Request By:
Hon. J. Quentin Wesley
Law Offices of Wesley & Simpson
111 Court Street
Morganfield, Kentucky 42437
Opinion
Opinion By: Robert F. Stephens, Attorney General; Rickie L. Pearson, Assistant Attorney General
In your April 13, 1978, letter, you posed several questions for resolution in the nature of a formal opinion by the Attorney General's Office which relate to occupational license taxes. In order to adequately resolve each of the questions in this communique, it will be necessary to answer each one separately.
QUESTION I
Pursuant to an occupational license tax (OLT), what income is taxed? That is, is only earned income taxed, including dividends, interest, etc.?
DISCUSSION
In City of Louisville v. Sebree, Ky., 214 S.W.2d 248 (1948), Kentucky's highest court was faced with the issue of whether an OLT was an income tax. As a result, the court held in the negative.
The rationale of the Sebree court provides a resolution to the question at hand. The court upon viewing Section 181 of the Kentucky Constitution stated:
"Section 181 of the Constitution, whose authority has been specifically delegated by the General Assembly to the city of Louisville (subject to other consistent statutes) prescribes no particular standard for measuring any tax. As stated in Moore v. State Board of Charities & Corrections, 239 Ky. 729, 40 S.W.2d 349, 352; "The power of classifying taxes upon business according to the volume of business done has always been upheld by this Court." And that an occupation tax is measured by the volume of the thing produced does not render it invalid. Cumberland Pipe Line Co. v. Commonwealth, 228 Ky. 453, 15 S.W.2d 280. The point is that by analogy the basis is substantially the same. As to business, the basis is not the gross volume in dollars but the net profits, and for those who work for wages, salaries, fees and the like, the amount thereof is the basis for measuring the value of the privilege." (Emphasis added.)
Thus, the court's rationale denotes that, in order to measure the value of the privilege of pursuing a particular occupation, it must be confined to earned income received from the performance of a livelihood. Otherwise, the tax may be classified as an income tax where interest, dividends and gains realized from the sale or disposition of property is included. See also Sims v. Board of Education of Jefferson County, Ky., Ky., 290 S.W.2d 491 (1956), citing the Sebree principle. The Sims decision expressly states that earned income is the yardstick.
CONCLUSION
The scope of an occupational license tax as relates to revenue received for the privilege of engaging in a livelihood is confined to earned income.
QUESTION II
Does a person have to live and work in Union County to be required to pay the tax (OLT) or may anyone be taxed who lives in Union County and works out of the county and vice versa?
DISCUSSION
In Long v. City of Benton, Kt., 148 S.W.2d 702 (1941),Ky., 148 S.W.2d 702 (1941), Kentucky's highest court stated:
"The Benton ordinance, as we construe it, attempts to draw a distinction between persons operating plants within the city and those operating them without the city. Is this a valid classification? We think not. We have frequently upheld the power of municipalities to classify different trades and occupations for taxation purposes and to subdivide them into particular classes where the subdivisions are made according to natural and well-recognized classes of distinction. In the case of Eales v. City of Barbourville, 177 Ky. 216, 197 S.W. 634, 635, it was said: "While our Constitution permits the classification of occupations and trades for the purpose of license taxation, it is well settled that there must be some reasonable basis for the classification, and classification based on mere difference in citizenship cannot be sustained. Simrall v. Covington, 90 Ky. 444, 14 S.W. 369, 12 Ky.Law Rep. 404, 9 L.R.A. 556, 29 Am.St.Rep. 398; 17 R.C.L. § 31, p. 510. Hence a statute or ordinance which, in imposing license taxes, discriminates in favor of residents of the city or state, as against nonresidents of the same class, is unconstitutional." See also Daniel v. Trustees of Richmond, 78 Ky. 542;Fechcimer v. City of Louisville, 84 Ky. 306, 2 S.W. 65, 8 Ky.Law Rep. 310;NcGraw v. Town of Marion, 98 Ky. 673, 34 S.W. 18, 17 Ky.Law Rep. 1254, 47 L.R.A. 593;Hager v. Walker, 128 Ky. 1, 107 S.W. 254, 32 Ky.Law Rep. 748, 15L.R.A., N.S., 195, 129 Am. St.Rep. 238;Davis v. Pelfrey, 285 Ky. 298, 147 S.W.2d 723;Chalker v. Birmingham & Northwestern Railway Company, 249 U.S. 522, 39 S. Ct. 366, 63 L. Ed. 748; 16 C.J.S., Constitutional Law, § 479. It follows that there is no sound basis for the classification of the ordinance in question; it is therefore void." See also, Gross Distributing Company v. City of Shelbyville, Ky., 445 S.W.2d 114 (1969).
