Request By:
Senator Bill "Fibber" McGee
1005 Minors Lane
Louisville, Kentucky 40219
Opinion
Opinion By: Steven L. Beshear, Attorney General; By Alex W. Rose, Assistant Attorney General
In your letter of May 24, 1982, you asked the question whether the exemption of retail sales of package liquor from the 5% sales tax is unconstitutional when sales of alcoholic beverages to be consumed on the premises of the seller remain subject to that tax.
It has long been generally held that inherent in the state's exercise of the power to tax is the freedom to choose the subjects of taxation and to grant exemptions therefrom. 84 C.J.S. Taxation § 216 (1954); 71 AM.JUR.2d State and Local Taxation § 309 (1973). Restrictions on this power are determined only by state or federal constitutional limitations. These constitutional limitations prohibit only those legislatively determined classifications which are arbitrary and unreasonable and have no fair and substantial relation to the permissible governmental purpose of the legislation. Burge v. Marcum, Ky., 394 S.W.2d 908 (1965); Louisville Gas & Electric Co. v. Coleman, 277 U.S. 60 (1928).
In City of Lexington v. Motel Developers, Inc., Ky., 465 S.W.2d 253 (1971) the Court of Appeals of Kentucky (now Supreme Court) briefly described some instances of arbitrary classifications. At page 257 the Court stated as follows:
"Examples of unreasonable classification are shown by the following cases. In Fiscal Court of Owen County v. F. and A. Cox Co., 132 Ky. 738, 117 S.W. 296 (1888) [sic], a license tax on vehicles using the streets was held invalid insofar as the tax on four-horse wagons was three times as much as upon three-horse wagons. In City of Covington v. Dalheim, 126 Ky. 26, 102 S.W. 829 (1907), a license tax only on grocers using delivery wagons which was not imposed upon other grocers was held lacking in uniformity. In City of Newport v. Frankel, 192 Ky. 408, 233 S.W. 884 (1921), a license tax on theatres was held invalid where the seller of a twenty-cent ticket was required to pay $15 a day more than the seller of a fifteencent ticket. In Commonwealth v. Payne Medicine Co., 138 Ky. 164, 127 S.W. 760 (1910), a license tax upon sellers of patent medicines exclusively, when no such fee was charged other sellers, was held invalid. "
Other classifications have survived judicial challenges as to their constitutionality. In Washer One, Inc. v. Commonex rel. Div. of U.I., Ky., 482 S.W.2d 590 (1972), a car-washing business employing four people challenged required tax payments under the Kentucky Unemployment Compensation Law on the basis that automated businesses rendering the same type of service were exempt. The court upheld the validity of the tax reasoning that the purpose of unemployment compensation was to provide relief from unemployment which resulted when once existing jobs ceased to exist. Since the automated car-washing businesses never created any jobs which could later be lost, it was not unreasonable to exempt them from the tax.
In Department of Revenue v. Spalding Laundry & D.C. Co., Ky., 436 S.W.2d 522 (1968), a sales tax statute was challenged which exempted machinery used directly in the manufacturing process and incorporated for the first time into plant facilities in Kentucky. The question which the court considered was whether the classification of exempt machinery used in manufacturing was arbitrary and unreasonable since similar machinery used in a service industry was not exempt. Finding that it was a fixed policy of the Commonwealth to promote industrial development in order to improve the overall economy of the state, the court held that it was peculiarly a matter of legislative discretion as to what type of industry would best serve this purpose. The court concluded that the choice of the manufacturing industry as the best field for promotion was not unreasonable and the wisdom of the policy was not a matter for the court.
Finally, in Williams v. City of Bowling Green, 254 Ky. 11, 70 S.W.2d 967 (1934), a city ordinance was upheld which imposed a $25 license fee on the operation of a cleaning and dyeing plant while imposing a $200 license fee on that same type of business when it did not utilize a plant within the city limits. At page 968 the Court summarized the basis for its reasoning:
"There is no provision of our Constitution that fixes a different standard from that prescribed by the equal protection clause of the Fourteenth Amendment to the Federal Constitution . . . From the very beginning we have upheld the power of the General Assembly and all municipalities, not only to classify different trades and occupations for taxation purposes, but to subdivide the classes into particular classes, if made according to natural and well-recognized lines of distinction . . . Whether a particular classification offends or does not offend the equal protection clause of the Fourteenth Amendment has been the subject of numerous decisions by the United States Supreme Court. The principles established by those decisions are in brief as follows: The restriction imposed by the Fourteenth Amendment does not compel the adoption of an iron rule of equal taxation, nor prevent a variety or differences in taxation, or discretion in the selection of subjects or the classification for taxation for properties, businesses, callings, or occupations. The fact that a statute discriminates in favor of certain classes does not make it arbitrary, if the discrimination is founded upon a reasonable distinction, or if any state of facts reasonably can be conceived to sustain it. A classification adopted by a Legislature in imposing occupation taxes will be held constitutional if there are substantial differences between the occupations separately classified, and such differences need not be great . . ." (emphasis added)
The operation of a tavern, restaurant, etc., where alcoholic beverages are sold and consumed on the premises is a type of business which is comparatively service oriented. Unlike the customer buying package liquor to carry out, patrons of taverns and restaurants may want food, entertainment, relaxation, etc. Providing such things necessitates more services, which in turn require more state and local regulation. Such differences would appear to reasonably distinguish for purposes of taxation sales of alcoholic beverages for consumption on premises from sales of package liquor for off premises consumption. It might also be noted that the mark-up on the sale of alcoholic beverages by the drink is much greater than that on package liquor. Consequently, the exemption of sales of alcoholic beverages for consumption on the premises from the 5% sales tax would result in substantial loss of revenue to the Commonwealth. Such reasons may have been the basis for the 1982 General Assembly's treatment of these sales. Therefore, it appears that the classification of these sales for tax purposes will overcome any constitutional challenge.