Request By:
Mr. Clifford T. Elgin
Vice President
Harris & Company
9th Floor, Starks Building
Louisville, Kentucky 40202
Opinion
Opinion By: David L. Armstrong, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
You have written that your agency handles a lot of insurance for governmental bodies and agencies and/or nonprofit and religious organizations. You believe that these organizations are exempt from payment of the 1.5% surcharge levied under KRS 136.392. The question has been raised in your office that "since these organizations are exempt from the 1.5% surcharge, are they not also exempt from the various municipal taxes on insurance?" You request our opinion on those questions.
Pursuant to KRS 136.392, every domestic, foreign or alien insurer, other than life and health insurers, which is either subject to or exempted from Kentucky premium taxes as levied pursuant to either KRS 136.340, 136.350, 136.370 or 136.390, shall charge and collect a surcharge of one dollar and fifty cents ($1.50) upon each one hundred dollars ($100) of premium, assessments, or other charges, except for those municipal premium taxes, made by it for insurance coverage provided to its policyholders, on risk located in Kentucky. The premium surcharge is to be collected by the insurer from its policyholders.
The first question is whether governmental units are exempt from the surcharge. Section 170 of the Kentucky Constitution provides in part:
"There shall be exempt from taxation public property used for public purposes; . . ."
Section 3 of the Kentucky Constitution provides in part:
"but no property shall be exempt from taxation except as provided in this Constitution, . . ."
Early in the Judicial history of Section 170, Constitution, the Court of Appeals held that the exemption language refers only to general ad valorem or property taxes, as applied to governmental units. Mount Sterling v. Montgomery County, 152 Ky. 637, 153 S.W. 952 (1913). The Court, in Mt. Sterling, wrote that this Constitutional exemption from taxation only refers to general ad valorem or property taxes that may be levied by the state, city, county, or taxing district under authority of law. Again in 1930, the Court of Appeals, in Louisville v. Cromwell, 233 Ky. 828, 27 S.W.2d 377, held that Section 170, Constitution, applies to ad valorem taxes and has no application to license, franchise, occupation, or excise taxes levied under proper authority. That case dealt with the exemption of the City of Louisville from a state gasoline tax. The Court of Appeals held that the exemption of Section 170 did not apply in that case, since the gasoline tax was an excise or license tax.
In the later case of Thomas v. Elizabethtown, Ky., 403 S.W.2d 269 (1966), the Court held that Section 170 applies only to ad valorem taxes. The tax in question was a tax levied upon 90% of an automobile's retail price at the rate of 3%, and paid on the use of such vehicle, except those exempted in KRS 138.470. The Court considered, under its doctrine of strict construction, the definition of an ad valorem tax (according to value, a duty laid upon goods at a certain rate of their value), and held that the tax was an ad valorem tax, not an excise tax. Thus the Court reasoned that the City of Elizabethtown and other governmental units were exempt from the ad valorem tax. The decision was prior to the 1968 amendment of KRS 138.470, which expressly exempted, from the excise or usage tax of KRS 138.460, motor vehicles sold to the United States, or to the Commonwealth of Kentucky or any of its political subdivisions. That simply indicated that the General Assembly treated the tax as an excise or usage tax, since Section 3 of the Kentucky Constitution provides that "no property shall be exempt from taxation except as provided in this Constitution". (Emphasis added). Thus we believe KRS 138.470 is constitutional, since the tax in question is not a property or ad valorem tax in the strict sense. However, in Commonwealth ex rel. Luckett v. City of Elizabethtown, Ky., 435 S.W.2d 78 (1968), the ghost of Thomas v. Elizabethtown, above, was raised. The court in the 1968 case held that the classification of the tax as an ad valorem tax in Thomas v. Elizabethtown was incorrect. The court concluded that the tax in question was a use or an excise tax. In addition, the court held that the tax was so similar to that of an ad valorem tax as to render the city exempt under Section 170, Constitution.
