Request By:
Mr. Kelly D. Powell
Attorney-at-Law
P.O. Box 524
Scottsville, Kentucky 42164
Opinion
Opinion By: Robert F. Stephens, Attorney General; Rickie L. Pearson, Assistant Attorney General
Re: Occupational License Tax
In your letters of May 11 and 22, 1978, you requested a formal opinion involving two questions. The first question presented was, "Whether it is legal for a city of the fourth class of the Commonwealth operating under the councilmanic form of government to impose an occupational license tax as a percentage of gross salaries with a maximum base or ceiling for each taxpayer of $100,000.00?"
The second question raised was "Whether it is legal to impose an occupational license tax only on gross wages with no tax on net profits of business entities or self-employed individuals?"
Please be advised that a city of the fourth class of the Commonwealth operating under the councilmanic form of government can impose an occupational license tax as a percentage of gross salaries or income but cannot impose a maximum base or ceiling for cash taxpayer of $100,000 on such gross income.
Please be further advised that the imposition of an occupational license tax on gross income also includes self-employed individuals, thereby meaning that such individuals do not create a separate classification who may be exempted from the tax. And the imposition of an occupational license tax upon gross earned income includes a tax on the net profits of business entities. Thus, both must be taxed.
The above conclusions were reached as a result of the following analyses:
A.
GROSS INCOME AND MAXIMUM CEILINGS
In City of Louisville v. Sebree, Ky., 214 S.W.2d 248, 254 (1948), while Kentucky's highest court was discussing the standard for measuring an occupational license tax, it 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.)
The Court's measure of the tax as it relates to occupations and businesses has been designated as, "the adoption of a fair and just standard." Southern Building & Loan Association v. Norman, Ky., 98 Ky. 294, 32 S.W. 952 (1895).
To place or mandate a ceiling of $100,000 on each taxpayer would lead to an unfair and unjust standard which is arbitrary and capricious.
Such a standard would be unfair or unjust because it would allow some taxpayers the pleasure and luxury of not carrying the burden for the full amount of the privilege of working, while others would be subjected to their complete burden. Hager v. Walker, Ky., 107 S.W. 254, 257, 258 (1908).
Therefore, the $100,000 ceiling would not be in keeping with the purpose for which the tax was created; that is, to tax all earned income that results from the privilege of working.
B.
TAX ON OCCUPATIONS BUT NOT ON SELF-EMPLOYED INDIVIDUALS
To determine whether self-employed individuals can be exempted from the imposition of an occupational license tax, it must first be determined whether self-employed individuals create a reasonable classification for which all persons in the class must be treated alike.
The test to be applied in creating a constitutional classification for taxation has been expressed in many cases. However, the test was comprehensively stated in the occupational license tax case of City of Louisville v. Sebree, supra.
In that case, Kentucky's highest court stated:
"It is familiar law that the selection of subjects of classification for taxation founded upon a natural and reasonable basis, with a logical relation to the purposes and objectives of a statute or ordinance, does not offend the principle of equality or uniformity in the imposition of a tax of this character so long as it operates equally upon all of those within the class. Commissioners of Sinking Fund of City of Louisville v. Weis, 269 Ky. 554, 108 S.W.2d 515; Great Atlantic & Pacific Tea Co. v. Kentucky Tax Commissioners, 278 Ky. 367, 128 S.W.2d 581; Louisville & Jefferson County Metropolitan Sewer District v. Joseph E. Seagram & Sons, 307 Ky. 413, 211 S.W.2d 122." (Emphasis added.)
Furthermore, there must be a substantial difference between the occupations separately classified, although the differences need not be great. Williams v. City of Bowling Green, Ky., 70 S.W.2d 967, 968 (1934).
As to the problem at hand, the only difference between a person self-employed and a person not self-employed is the manner in which his/her earned income is received.
Thus, the self-employed person receives his/her income directly for the performance of his/her labor. On the other hand, the person who is not self-employed, also known as an employee, receives earned income indirectly through a conduit, called an employer.
The mere fact that the earned income in either case is derived directly or indirectly is not a substantial difference that results in a rational and reasonable basis for creating a separate classification.
C.
TAX ON OCCUPATIONS BUT NOT ON BUSINESS ENTITIES
In order to determine whether an occupational license tax can be imposed only on gross wages with no tax on the net profits of business entities, the scope or magnitude of the tax must be determined.
In the Sebree case ( supra at page 252), Kentucky's highest court construed the meaning of "occupation tax. " The Sebree court stated:
"As implied by the name itself, an occupation tax being upon the right or privilege of carrying on a business, vocation, trade or calling, is not a property tax but a tax on the exercise of the right or privilege in the nature of a license or excise tax.: Note, 103 A.L.R. 20, See Vol. 29, Words and Phrases, Perm.Ed., Occupation Tax. (Emphasis added.)
The court's definition of an "occupation tax" reveals that the activity to be taxed is basically the same, regardless as to whether it is called a business or a trade. This construction is in keeping with Section 181 of the Constitution of Kentucky and KRS 92.280, which also uses the words on a synonymous and conjunctive basis.
Therefore, if a tax is imposed upon gross wages, it must likewise be imposed upon net profits.