November 18, 2016

Kentucky Appellate Court Holds Cap on Vendor Compensation Constitutional

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The Kentucky Court of Appeals recently upheld the constitutionality of a 2009 amendment to KRS § 139.570, which retroactively set a cap on the total reimbursement allowed to retailers for collecting and remitting the sales tax.[1]  During the period for which the taxpayers claimed refunds (July 2003 to June 2008), KRS § 139.570 provided that a seller may deduct on each sales tax return 1% of the tax due in excess of $1,000 as reimbursement for the cost of collecting and remitting the tax.  Three budget bills enacted during the refund period placed a $1,500 cap on the total reimbursement allowed per seller in any month.  Effective July 1, 2008, the Kentucky General Assembly passed a separate bill (that is, separate from the budget bills) formally amending KRS § 139.570 to reflect the $1,500 cap.  In 2009, the General Assembly repealed and reenacted KRS § 139.570 to include the $1,500 reimbursement limit and apply the limit retroactively from July 1, 2003 to June 30, 2004, and for the period of July 1, 2005 to June 30, 2008. 

On average, Petitioners Wal-Mart Stores East, LP (“Wal-Mart”) and Sam’s East, Inc. (“Sam’s”) collect and remit a combined $17 million in sales tax each month to the Kentucky Department of Revenue (the “Department”). For the periods of July 1, 2003 – June 30, 2004 and July 1, 2005 – June 30, 2008, Wal-Mart and Sam’s remitted the sales tax collected and withheld $1,500 as vendor compensation.  On September 8, 2008, Wal-Mart and Sam’s submitted refund claims to the Department for vendor compensation owed to them over the $1,500 limit.  They argued their refund claims were filed after the $1,500 cap provisions in the budget bills expired and within the four year statute of limitations set forth in KRS § 134.580. 

After the Department denied their refund claims, the Petitioners appealed to the Kentucky Board of Tax Appeals (the “Board”), which affirmed the Department’s denial and held it did not have jurisdiction to reach the Petitioners’ constitutional challenges. The Petitioners appealed to the Franklin Circuit Court, which affirmed.

On appeal, the Kentucky Court of Appeals first held the repeal and reenactment of KRS § 139.570 did not violate Section 180 of the Constitution, which provides that every act enacted by the General Assembly levying a tax must specify the purpose for which the tax is levied, and no tax levied and collected for one purpose shall ever be devoted to another purpose. The Petitioners argued that by taking money that was supposed to be collected for reimbursing vendors and redirecting this money to the General Fund, the money was collected for one purpose and devoted to another.  The court disagreed.  The court found that taxes collected by retailers are held in trust for the Commonwealth and thus belong to the Commonwealth (not the retailers) at all times.  The court also held that KRS § 139.570 was never intended as a tax purpose statute; instead, it was an allowance or deduction statute that provided the purpose for the deduction, not the purpose for the tax itself.  KRS § 139.020, however, provides the purpose of the sales tax: to pay off certain state bonds and to provide monies for the General Fund.  Thus, the court found the money was collected for the General Fund all along and not impermissibly transferred.

The court also rejected the Petitioners’ argument that the budget bills violated the provision of Section 51 of the Kentucky Constitution requiring that an act relate to only one subject and that the subject be expressed in the title of the act. The court held that because the 2009 Act did not violate Section 180, refunds due the Petitioners were constitutionally capped at $1,500.  The court noted that the Petitioners did not appear to argue that the 2009 Act violated Section 51, only that the budget bills violated Section 51.  Since the 2009 Act applied the $1,500 cap retroactively throughout the refund period, the court held it need not address the constitutionality of similar cap provisions contained in the budget bills.

The court did not determine whether the Petitioners’ claims were barred by the statute of limitations, as the circuit court did not address this issue since it found the Petitioners’ refund claims were not meritorious, and the court declined to address an issue on which the circuit court did not have the opportunity to rule.

The Petitioners have thirty days to seek discretionary review by the Kentucky Supreme Court.

[1] Wal-Mart Stores East, LP and Sam’s East, Inc. v. Dep’t of Revenue, Finance & Admin. Cabinet, Commonwealth of Kentucky, No. 2015-CA-001054-MR (Ky. App. Sept. 9, 2016) (not to be published).