Request By:
Mr. Ben J. Snyder, Councilman
4 Belle Monte Avenue
Lakeside Park, Kentucky 41017
Opinion
Opinion By: Steven L. Beshear, Attorney General; By Alex W. Rose, Assistant Attorney General
In your letter of October 24, 1981, you requested the opinion of the Attorney General as to whether or not the city of Lakeside Park, Kentucky, a fifth class city, has the authority to establish a license tax to help meet its 1982 and future budgets. The proposed ordinance would impose the license fee on all businesses operating within the city. The rate of the license fee would be determined by applying a percentage factor to the amount of the licensee's gross receipts for each month. The percentage factor would be increased as the amount of the licensee's monthly gross receipts increases.
Section 181 of the Kentucky Constitution provides, in pertinent part, as follows:
". . . The General Assembly may, by general laws only, provide for the payment of license fees on franchises, stock used for breeding purposes, the various trades, occupations and professions, or a special or excise tax; and may by general laws, delegate the power to counties, towns, cities and other municipal corporations, to impose and collect license fees on stock used for breeding purposes, on franchises, trades, occupations and professions . . . ." (Emphasis Added)
By enacting KRS 92.280(2) and 92.281(1), the General Assembly has delegated the licensing power to cities of the second through sixth classes. The only required exemptions from this licensing power are contained in KRS 92.281(5) and 92.300(2). KRS 92.281(5) is applicable only to cities of the sixth class while 92.300(2) prohibits any city of the second through sixth classes from imposing a license tax on ". . . any bank, trust company, combined bank and trust company, or trust, banking and title insurance company organized and doing business in this state."
The exercise of the licensing power given to local governments is subject to certain requirements. Sections 2 and 171 of the Kentucky Constitution require that for taxation purposes classifications must be based on reasonable distinctions, be uniform as to the class, and not excessive, arbitrary or prohibitive. See Link v. Commonwealth, 205 Ky. 243, 265 S.W. 804 (1924); Beavers v. City of Williamsburg, 306 Ky. 201, 206 S.W.2d 938 (1948); and Baker v. City of Corbin, Ky.App., 556 S.W.2d 449 (1977). In Baker v. City of Corbin, supra, the Court of Appeals of Kentucky stated at page 450 that:
"Generally, the reasonableness of the distinctions is a matter within the discretion of the taxing body . . . ."
It is constitutionally permissible for a city to levy a license tax computed on the basis of the licensee's gross income. See Paducah Automotive Trades Association v. City of Paducah, 307 Ky. 524, 211 S.W.2d 660 (1948). However, where a license tax rate varies for each licensee according to the amount of gross sales made, the classification has been held to be arbitrary and unequal. In Stewart Dry Goods Co. v. Lewis, 294 U.S. 550 (1935), the Supreme Court of the United States invalidated a Kentucky gross sales tax which was graduated according to the amount of gross sales made. The Court stated at page 566 as follows:
"The law arbitrarily classifies these vendors for the imposition of a varying rate of taxation, solely by reference to the volume of their transactions, disregarding the absence of any reasonable relation between the chosen criterion of classification and the privilege the enjoyment of which is said to be the subject taxed. It exacts from two persons different amounts for the privilege of doing exactly similar acts because the one has performed the act oftener than the other."
In conclusion, the proposed ordinance for establishing a business license fee in Lakeside Park, Kentucky, is constitutionally valid in every respect except for the graduated fee rate. If the percentage rate remained fixed regardless of the gross receipts of the licensee, the ordinance would be constitutional. See Paducah Automotive Trade Association v. City of Paducah, supra.