Thus, the holding in the Long case denotes that residency or citizenship is not the touchstone for subjecting a person (corporate or otherwise) to the tax.
However, the touchstone is whether the work or service performed was done within the county or city, whichever the case may be. Batten v. Hambley, Ky., 400 S.W.2d 663 (1966).
Finally, it must be noted that the work or service performed in the city that is a single act, a number of isolated acts, or special employment on a temporary basis are not considered engaging in or carrying on a business within the meaning of a law imposing a license tax. Evers v. City of Mayfield, Ky., 85 S.W. 697 (1905). Nevertheless, it should be understood that where the abovementioned activities are continuous or systematic, such acts may be considered as engaging in or carrying on a regular business or occupation by a nonresident.
CONCLUSION
Where a person resides is not the basis for levying an OLT. However, the touchstone is where the person works and whether that activity is continuous or systematic.
QUESTION III
If a tax is imposed as of July 1, 1978, what percent of the 1978 income is taxable for the year 1978?
DISCUSSION
Whenever a taxing ordinance, specifically an OLT ordinance, is published, its effect is prospective and not retrospective. City of Louisville v. Roberts & Krieger, Ky., 105 S.W. 431 (1907). If the ordinance is or was applied retrospectively, the result would be an unconstitutional ex post facto law. Id.
In situations like the one posed by the question under discussion, the most constitutional result would be to codify in the ordinance a proportional deduction. Such a deduction can withstand a constitutional challenge if it is logically arranged. City of Louisville v. Sagalowski, Ky., 124 S.W. 339 (1910). The logical arrangement cannot be so prohibitive as to be confiscatory. The word, "confiscatory, " in this setting, means that the proportionate tax cannot be unreasonable or arbitrary as to amount to a confiscation of property or a denial of the right to engage in a particular trade, occupation, or profession. Thus, the proportionate tax cannot place an oppressive burden on the taxpayer. Hager v. Walker, Ky., 107 S.W. 254, 256 (1908).
The following is an example of the proportionate deduction applied and upheld in the Roberts & Krieger and Sagalowski cases:
"If said business is commenced after the 1st day of September, and before the 2d day of January, said license fee shall be two hundred and fifty dollars.
"If said business is commenced at any time after the 1st day of January and before the 1st day of May, the license fee shall be one hundred dollars.
"If said business is commenced at any time between the 30th day of April and the 1st day of August, said license fee shall be fifty dollars.
"Each license issued under this section shall entitle the licensee to conduct or carry on said business until the 1st day of the next succeeding September."
Note that such a schedule could be constructed on a percentage basis for the problem at hand.
CONCLUSION
A proportionate deduction may be used where the taxing ordinance is effectuated during the middle of a calendar-tax year, so long as it is logically arranged.
QUESTION IV
If a Union County business, whether a partnership or a corporation, performs work and services outside the county, is the net income of the business taxable or only that portion which is earned in Union County?
CONCLUSION
Only that portion earned by the entity in Union County is taxable. See Discussion for Question II.
QUESTION V
In the event the levy of the tax requires the county employers to deduct the tax from the wages of its employees, and the employer fails to comply, how can the Board of Education require the employer to comply with the levy and what are the penalties?
DISCUSSION
The Board of Education can require the employer to comply with the OLT ordinance by explicitly stating in a separate ordinance a penalty for failure to comply.
In City of Louisville v. Fischer Packing Company, Ky., 520 S.W.2d 744 (1975), Kentucky's highest court held that a city ordinance imposing or assessing a penalty in the amount of 5% of unpaid license fees for each month or a fraction of each month when an OLT return remained unfiled, but not exceeding a penalty of 25% in the aggregate, was not unreasonable and was not void for excessiveness.
The court reasoned that the penalty scheme involved or imposed resulted as an implied power necessary and incident to the express power to impose and collect such a tax. Furthermore, the penalty was not excessive because it was no greater than those authorized the United States Congress for failure to file a tax return.
QUESTION VI
Does a Union County resident who is an employee of a coal mine with its principle office in the county have to pay an occupational tax if he enters the mine in Union County and performs his duties in another county? If the employee enters the mine in another county and performs his duties in Union County, does he have to pay an occupational tax?
