Request By:
Honorable Barbara S. Mask
Mayor, Minor Lane Heights
8710 East Glenwood Circle
Minor Lane Heights, Kentucky 40219
Opinion
Opinion By: David L. Armstrong, Attorney General; By: Ross T. Carter, Assistant Attorney General
You have asked whether a city of the 5th class is authorized under KRS 92.280 to impose an occupational license tax on the proceeds from the rental of real property by individuals. It is presumed that you intend that question to focus on a single individual owning and renting a single unit. You have also asked whether a license tax may be distinguished from a license fee.
Cities of the second through sixth class are authorized to impose an ad valorem tax and license fees pursuant to KRS 92.280, which states, in pertinent part:
The legislative body of each city of the second to sixth class may impose license fees on . . . franchises, trades, occupations and professions and may provide for the collection of fees.
Taking your questions in reverse order, Kentucky has traditionally considered a license fee to be imposed as a means of taxation. Therefore, in this case there is no significant distinction between a license fee and a license tax. See
Fiscal Ct. v. F & A Cox Co., 132 Ky. 738, 117 S.W. 269 L.R.A. (n.s.) 83 (1909).
The second question is not so clear cut, for the susceptibility of rental income to an occupational license fee (or tax) depends on whether the proceeds are received in the conduct of ". . . trades occupations and professions . . ." pursuant to KRS 92.280(2). We suggest that the correct answer is yes. Rental receipts received by an individual are susceptible to the imposition of a municipal occupational tax.
What distinguishes an individual renting his or her own residence from an occupation is a matter of degree. That distinction's impact upon a municipal occupational tax was considered in
Commissioners of the Sinking Fund of the City of Louisville vs. Estate of Doyle, Ky. App., 573 S.W.2d 932 (1979). Commercial leasings concerns (both corporations and partnerships) challenged the alleged discrimination caused by a Sinking Fund regulation which imposed the occupational tax on receipts from real property rentals. The regulation also exempted from the tax rental proceeds received by individuals who devoted less than 30% of their time to the rental activity. Two issues were raised: (1) whether rental income was business or investment income; (2) whether a single individual's rental activity could constitute a business activity.
The court's response to the first inquiry foreshadowed its response to the second:
Our analysis of the activities involved in renting real property leads us to conclude that such activities may indeed be considered a business venture in most cases, but not necessarily in all.
573 S.W.2d, at 935.
The regulations' exemption of an individual's income was upheld because it was one of those exceptional cases where the taxing authority has discretion in imposing or not imposing the tax:
An individual may be involved in rental activity in such an insignificant way that it would be neither proper nor administratively feasible to subject such individual to an occupational tax. . . . [W]e believe that the Fund's regulation . . . could be justified on administrative convenience (sic) alone.
Id.
We conclude, then, that a municipality contemplating the imposition of an occupational tax on rental proceeds should consider the inclusion within its enabling ordinance of a definition of the minimum degree of individual involvement or activity required to bring an income generating activity within the scope of the tax. The cited case announces not only that a city may justifiably exempt an individual's proceeds from the rental of real property; but also that the municipality is not required to exempt such proceeds. The municipality has the authority to determine that the modest revenue to be obtained is not worth the administrative cost of taxing relatively small rental incomes.
In this context, OAG 83-451 states:
Person renting property owned by him would not be subject to an occupational license tax. On the other hand, a person renting property owned by another, to a third person, would be subject to state as well as local tax.
At first blush, the opinion seems to contradict the conclusion drawn above. However, that opinion is premised on the policy determination that one renting one's own property is not engaged in a trade, occupation or profession. Strictly speaking, the generation of income is an occupation, and the terms "trade" and "profession" only sub-categories of the broader context defined by "occupation" .
While the specific assertions made within OAG 83-451 are valid, the implication that no individual's rental income could ever be subjected to an occupational tax is invalid. Therefore, OAG 83-451 is hereby withdrawn and substituted by the provisions of this opinion.
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