport lists Kentucky as his “abode,” and his last will and testament and power of attorney assert that he is “of Fayette County Kentucky.” Finally, Linda and their children live in Lexington, Kentucky. In light of this fact alone, it seems likely that Peter has “the intention of returning” to but “no present intention of moving” from Lexington as required by Kentucky’s definition of domicile.

Accordingly, the trial court erred in substituting its judgment for the judgment of the Department on this factual determination. Therefore, COA reversed the order of the Franklin Circuit Court and remanded for proceedings consistent with this opinion.

Digest by Michael Stevens

Exemption to use tax applied to prosthetic devices etc. prescribed by licensed physician: KING DRUGS, INC. V. REVENUE CABINET

REVENUE AND TAXATION:  Sales and use tax re: medical devices prescribed by licensed physician
2005-SC-000789-DG.pdf – NO. 82
DATE RENDERED: 5/22/2008

The Revenue Cabinet sought judicial review of decision of Board of Tax Appeals that granted taxpayer’s request for relief concerning assessment of sales tax regarding medical items.  A 1986 amendment to former KRS 139.472, a statute exempting “prosthetic devices and physical aids” from Kentucky sales and use tax, is the focal point of the case before this Court.

KRS 139.200 imposes a sales tax on gross receipts derived from “[r]etail sales, regardless of the method of delivery, made within this Commonwealth.” Pursuant to that statute, in early 2001, the Revenue Cabinet assessed sales taxes against King Drugs, Inc., and King Home Care, Inc., (collectively “King”) of $75,342.09 and $13,253.86, respectively, for sales between April 1997 and January 2001 of medical items such as C-Pap supplies, TENS units, heating pads, humidifiers, ventilators, catheters, and bandages.

Maintaining that these sales were exempt from sales tax under KRS 139.472, which at the time provided an exemption for “prosthetic devices and physical aids,” King sought review of the Cabinet’s assessments before the Board of Tax Appeals. The Board agreed with King that the statute exempted the sales of all such items when prescribed by a physician, and, because it was undisputed that virtually all the sales at issue involved items that had been prescribed, the Board granted King’s request for relief.

The Cabinet then sought judicial review, and both the Franklin Circuit Court and the Court of Appeals rejected the Board’s reading of KRS 139.472. Those courts ruled instead that the statutory exemption applied only to sales of prosthetic devices and physical aids “prescribed … solely for the use of a particular crippled person so as to become a brace, support, supplement, correction or substitute for the bodily structure including the extremities of the individual.” Because King’s sales had not been limited to the identified items to be used by “crippled persons,” the court below held that King was not entitled to the exemption and so ordered that the Cabinet’s sales-tax assessments be reinstated.

The Supreme Court granted King’s petition for discretionary review and held that statute governing sales and use tax exemptions for certain medical items provided exemptions for all sales of artificial devices prescribed by licensed physician.

Digested by Michael Stevens