Request By:
Ms. Letha Dawson
Business Developer
MACED
210 Center Street
Berea, Kentucky 40403
Opinion
Opinion By: David L. Armstrong, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
The question of whether or not a fiscal court can levy an oil shale severance tax is raised in your letter. It reads in part:
"The Mountain Association for Community Economic Development is a nonprofit organization based in Berea which works to promote economic development in the eastern Kentucky counties. We have been monitoring the progress of the Means oil shale project proposed for Montgomery, Bath, and Menifee counties. Over the last several months we have provided to the local governments and citizens groups unbiased research data on the project. The question has come up from citizens as to whether the counties have the authority to levy a severance tax on the oil shale. From our review of the Kentucky Revised Statutes, we are unable to arrive at a single, clear answer."
Sections 171, 172, and 174 of the Kentucky Constitution permit the General Assembly to enact legislation relating to ad valorem taxation. This includes taxation by county governments. Great Atlantic & Pacific Tea Co. v. Kentucky Tax Comm., 278 Ky. 367, 128 S.W.2d 581 (1939). See KRS 132.190, 132.200 and 132.280, relating to county ad valorem property taxes.
Section 181 of the Kentucky Constitution permits the General Assembly to enact laws authorizing counties, inter alia, to impose occupational or license taxes on trades, occupations, and professions. Fox v. Board for Louisville & Jefferson County C. Home, 244 Ky. 1, 50 S.W.2d 67 (1932). See KRS 67.083 and Fiscal Court v. City of Louisville, Ky., 559 S.W.2d 478 (1977), in which the court declared as constitutional the provision of KRS 67.083(2) that "The fiscal court of any county is hereby authorized to levy all taxes not in conflict with the constitution and statutes of this state now or hereafter enacted." (Emphasis added). See also KRS 68.197, imposing certain restrictions on license taxation in counties having a population of thirty thousand (30,000) or more.
Thus ad valorem taxes and license taxes are the only kinds of taxes that a county may levy. See Wiedemann Brewing Co. v. City of Newport, Ky., 321 S.W.2d 404 (1959); and Driver v. Sawyer, Ky., 392 S.W.2d 52 (1965).
In view of the fact that the counties' authority to levy only two types of taxes, ad valorem and license taxes, comes clearly from the Kentucky Constitution, the General Assembly has no authority by legislation to extend the counties' taxing powers beyond those two categories of taxes. To attempt to do so would be strictly unconstitutional. Fiscal Court v. City of Louisville, above.
CONCLUSION
Since a county, through its fiscal court, can levy only two kinds of taxes under the constitution, a county cannot levy a severance tax on natural resources. Thus the attempted levy of an oil shale severance tax by a county would be unconstitutional, since it would not be an ad valorem tax nor a license tax. The coal severance tax treated in KRS 143.010, et seq., is a state tax (see Clay County v. Leslie County, Ky., 531 S.W.2d 524 (1975)) only. See KRS 143.100. Also see KRS 42.450(3), involving the Local Government Economic Assistance Fund, funded from the coal severance tax.
In 1974 the Kentucky County Coal Coalition, consisting of some 40 county judges from coal producing counties, drafted a model ordinance levying a tax on coal severed and processed within the boundaries of the various counties. However, in C.C.C. Coal Co., Inc. v. Pike County, Ky., 536 S.W.2d 467 (1976), the Supreme Court of Kentucky struck the ordinance down as being unconstitutional. The court observed that the ordinance sought to impose a franchise tax upon "the business of receiving and/or processing coal in Pike County, Kentucky, the business of mining and removal of coal" and such an "extractive business enterprise. " The tax was computed at the rate of ten ($ .10) cents per ton on all coal so received and/or processed. The court held that such tax was a use tax or excise tax, and thus, under § 181 of the constitution, was unconstitutional and void.
To answer your immediate question as to an oil shale tax, it is our opinion that a county ordinance which levies a license or occupational tax on oil shale producers engaged in the extractive business enterprise of oil shale would be constitutional, provided that the license or occupational tax as applied to oil shale producers [the same principle would apply to other mineral producers] is fairly and equitably integrated with a general county occupational or license tax applying to an overall occupational or license tax. Such a general county occupational or license tax must be based upon reasonable classifications, must not be discriminatory, and must not be arbitrary or confiscatory. Such general tax must be uniform as applied to each classification. See § 171, Kentucky Constitution, and City of Lexington v. Motel Developers, Inc., Ky., 465 S.W.2d 253 (1971) 257. The term "oil shale producers" refers to producers who are in the business of extracting oil shale for the ultimate purpose of extracting the oil trapped in shale for commercial purposes.
The trouble with the ordinance in the Pike County case, above, was that the tax was not levied upon "coal producers" as a license tax. The Pike County coal tax was levied upon the receiving and/or processing of coal at a fixed place of business for distribution. The court pointed out that the latter was not an independent trade, occupation or profession. It was but one of a series of events which occur in the business of production. The court wrote: "This is not a license tax laid upon a trade, occupation or profession. It is an attempt to levy a license tax on but a single aspect of a trade, occupation or profession. " Thus the Pike County case suggests, as we just outlined, that the County Phoenix can rise from the ashes of its abortive enactment if the principles and limitations we mentioned are carefully followed. The Pike County coal tax, since it fell short as a license or occupational tax [the terms "license" and "occupational" are interchangeable], was merely a tax on certain uses made of coal, and thus was an excise tax.
In summary, a valid ordinance must enact a general occupational or license tax covering the various trades, occupations and professions carried on in the particular county. Within the general ordinance "oil shale producers" [those individuals or corporations engaged in the extractive business of oil shale production] must be integrated as a trade or business. In counties of 30,000 or more, certain restrictions described above must be observed. In counties of less than 30,000 population, the occupational or license tax placed upon oil shale producers could be measured in terms of a percentage of oil shale produced. See Raydure v. Board of Supervisors of Estill County, 183 Ky. 84, 209 S.W. 19 (1919); and Cumberland Pipe Line Co. v. Commonwealth, 228 Ky. 453, 15 S.W.2d 280 (1929).