Actually, legal theorists may argue that the practical effect of the City of Elizabethtown cases was to create an extension of Section 170 to embrace a use tax. We do not agree. We believe the long line of cases holding that Section 170 applies only to ad valorem taxes, as concerns governmental units, still stands, since the Elizabethtown cases at most were based purely on whether the tax was similar to an ad valorem tax. In any event, we can find no further "deviation" from the basic ad valorem construction. The case of Gray v. Methodist Episcopal Church, 272 Ky. 646, 114 S.W.2d 1141 (1938), relates narrowly to the holding that the tax exemption of Section 170, Constitution, was intended, as relates to institutions of purely public charity, to extend further than an exemption of ad valorem tax on property, directly used by the institution in the operation of its charity. In other words, such institutions are exempt from taxes, generally. See also Dept. of Rev. v. Louisville Children's Theater, Ky. App., 565 S.W.2d 643 (1978).
Now, the question is just what is this surcharge on insurance premiums. The Court of Appeals, in Kroger Co. Department of Revenue, Ky. App., 556 S.W.2d 156 (1977), observed that "the name by which a tax is described in the statutes is without significance. The character of any tax must be determined by its operation and effect, rather than its label". It is not an ad valorem tax; it is simply a tax on insurance premiums even though the tax revenue goes into the state treasury for a Fund for Professional Fire Fighters, Law Enforcement Foundation, and Volunteer Fire Department Aid Fund. It is simply a corporation tax. Commonwealth v. Washington Life Ins. Co., 159 Ky. 581, 167 S.W. 872 (1914); and Commonwealth v. Illinois Life Ins. Co., 159 Ky. 589, 167 S.W. 909 (1914). Earlier premium tax legislation was characterized in Shanks v. Cornett-Lewis Coal Co., 218 Ky. 643, 291 S.W. 1034 (1927) 1036, as "a sort of license or privilege tax". (Emphasis added).
Central in the above cses
Central in the above cases in which tax exemption is considered is the concept of strict construction. In Gray v. Methodist Episcopal Church, above, the court wrote that "The general rule is that exempting statutes are to be strictly construed as against the one claiming the exemption. Exemptions will never be implied except by the most satisfactory and imperative language". See also Sutherland, Statutory Construction, Vol. 3, Section 66.09. There it was stated that taxation is the rule, and exemption therefore the exception.
Conclusion
1. It is our opinion that, as relates to the state government and political subdivisions, and special districts, such governmental units are not exempt from the state surcharge or tax levied on insurance premiums pursuant to KRS 136.392. The exemption of Section 170, Constitution, as relates to governmental units, involves only ad valorem taxes.
2. As relates to nonprofit institutions of purely public charity and education, and since the tax is designed to raise revenue, Section 170 of the Kentucky Constitution exempts such institutions from this tax. Here the exemption is to the institution. See Gray v. Methodist Episcopal Church, 272 Ky. 646, 114 S.W.2d 1141 (1938); Dept. of Rev. v. Louisville Children's Theater, Ky. App., 565 S.W.2d 643 (1978), and cases cited therein relating to nonprofit charity and educational institutions.
3. As concerns a city license tax on insurance premiums, political subdivisions and special districts would not be exempt under Section 170, Constitution, for reasons given above. We are not aware of any clear or express statutory exemption in that regard. This is not an ad valorem tax. The immunity of public bodies from ad valorem taxation, as expressed in Section 170, Constitution, "rests upon fundamental principles of government, it being necessary in order that the functions of government shall not be duly impeded". 71 Am. Jur. 2d, State and Local Taxation, Section 336, page 647. However, in connection with excise and privilege taxes, an exemption of local governments from this city tax would require an express provision in a state statute. 71 Am. Jur. 2d, State and Local Taxation, Section 338, page 648. In the absence of a statute or Constitutional section permitting the application of such tax to the state government or one of its agencies, we do not believe such city tax would be applicable to the state or one of its agencies. See Covington Bridge Commission v. City of Covington, 257 Ky. 813, 79 S.W.2d 216 (1935) 221; and City of Georgetown v. Morrison, Ky., 362 S.W.2d 289 (1962) 293. Generally the tail cannot wag the dog. Nonprofit institutions of purely public charity and education, where the tax is designed for revenue, would be exempt from the city tax under Section 170, Constitution, as an institutional exemption. A city license tax is not an ad valorem tax. City of Louisville v. Aetna Fire Ins. Co., 284 Ky. 154, 143 S.W.2d 1074 (1940) 1077; and section 181, Kentucky Constitution.