CONCLUSION
The key to resolving the above-stated question is to determine where the employee performs his occupation. Remember citizenship or residency is not the touchstone (see Discussion to Question II).
Therefore, if the employee's duties are performed in Union County, such person is subject to the tax. If, however, the duties are performed in another county, then such person is not subject to the tax.
QUESTION VII
Do persons living on a federal reservation in the county and performing duties for a corporation on the federal reservation have to pay an occupational tax?
In Howard v. Commissioners of Louisville, 344 U.S. 624, 73 S. Ct. 465, 97 L. Ed. 617 (1953), the United States Supreme Court held in part that the City of Louisville was granted permission under the Buck Act, 4 U.S.C. §§ 105-110, to impose an occupational license tax upon employees working at a Federal-Naval Ordnance Plant within the city limits of Louisville. 1
The court reasoned that, notwithstanding the exclusive jurisdiction of the Federal Government or United States, Kentucky (Louisville acting as its taxing authority) was free to tax earnings just as if the Federal Government were not there. See also, Kiker v. City of Philadelphia, 31 A.2d 289, 293 (1943) certiorari denied, 320 U.S. 471, 64 S. Ct. 41, 88 L. Ed. 439, where the same result was reached. There, the Pennsylvania Supreme Court denoted that the Buck Act restored sufficient sovereignty to the state to enable the city to collect the occupational tax within the Federal reservation ( i.e., League Island Navy Yard).
The abovementioned decisions are in keeping with KRS 3.010, Consent of state to acquisition of lands, which provides:
"The Commonwealth of Kentucky consents to the acquisition by the United States of all lands and appurtenances in this state, by condemnation, gift or purchase, which are needful to their constitutional purposes, but said acquisition shall not be deemed to result in a cession of jurisdiction by this Commonwealth."
CONCLUSION
Union County may impose and collect an occupational license tax on earned income of persons employed at Camp Breckinridge.
QUESTION VIII
What is proper or practical construction of KRS 160.597, Levy may be recalled, where it provides inter alia:
". . . If during the thirty (30) days immediately following the passage of the order or resolution a petition signed by a number of registered and qualified voters equal to fifteen per cent (15%) of the votes cast in the school district or combined taxing district levying the tax for the office receiving the greatest total vote at the last preceding presidential election is presented to the school board protesting against passage of the order or resolution, the order or resolution shall be suspended from going into effect for that district until after the election provided for in subsection (2) of this section."
The above-cited KRS section sets forth a 15% standard for a recall under two separate conditions. The first condition being that such an action may be taken by 15% of the voters in a single school district. Secondly, 15% of the voters in a combined taxing district may petition for a recall.
As to the 15% requirement for a school district, the statute upon a plain reading is explicit in that all that is required is a 15% petition.
As to the combined taxing district, Fiscal Court of Campbell County v. Board of Education of Campbell County, Ky., 522 S.W.2d 454 (1975) seems to be dispositive of the second interpretation. In the Campbell County case, Kentucky's highest court construed KRS 160.485(2), which provides substantially the same language as to the provision in question. The Campbell court held that referendum petitions must contain a number of signatures equal to 15% of the votes cast for the officer receiving the greatest total vote in the entire county notwithstanding the fact that the utilities tax levied applied only to two school districts.
The court rejected the argument that each district must meet the 15% standard. Id. p. 456 at footnote #1.
CONCLUSION
To recall a resolution for the imposition of an occupational license tax, a 15% petition is required in a single school district or a combined taxing district. And because two school districts may exist in a combined taxing district, a 15% requirement is not imposed on both school districts.
Summary: A county may impose an occupational license tax for school purposes under KRS 160.605 only as to earned income. Such a tax can be levied against natural or artificial persons as to the amount of income earned or services performed within the county limits, except as to those activities which are isolated occurring infrequently (non-systematic) or are a result of temporary special employment. Furthermore, an occupational license tax may be imposed upon a federal reservation by a county, notwithstanding the exclusive jurisdiction of the federal government.
A county may proportionately reduce the occupational license tax imposed under KRS 160.605 by enacting an ordinance with a logical arrangement for such a reduction, when the tax is to be levied after the start of the fiscal year. Likewise, penalties may be imposed for failure to pay the tax, but such penalties must be codified by ordinance.
Finally, a resolution for the imposition of an occupational license tax may be recalled by the voters in a single school district or a combined taxing district where 15% of the voters in either situation petition for a recall.
Footnotes
Footnotes
1 4 U.S.C. § 106 expressly grants permission.